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.)

In Pictures: Top 10 Green Industries

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.

Related Articles
  1. Investing Basics

    Should You Invest in Oil and Gas? Consider These 3 Risks

    Learn about some of the major risks with investing in the oil and gas sector including volatile commodity prices, dividend cut risk and an oil spill risk.
  2. Stock Analysis

    Who Are Exxon’s Main Competitors? (RDS.A, XOM)

    Learn about some of the main competitors to Exxon Mobil in the energy sector, and find out how their businesses are different from that of Exxon.
  3. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  4. Stock Analysis

    The Top 5 Oil and Gas Stocks for 2016 (XOM, BP)

    Read detailed analyses of the top five oil and gas stocks, and learn why they may be poised to rise in 2016 after a dismal 2015.
  5. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  6. Investing News

    5 Stocks to Buy Before Oil Rebounds

    Here are five oil related stocks that you might want to own before oil rebounds.
  7. Markets

    What Drives Oil Prices?

    Have you ever wondered why oil’s price fluctuates more than the value of other investments?
  8. Investing News

    Obama Floats $10 a Barrel Oil Tax

    President Obama intends to propose a $10 a barrel tax on oil; consumers might have to cough up 25 cents more per gallon.
  9. Fundamental Analysis

    4 Predictions for Oil in 2016

    Learn four predictions for oil markets in 2016 including where prices are heading and the key fundamental factors driving the market.
  10. Investing News

    Gartman: Oil Swings to Flatten Out at $27-$47

    Trying to figure out if oil has bottomed? The opinions of the names listed below might give you some insight.
RELATED FAQS
  1. Is Norway a developed country?

    Norway is a highly developed country, and typically has a world GDP ranking in the top 30, with a 2014 GDP at $500 million ... Read Full Answer >>
  2. Is Qatar a developed country?

    Qatar is a developing country, according to the United Nations. However, as the country with the highest gross domestic product ... Read Full Answer >>
  3. Why do some oil refineries get tax exemptions?

    Oil refineries normally receive tax exemptions due to tax loopholes. The extracted fuel exemption, for example, one of the ... Read Full Answer >>
  4. Why do ETFs have fees?

    An exchange-traded fund (ETF), like any other company, has operating costs that it incurs as a result of conducting business. ... Read Full Answer >>
  5. Do nonprofit organizations have working capital?

    Nonprofit organizations continuously face debate over how much money they bring in that is kept in reserve. These financial ... Read Full Answer >>
  6. What are some examples of general and administrative expenses?

    In accounting, general and administrative expenses represent the necessary costs to maintain a company's daily operations ... Read Full Answer >>
Hot Definitions
  1. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  2. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
Trading Center