The Most Expensive Oil Spills

By Eric Fontinelle | May 26, 2010 AAA
The Most Expensive Oil Spills

The BP Deepwater Horizon oil spill may very well become one of the most costly environmental disasters in history. While many factors are still up in the air concerning how bad the oil spill may ultimately be, we can get an interesting sense of perspective by analyzing the BP spill in light of two of the most expensive oil spills in history. (Find out more in The Real Cost Of Natural Disasters.)

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The Exxon Valdez
The Exxon Valdez oil spill in Prince William Sound, Alaska was the largest oil spill in U.S. waters. Approximately 250,000 barrels of oil were spilled into the ocean. Despite attempts to use dispersing agents and oil skimming ships, a large amount of the oil washed ashore in the Sound and in nearby islands. The public was appalled by the damage to the pristine wilderness in an Alaska. They demanded a thorough and costly cleanup, beach by beach. In addition, valuable Alaskan fishing waters were heavily polluted.

Exxon paid more than $3.8 billion in clean up and damage costs and $500 million in punitive damages; lawsuits against the oil giant proceeded for 20 years following the accident. Exxon was originally ordered to pay $5 billion in punitive damages, but that the figure was successfully reduced through a series of appeals that brought the case all the way to the U.S. Supreme Court. More costly than these explicit pay outs, however, was the loss to Exxon in terms of its reputation in the marketplace. Exxon now ships its oil through a subsidiary which uses a different name in the hopes of avoiding further damage to the Exxon brand if there is another accident in the future.

The Ixtoc I Spill
The 1979 Ixtoc I Spill is an interesting case because the circumstances are extremely similar to BP's Deepwater Horizon. Just as with Deepwater Horizon, Ixtoc I was being drilled when it suffered a catastrophic wellhead blowout. Oil and gas fumes flowing out of the well exploded, causing a fire on the drilling platform and leading to its collapse.

The flow of oil from the Ixtoc I well could not be fully stopped until nine months later, after a relief well was drilled. Before it was capped, the well released approximately 3,500,000 million barrels of oil. This makes it the largest accidental oil spill in history. This oil spill is exceeded only by the intentional spilling of around 8,000,000 barrels of oil into the Persian Gulf by the Iraqi army in an attempt to discourage an American seaborne invasion in the 1991 Gulf War.

A final accounting of the total cost of the Ixtoc I oil spill and its cleanup could not be found, however, an economic impact study conducted for the U.S. Bureau of Land Management speculates that the spill was probably the most expensive oil spill in history at the time. Backing this assertion, the report cites cost figures which would indicate a total cost estimate of approximately $1 billion for the lost oil, well capping operations, cleanup efforts and pending damage claims. Notably, these costs were significantly less than those of the Exxon Valdez because less of the oil washed up on shore. Also, oil spills tend to be less expensive outside of U.S. waters, because the U.S. political climate is such that citizens demand extraordinary measures to repair damage to fishing waters and to coastal environments - as well as reparations for the damage caused.

BP Deepwater Horizon
Since the case of the BP Deepwater Horizon spill is still unfolding, it is difficult to give a good estimate of what total costs could come to. Many experts expect that this spill could exceed the costs of the Exxon Valdez spill, with some even saying that the final bill may be in excess of $12 billion. The total costs will ultimately be determined by the success of the ongoing attempts to mitigate the damages.

A critical factor in the total cost of the spill will be the total amount of oil released. However, there is significant controversy surrounding the rate at which oil is flowing from the well. According to expert analyses reported by NPR (National Public Radio), the rate at which oil is spilling into the Gulf may be as much as 10 times greater than the initial 5,000 barrel per day estimate.

The Bottom Line
There are numerous factors which determine the ultimate cost of an oil spill cleanup and the amounts of the subsequent damage claims. It will likely be years until a final tally of the damages can be taken. While BP will almost certainly have enough money to pay the damages, the harm to BP's reputation in the U.S. may very well impact financial results long after the spill is stopped. BP PLC's shares have fallen from $59.49 on April 20 to below $45.50, a decline of almost 25% in the month since the spill.

Get a rundown of the latest financial news in this week's Water Cooler Finance: Buffett Buzz, Toxic CDOs And Facebook Privacy.

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