Seems to me that if anyone wanted to send a message about offshore drilling, the perfect time to do it would be during the early stages of energy policy discussions in Washington. Nobody has any evidence, but I’m sure that government officials will examine every angle.
Regardless of the cause, the effect will be the same. A massive oil spill that destroys American shores will impact the way politicians vote. It’s possible that this locks out offshore drilling for another decade.
What does that mean for an energy dependent nation that is relying on ever-expensive imports from not-so-friendly nations? It would mean another step back in America’s fight for energy independence. Moreover, it would mean less oil supply for the world.
Expensive and environmentally destructive sources of oil – tar sands, offshore – are easy to reject when the the world is flush with oil. What happens when oil prices spike back to $145 a barrel? Bringing these sources online could take 5-10 years. So the longer we are dependent on depleting reserves, the greater the impact scarcity could have in the future. Until we develop truly viable alternatives – and I hope we do – we must own up to the fact that we are addicted to oil.
In the meantime, BP stock is down about 8% today. (Continued below…)
———-
Also Read:
Matthew Simmons recommends the nuclear option to stop BP Spill…raises leak estimates to 120,000 barrels per day
———-
To provide some historical context we look to Exxon during the late 1980s. On March 24, 1989 the Exxon Valdez ran aground spilling about 250,000 barrels of oil causing perhaps the biggest man-made environmental disaster in history. The spill opened Exxon to litigation and massive cleanup costs.
So what happened to Exxon stock? One might think that it fell 20-30-50%, possibly going nowhere for months and years. A huge disaster sounds like good reason to sell, but in fact it may have been a good time to buy.
Surprisingly, Exxon stock did not react that badly to the spill. From March 24, 1989 to March 22 1991 the total return (price plus dividends) on Exxon stock was about 38%. (Check out the graph.) A study was conducted on how Exxon stock responded:
Source: An Analysis of the Stock Market’s Response to the Exxon Valdez Disaster
In other words, the small decline in Exxon shares was an appropriate response, given the expected loss in firm value due to lawsuits, etc.
So why are BP’s shares down 13% since the explosion? That equates to about $25 billion in market capitalization down the toilet. While uncertainty still surrounds the total cost of the disaster, could the present value of the losses really be $25 billion? Or are investors overreacting?
One ‘advantage’ the Exxon Valdez spill had was that the amount of oil carried in the boat was known, therefore investors had an easier time assessing the maximum amount of damage. The BP leak, on the other hand, seems like it could go for days and days. Also, the BP leak is closer to populated areas and will likely have a greater impact on economic life for locals.
A class action lawsuit has already been filed on behalf of local fishermen, who supply 25% of fish for the continental US. There will be more. [Incidentally, with 25% of fish supply at risk food prices could rise!] But legal wrangling could postpone the eventual awards and payment of damages, further reducing the present value of the cost to BP.
Interestingly, (unless investigators find negligence as the cause) suing BP is like a drug addict suing his dealer. We are the reason oil companies take the risks they do. We drive our SUVs to pick up a carton of milk. We are the ones that don’t adequately support public transportation and choose to live in the suburbs. To satisfy our addition to oil, companies like BP must take calculated risks.
Sometimes those risks pay off, sometimes they don’t.
-
Yvonne
-
Samantha
-
Plan B Economics
