Oil spills are expensive. Nearly two weeks after a massive explosion in an oil rig killed 11 workers and triggered a massive oil spill in the Gulf of Mexico, the cleanup and other associated costs are rapidly mounting and, by one estimate, will total at least $12.5 billion.
On Monday, the Gulf rig's owner, British Petroleum (BP), announced that it will pay for the cleanup.
“BP takes responsibility for responding to the Deepwater Horizon oil spill. We will clean it up,” the company said in a statement, adding that it will pay “all necessary and appropriate clean-up costs.”
If the 1989 Exxon Valdez spill is any indication, BP’s bill will be big.
BP is already spending between $6 million and $7 million per day on cleanup. That doesn't include state and federal spending – including the deployment of thousands of National Guard units to the Gulf – that BP will likely be held responsible for.
So what’s the bill?
“I don’t think anybody knows at this point,” says Mr. Eisenbeis. “We don’t know when the gusher is going to be capped. Every day it goes on longer than anticipated, more and more [the costs mount].”
For starters, BP is looking at $12.5 billion, minimum, says David Kotok, chairman and chief investment officer of Cumberland Advisors.
“This will be a financial calamity for many firms, not just BP and its partners and service providers,” he said in a statement. “Their liabilities are immense and must not be underestimated. The first estimate of $12.5 billion is only a starter.”
Included in that $12.5 billion in potential costs is a laundry list of expenses, says Eisenbeis.
Depending on how the situation unfolds, the oil behemoth may be footing the bill for costs of drilling and capping spill, costs associated with containing and picking up oil that has been spilled, damages to wildlife, damage to commercial fisheries, damages involving tourism and recreational industries, costs associated with disruption of shipping.
That’s not to mention litigation costs and fines, adds Eisenbeis.
There are questions as to whether BP may have violated US safety regulations, and a number of private citizens affected by the spill are organizing class action lawsuits.
“These are all things that can really bump costs up,” says Eisenbeis. “It’s obviously going to be greater than Exxon Valdez,” he says of the 1989 oil spill that cost Exxon more than $7 billion. “That’s because of the sheer volume pumping into the Gulf right now and the fact that Exxon Valdez was a known volume on a ship, whereas this is an unknown volume.”
The question is whether BP will actually pay, and how much.
“Of course, BP’s a foreign company and we don’t know to what extent there might be some indemnification provided by British government,” says Eisenbeis. “If Britain backs [BP] up because it’s deemed too big to fail, costs may be shouldered by British taxpayers.”
BP’s cleanup costs are still hazy, but costs to BP are clear as day: The 52-week high for the oil behemoth’s stock is $62.38. Monday morning’s trading low? $47.82.