FNArena has the pleasure to welcome senior resources analyst Gavin Wendt as contributor to our news and analysis service.

By Gavin Wendt

While oil giant BP has rightly had to carry the can for the unmitigated environmental disaster that continues to unfold on the shores of the US Gulf of Mexico, BP’s role in the clean-up is just one aspect of the sorry saga that needs to be addressed. Other important issues need answers. Some include just why wasn’t the response of local and federal authorities to the spill more immediate; and what impact will this all have on the future of the oil industry, in particular oil prices and the repercussions for consumers.

Companies of course need to be held accountable for safety and operational errors. But there are non-market costs, outside a company's ability to finance and still compete in its market.

It is therefore the duty of governments to try and identify these non-market costs, to assess what fees may be required in advance, and to then allocate adequate resources and deal with the specific crisis. In the case of the BP oil spill, the company should be held accountable for the initial accident and the first week of the spill.

However, the delay in repairing the leak is essentially a government failure. Had the federal government been diligent in its duties, it would have assured that necessary safety and emergency response procedures were well in place prior to the issuing of drilling permits.

After all, the US government rakes in an extraordinary amount of tax from its oil producers. Therefore it is entirely appropriate that the federal authorities have a well-funded plan of action that it can quickly and properly implement when these sorts of disasters occur.

Could ego and national bloody-mindedness also have contributed to the ineffectual response by authorities so far? If so, it demonstrates that governments and authorities have been more concerned with demonizing BP than actually getting on with the job of fixing the problem.

I ask this question because I was alerted to a US publication with the decidedly unexciting title of Dredging News.

One should never judge a book by its cover, though, because the journal offered a serious of interesting and thought-provoking stories highlighting the apparent fact that foreign oil cleanup resources were not being employed to clean up the mess in the Gulf.

Apparently it relates to some obscure US legislation known as the Jones Act (1920) which protects union jobs in the US. Belgian newspapers had reported that several of its national dredging companies had been bewildered by the fact that BP and US authorities had not contacted them to assist with the relief effort.

The Belgians among other foreign clean-up operators claim that the Americans have not accepted their proposed assistance for two reasons: firstly, the US authorities are reluctant to admit that somebody else has better equipment; and secondly the protection of the American market through the protectionist 1920 Jones Act, prohibiting foreign dredging companies from operating in US waters.

I hope this ludicrous situation changes quickly, because things are becoming more desperate daily for the environment of the Gulf states.

But when it does, there will still be serious near term and longer-term consequences for the oil industry, the world economy and consumers.

For starters, companies are going to find it harder to explore for oil in the US, the world’s biggest oil market. The Obama administration is going to make it much tougher for oil exploration in the US, once again closing off large areas of offshore waters from exploration.

Secondly, even when commercial finds are eventually made, projects are going to be faced with much longer lead times to development, as there are going to be bigger hurdles for projects to jump through in terms of environmental approvals.

This will delay the supply side response of the oil industry to problems of growing demand, particularly from the emerging economies of China and India.

This means that over the longer term we will be once again faced by higher oil prices than would otherwise have been the case. It was already becoming much harder and more expensive to find and develop new oil fields, but that job has just become much harder and a lot more expensive.

What this means is that motorists will eventually feel the impact of the current US Gulf oil spill in their hip-pockets, with prices in my view likely to head back towards the US$100 per barrel mark by early 2011.

The above story was originally written and published on Tuesday, 22 June 2010.

Gavin Wendt is a senior resource analyst from Mine Life, find out more at www.minelife.com.au

The views expressed in this story are Wendt's, not FNArena's (see our disclaimer).

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