Black Swan, Baby, Black Swan: The BP Oil Spill

After figuring a back-of-the-napkin cost of the BP Oil Spill, days later everything has changed. Both Business Insider and The Big Picture are featuring a very scary set of cost scenarios by David Kotok at Cumberland Advisors — and it makes the new A Nightmare on Elm Street look like a G-rated adorable fest. Kotok concludes this will be the event which pushes the US into a double dip recession. Here’s the cheat sheet:

The Bad Case Scenario

Unprecedented containment chambers will be working by June and limit the damage to the tens of billions of dollars. Insane damage will be limited to Texas, Louisiana, Mississippi, Alabama, and Florida.

The Worst Case Scenario

A new well must be drilled and then this one can be sealed. This will take at least three months. Damages will be to the tune of hundreds of billions of dollars, all industries dependent on the Gulf of Mexico will be destroyed for a generation, and spread to Mexico is possible.

The Ugliest Case Scenario

The spill takes much longer to contain, allowing enough oil into the Gulf to spread into the Atlantic Ocean. The Eastern seaboard of the US is also damaged. The costs rise into the very high hundreds of billions of dollars. The cleanup takes a decade or more. Exxon Valdez (XOM) loses its Bernie Madoff slot in the worst oil spills in history.

Collateral Damage

This spill is to the oil industry what Three Mile Island was to the nuclear industry. Off-shore drilling becomes an important issue in the November mid-term elections. Any politicians who were strong supporters of off-shore drilling will be lambasted.

The already fragile economy slips into a double-dip recession.

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