Now That the Oil Well Has Been Covered, Will BP Survive?

It’s been a month and a half since the oil spill incident unfolded in the Gulf of Mexico, United States, and British Petroleum (BP) finally put a containment cap on the ruptured well on June 4.

However, it will take until mid-August before the spill is completely contained. Millions of barrels of oil are still flooding the Gulf of Mexico, causing serious problems for the fishing industry, the tourism industry and the environment. The accident has caused a financial and political crisis just as serious as a hurricane in the Gulf of Mexico.

Is This the End of Offshore Drilling?

How will this oil spill ultimately affect the oil drilling business in America? The spill has been compared to the Three Mile Island nuclear plant incident in 1979: the partial meltdown of a [core within a] unit at Pennsylvania’s Three Mile Island nuclear plant stopped the growth of an industry for several decades. The Three Mile Island incident was not a death sentence for nuclear power plants, however, and this accident will likewise not be the end for deep-sea oil drilling. Offshore oil drilling, on the other hand, is another matter. The agenda for offshore drilling will have to change; the original plans will not be accomplished for a few years.

Robert Bryce, energy policy researcher for the Manhattan Institute in New York, told reporters: “What’s bad for the offshore oil and gas industry is good for corn ethanol and wind.” He predicts that the Obama administration will soon send a gift to the biofuel industry, approving an increase to the cap on the amount of ethanol allowed in U.S. gasoline from 10 percent to 15 percent.

“Drill, Baby, Drill,” a slogan used by the Republican Party, called for increased domestic production of oil. A few months ago “Drill, Baby, Drill” almost became a reality. At the end of March, President Obama had announced that he was considering lifting the ban on offshore oil drilling and expanding offshore oilrig development. This plan included lifting a drilling ban on two protected areas in Alaska and having an oil drilling lease sale for a piece of land off the coast of Virginia. However, after the oil spill, the Obama administration made a 180 degree turnaround. Some of the supporters of “Drill, Baby, Drill” were put in an awkward position. Environmentalists used a play on words and changed the phrase to “Spill, Baby, Spill.”

Obama’s Suspension of Drilling Policy: Better Late Than Never?

On May 27, Obama announced a six-month suspension of deep-sea oil drilling and suspended all offshore drilling until oil rigs could pass new safety standards. Recent opinion polls show that many Americans are dissatisfied with Obama’s handling of the crisis. Obama was forced to cancel plans to visit Australia and Indonesia to focus on the crisis.

Many in the oil industry and the coastal area of the Gulf of Mexico are also dissatisfied with the suspension of oil drilling. The oil companies are perplexed and suspicious that the government went back on its word. Even though Exxon, Chevron, and Shell have all slowed their operations in the Gulf of Mexico, they are worried that the drilling ban will be extended.

The local government, as well as research institutes, is worried that the drilling suspension will deliver a deadly blow to the local economy. “It may be good politics, but it is bad economics,” said Bernard Weinstein, associate director of the Maguire Energy Institute at Southern Methodist University in Dallas.

According to Weinstein’s estimates, 20,000 oil industry related jobs will disappear.

On June 2, both Louisiana Gov. Bobby Jindal and Sen. David Vitter separately wrote to President Obama asking him to reconsider the six-month drilling suspension. Jindal wrote, “The last thing we need is to enact public policies that will certainly destroy thousands of existing jobs while preventing the creation of thousands more.”

Will a Century-Old Company Be Wiped Out in a Day?

At the center of the crisis, BP is undoubtedly experiencing the darkest period of its 100-year history. The U.S. Justice Department has already announced that it will launch a criminal inquiry, which will investigate both criminal and civil charges. The U.S. government has already asked the company to pay $69 million to help deal with the oil spill.

BP has made painstaking efforts to construct an environmentally friendly image for the company during the past ten years. This image is now on the verge of collapse. This series of setbacks has affected BP’s financial situation: Investors are worried that BP will not be able to survive the crisis.

As an international company that was established over 100 years ago, BP plays an important role in the financial market. In some British pension fund plans, one out of every six pounds of British pension dividends came from BP.

However, in the last seven weeks, BP’s stocks have fallen from $60 per share to $37 per share on June 5. The company’s market value has decreased over $70 billion. On June 1, when the U.S. Justice Department announced it would conduct a criminal inquiry, BP’s stock prices fell 15 percent, reaching its lowest level in 20 years. Due to the protracted oil spill, three major American credit agencies lowered BP’s credit score.

Investors are withdrawing support from energy related companies, especially oil companies, thanks to BP’s problems. After the exposure to the risk of drilling, more investors have become increasingly cautious in their assessment of oil companies.