Oil, Water, Profit and Peril


    By John Cranford, CQ Staff

    It was Carl-Henric Svanberg, the board chairman of BP, of all people, to say what many others are thinking: that the devastating and still-unchecked Gulf of Mexico oil spill will be a world-unraveling event for the oil industry, just as a partial reactor meltdown 31 years ago in the middle of Pennsylvania upended the plans of American nuclear power producers.

    “It will be, in many ways, a game-change in the way that Three Mile Island was,” Svanberg told an audience of European business executives May 19.

    These were startling words coming from the man atop the British oil giant, which is both the biggest operator in the gulf and the company ultimately responsible for the worst environmental disaster to ever strike the United States.

    The conclusion — and in some cases the wishful thinking — of environmental activists is that the blowout of the Deepwater Horizon well on April 20 may halt all offshore petroleum production, bring increased pressure on Congress to accelerate the move to alternative energy sources and reduce the nation’s dependence

    upon carbon-emitting fossil fuels.

    At the very least, some argue, this catastrophe a mile below the surface of the gulf and 40 miles off the Louisiana coast may signal an end to drilling in dangerously deep waters, where robots must perform all tasks, and ordinary chemical and physical processes associated with oil exploration on land or in shallower undersea places do not always work.

    As BP attempts to stanch the flow of as much as 1 million gallons of oil a day from the broken well, fears mount over the ultimate price of wrecked fisheries, destroyed wetlands, ruined beaches and wholesale environmental degradation. Cleanup costs and economic losses will be staggering — serious estimates already range up to $20 billion or even $30 billion, and those estimates presuppose that BP will succeed by August in its effort to seal off the spewing hole in the gulf floor. The costs will surely rise if two so-called relief wells also fail to plug the leak.

    Regardless, experts caution that the game-changing nature of this event on energy policy is still likely to be more incremental, and less disruptive, than Three Mile Island. Public opinion, commercial losses and environmental damage will play a role. But the degree to which policy will be altered depends largely on the economics of oil. And there, the situation has no parallel.

    To be sure, a complete shutdown of drilling in the gulf would change the equation. But almost no one expects that. The promise of profits makes drilling in deep water far too valuable for the industry to give up, despite the potential for a costly calamity. America’s dependence on oil is still so great that drilling in the gulf, and anywhere else oil can be found, is still worth it to companies willing to take the risk.

    Take BP, for example. The company took in $239 billion in revenue during the recession year of 2009 and reported a $16.8 billion profit from continuing operations, an amount worth more than $10 billion in dividends paid to its shareholders. Even in the worst case, in which the cleanup costs and economic losses reach $100 billion, that’s roughly equivalent to BP’s profits for the past five years. And if the company were to go bankrupt, another would find the lure of oil profits great enough to take its place.

    The potential for $100 billion in losses would add only pennies to the price of a gallon of gasoline, according to Trevor Houser, an energy and climate expert with the Rhodium Group, a New York economic consulting firm. That $100 billion cost would stand against the $600 billion that the United States spends every year on oil, said Houser, who is also a visiting fellow at the Peterson Institute for International Economics in Washington. “If we have a spill like this every decade, that’s a $10 billion-a-year premium. It doesn’t fundamentally change the cost of oil.”

    That, of course, is a different question from the more immediate deliberations Democrats are pursuing over the causes, responsibilities and punishments for this catastrophe.

    Read More here: http://www.cqpolitics.com/wmspage.cfm?docID=weeklyreport-000003677633


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