jrrosskampweb.jpgThe first measure of a disaster is its human toll. The April 20, 2010, Deepwater Horizon oil rig explosion in the Gulf of Mexico killed 11 workers. No grievance, ecological or financial, trumps this loss. 

As July begins, oil yet spews from an uncapped well (up to 60,000 barrels daily), despoiling marine life and coasts in several states.         

Catastrophes engender blame.  The Gulf spill is gushing claimants against British Petroleum (“BP”), the driller.  What went wrong?  

Whistleblowers were ignored:  Supervisors were warned, pre-explosion, of broken spill prevention equipment.  

Technology lagged:  BP’s spill models were based upon 2004 studies for surface spills only.  Remedies for deep-water accidents went untested.          

Complacency ruled:  The U.S. relaxed testing requirements for blowout preventer systems in 1998.  Some allege that BP’s safety record was atrocious, that it cut corners, and chose well designs on the basis of cost only. Gulf drilling appeared safe; vigilance over low-probability events (accidents) having high-impact consequences (oil spills) eased.    

BP’s self-interest:  BP enjoys the 4th highest revenues of any company in the world, and 4th highest profits (about $93 million per day), behind Gazprom, ExxonMobil, and
Royal Dutch Shell. BP has contracts to sell $2.2 billion of fuel to the U.S. military. BP is a major energy derivatives trader.             

U.S. self-interest:  Americans are energy gluttons, consuming 25 percent of global oil output. Gulf oil jobs pay well; BP employs 23,000 Americans.          

Energy politics:   The U.S. needs Gulf oil to supplement foreign imports.  Global proven reserves (1.36 trillion barrels) are mostly in the Mideast, with barrel assessments of 100 billion each in Kuwait and Iraq, 139 billion in Iran, 178 billion in Canada, and 266 billion in Saudi Arabia.  Big oil has long enjoyed U.S. congressional favor.          

The post-spill impact upon BP is substantial. Its market value has fallen by $104 billion, its stock reached a 14-year low, and dividend payouts were canceled. At President
Obama’s urging, BP agreed to escrow $20 billion to be administered by Kenneth Feinberg, former manager of the September 11 (2001) Victim Compensation Fund. BP faces some 81,000 claims; it has spent $2.65 billion in clean-up costs.    

Don’t cry for BP.  It has $7 billion in cash and a standby loan for $7 billion. Operating income for first quarter 2010 was $5.3 billion. Like most businesses, BP is not an altruistic entity, but risks its capital to make profits.  Under U.S. law, BP must clean up any oil spills and stand liable for damages.          

The largest oil spill ever was an intentional 11-million barrel release by Iraq into the Persian Gulf in 1991, with temperate ecological impact. In 1979, a Pemex (Mexico) well failed and gushed 30,000 barrels of oil daily into the Gulf of Mexico for almost 10 months, coating half of Texas’s Gulf coastline. Pemex claimed sovereign immunity, but still paid $100 million in clean-up costs.   

In 1989, the Exxon Valdez tanker ran aground in Alaska, leaking 266,000 barrels of oil.  Exxon paid out $3.83 billion and, after 19 years of appeals, was handed a victory by the U.S. Supreme Court when a $5 billion punitive damage award against Exxon was reduced to $507.5 million.  (Does anyone today boycott Exxon? Consider this before boycotting locally owned BP stations.) 

The 2010 Gulf spill will reduce U.S. economic growth in a future quarter by one half of one percent, about $73 billion.  Energy production is 10 percent of the Gulf region’s economy.  Long-term, Gulf fishing may be severely harmed and immune to monetary reparation; tourism will rebound.       

Let us consider an event, almost to the day of the Gulf spill, 24 years ago. 

On April 26, 1986, the Chernobyl nuclear accident affected 586,000 citizens of Belarus, the Russian Federation, and Ukraine. Fifty plant workers died immediately from radiation poisoning, 135,000 were evacuated in an 18-mile radius, 200,000 were conscripted for dangerous clean-up duties, and 270,000 residents were put in the path of nuclear fallout.

Untold numbers have suffered cancers, birth defects and deteriorating health.  Clean-up costs are estimated at $265 billion from 1986 to 2015.   The Chernobyl area will remain forever uninhabitable.

Over time, the Gulf of Mexico will be restored.  Patience is required.  

J.R. Rosskamp is an investor, entrepreneur, and managing director of Veritas Partners, Inc., a business consulting firm. She can be reached at jrrosskamp@aol.com.