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Deepwater Horizon Problem would likely mean higher oil prices

David Kotok of Cumberland Advisors:

The oil and gas industry in the GOM has permanently changed because of this event.  One can relate this to Three Mile Island (TMI) and its profound impact on the nuclear power industry.  It took more than thirty years to overcome the psychological and political damage done by TMI, and there was no actual nuclear leakage.  We estimate that Deepwater Horizon may end up larger in national impact than the nuclear event decades ago.

It is important to understand the scope of the Gulf of Mexico in US and global energy terms.  GOM “accounts for 12% of the world’s active jack-up rigs and 16% of active floating rigs.  In 2009 the Gulf accounted for 19% of the operating revenues of the nine largest US-listed offshore drilling contractors.  The Gulf’s share of global capital spending on subsea production equipment was 20% in 2009.  Slightly less than 2% of world crude oil production came from the Gulf last year.  Of total US crude oil and natural gas production in 2009, 30% and 13% (respectively) came from the Gulf.”  (Source: Citi)  There is no way to currently assess what the implications of the Gulf events will be for offshore oil-drilling activity elsewhere in the world.

Our expectation is that the oil business is about to enter a period of intense scrutiny and regulation worldwide.  It will confront higher cost structures and much more inspection and regulation.  This will eventually be reflected in higher oil prices.

These strategic cost changes will pile on the geopolitical risks associated with oil.  The current news from the Middle East is an example of cause with the outcome being a higher oil price.


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