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By Dr. Peter Dailey, assistant vice president and director of atmospheric science, AIR Worldwide
The world has watched the Gulf of Mexico since a massive leak began spewing oil following the April explosion on the Deepwater Horizon oil drilling platform. The timing of the leak is significant. According to sea surface temperature anomaly charts from the National Oceanic and Atmospheric Administration (NOAA), the North Atlantic hurricane season began in June with warmer than average temperatures in the northern Gulf of Mexico. The possibility of a tropical storm or hurricane passing over the oil spill is very real.
Oil’s effect on hurricanes
Could the oil spill form a blanket over the ocean surface, cutting off evaporation and preventing hurricane formation? In reality, such an effect is likely to be minimal. As in an interactive map from Google Crisis Response shows, the current spill, while historic in extent, covers just a small portion — about three percent — of the Gulf. According to the NOAA Office of Response and Restoration website, much of the spill area remains patchy.
Could the oil slick further heat the already warming waters and encourage hurricane formation That scenario appears in a May 21 NPR article, “Hurricane, oil spill could be troubling mix,” which quotes a hurricane expert from MIT (Massachusetts Institute of Technology). But the oil is gushing out of the well a mile below the surface and mixing with chemical dispersants and water. What arrives at the surface is fundamentally different from crude oil spilled from a tanker, so its ability to warm the ocean surface may be limited.
Storm over oily waters
While the effect of the oil on hurricanes appears to be minimal, the effect of hurricanes on the oil is another matter. The ongoing impact of the oil spill on Gulf of Mexico wildlife, habitats, fishing, tourism, and other related businesses could intensify if a tropical storm developed or moved into the area. All rescue, spill control, coordination, and other activities would halt if a major storm were to threaten. Crews laying out booms or trying to cap the spill itself rely on relatively calm seas and safe conditions to do their work. Any nearby storm would put workers in danger, requiring evacuations and halting efforts to deal with the spill. The barriers that keep oil away from the coast would not only be unmanned, they would also be overwhelmed by strong winds and high seas, washing oil over the booms and well inland if the storm makes a Gulf landfall.
An April 30 release from the Louisiana State University Center for Natural Resource Economics and Policy titled “Economic impacts to fisheries and coastal habitat,” suggests that the northern Gulf of Mexico is one of the world's major sources of shrimp, oysters, and crabs, with fishery production worth more than half a billion dollars annually. However, as of the end of June, NOAA had closed more than 30 percent of Gulf of Mexico federal waters to fishing. The inland reach of the oil with the arrival of a tropical storm surge — coupled with oil mixing thoroughly into the coastal waters because of wind and surf — could destroy this year's harvests and also threaten future production by harming underwater habitats.
Birds in the area's marshes face a similar risk. Strong winds or intense storm surge could completely breach the barriers in place and expose the animals' habitats to the spill. What ultimately washes ashore may or may not be as toxic as oil straight out of a tanker, but it would add to the scientific unknowns regarding the spill's impact. There is also likely to be a large amount of oil underwater, with possibly long-lasting effects on marine life.
Contamination from storm surge could also be detrimental to tourism, as images enter the public consciousness of once-pristine beaches sullied by tar balls or covered in oil. Already, hotels in the region — even where the oil has not come ashore or affected nearshore fishing — are reporting occupancy rates at less than 25 percent of the season's normal levels. A May 12 Businessweek article, titled “Crist asks BP to pay for oil-spill tourism ads,” reported that the Florida governor requested that BP pay $35 million to cover public relations and advertising designed to reassure potential Gulf Coast visitors that the Gulf is still open for business. The coming months should be very revealing with regard to tourist activity in spill-affected areas in terms of claims for lost business.
The costs: A developing story
No one doubts that the costs associated with the oil spill will be high — billions of dollars. But there is much uncertainty about the spill, and response actions are still under way, so estimates of the total costs are premature.
The incident has served as a wake-up call to the oil and insurance industries, and both sectors will be watching closely to see what the implications are for the future of deepwater drilling. BP is self-insured in the United States, according to a BP spokesperson. However, the self-insured option may be realistic only for the largest oil companies.
According to a May 24 Business Insurance article titled “Spill triggers effort to up liability cap,” the terms of the national Oil Pollution Act (OPA) of 1990 require operators to demonstrate financial responsibility through a letter of credit, surety bond, insurance, or self-insurance. In addition, the article indicates that a firm should have stockholder equity equal to ten times the insured amount of potential damages in order to self-insure, and that it may not be possible for all companies to purchase the insurance necessary to cover the expected liability associated with drilling. While the OPA generally limits an oil company's liability to an amount equal to the cost of oil removal plus $75 million — except in cases where gross negligence, willful misconduct, or flouted safety codes caused the spill — both BP and the U.S. Department of the Interior have indicated that BP has accepted responsibility, and its costs for the spill will not be limited to that amount.
Another consideration is the role that federal funds may play in compensating affected parties for the current incident and its aftermath. The OPA established a federal fund known as the Oil Spill Liability Trust Fund (OSLTF) to compensate those affected by oil spills. Setting aside the individual-plaintiff and class-action lawsuits that many private law firms have already begun developing, the proper way to recover losses, according to government websites, is to submit claims to BP before seeking other compensation. Should BP deny claims, the law would generally address the submission of claims by those parties to the OSLTF. (See the U.S. Government Printing Office website at www.gpoaccess.gov.) Even though the $2.7 billion limit of the OSLTF might be insufficient to cover all associated expenses, it still could act to provide a cushion for privately insured and self-insured oil companies — which originally supplied the fund through a federal tax on every barrel of oil imported into the Unites States.
How the OSLTF is used now may affect insurance rates for deepwater drilling and, by extension, the viability of such enterprises in the future. If the fund acts to lessen the cost to BP and other private parties, it may help contain the estimated risk associated with deepwater drilling. But if official enforcement, judicial decisions, or legislative actions require BP to pay most of the bill, or to repay most of the funds tapped from the OSLTF, those costs could further increase the risk estimate for future deepwater drilling activities.
The present deepwater break is the first of its kind and magnitude and threatens to reach a new scale of costs associated with long-term pollution cleanup, business interruption, and response costs. Legal decisions or legislative actions may also establish laws attaching additional liabilities to future drilling in deep water, which may in turn affect insurance costs. Even if the worst-case scenario — a powerful hurricane halting cleanup efforts and driving toxic oil deep into sensitive areas — does not come to pass, the widespread realization of the double-barreled peril made possible by deepwater drilling in the Gulf of Mexico is bound to drive up coverage costs for such activities.
Deepwater drilling is at a critical juncture. One of the only certainties is that no matter how long it takes to quell the flow of oil from the bottom of the Gulf of Mexico, the impacts — socioeconomic, political, financial, and legal — will resonate for many years to come.
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