Saturday, May 15, 2010

How the Oil Spill Impacts Nuclear Power

The world is watching the oil spill in the Gulf of Mexico and the struggles of the oil industry to contain the spill.

The financial markets are watching as well... this article explains how BP lost over 20% of its market value in the days following the incident that happened on April 20th, moving from $60 / share to $46 / share as of May 14.

The stock market is attempting to determine the impact of this incident on BP's share price, which includes the immediate costs to clean up the spill, but also a general loss of corporate credibility and a negative pall over the offshore drilling industry that BP was counting on for future growth. While only the furthest left are calling for an abandonment of deep-water drilling off the coast of the USA, you can be certain that heavy new governmental controls and costs will burden future projects, to the extent that they can get approval at all.

While it may not seem like there is a connection between this environmental event and the nuclear industry, it is conceptually close to what occurred after Three Mile Island in 1979. While this incident did not "shut down" the nuclear power industry in the United States, it effectively stopped new, incremental construction and the electrical utility industry just managed to complete the bulk of their in-progress projects before the industry went into a state of hibernation on new construction that (mostly) continues to this day.

Nuclear power projects rest on a shaky foundation of public and governmental support; any sort of environmental event, whether minor or major, contained or not, will likely cause public opinion to turn which will cause the government to turn on the companies. There is a vast crew of environmentalists just waiting for this event to turn on the spin machine, and they will put out a full court press across all media to attack the industry.

The fact that EVERYTHING has to go right, in the US and abroad, for nuclear power to be successful in the United States makes these investments extremely risky. In prior posts I discussed the dis-incentives in terms of regulatory structure in most states in the US (there are some exceptions, such as South Carolina, which are the few areas going forward with nuclear projects), the fact that most generators aren't sufficiently capitalized to make the massive investments in new generating capacity, but I really didn't touch on the fragile level of public support for nuclear power among the general population.

You can bet that the financial officers of companies considering to invest in nuclear generation are watching the market capitalization of BP very carefully, thinking that it only would take a nuclear event anywhere in the US (or outside of the US, if it was major like Chernobyl) for not only their company but the entire industry to take a beat-down in the stock market. Remember, too, that most top officers of these companies have heavy stock-based incentives; it isn't just the shareholders that would suffer, too - they would also feel it in their pocketbook.

Cross posted at Chicago Boyz

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