BP Profit Down on Oil Spill Charges

This article is focusing on the BP Oil Spill in the Gulf of Mexico. Robert Dudley, BP’s chief executive, discusses the profit changes since the spill has occurred and where BP stands now, as opposed to before the spill and right after the spill. The article takes a closer look at the actual amount of money they have lost, as well as not being able to pay dividends to their shareholders.
In the beginning of the article, Dudley discusses the percentage of profit decrease. He said from the third quarter of 2009, until the third quarter this year, there has been a 66 percent drop in the profit. When I saw these numbers, my first thought was how BP is still in business at all. There are many competitors in the “oil” industry, but also many consumers. Gasoline is inelastic, which means people need it. Everyone basically uses a car, which takes gas, and no matter how high the prices go, we are willing to pay that amount. I think of BP as a substitute good, with the other oil companies. Since BP had a major oil spill and lost a lot of oil, their prices are going to rise. Therefore, the quantity demanded of BP gasoline will decrease, but the demand for other brands of gas will rise.
Colin McLean, managing director at SVM Asset Management in Edinburgh, stated that he wasn’t as concerned with the additional charges and recovery prices, as he was with the dividends. He states “The Company now needs to show that it can grow the business from its smaller capital base.” I found this interesting because it gives a clear view that since BP lost all of this money, they are at the bottom and must work their way back up. It kind of put an image in my head that BP was forced to shut down for a while, in some ways. They lost a lot of money and weren’t able to produce as much gas for the U.S. because they lost so much oil in the spill. Therefore, it wouldn’t be a complete shutdown, but it’s almost like they had to put everything on pause for a while, and pay the extra costs to get the spill cleaned up and fix the damages.
Robert Dudley concludes that BP has pushed ahead with the plan to sell $30 billion in assets by the end of 2011. This will help cover costs related to the oil spill. He said they were now starting to make good progress and that “BP is well on track for recovery after the tragic accident on the Deepwater Horizon drilling rig and subsequent oil spill.” This again shows how much extra costs they are faced with due to the unpredictable event. Companies never know when something like this will occur. Since gasoline is an inelastic product, meaning people have to have it, I agree that BP will slowly build their way back up in ratings. There are substitutes for the BP company itself, but I still think once BP gets some of their costs paid, they will start to even out with other companies.

http://www.nytimes.com/2010/11/03/business/global/03bp.html?_r=1&hp