24 June 2010

Oil Spill Math: How Much and Why?

How much oil has spilled?

Big quantities are sometimes hard to grasp. They are outside our everyday experience. When you hear that millions of gallons of crude are spilling in the Gulf, how much is that really? Professor James Corbett of the University of Delaware has done the math in a creative way.

Assuming the gusher is was gushing 50,000 barrels of crude a day (you can adjust this assumption on the site), "As of day 66 (today), if that oil had been refined to fuel in a typical US refinery, it would have produced gasoline, diesel fuel, and fuel oil capable of powering these vehicles:
  • 118,000 Cars for a year, and
  • 9,800 Trucks for a year, and
  • 163 Containership days"

All the cars in Topeka

Most of us don't have a good feel for how many a hundred thousand cars are. So the U. Delaware site also shows the cities in the U.S. with 100,000 or more cars. This includes such cities as Pasadena, California, Buffalo, New York, Brownsville, Texas, Hartford, Connecticut and Alexandria, Virginia. All the cars in one of those cities could do all their driving for a year on the gas that could be made from the oil spilled so far. And the same crude would also provide diesel fuel for 10,000 trucks for a year, and bunker for ships.

If that's too hard to grasp, consider that you could drive your car on that gas for 100,000 years. (But what fun would that be?)
If the first Homo sapiens had started driving with that gas he or she could still be driving today (assuming fewer miles driven during the first 199,900 years, when there weren't any decent roads). Our species is only about 200,000 years old.

How risky was it to drill there?

And was that a risk worth taking? The U. Delaware site also provides a good discussion of how we try to quantify such risks. In fact, we can look at the environmental impact statement approved by the Minerals Management Service and see the probabilities BP assigned to the type of accident that occurred. The EIS "estimated the probability of a blowout in deep water drilling to range between 2 and 7 in a thousand".

If you had such a 0.2% to 0.7% chance of a disaster costing $100 billion (and the bill might be that high--not counting the damage which can't be repaired at any cost), then you would have to expect a proportionately huge upside potential to make such a well worth drilling. In fact you would have to expect to make about $500 billion in profit on the well to take such a risky bet. Since BP only makes about $30 billion in profit a year, the well would have to generate as much profit as all of BP's other activities put together every year for more than a decade, which seems unlikely. So why did they drill there?

Oil companies get special math

The reason oil companies will drill in the face of such odds is this: They know they won't have to pay the whole bill. Also, they probably told themselves that it couldn't possibly be this bad. (In fact we can read their EIS and see that they told government regulators it couldn't be this bad--and the regulators believed them!)

The Oil Pollution Act "limits the liability of responsible parties for offshore facilities, such as the Deepwater Horizon facility, to all removal costs (i.e., direct cleanup cost) plus $75 million and other language places a limit of $3,200 per gross ton".

This gross ton number tells you why BP has been so cagey about accurately quantifying just how much oil is spilling, has spilled, or will spill. Expect lawyers to argue about this for the next few decades. There's more detailed discussion on the site.

So even if the Gulf blowout ends up gushing two million barrels, as seems likely, that is about 300,000 tons of crude, for a total liability of around a billion dollars. (See conversion factors here.)

So the math for oil companies is not so bad. Downside say a couple of billion max, with a probability of 0.5%, so you only have to plan on making $10 million profit on the project to make it an even bet. The U.S. taxpayer and those who would have benefited from an undegraded environment bear the rest of the liability.

The severity and cost of the current spill may change that calculus, but they haven't yet.

No comments:

Post a Comment