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Deepwater Disaster
New York: June 07, 2010
By John Stephenson

British Petroleum's (BP) Maconda well has been spewing oil into the Gulf of Mexico for the last fifty days, threatening the beaches and livelihoods of thousands of residents of the Gulf region. To say that this is an environmental and economic disaster is an understatement. But beyond the immediate damage to a handful of industries, BP's oil spill won't manage to budge the overall economic needle much for America.

The loss of lives and the degradation of the environment will be the lasting legacies of the April 20 th explosion and sinking of Transocean's Deepwater Horizon oil platform. And nowhere will the impact of this disaster be more acutely felt than in the state of Louisiana . Already, oil is lapping up on shore, threatening the sensitive marshland, wildlife and beaches of the state and destroying the local fishing and tourism industries.

The U.S. government's response has been swift and unwavering. BP must pay every dime associated with the containment and the cleanup efforts. Furthermore, all offshore drilling efforts in the Gulf of Mexico have been halted for at least the next six months.

Already, the Deepwater Horizon leak is America 's biggest environmental disaster and getting worse all the time, as the well continues to leak oil into the Gulf and hurricane season swiftly approaches. But while its final economic impact for BP and much of the energy industry is unclear, its overall economic impact may not be as dire as many suspect.

Fishing employs just 50,000 nationally with an additional 10,000 or so in the seafood processing industries. And while fisherman in the Gulf will surely be impacted, the moratorium on deepwater drilling could result in job losses of upwards of 30,000 people—most of them in Louisiana . And while tourists may think twice before heading to Florida or Louisiana for a beach vacation, tourism will only suffer nationally if vacationers don't substitute a trip to Florida with another U.S. location.

Over the last fifty days or so, the share prices of energy companies have come off hard. Anadarko and Transocean, which were partners with BP in developing the Maconda well, have seen their share prices slump 34 and 41 percent respectively, as investors have sold en masse. For BP, the loss of reputation will be much more severe than the relatively short term impact of its falling stock price.

Ever since the 1990s, BP promoted itself as “Beyond petroleum,” in a deliberate attempt to re-brand itself as an environmentally friendly energy company. And for a while, that branding effort helped the company obtain a premium multiple for its stock. But behind the positive company spin, BP has had one of the worst environmental and safety records in the industry. In the last year alone, industry watchdogs have pointed out that BP had 350 environmental or safety related violations, compared to just one such violation by Exxon Mobil.

An outright ban on offshore drilling may be in the cards, with enormous consequences for the American economy. While the immediate reaction to the spreading disaster may be to say no more drilling , the reality is that America needs the oil. The U.S. gulf coast produces one third of America 's energy and over the last 40 years, some 35,000 wells have been drilled in the Gulf—all without incident. Deepwater production globally, accounted for 46 percent of the increase in global oil supply over the last decade. Tighter offshore drilling regulations in Canada, Brazil and the North Sea would have major impact on energy industry globally.

With supply stagnating or falling throughout the world, deepwater drilling provided some much-needed lift to faltering energy supply. The threat of outright bans or higher costs to produce from deepwater basins will surely mean higher, not lower, oil prices in the months ahead. One beneficiary of the deepwater disaster may be Canada 's oil sands, which accounted for nine percent of the global growth in oil supply over the last decade. By comparison, Canada 's oil sands and its energy producers may be one beneficiary of the disaster in the deepwater.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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