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When Rear Ends Need Kicking
Finance
Perspective on the News
Monday, June 21, 2010
Ed DeShields

When the Obama administration ordered a six-month moratorium on all deepwater drilling after the April 20 Deepwater Horizon disaster he was attempting to show who was in charge of the disaster.  He was famously kicking well, you know, rear ends. 

But the rear end he was kicking wasn’t British Petroleum (BP), but the entire world as it turns out. 

Let’s face it.  There are two of three things certain.  First, the oil spill is a true disaster and we’re going to pay for this, one way or another, for many years.   Second, President Obama is either terribly inexperienced, or has a narcissistic personality disorder, or both.  Or third, President Obama knows exactly what he is doing by not letting another disaster go to waste.

I did a little mathematics on the economic costs of the mistakes made by both President Obama and BP which will prove my point. 

So far, no one knows the actual economic impact of the disaster but let’s set that aside for a moment and put the numbers into perspective.  Let’s also look at Obama’s decisions and how his inexperience has potentially created a negative economic impact over 100 times greater than the spill itself.  Stay with me here. 

There are 31 deep wells drilling in the Gulf.  Shutting them down created an instant loss of employment for 50,000 workers in the region – a loss of $5 billion in wages and 900,000 barrels of U.S. oil off the market (more on this in a moment).   Nine hundred thousand barrels daily is a loss to U.S. producers of over $24 billion; if they can be brought back online within one year.   Unfortunately, many rigs will never be brought back online because the rigs are going to be moved to other areas of the world starting immediately.   This is a permanent loss of an important part of our domestic oil industry.  Not smart Mr. President.    

The President’s decision to scuttle these rigs cost a whopping $29 billion in economic benefit they produce equating to an amount comparable to 10% of the gross domestic product of ALL FOUR oil producing states in the Gulf (Alabama, Mississippi, Louisiana and Texas) – all because the President wanted to show he was in charge. 

Rule number one.  In the midst of a disaster, DON’T make it worse by making stupid decisions! 

To be fair, let’s compare the numbers.  BP is losing about $4.5 million a day in oil production from the leaking well and over 60 days that’s about $270 million.  That’s about an amount equal to what they spend on pencils for the office each year.  That will probably double before the leak is stopped to about $500 million in lost production from this well; still a rounding error in accounting. 

So far, that’s a $500 million mistake for BP, and $29 billion (that’s with a “B”) mistake for President Obama. 

Now let’s say that the entire Gulf fishing industry is lost.  All fish.  No production for a year.  According to the National Marine Fisheries Service, the entire commercial fish and shellfish harvest from the five U.S. Gulf states was estimated to be valued at $661 million.     So let’s send that bill to BP. 

So let’s add that up too. 

So far, a $1.1 billion mistake for BP (via a loss of the Gulf harvest and lost production not counting cleanup) and $29 billion for Obama for shutting down the U.S. Gulf oil industry.  

But, BP did create a big problem that it will have to clean up.  So let’s charge BP with $20 billion over five years to clean it up (if it can) like the Administration is suggesting (kicking rear ends again Mr. President?). 

Grand total?  A $21.1 billion mistake for BP and a $29 billion mistake for the President.  Fairly yoked in the incompetence department so far. 

But, a loss of nine hundred thousand barrels of crude on the world market is another matter.  It is expected that this loss will elevate oil prices to $100 per barrel according to John Kingston, Platts Director of Oil.  Platts is a leading oil industry expert.   The world’s production of 84 million barrels of day makes the impact estimate of the Gulf shut down to $1 trillion (that’s with a “T”) annually.

Therefore, mismanagement by BP = $21 billion; mismanagement by the President = $1.3 trillion.   BP’s damage is a mere 2% of the cost of President Obama’s decision-making prowess.

Mr. President we can’t afford any more reckless economic policies.  And, we fear your decision to shut down U.S. oil capacity could be a tactic to raise oil prices so America will renew its interest in your cap and trade energy theories.   

About Ed DeShields

From last week: Wise Men. Power of Fools.

 



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