Last week, this column introduced the topic of what an oil spill may cost Guyana in an attempt to ascertain what, should such an event occur, might be the true cost. Of course, in order to do so, a number of reasonable assumptions would have to be developed in order to work around this to find a plausible, quantifiable answer.
The previous article began by firstly examining one of the most recent oil spills that occurred in 2010 – that is, the BP oil spill in the Gulf of Mexico. To this end, BP was sentenced to pay US$4 billion in fines and penalties. This sum is greater than the size of Guyana’s economy measured in terms of GDP (Guyana’s GDP as at the end of 2016 was just about US$3.4 billion). It is noteworthy to mention that the daily oil production had dropped to 57,000 barrels of oil equivalent per day from more than some 90,000 before the spill (Real – Time News from AL.com). Here in Guyana, daily production is projected to kick off at 100,000 barrels per day, and to eventually be scaled up to 220,000 and 500,000 barrels per day, according to releases in this regard by the oil exploration companies – ExxonMobil and its local subsidiaries.
Excerpts of the economic damages caused by the BP oil spill:
* Apart from those costs highlighted in last week’s article, BP has paid US$713 million for lost tax revenues in advance to the Louisiana, Florida, and Texas state governments.
* The fishing industry had suffered greatly from the oil spill. It cost fishermen over US$172 million in commercial fish landings in 2010.
* The public views Gulf seafood as potentially contaminated by oil; demand and prices had dropped accordingly. In a study commissioned by the Louisiana Seafood Promotion Board, 70% of consumers polled expressed some level of concern about safety following the Gulf oil spill, and 23% had reduced their consumption of Gulf seafood. At the time, it was unclear if, and when, customers would perceive Gulf seafood as safe enough to buy in former quantities.
* A respected consulting firm, Oxford Economics, put damage to tourism in the Gulf at between US$7 billion and US$23 billion for a three-year period following the oil spill.
By and large, it is a difficult task to assess the true cost of any oil spill, and especially potential oil spills. But with past oil spills in other parts of the world, these serve as a framework for assessing the nature of damages as well as providing information on the potential magnitude of costs. The costs of an oil spill consist of two components: private costs to the oil rig operators, and external costs to the Government, victims and natural resources (Cohen, 2010). In this framework, private costs constitute the following:
* Damage to the oil rig and related equipment
* Containment costs to stop or reduce further oil spillage (e.g. efforts to cap wells, booms, dispersants, controlled burning)
* Cleanup costs incurred by responsible parties
* Lost oil
* Cost of litigation (including punitive damages or other penalties not directly related to the above)
External costs:
* Loss of life and injury to workers
* Containment costs to stop or reduce further oil spillage (e.g. booms, dispersants, controlled burning)
* Cleanup costs incurred by government agencies
* Cost of repair to public infrastructure
* Loss of income by affected businesses (e.g. fisheries, tourism businesses)
* Lost consumer value from shifting purchases and/or behaviour
* Natural resource damages
* Cost of litigation (both to Government and to victims)
Irrespective of these costs that oil spills can impose, some spills will have no costs in one or more categories – and the magnitude of costs that do occur can vary widely. There are a number of factors that can affect the ultimate cost of an oil spill, including the type of oil; weather patterns at the time of the spill; and the proximity to industry, tourism, recreation, and environmentally sensitive areas. Very small spills are likely to have negligible costs, because oil tends to disperse in water. Most small spills can be contained easily, or will disperse on their own and cause little harm. Many large spills also have relatively little or no impact when they do not reach sensitive shores.
According to Cohen (2010) the average oil spill in the United States costs approximately US$16 per gallon in clean up and damages, excluding litigation costs. The variation in this estimate is, however, enormous. For example, the Exxon Valdez spill of approximately 10.8 million gallons in Alaska in 1989 cost over US$630 per gallon.
Next week the author shall bring this topic to a close by presenting some precautionary measures that have developed as a result of previous oil spills among other critical elements within the context of Guyana.
*The Author is the holder of a MSc. Degree in Business Management, with concentration in Global Finance, Financial Markets, Institutions & Banking from a UK university of international standing.
