BP Spill: an update

The only thing more fun for me than making predictions is going back and actually checking how I did with them.  Today, I want to go back to a post I wrote a week ago about BP's potential liability from all this hullabaloo and look at how the predictions I made back then have stood up to the developments of the past 7 days.

In my post, I assumed that 60,000* barrels of oil a day were spilling when the official figures were less than a third of that - since then, the current government numbers have twice been revised upwards to their current levels of 45-60,000 barrels a day, exactly my estimate a week ago.

In my post, I predicted a final net liability that was most likely to be somewhere in the range of $10-25 billion.  Since then, after meeting personally with Obama, BP has agreed to put $20 billion into escrow to fund the recovery.  Although this isn't necessarily a final number in either direction, it does indicate that the two biggest players in this negotiation - BP and the U.S. Government - are acting as though my prediction is the most likely reality. 

Further, by virtue of the fact that its an escrow account, it is in fact quite likely that the $20B figure is an upper bound to the likely costs of the relief effort.  Consider it this way - if the government expected the recovery to take at least $20B, they would have likely demanded something more like $30-40B in escrow just to make sure the funds are there.  The amount put in escrow is most likely a standard deviation or two above the expected cost of the relief effort, just from the perspective of prudent budgeting.  However, note that this is also consistent with my predictions that the recovery would likely cost between $10-25 billion - I used a log normal distribution which has a mean of about $16 billion here, and a $20 billion escrow account seems to be a healthy amount above that number such that I'd say its probably also BP and the Government's expected amount.  Going forward, although I'll certainly keep my $66B worst-worst case estimate in mind, I'm going to start assuming a $16B price tag for BP as the most likely course of events.

* In my post I assumed 1.8 million gallons, which is 60,000 barrels in barrel-speak