David R. Kotok, Cumberland Advisors

May 10, 2010

In “Oil Slickonomics”, part 1, we set forth three scenarios for the BP disaster. They are “bad,” “worse,” and “ugliest.” Events are now moving from bad to worse.

BP’s attempt to install a large funnel-type device is running into problems. They have shifted the device several hundred yards away from the well as they try to deal with complex technical issues. Meanwhile the damaged well continues to spew at least 200,000 gallons of oil a day.

Within days we will have reached the second level of damages in the Gulf of Mexico. Under our “worse” scenario the total will be in the many tens of billions before this is all over. There are now early reports of “tar balls” washing up on beaches. Damage is now witnessed in Alabama, Louisiana, and Mississippi. NOAA has expanded the no-fishing zone to about “4.5 percent of Gulf of Mexico federal waters.” The original closure boundaries, which took effect Sunday, May 2, encompassed “less than three percent.”

Readers please note that this event is still mostly confined to United States “federal waters,” which are under NOAA jurisdiction. International claims are a more complex financial liability for BP and its partners.

So far, BP has offered US-based fishermen a one-month-pay settlement package. This is being routinely rejected, according to the professional fishermen we have been able to reach. If this spillage continues, as we project under our second and “worse” scenario, and IF it can be limited to that scenario and doesn’t worsen to “ugliest,” the ultimate loss of income to fisherman will continue over many, many months or even years.

According to NOAA, “There are 3.2 million recreational fishermen in the Gulf of Mexico region who took 24 million fishing trips in 2008. Commercial fishermen in the Gulf harvested more than 1 billion pounds of finfish and shellfish in 2008.” BP’s offer of one month’s pay is a pittance when compared with the ultimate damages that will be suffered by the fishing industry.

Some readers have asked about the federal fund that is designed to pay for cleanups of oil spills. It is funded by an eight-cent-per-barrel tax and is wholly inadequate for this type of catastrophic event. In the wake of the BP explosion, three Senators have offered a bill to broaden the scope of the fund and raise the tax.

One May 1, the New York Times reported that, “A count made by the Department of Homeland Security last August found that since 1991, there had been 51 instances in which liability exceeded caps. In most years it was a handful; in 1999 there were 11, because of a typhoon in American Samoa that wrecked eight fishing vessels that spilled oil. Numerically, cargo vessels and fishing vessels are the biggest culprits, but oil tankers and barges cause the most dollar damage. The fund’s single largest expense so far came after a tanker in the Delaware River, the Athos I, spilled tens of thousands of gallons of crude oil in 2004. Money can be sought by the states for expenses like restoration of a damaged wetland or compensation for loss of use of a resource.”

We wondered about the details surrounding the federal fund and asked Jim Lucier of Capitol Alpha Partners for his views. Jim is one very smart analyst, whose firm does superb research on federal political activities and Washington-based intelligence. He is current with the BP spill issue. Jim gave us permission to share his piece on this federal fund. You can find “How the OPA Trust Fund Works” on our website, at http://www.cumber.com/content/Special/HowOPA050410.pdf.

We thank Jim for giving us permission to share it. Please note that Jim is a member of the GIC and will be speaking on the Washington scene at our briefing in Paris on June 18.

David R. Kotok, Chairman & Chief Investment Officer, Cumberland Advisors, www.cumber.com

Category: Energy, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

4 Responses to “Oil Slickonomics (Part II)”

  1. alfred e says:

    Here’s a super irony for you.

    And just another example of how everyone assumes they have the perfect sources and the best information.

    And I suppose a free stock tip of potentially huge significance. Appropriate voluntary contributions will be graciously accepted. One percent sounds more than fair. BR knows my EMA.

    There could be some really good reasons BP is remaining very silent about details.

    So far they have done the right PR thing assuming responsibility, but I’m not sure that’s the beginning and end of the story.

    I have been entirely too many places with a curiosity. A lot most would not consider visiting.

    Here’s the deal. That well was at the stage known as “servicing”. Driller finished the work. Left it to the well servicing company to mop up the details and prepare it for production.

    IMHO. At the point the well servicing company is totally in control and responsible for everything done at the well-head. and potentially legally liable for everything that happens at that point.

    Care to guess who that company was?

    Halliburton. You know. That company that’s expert as servicing wars and political advantage.

    So don’t be surprised if BP shares the blame at the right point in time.

  2. CitizenWhy says:

    Nothing ill be fixed. Halliburton will not be held responsible, exempted “in the national defense.” It just won a huge contract from the Pentagon, for whom Halliburton has done much shabby work in the past. Ho-hum, business as usual.

  3. As long as the penalty for these disasters is a pittance of a fine, there is no incentive to prevent these occasional disasters. It’s just the cost of doing business.

    If the fine in this instance is $10 billion – plus 100% responsibility for every penny spent in the clean-up, you better believe the oil companies would be more responsible and be more attentive to disaster prevention. I’d even like the law to prohibit the laying off of risk by making it against the law to own insurance for such events.

  4. alfred e says:

    As some more information.

    My limited sources deep in the deep-well drilling field, are familiar with Halliburton and Schlumberger.

    And they prefer Schlumberger.

    By a huge margin.

    Because they are professionals and understand when their employee’s life is on the line.

    That is the most dangerous time in the life of a well.

    And Schlumberger wins by a factor of ten at least.

    Well, I guess in a war people have to die, so the CEOs can get their bonus and elected VP.

    So what’s so different about the oil business?