June 3, 2010

Economic Impact of BP Oil Leak Continues to Climb

Oil giant spending $40 million per day as stock price sinks and takeover rumors rumble

The economic impact from the April 20 oil rig drilling disaster in the Gulf of Mexico is being felt far beyond the Louisiana coast. It's estimated that the expense to British Petroleum from the cleanup and payments to Gulf residents and businesses sidelined by the accident have risen to some $40 million daily. Credit Suisse has estimated that eventually the combined cost of the cleanup, fines and litigation could cost the oil giant as much as $37 billion--between $15 billion and $23 billion for the cleanup alone and another $14 billion in claims.

BP shareholders have been especially hard hit as the company's stock has plummeted and experts estimate that the 34% drop in price since the incident represents a loss of as much as $75 billion in value. The stock had a slight rebound on the afternoon of June 2 (+2.6%), following a broad sell-off a day earlier, when the stock dropped 15%. Share prices of the other companies involved including Halliburton, Cameron International and Anadarko Petroleum also were up slightly on June 2, while those of rig owner Transocean Ltd. continued moving downward.

With its enormous size and huge profits ($6.2 billion in the first quarter of this year) BP is likely to survive the fallout from this incident, although a number of analysts have speculated that it may be weakened enough to be a merger or takeover target, with Royal Dutch Shell among the names mentioned in speculation.

In an interview with The Financial Times on June 3, BP CEO Tony Hayward admitted that the criticism that BP was unprepared to deal with a deepwater oil spill of this magnitude was entirely fair. From some reports it seems that BP is either unprepared for most disasters or views the economic costs as just another business expense. In a report by ABC News, it was noted that OSHA statistics showed that in the last three years BP was cited for 760 "egregious, willful" violations. By comparison, its rivals Sunoco and Conoco-Phillips each had eight, Citgo had two and ExxonMobil had one such citation. BP also paid $16 million in fines for a 200,000-gallon spill in the Alaskan wilderness in 2007.

Still to be considered is the economic impact of the disaster on the tourism and seafood industries which are vitally important to the Gulf Coast areas of Louisiana, Texas, Mississippi, Alabama, and Florida. So far there don't appear to be seafood shortages or price increases in restaurants and supermarkets, due to the fact that, according to the National Fisheries Institute, about 80% of U.S. seafood is imported. Louisiana for example only supplies about 2% of the U.S. total (but about 40% of the fresh oysters), but that amount represents almost $2.5 billion a year to the local economy.

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