The Cost of the Gulf Oil Spill

The dimensions of the cost are now starting to emerge. The number being batted around is $20 billion (But I would argue that they will probably continue to rise by at least another 50% because things will continue to go badly.) Here's a bit from a Bloomberg news report:

BP Plc, seen as a rising default risk by credit investors, scrapped dividends and pledged asset sales to meet President Barack Obama’s demand for a $20 billion fund to compensate victims of the U.S.’s worst oil spill.

BP’s Chairman Carl-Henric Svanberg visited the White House today and agreed on payments over four years to finance an independent body that will settle claims resulting from a damaged oil well that’s spewing as much as 60,000 barrels of crude a day into the Gulf of Mexico.

Halting the $10 billion-a-year dividend, reducing investments in drilling and selling oil and gas fields will do enough to ensure the company’s financial stability, Chief Financial Officer Byron Grote said today. Credit swap contracts before the announcement showed investors pricing in a 39 percent risk of default within five years.

...

BP had come under pressure to reach an agreement with the U.S. Administration this week after Fitch Ratings yesterday lowered BP’s credit score by six to BBB, two levels above junk, on concern that costs from the spill would undermine the company’s ability to operate.

The price of BP stock is down by much more than $20 billion, and I think the stock market has a better handle on the final cost than this interim agreement between the White House and BP.