More on that Gulf oil spill

\”The Gulf of Mexico is a bit like the River Tyne. There is a lot of industry and boat traffic along it, as well as the oil industry, which has minor leaks all the time. When Tony Hayward said it was a drop in the ocean, it might have been the wrong thing to say at the time, but it was the truth. This spill is the equivalent of less than a drop in an Olympic-sized swimming pool. For all but a tiny bit of the Gulf, it will be back to normal within a year.

\”The beaches will be normal before Christmas, fishing will be back in two months and the shellfish industry in two years. It\’s not that the oysters and clams are poisonous, it\’s just that they won\’t taste very nice.\”

A quick look at the statistics produced by the US National Oceanic and Atmospheric Administration and other bodies seems to bear out his thesis. Of the more than 2,100 miles of threatened coastline, one quarter has been touched by oil and much less has been heavily soiled. As for wildlife, the total number of animals found dead and covered in oil for the whole period is 1,296 birds, 17 sea turtles and three dolphins – that is less than one per cent of the birds killed by the Exxon Valdez spill in 1989. During the same period, 1,675 birds, 82 turtles and 53 dolphins were found dead without any outward signs of oiling.

So, the total oil released was about 2 years\’ worth of natural seepage and the observed effect on wildlife is less than (but of course in addition to) the natural death rate over the time period.

The environmental costs therefore appear to be really very small indeed. We should thus be able to treat this purely through the economic costs, those environmental externalities being so small.

Using very loose numbers indeed we can say that the economic cost of the blowout is the $20 billion that BP has already put aside. Deepwater drilling provides either 10% of current oil supplies or is 10% of proven reserves (there\’s not a huge difference between these two, for although one is a stock and the other a flow \”proven reserves\” pretty much means the stock that we know is there and are already or are on the cusp of lifting….and yes, we\’re being very rough here in our numbers. To get to proven reserves we\’ve most certainly already had to drill into the field as Macondo was doing).

Global production is 85 million barrels a day of which 10% we can ascribe to deepwater drilling. 365 days in a year….say, 3 billion barrels a year coming from deep water rigs. At $100 a barrel (not too far off, keeps the maths simple) that\’s a value of $300 billion a year.

So, while the Macondo well has been hugely expensive for BP, in terms of the costs/benefits of the whole system of deepwater drilling it\’s not really all that expensive. More than a pimple but less than a full on boil really: 7% or so if we allocate all of the costs against one year\’s production.

However, perhaps we shouldn\’t allocate it against one year\’s production? How long have we been deepwater drilling for? A decade say (I\’ve no idea, just a guess)?

The damages are therefore coming out at 0.7 % of the value produced by the technology.

The cries of \”Oh, this is all too expensive\” don\’t really therefore seem to be based in reality.

Now yes, OK, this is all very back of the envelope, needs a lot more real numbers plugged into it. But there is however a very important point to be made about the system as a whole.

We can see that there\’s going to be huge swathes of new regulations about how, even if it will be allowed, deepwater drilling takes place. But our very rough numbers suggest that if such regulations increase the cost of such drilling by more than 0.7% then those regulations will cost more than any benefit we get from them.

Yes, this is assuming that such a blowout only happens once a decade….but do note it is also assuming that the new regulations entirely eradicate the possibility of a blowout at all.

The real lesson here being that whatever the new regulations brought in are they need to be written with a very light hand. For it won\’t take much of a rise in the cost of deepwater drilling or such regulations to make us collectively poorer.

6 thoughts on “More on that Gulf oil spill”

  1. Pingback: More on that Gulf oil spill | The Daily Conservative

  2. As with financial regulation, the new rules will be designed to stop a reoccurance of the last problem. However, not being stupid, the oil companies will have already worked out how to stop the same problem happening again. They have 20 billion reasons to do so. So any new rules will be superfluous.

  3. And how the Americans love to bash BP but they don’t seem to be bashing Andarko the American firm who own 25% of the well and are refusing to pay their share of the clear up nor are they bashing Mitsui the Japanese firm who own the other 10% of the well.

    Nor do they appear to be bashing Transocean the US listed firm that was running the rig. If you’ve been reading the recent testimonies it is looking like Transocean are very much on the hook having had staff deliberately switch off the alarm system on board the rig and switch off the blow out preventer. One employee admitted that the on board safety procedures were common across all of Transocean’s rigs. Which might explain why Transocean were responsible for another US oil spill in the last year but that one doesn’t get much attention!

  4. “And how the Americans love to bash BP …”

    It’s not ‘the Americans’. It’s the Obama administration and its media lackies.

  5. If it is proven that larvae of blue crabs and fiddler crabs sampled from Louisiana to Pensacola are contaminated with oil and corexit dispersant, (as one expert put it) “the effect on fisheries could last for years probably not a matter of months” and affect many species.

    SO we just stop eating crab and it will be OK right? Wrong!

    It all comes down to understanding the food chain. The food chain is the sequence of who eats whom in a biological community (an ecosystem) to obtain nutrition.

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