The BP oil disaster has set new financial precedents regarding accidental oil spills, particularly when the ratio of duration to cost is taken into consideration. Enormous sums of money have been distributed on behalf of the company in cleanup costs, stipends paid to displaced workers and payments made to affected states.
The Cost to BP Oil
As of July 7, 2010 the gulf oil spill has cost BP an estimated $2.27 billion. This figure can be itemized as follows:
-$25 million in grant money given to the states of Alabama, Florida, and Mississippi
-$60 million allocated towards the construction of barrier islands off the Louisiana coast
-$1.65 billion accrued as of July 7, 2010 in cleanup efforts (calculated at a rate of $33 million per day since the incident)
The above figures do not include costs pertaining to current and future lawsuits or the over 6,700 compensation claims filed, although 1,000 claims have already been settled.
Energy analysts at Barclay Capital project losses totaling $22.6 billion will be incurred by BP, which include cleanup costs, worker compensation, legal fees and lost revenue. In addition, on June 16, 2010 BP announced it will slash its capital expenditure bill and suspend dividend payments until September 2011 in order to pay for the $20 billion in claims fund imposed upon the company by the United States.
The Gulf Spill Compared to Similar Accidents
To provide more insight to what these numbers truly represent, it is helpful to view them in perspective with comparable incidents. For example, the Exxon Valdez disaster of 1989 caused 10.8 million gallons of oil to be released into the Prince William Sound, a figure which when compared to the current Gulf situation seems relatively minor. However, the Exxon Valdez accident shares many traits with the BP spill. The image of Exxon was irrevocably tarnished and there was a stigma attached to the brand that is still present today.
The company was highly criticized by the government and media for lack of a quick response time and refusal to acknowledge the extent of the problem, leading the public to infer they were not taking the accident seriously. The company paid $2.5 billion towards cleanup efforts, $1.1 billion in settlement costs, and a $5 billion fine which was later successfully appealed. It is worthy to note whereas the Exxon Valdez spill was limited to the capacity in which the vessel it was contained, the Deepwater Horizon is not.
Although not accidental, the Gulf War oil spill of 1991 is still the greatest in history in terms of ecological damage and oil loss. It is estimated 450-520 million gallons were released into the Persian Gulf, and its effects on the region’s ecosystem are still being felt today.
It is unlikely the BP oil spill will reach that magnitude, but according to an analysis by Stephen Wereley, associate professor of mechanical engineering at Purdue University, it is possible that 56,000-84,000 barrels a day are being released daily. This analysis was performed using a technique known as particle image velocimetry, which tracks particles and the velocity at which they travel. The potential amount of spilled oil could reach the 500-600 million gallon range, if BP can have relief wells in place by mid-August 2010.
Domestically the impact on gas prices have been minimized, and they are congruent with market averages. But BP and its response to its mistake have already diminished consumer confidence in the brand, and put Gulf area businesses in a dire position. The seafood industry is also demonstrably damaged and has subsequently raised its prices. BP shareholders have been the hardest hit thus far, with a 20% drop in stock value since the incident and the suspension of dividend payments.
The severity of this disaster is evidenced on many levels, but the potential financial damage and subsequent consumer impact will be realized in the costs that are to be incurred from it.