BP Credit Rating Takes Hit

BP's struggles to stop the largest oil spill in U.S. history almost ensures that it will become intensely difficult for the company to prevent its credit rating, not to mention its image, from sinking for years to come. Still NACM's economic analyst believes the problem is relegated to just one company in the oil sector and other small industry sectors, meaning a massive national economic impact remains unlikely. That is unless a worst case scenario rears its head during hurricane season.

BP, which has continued to botch its efforts to stop the massive Gulf Coast leak more than a month after an explosion and failed cut-off started the growing mess, saw its credit rating dropped this week by all three major ratings agencies: Moody's Investment Services, Fitch Ratings and, following their counterparts' lead, Standard & Poor's. Despite the ratings agencies own ongoing credibility problems (see related story in NACM's June 8 eNews), the lower ratings could signal big problems for BP. The ratings agencies explained their respective decisions by noting concerns that include the potential for mounting cleanup and legal costs that could be long-term, the possibility of federally levied criminal charges or cease/desist orders that prevent future BP drilling and a lack of confidence in the company's ability to stop the leak.

NACM Economic Analyst Chris Kuehl, Ph.D, of Armada Corporate Intelligence, said he believes most other oil companies won't be badly wounded by this situation. However, it is likely BP will become subject to rampant rumors of takeovers in the coming years and will be spending large amounts of effort cleaning up its mess while its competitors are moving into new, profitable areas. Kuehl said the oil drilling industry, even in the Gulf, is unlikely to be brought to a halt because the drilling areas are dependent on three major industries: oil, fishing and tourism. And BP's snafu has pretty much destroyed the latter two.

"But tourism and fishing still only bring in less than one-quarter of what oil brings in," said Kuehl, noting there are more than 4,000 rigs and accompanying jobs in the Gulf alone. "That's the economic reality of their world. If you take away oil, what are they going to have left?"

Kuehl also reiterated the general economy very likely won't be affected significantly by this disaster. He called it an emotional issue, mainly because of environmental degradation and media stories on struggling fisherman from the Gulf area, more than a real economic issue. Kuehl noted there have been oil spills occurring in Nigeria of this magnitude for 20 years that few discuss, or even know about. The true threat to the economy, long-shot as it is, would be a sort of perfect storm during 2010's hurricane season. Forecasts aren't calling for a particularly active, strong storm season in the spill's heavily impacted area - but anything can change.

"If you get a really badly placed storm that drives the oil over all the barriers and shifts prevailing winds in different directions [like toward the Texas coast or beyond the Florida peninsula], and the cleanup is truly catastrophic, the interdiction efforts will become overwhelmed," said Kuehl. "That could end up inundating cities and driving oil into farm country, where you'd see things affected like cotton and rice."

Brian Shappell, NACM staff writer

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