The Gulf Oil Spill: The View of the Financial Markets

May 14, 2010 in Uncategorized
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Chart A: Stock price performance of BP, Transocean and Halliburton.

While financial markets are not always right, it is useful to see what they have to say. Chart A plots the stock price performance of the three companies that are most closely tied to the oil spill–BP, Transocean and Halliburton. As you can see, the stock prices of the three companies have been hammered, realizing loses in the neighborhood of $35 billion, which is substantially greater than most estimates of the various damages and cleanup costs.
Chart B: Stock price performance of ConocoPhillips, ExxonMobil and Petrobras.

Chart B: Stock price performance of ConocoPhillips, ExxonMobil and Petrobras.

As a comparison, as I plot in Chart B, the stock prices of ConocoPhillips and ExxonMobil were not affected by the spill. However, Petrobras, which was in no way associated with the accident, has also suffered significant declines in their stock price.

What is the connection with Petrobras? Petrobras is essentially betting the company on very deep water drilling, and the stock market, in light of the Gulf disaster, appears to be questioning that bet.

Chart C: Long term futures market for oil.

Chart C: Long term futures market for oil.

Finally, it is worthwhile looking at the long term futures market for oil, which is plotted in Chart C. Are the markets expecting a moratorium on deep water drilling that will lead to a future shortage of oil?

Apparently, the markets response suggests that the Gulf event will not have a major effect on oil prices. The move in five year futures prices has not been material, and the spread between Brent and WTI has actually widened a bit, suggesting that–if anything–oil is likely to become scarcer in Europe than in the U.S.

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  • About Sheridan

    Sheridan Titman, Professor of Finance at the McCombs School of BusinessSheridan Titman is a professor of finance at The University of Texas at Austin and a research associate of the National Bureau of Economic Research. He was recently elected Vice President of the American Finance Association and is incoming President in 2012. He is also the Executive Director of the Energy Management and Innovation Center (EMIC) at The University of Texas at Austin.

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  • About this blog

    This blog’s primary focus will be on energy and this will be, more or less, a learning blog. The blog will offer some of my own views, as well as the views of some of the participants at EMIC. I will also raise questions in the hopes of receiving answers, insights and opinions from our participants. Since my own expertise is in finance, much of the initial focus will be on issues that relate to hedging, financing, derivative markets, and the financial evaluation of alternative energy sources. As my knowledge of these issues expand, I would also like to explore issues that relate more broadly to innovation and the role of public financing in this sector.