The Outlook on the Gulf Spill Just Got Scarier

If you're a Fool who even occasionally ventures into the energy space, you probably know about Matt Simmons, a longtime operator of a Houston-based energy investment banking firm, Simmons & Co., who is also an author and lately a seer on BP's (NYSE: BP  ) Gulf oil spill.

Five years ago, Simmons cranked out a book entitled "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy." In it, he contended that the Saudi kingdom's oil reserves don't begin to measure up to generally accepted volumes. That theory will be either refuted or confirmed in the future -- a number of my energy friends aren't buying it -- but more immediately, Simmons' thoughts about the raging Gulf spill won't do anything to bring a smile to your face.

Raising the numbers
For instance, he recently claimed in Fortune that the spill caused by the explosion of Transocean's (NYSE: RIG  ) Deepwater Horizon rig is much bigger than had been generally believed. Sure enough, on Tuesday government scientists noted that the gusher appears to be sending oil into the Gulf at the rate of as much as 2.52 million gallons a day, far more than earlier figures indicated. The government has now raised the estimated amount of leaking oil four times.

But Simmons has other thoughts about the spill. To my mind, the most daunting is that the relief wells currently being drilled, and thought by many to be the one surefire way to cut off the oil flow, simply won't work.

Kaboom!
He blames structural problems with the pipe, and says that the only way to get the spill under control may be to explode a nuclear bomb underground. That, he believes, would plug the well with melting rock.

Nevertheless, Simmons' other cheery notions include the possibility that nearly half of the Gulf may already be covered by a massive oil lake sitting on the sea floor. He also thinks there may be another bigger leak nearby, although the basis for that contention is unclear. There was a report of a leak on Diamond Offshore's (NYSE: DO  ) Ocean Saratoga rig earlier this month, but that report appeared to be only a rumor.

He's touting what?
But let me point out that, despite a career spent making things happen in conventional energy, Simmons is now touting wind as our energy panacea, which may explain why. Indeed, he's currently involved in a wind project in Maine that could produce 50 megawatts. Renewables like wind would be a welcome switch for a number of reasons, but I'm giving it several decades to become even moderately viable.

Moving along, government scientists weren't the only ones expressing their thoughts on Tuesday. Instead, executives from BP, ExxonMobil (NYSE: XOM  ) , Chevron (NYSE: CVX  ) , ConocoPhillips (NYSE: COP  ) , and Shell (NYSE: RDS-A  ) had the "pleasure" of responding to questions by members of the House Energy and Environment Subcommittee. As you might expect, BP received the most thoroughgoing roasting during the session.

Lamar McKay, BPs America's President was asked by members of Congress to: 1) resign, 2) commit suicide, and 3) apologize for the perpetually incorrect spill sizes that have been published. McKay refused all of those requests during the session, in which he also maintained that BP's cleanup efforts were going well vis-a-vis the oil on the surface. However, he acknowledged lesser success in dealing with the leak on the sea floor.

We'd do it our way
But McKay didn't receive protection from his peers, who were busy throwing BP under the proverbial bus. John Watson, Chevron's CEO pointed to his company's safety record and expressed a belief that an investigation would show that "this tragedy was preventable." And Exxon's Rex Tillerson said that his company "would not have drilled the well the way they did."

Tillerson also said that he believed that BP's well design deviated from some industry standards and noted that the BP spill "represents a dramatic departure from the industry norm in deepwater drilling ... Tragic incidents like the one in the Gulf of Mexico today should not occur."

Simmons gives BP about a month before Chapter 11 enters its picture. That's a difficult prediction to either support or refute. I continue to believe that Fools should maintain an energy representation in their portfolios, but until the industry begins to settle down, it would make sense to focus on superbly managed companies with global reach like ExxonMobil and Schlumberger.

Fool contributor David Lee Smith doesn't own shares in any of the companies named above. He does welcome your questions or comments. The Fool has a disclosure policy.


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  • Report this Comment On June 18, 2010, at 1:43 AM, MyDonkey wrote:

    We shouldn't let this catastrophe go to waste.

    Americans need to develop the "Solar Grand Plan" that was published in the December 2007 issue of Scientific American, and available in PDF here:

    http://www.science.smith.edu/~jcardell/Readings/uGrid/Solar_...

    The article describes how solar energy could supply 69 percent of US electricity and 35 percent of its total energy by the year 2050.

    The authors further predict that renewable resources could supply 100 percent of US electricity and over 90 percent of total energy by 2100. Solar power would comprise over 85 percent of this total, with the remainder coming from wind power and smaller amounts of geothermal energy and biomass-based fuels. The numbers assume a one percent annual increase in energy demand, and no new technological innovations after 2020.

    The total cost is estimated at $420 billion ($10.5 billion per year for 40 years), ending in 2050. The money would be generated by a carbon tax of 0.5 cents per kilowatt-hour, raising the cost of electricity (currently 6-10 cents per kWh) to 6.5-10.5 cents per kWh. The annual expense would be less than the current US Farm Price Support program. It would also be less than the tax subsidies responsible for building the country’s high-speed telecommunications infrastructure over the past 35 years.

    Solar power is the only renewable resource capable of satisfying such large-scale demands for energy. To learn the details, read the SCIAM article (linked to above) and then read its 716 comments (including many responses by the authors) beginning here:

    http://www.scientificamerican.com/article.cfm?id=a-solar-gra...

  • Report this Comment On June 19, 2010, at 2:18 PM, bozomonkey wrote:

    We are not going to quit using oil anytime soon. Our ~300 million people in this country consume on average about 1 gallon of gasoline and 1.5 gallons of other oil products per person per day which doesn't seem like much. And may even seem economical but all together we use ~750,000,000 gallons of oil per DAY in this country which is about 275,000,000,000 gallons per year. That is positively staggering. And this should make clear why conservation is so important, We use so much it's almost ridiculous and any little thing we do will make a gargantuan difference. 300,000,000 times anything is a heck of a lot. If everybody had a car that got 30 miles to the gallon instead of 20, we would save/burn less somewhere on the order of 75,000,000 gallons of gas per day/ 27 billion gallons of gas per year. Incredible figures. If you need help visualizing that, a typical 1400 square foot house would hold about 136,000 gallons from ground to roof. So 7 houses per milion gallons and we use 750 million gallons of oil per day equals 5250 houses of oil per day. A big chunk of your town.

    Hope that helps you all get a handle on whats going on

    The gulf spill while large scale and incredibly tragic is a drop in the bucket compared to what we use daily. Maybe thats why BP wasn't panicking right away, it's just a drop in the bucket to them. They weren't going to go broke on lost oil revenue for sure. But they have big problems with the cleanup, and I certainly don't want to downplay the utter disaster for the gulf that it is.

    Figures taken from U. S. Department of Energy

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