Oil Slickonomics Part 4

David R. Kotok, Cumberland Advisors

May 24, 2010

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“The most recent satellite imagery indicates that the portion of the oil previously observed moving to the SE towards the Loop Current (LC) has largely been entrained into a counter-clockwise rotating eddy to the north of the LC. Over flight observations report this oil is in the form of very scattered light sheens. It is possible for sheens on the southern edge of the eddy to become entrained into the LC and persist as very widely scattered tar balls not visible from imagery. Model trajectories do not indicate additional oil from the source region will move south towards the LC during this forecast period.”

Source: NOAA, May 22, 72-hour offshore trajectory forecast through May 25
So far we are still going from “bad” to “worse,” as outlined in our series on Oil Slickonomics. It’s not in the Loop Current, yet.

Meanwhile, BP is trying new measures to slow or stop the leak. So far attempts to mitigate the flow have mostly failed. BP and the US Coast Guard each admit that they do not know how much oil is flowing into the Gulf. 5000 barrels a day is an estimate, but there are many other estimates and they range widely.

Some leaking oil is being captured and brought to the surface. Most is still going into the waters of the region. NOAA has now declared about 1/5 of the Gulf’s federal waters off limits to fishing. This is about 50,000 square miles. Shellfish buyers told me that, essentially, if shrimp or oysters come from west of the Mississippi River they are OK and east of the river they are to be avoided. In the region there is now a term, “Texas oysters,” to describe what is edible. So far the western Gulf has been spared damage, while Louisiana and Mississippi are the hardest hit.

Notice NOAA’s use of the term “federal waters.” Remember that NOAA is a US government agency. It only deals within its jurisdiction. In addition to the federal waters there are state jurisdictional waters, which amount to the coastlines; and there are international waters, which are beyond the NOAA jurisdiction. We have yet to see any reports of the slick reaching international waters.

Many details may be found on the CNN website www.CNN.com. We will not repeat them here, but we recommend readers to spend a few minutes on the CNN reporting, which has been excellent.

We will comment on three items. First: the drilling rigs and platforms in the Gulf that are registered in the US are under the supervision of our federal government. Others, like the one that is the source of this catastrophe, are registered in foreign jurisdictions. That is done by the oil companies in order to save money. There are representations made about compliance with US law. But the evidence is that the US-registered vessels get much more inspection and scrutiny than the non-US ones. This foreign registry issue is now an exploding area of inquiry and controversy.

The second item is dispersants. EPA has ordered the cessation of the use of Corexit, a dispersant that BP had been using to combat the spill. The reason is that it is too toxic. EPA admits that there is no precedent for the amount of dispersant used in this event and the type used. This is truly an uncharted area. They are now concerned enough to call for only mild dispersants, so as to reduce the risk from the toxicity. No one knows how much damage has been done by the dispersants already used.
Third, The New York Times reports that the laboratory used to do the sampling and testing to determine degrees of damage and eventual liability is owned by an oil-services firm that “counts BP” among its biggest clients. Critics claim conflict of interest. The lab owner says its work is “unbiased.”

Several websites have erroneously quoted our writings as estimating the final cost to be $125 billion. They are in error. We have used the $12.5 billion number and have been gradually increasing it to “tens of billions.” I believe the website put the decimal point in the wrong place.

If we get confirmation that the oil is in the Loop Current, then our assessment will go from the “bad” condition to the “worse” condition. That confirmation would mean Florida’s west coast is in danger and that the possible spread around the tip of Florida has become a serous risk. So far we have evidence that the slick reached within a few miles of the LC, but the establishment of a serous amount of oil there is still not confirmed.

We watch; we wait; we hope. But in our gut we know that the unfolding drama in the Gulf of Mexico is destined to become the largest and most costly oil pollution event in global history. We reiterate our recommendation to avoid investment in BP shares or related companies. Their liabilities grow every day.

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David R. Kotok, Chairman & Chief Investment Officer, Cumberland Advisors, www.cumber.com