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Oil Patch Gossip About BP

Over the years, I have invested so much time wildcatting in the oil patch that I will never be wanting for great steaks at Nick & Sam's in Dallas, skyboxes at Cowboys games, and personally signed 8 X 10 glossy photographs of George W. Bush.

So to get the skinny on the BP mess, I spent the weekend catching up with old friends who live with a permanent oil stain under their fingernails.

Some of the chatter that came back was amazing. BP has discovered the largest and most powerful well in history, and control of it may be outside existing technology. The previous record gusher was Union Oil Co.'s Lakeview well in Maricopa, California, which spewed out a staggering 100,000 barrels a day at its peak in 1910, and created an enormous oil lake in the central part of the state.

Estimates for the BP well now range up to 50% more than that.

The pressures at 18,000 feet are so enormous, that drilling two more relief wells might only result in creating two more oil spills.

 If Obama doesn't want to take the nuclear option, then there will be no other alternative but for the spill to continue until the field exhausts itself or becomes capable, possibly some time next year.

This is not the end of the world. Less than 1% of the spilled oil is ending up on the beaches. Watch TV, and that is not 150,000 barrels on the beach in Pensacola, Florida. Most of the crude is being moved parallel to the coast by the current and will eventually end up in the mid-Atlantic, where it will break down or dissipate.

Using the high end estimates, and assuming that it takes a year to run out, possibly 36 million barrels will end up in the sea (pressure is declining). This is the same amount of oil that was dumped into the Atlantic during WWII, when 452 tankers were sunk by German U-boats, mostly along the US east coast, and when tar on the beach was a daily occurrence.

This is on top of the 1.5 million barrels a year that leak into the Gulf through natural seepage, which no one ever notices.

One way or the other, this will end, and Western civilization will survive. And by the way, the crude price rise brought by the spill also marked up the value of BP's reserves, easily allowing it to cover the cost of the clean up, no matter how big it is.

This is how profitable this company is, and why they were so generous with a $20 billion contingency fund.

For a fascinating peak on how BP's management initially responded to the Gulf oil spill, watch this video taken by a secret camera inside their board room, which I obtained from a confidential source on pain of death. Brace yourself. And you wonder how it got so bad.

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By. Mad Hedge Fund Trader


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