Via Zero Hedge, a report from Credit Suisse which estimates BP’s total costs for it’s Gulf of Mexico problem at an eye watering $37 billion :

Some more bad news to BP, and to all those chattering heads that due to BPs tens of billions in cash, any cleanup costs are just a drop in the bucket. Credit Suisse has just come out with a new estimate of total clean up costs and liabilities to BP: the Swiss firm sees BP paying between $15 and $23 billion in clean up costs plus $14 billion of claims. The punchline: “This would absorb 3 years of BP’s free cashflow after dividends and capex (at $80/bbl oil) and require a 10% rise in gearing; raising dividend risk.” Maybe all those who are looking to jump into BP stock should consider waiting just a little longer…

Three years cashflow blown and increased borrowings would suggest that BP will be avoided like a bad smell by investors for some time to come.

And, if that wasn’t bad enough, breakingnews.com reports of problems with their attempt to cut through the leaking pipe as a saw gets stuck in the partially cut pipe.

As to why BP ever got involved with highly risky deep water exploration, the following is probably not far off the truth (emphasis mine) :

As I understand the law, BP is responsible to pay 100% of the cost of the clean-up. What the liability cap does is to cap economic damages to $75 million. What that means is if anyone suffers a loss of income or property as a result of a spill, BP is only obligated to pay $75 million even though the losses may be in the billions. That is not right.

Businesses seeking advantages from legislators is not news. While lobbying is often a proper and necessary response of business to legislation that would be harmful to them, it is a two-edged sword when they try to gain economic or competitive advantage. Our history is full of examples, most recently, tire import tariffs. While it is right to condemn business for this we should blame legislators who have the primary duty to act in the best interests of all the people. At least one could say that we understand that business is motivated by self-interest, but Congress is held to a higher ideal. While politicians preach this principle they rarely live up to it.

In free market capitalism, no one has a legal or a coercive advantage over anyone else. If I commit a civil wrong, in this case the tort of property damage and the resulting economic loss, I should be fully liable for it. That is, I should pay the cost. If I go broke, so be it. If I do something with willful, wanton disregard for safety I may be grossly negligent which may allow a court to impose punitive damages.

In my view, the liability cap was a major cause of this environmental disaster.

Assume for a minute that there was no liability cap in place. BP was engaged in very risky drilling activity that posed potentially huge losses if they acted negligently. Drilling at 5,000′, I am informed, is not like drilling at 500′. Like all businesses, BP must weigh the potential risks against the potential gain of any enterprise. Like most businesses, they lay off as much risk as they can by buying insurance. If they didn’t buy insurance then they weighed the risk against their assets and net worth.

I am going to guess here that the economic loss of the BP spill will be far more than the cost of the clean-up. I assume that is always the case or otherwise oil companies would not have sought a liability cap. When they evaluate the risk of such risky activity, then they know that whatever damage they cause, their liability will not exceed $75 million. That is a drop in the bucket for a company whose after-tax earnings were $6.1 billion in Q1.

The only remaining question here for me is whether it was worse for BP to ask for the liability on damages knowing that the process is itself risky or for someone to have granted that liability cap in the first place.

Knowing the US system, this one will still be in the courts when the days of oil are long gone. Whether BP remains around that long remains to be seen though.