A Crude Awaking In the Gulf

The BP oil spill has exposed the US’s inability to cease oil production in the Gulf of Mexico even in the face of an unprecedented ecological disaster. Even as the crude soils the coastwise beaches, sensitive wetlands and destroys businesses, the offshore industries are demanding the administration end its six month moratorium on deepwater drilling. On the human level it’s about jobs, but the loss of production is estimated to be 26,000 barrels per day (bpd) in the fourth quarter and 70,000 bpd in 2011, which will have a profound effect on the nation’s economic engine and its ability to emerge from the global economic crisis.

The US can ill-afford to fall behind in the global economy especially while its debt is off the charts and unemployment is at 9.5 percent, which is expected to remain at this level throughout 2010. The GOM produces 8 percent of the entire US domestic production accounting for 28 percent of liquid consumption. The US maintains 2 percent of world oil reserves and the GOM accounts for 19 percent of the reserves. Meanwhile, US demand for oil and gas is expected to rebound by 5 percent this year even with tepid economic growth.

The administration’s moratorium has now unemployed thousands of rig workers and related offshore workers who worked on the 33 rigs affected by the ban, and their lost wages are estimated to be about $330 million per month. Meanwhile, if the GOM drilling ban lingers for any length of time, the economic consequences could be dire. Gulf communities and cities could die like the Midwest towns that died due to the demise of the auto industry and steel mills. In fact, the entire Gulf coast—where deepwater drilling is crucial to the economy—could just simply fade away.

The Changing Global Economy

The US is no longer the world’s largest economy, and it will continue to fall behind for more reasons than just oil production. In 2009, the EU posted a GDP of $14.5 trillion; the US came in second at $14.2 trillion followed up by China at $4.9 trillion. The US has a massive trade deficit on many fronts, but imported oil is the lion’s share of the imbalance of trade. In 2009, the U.S. imported over $265 billion in petroleum-related products while only exporting $49 billion. Petroleum-related products include crude oil, natural gas, fuel oil and other petroleum-based distillates such as kerosene. This oil-related deficit of $204 billion was over half of the total 2009 trade deficit of $380.7 billion.

Each year the US imports over 60 percent of its hydrocarbon consumption, and beyond Canada, which provides one out of every six barrels of oil consumed daily, US friends with oil are few and far between. Chavez just nationalized 11 oil rigs owned by Helmerich & Payne, OPEC is filled with militant countries towards the US, and Russia might look like a friend now, but it is also known to twist the political dagger when it comes to oil.

Meanwhile, the US federal debt is over $13 trillion, and nearly two-thirds being the public debt, which is owe to the people, businesses and foreign countries that bought Treasury bills, notes and bonds. The fastest growing economy on the planet is China, who owns $755.4 billion of the Treasury indebtedness, which accounts for 20 percent of the $3.5 trillion owned by foreigners. China also sends 18 percent of its exports to the US, which creates a $226 billion trade deficit. And, while many believe the Chinese flood the market with exports, they only account for 4 percent of its GDP.

In June 2010, the US posted its largest trade deficit since November 2008 of $42.3 billion, which provides additional evidence that the US recession is far from over. More importantly, as the global economy begins to recover, China’s economy expanded by 8.7 percent while the US did improve to 5.7 percent in 2009. But, the US imported 4.35 billion barrels of foreign oil at a cost of $265 billion in 09’.

Cmon Man……..

While Washington debates on whether to add a new tax on oil production to pay for the Gulf cleanup. This and other attempts to curb oil industry tax breaks are likely to create fierce opposition in Congress. With that being said, oil producers are packing their collective bags and leaving the Gulf for greener pastures due to the moratorium. If Washington continues to spit into the gale winds of the economic climate, then the limping US economy is heading for big trouble.

At the recent House Energy and Commerce Committee hearings, oil executives lined up to criticize BP and repudiate it for the Macondo well design and its series of bad decisions. The CEOs of ExxonMobil, Chevron and Shell had extraordinary criticism for fraternity member BP and they did not hesitate to throw BP under the bus.

Rex Tillerson, Chairman and CEO of ExxonMobil said he saw a number of design implementations that did not follow industry normal standards, and “we would have not drilled the way they did.” Chevron’s John S. Watson, Chairman and CEO, said not all the standards it would have had recommended or employed were not in place. And, Shell’s President Marvin Odum offered the committee “it is not a well we would have drilled with that mechanical set-up, and there were operational concerns as well.”

Additionally, Anadarko Petroleum, BP’s 25 percent partner on the Macondo project did not hesitation to blame BP when its CEO, Jim Hackett, said the tragedy was “preventable and a direct result of BP’s reckless decision and actions likely represent gross negligence and willful misconduct.”

Now, for the record, BP is not a British owned company. In 1998, British Petroleum merged with Amoco (formerly the US’s fourth largest oil company). Today, the British own (40%) slightly more than American shareholders (39%). Additionally, BP board of directors, which is made up of 13 members are multi-nationals. Five are from the UK, four from the US, two have dual citizenship (UK/US), the chairman is a Swede (Carl-Henric Svanberg) and, rounding out the thirteenth, is a Dutchman.

In the end, BP should pay for its bad decisions with all its assets, if need be. But, should we take the entire industry to the gallows for the misdeeds of one? If Obama and Salazar think the moratorium won’t devastate an already shaky economy, then the rest of us in the “lifeboat” are in big trouble.