The Economics of the BP Oil Spill

Though there are arguments about the future of offshore oil drilling, one thing is certain: this is a terrible disaster.  For those who say, "This is not as bad as the Exxon Valdez spill," these types of comparisons may not even be necessary.  How about we just choose to acknowledge that they're both terrible and find ways so this never happens again.  For a region still reeling from the effects of Katrina, the Gulf oil spill is particularly troubling. 

So what's this all mean for the the economics of the region and the future of offshore oil drilling?  Some of this is to be determined (especially the future of offshore oil) but the economics of this spill are pretty startling. 

The oil spill is estimated to be spilling 200,000 gallons of oil per day.  In comparison, the Exxon Valdez spill dumped 10.8 million gallons into the water.  The difference between the two is that the Valdez was a closed circuit--only the amount of oil in the tanker spilled--whereas in the gulf it's like an open tap that keeps spilling and spilling.  Though there were reports that this spill was less damaging because the oil is lighter than the crude Valdez oil, but this also means the oil can disperse over a larger area.

The environmental damage does not inspire indignation in everybody the same way.  When people are out of work, it can be harder to care about the plight of the sea turtle (don't count me in that category, but it's understandable).  What's so troubling is that--according to Money Morning--this spill will have a major impact on local fishing, which has a national reach:

"Shrimpers and fishermen on April 28 filed suit in federal court against BP and Transocean Ltd., (NYSE: RIG), the owner of the sunken rig. The lawsuits say Louisiana supplies 25% of the seafood for the continental United States, Bloomberg reported.

The Gulf also generates billions of dollars in revenue from outdoor recreation, sport fishing, and beach tourism, which could be decimated as the crude oil washes ashore...."

The impact on BP is not negligible either.  No, there's not a lot of sympathy there--but this could potentially put BP workers out of work. BP's costs are now $6 million a day and will rise as it adds people and equipment.  It estimates the cost to drill the containment well will top $100 million.  The government will also bill the company for any assistance it provides.

BP, Anadarko and Mitsui may have to pay as much as $12.5 billion before tax to control and clean up the oil spill, Sanford Bernstein & Co. analyst Neil McMahon said in a note to investors obtained by Bloomberg. 

In short, this is an economic issue, not just an environmental issue.  According to a 2009 DOE report, the impact of increased offshore drilling on the price of oil (or your gas prices) will be "insignificant."  Couple that with the increased awareness about the potential dangers of offshore drilling, and "drill, baby, drill" is probably going to take a back burner.

So what's the answer?  Some say wind power. It obviously doesn't pose the same environmental threat as offshore oil, but it's not 100% without problems (what is?). 

From the New York Times:

"Supporters say the $1 billion Cape Wind project would provide a clean, renewable source of energy that could meet up to 75 percent of the power needs on Cape Cod, Martha's Vineyard and Nantucket. They also say it would provide hundreds of construction jobs, decrease the region's reliance on fossil fuels and benefit the environment by lowering emissions of greenhouse gases.

Opponents say it would be an industrial blot in an area of pristine beauty and change the region's historic character. They also warn that the costs to consumers are likely to be double or triple the costs for conventional power. Improvements to the region's electrical grid and transmission lines could cost $10 billion."

So the economics are costly any way you slice it. The environmental issue isn't negligible either, as wind farms can kill bats and blight the scenic view.  That said, there's never going to be reports of a "wind spill" so the dangers are decidedly less.  With things like recycling becoming pretty commonplace, and not just the obsession of "tree huggers," don't be surprised if wind power now becomes the next big thing.