Over the past six weeks or so, even amidst the notable difficulties and challenges experienced by corporations, currencies, and countries, never far from the headlines has been the news of the massive oil spill in the Gulf of Mexico which began on April 20.
Although the overall economic cost is still being tallied, and will continue for several more weeks, there is a consensus among oil executives and government authorities that the Deepwater Horizon oil spill (also called the BP oil spill because the rig was operated by British Petroleum) is by far the worse oil-related disaster in the history of our nation. The release of oil into the Gulf of Mexico has already well surpassed the amount leaked from the Exxon Valdez oil tanker when it ran aground in 1989.
The exact amount of oil gushing from the broken well a mile beneath the waters of the Gulf is not known, but estimates range from less than 1 million to approximately 2.5 million gallons per day. (Government estimates at the beginning of this week place the totals between 19.7 million and 43 million gallons thus far.) Whatever the actual amount of oil rising to the surface is, the oil slick it has currently produced is larger in size than the state of South Carolina.
British Petroleum announced last week that more than $930 million had been spent in clean-up activities and, by now, the total is undoubtedly approaching at least $1 billion. While that amount is certainly large, it equals only about 5% of BP’s annual profits. Even so, by the time all is said and done and BP has dealt with the countless lawsuits likely to be filed, the overall impact on the company stands to be much larger. In fact, the specter of a bankruptcy has been raised in some articles, though this seems unlikely provided the firm gets the well contained.
The entire offshore oil and gas exploration industry cluster is also suffering. The government prohibition of exploratory offshore oil drilling for the next six months has effectively idled 33 deepwater exploratory rigs and is preventing the issuance of new permits in water depths more than 500 feet over that timeframe. These bans will likely delay 80,000 barrels a day of US oil production anticipated for next year. Layoffs and furloughs of workers will undoubtedly result when final instructions are issued by the Interior Department. While this amount relative to the global market is not huge, it will have some modest ongoing price effects and further increase US dependence on foreign sources.
Beyond the cost to the firms and industry involved, overall economic losses in the communities along the Gulf coast stand to be massive. Because of a government-directed fishing ban of more than 1,000 square miles, thousands of fishermen have already lost their livelihoods, at least for the summer months. Additionally, tourism has almost vanished in some areas, causing hospitality industries in those areas to suffer greatly. Although most beaches have not been affected by the oil spill, officials in some states indicated that just the threat of pollution causes a significant loss to the hospitality industry. Unfortunately, this saga is unfolding just as the peak season is beginning.
Moreover, the wetlands along the Gulf coast and the birds and sea life are facing substantial losses, some perhaps permanently. Dozens of species of fish, including one discovered only six months ago, are in danger of being wiped out. In addition, the dispersants used to control the oil spill have the potential to cause health problems among those involved in the clean-up and could even damage the marine ecosystem in the Gulf and beyond.
Although new regulations were put into place following the Valdez spill, it is apparent that few could imagine a disaster of the magnitude of the BP oil spill, and resources to contain it in the early stages were either not available or not utilized to their full capacity. It was more than a month after the spill before the state of Louisiana received permission and funds to create a wall of sand on its coastline to keep out the oil.
BP’s attempts to seal the leak have not worked thus far; however, the new mechanisms being used as we go to press appear promising. Irrespective of the success of interim measures, it will be another two months before the two relief wells being drilled diagonally in the well should solve the problem permanently.
The BP oil spill is without a doubt historic as an economic and ecological disaster and one that will be on the front pages of news media for some time. During this period, because of America’s ongoing thirst for oil, new oil drilling regulations will be written and safety procedures strengthened. As always, the challenge is to provide the level of oversight necessary to achieve safety, but to avoid the temptation to put in draconian measures that will disrupt long-term energy availability,