Greatest environmental challenges

Described as one of the greatest environmental challenges in current generation, the British Petroleum oil spill has come not only at the wrong time for the Obama Administrations but has also severally impacted negatively on the economies around the Gulf of Mexico. Critics point out that it could years to ascertain the exact estimate of damage this environmental disaster has on the economy and the ecosystem around the Gulf of Mexico. Louisiana, which remains the nearest state to the Gulf of Mexico, has its 400 mile coats line severely polluted by floating oil. So much has happened but the true impact of this environmental disaster will take years to estimate. This essay seeks to specifically analyze the impact of BP oil spill of the hotel industry in these affected regions. Towards this, available literatures and statistics of the current status of hotel industry with those retrieved from the recent past before the disaster will be comparatively analyzed. A conclusion on the state of affairs as regard this industry will then be given and any other relevant information dissected.

Background Information

Anger and frustrations continues to besiege the Washington administration concern the recent catastrophic, meteoritic Deepwater Horizon oil spill

Cassidy (2010) reports that: “Like frantic doctors in the emergency room, frantic politicians are prone to overreaction and error. It is imperative for leaders to check their own pulses first in times of national distress. Rather than responding with reason and precision, the Deepwater Horizon oil spill has provoked overreaction and error from Washington.”

However emotion and alarm seems to be taking a better toll of the Washington administration whose reaction Cassidy describes as knee-jerk fashion. This is painting a somewhat grim picture of the Obama administration currently experiencing a difficult political situation. Cassidy (2010) reports that “Americans, particularly Louisianans, are outraged and heartbroken that oil continues pouring from the site of the spill weeks after it broke open. Lacking the equipment or expertise needed to take control of an oil leak 5,000 feet under the sea, the federal government appears impotent” Unfortunately President Barrack Obama’s character is receiving a bashing from former folks and allies alike concerning his reaction in this matter. Oil spills continue to occur the world over but this one seems to attract more political attention than environmental concern.

In Cassidy’s opinion “the president should recognize that the verdict on his administration’s handling of this disaster will be rendered in six months or six years – not on the 6 o’clock news. The president should take his own pulse” (2010). Accordingly the over 300,000 Louisianans whose livelihood thrives on energy economy continue to be optimistic that the president will get round and work out this disaster physically not emotionally. The people affected and suffering as a result of the oil spill consider that an offshore suspension for the multinational corporation executives is a drop in the ocean for them considering their capability to transfer their rigs elsewhere. However how about those whose job is on the line due to this suspension. Cassidy reports that “it is harsh punishment for the welders, roustabouts, workers and pipe fitters, in the range of service and support industries connected to energy production in the Gulf Coast”(2010).

The chilling relationship between White House and energy giant BP is becoming confrontational over the costs incurred due to the Gulf oil spill .The U.S. is seeking to expand the scope of BP’s liability. CBS /AP reports that “efforts to contain the undersea oil leak appear to be progressing, but cleaning up the millions of gallons of oil in the Gulf of Mexico and paying out damage claims to affected residents in the region remains a daunting task for the British energy company.”(2010) So far BP has spend over $80 million to June as compensation for people for lost wages and this figure continues to grow. The oil giant’s total liabilities are expected to run into tens of billions when it’s finally over. The showdown has a new argument emerging … that the government being responsible for the moratorium should take responsibility for the job losses…

Micro-Economic Analysis

Economists paint grim pictures on the future of hotel industry following the aftermath of the BP oil disaster. This is largely linked to the declining number of tourists heading to the affected states. One microeconomic sector that has been hit hardest by the BP oil spill is the hotel industry. Tourism operators as well as restaurants and hotel owners have all reported sharp decline in business due to the effects of the oil spill. This has been precipitated by the scare of tar balls spotted along the Florida key beaches. While researchers established that the spotted tar balls did not have their origins from the oil spill disaster, there was already a enough distrust in the main beaches surrounding the affected states.

The tourism industry has thus lost millions of dollars due to the decline in business. The loss to the state of Florida due to decline in tourism is illustrated by Venice, Gorman and Pascual (2010) in stating that “Tourism is its economic lifeblood, its largest industry, generating $60 billion in spending from more than 80 million visitors a year, bringing in 21 percent of all state sales taxes and employing nearly 1 million Floridians”. Economists abide in the fact with increase in the losses of revenue due to decline in the tourism industry, the hotel owners are likely to lose massively in the coming months. In fact, it has been estimated that it might take a long time for normal activities to resume in the shores of the affected states of Louisiana, Florida, Mississippi and Alabama because experts cannot fully analyze the extent of this environmental disaster consequences.

Given the dynamic nature of business and customer reaction towards such a tragedy, it might take along time before the hotel owners can effectively win back the confidence of their customers. With the rising uncertainty on the real effects of the oil spill tragedy, it might take time before the hotel industry records a buzz of activity as in the past.

The theories of capital structure attempts to provide an explanation between the mix of securities and financing sources that may be employed by business hardest by tragedies to finance their real investments. Most of these theories have focused on the proportions of debt vs. equity as observed on the right-hand sides of the firms’ balance sheets. Several theories have been advanced on the debt-equity choices without one being universally accepted. For example, the trade-off theory suggests that firms seek debt levels that will provide a balance between the tax advantages of additional debt against the cost of possible financial distress. The pecking order theory on the other hand advances that a firm will borrow, rather than issue equity, when internal cash flows are not sufficient to fund capital expenditures, suggesting that the amount of debt will reflect on the firms cumulative need for external funds. The free cash flow theory on the other hand proposes that dangerously high debt levels will increase value, notwithstanding the threat of financial distress, when the firms operating cash flow significantly surpasses its profitable investment opportunities. The latter theory has been designed for mature firms that are more inclined to over-invest (Armstrong, 2007).

The surveys of the optimal capital structure all seem to step from the Modigliani and Miller (1958) assertions that financing doesn’t matter in the case of perfect markets. According to his model, the market values of the firms’ debt and equity, D and E should add up to the total firms value given that V is a constant. This proposition assumes that the assets and growth opportunities on the left hand side of the balance sheet have been held at a constant. This assumption results, to a large extent, in generalization of the mixes of the securities issued by the firm. For example, the debt period (whether long term or short term, callable or call-protected, straight or convertible etc) are not factored in the equations. This would also suggest that each firms cost of capital stands at a constant regardless of the debt ratio. Unfortunately, the capital markets are not sufficiently perfect. This is more so when we consider the effects of a major crisis in a micro-economy such as the analysis of the impact of oils spill on the hotel industry in Louisiana, Florida, Mississippi and Alabama. The future for the hotel industry in financing their operations is this seen to be in jeopardy following lack of confidence in their capital structure by lending institutions.

The high level of uncertainties in the estimation of forward-looking financial figures stems from the problems of estimating accurate values for the risk-free rate, the corporate bonds credit spread and the corresponding gearing ratios. The increasing cost of debt also in the case of stable and reputable hotel service providers has resulted from the shortage in credit supply and the lack of cheap financing sources precipitated by lack of customer confidence. This will definitely make it more difficult for the hotel industry to determine the optimal capital structures from the traditional approach, largely due to the increases in risk aversions and the more extreme positions that are being taken by different stakeholders. This has meant that a lot of hotel owners and restaurants are struggling to stay afloat in business.

The above scenario present hotel firms along the Gulf of Mexico with major headaches in the ascertainment of the costs of debts and what should be their optimal capital structure and creating confidence on their customers. It has been advanced that in turbulent times, businesses should consider multiple scenarios in an attempt to arrive at the optimal capital structure for their businesses, which should provide three different degrees of outcomes-optimistic, base and pessimistic (Armstrong, 2007). The drivers to be taken into account should ideally vary as an attribute of the varying situations such as additional premiums required, market conditions and the interest rates. These should be tailored to capture the underlying business issues and concerns for the key stakeholders. It has been advanced that elaborating on the intrinsic values of the firms and overall business risks in the long term and capturing the same in forward-looking figure can provide a solid background on the basis of which solid capital structures can be anchored in times of crisis.

The impacts of oil spill have always been catastrophic (ASTM Committee, 1984). Fisheries, tourism and shipping are some of the economic activities along the Gulf of Mexico that have been hardest hit by the environmental disaster caused by BP oil spill. This has necessitated the United States government to declare a fishery disaster in the surrounding waters. According to Venice, Gorman and Pascual (2010), “the U.S. government has declared a fishery disaster in the seafood-producing states of Louisiana, Mississippi and Alabama due to the oil spill which makes them eligible for federal funds to offset the impact on fisherman and their communities of the oil pollution in their fishing grounds”. This means that the fisheries department has been negatively affected by the oil spill to a very large extent. This is more worrying because the affected state of Louisiana is responsible for more than a third of the United States seafood supply. In addition to the above, it employs thousands of US citizens either directly or indirectly. This issue is buttressed by Venice, Gorman and Pascual (2010) in stating that “Louisiana’s $2.4 billion seafood industry supplies up to 40 percent of U.S. seafood supply, employs over 27,000 people and is the second-biggest U.S. seafood harvester and the top provider of shrimp, oysters, crab and crawfish”. This demonstrates that the effect of BP oil spill has denied the United States its primary source of seafood, led to massive loss of employment opportunities and has finally led to massive losses of revenue that is estimated to be in the range of billions of dollars.

The losses of jobs within the fishing industry are likely to increase in the tourism, hotel and shipping sectors of the economy

One aspect of the ecosystem that has been greatly affected by the BP oil spill is wildlife. The BP oil spill has not only triggered an imbalance in the existing ecosystem but has also made the affected regions completely inhabitable to a sizable percentage of wildlife. Some of the wildlife reserve areas that that have been affected include the “Breton National Wildlife Refuge in the offshore Breton, Chandeleur Islands, and the Pass-a-Loutre refuge further to the south” (Smith, 2010). In addition to the above, the states have lost a large number of wildlife due to the environmental pollution precipitated by the oil spill. This estimate is perhaps presented best by Venice, Gorman and Pascual (2010) in stating that “over the 40 days since the spill started, wildlife officials report that 491 birds, 227 turtles and 27 mammals, including dolphins, have been collected dead along the U.S. Gulf Coast, according to an update released on Sunday by the oil response unified command”. Sharks as well as eels and turtles have been reported to have been sported dead and floating on water surface (Weise and Rice, 2010). This environmental disaster has therefore robbed us a good percentage of some of our prized wildlife species. The extent of the damage to the existing wildlife cannot be estimated but is ultimately expected to rise in the coming future. The greatest concern to scientists remains the unknown and unseen effects of the oil spill to the underwater marine life and environment.

Furthermore, the impact of BP oil spill has dealt a big blow to the shipping industry. This is because very critical shipping routes have been closed and the numbers of delays caused by the oil slick are on the rise. These shipping lanes are the lifeline of the United States’ export and imports. In addition to the above, the cost of shipping has escalated by the mandatory inspections and decontaminations before entering ports. In conclusion, the impacts of BP oil spill have been demonstrated to affect the environment the economy and have led to losses of thousands of employment opportunities.

In addition to the above, what is important to note is that small affected businesses may experience more difficulties in gaining access to credit during this tragic period, given their less intense asset bases, that is required as collateral in the issuance of loans. As a result, smaller firms may actually not be highly dependent on bank loans, largely because they fail to meet loaning requirements from the financial institutions. Their capital structure may therefore be fewer banks dependent. Conversely, it may be argued that the effects of oil spill catastrophe bear more significance on the larger, bank-dependent firms (Armstrong, 2007). This is because the perception of the customers in regard to the levels of oil pollution. According to Smith (2010), “when it comes to oil, market perceptions can quickly become reality. But if irrational fears don’t have an effect, political decisions about offshore drilling might nudge prices upward” It has also been advanced that managers in firms will time the issuance of public debts to periods when interest rates are low relative to recent historical rates (Leary, 2005). This is usually done, largely in part due to the limited availability of loan facilities. It should be noted though that only large and publicly owned firm can be able to raise more capital through equity.

From the above sentiments, it can be ascertained that the current credit crunch will have profound bearings on a firms cost of debt and the subsequent capital structure. However, it should be noted that the degree of effect will vary based on the characteristics of the firm, chiefly among which are whether the firms are bank dependent or non-bank dependent. Relative to firms with public debt market access, the leverage ratios of bank dependent firms either decrease or increase following a contraction or expansion, relatively, of the bank credit. Conversely, these businesses will shift the composition of their financing sources in response to the tight credit conditions created by the oil spill. Thus, it can be adjudged that bank dependent firms or corporations will tend to shift towards equity financing following bank debts scarcity. On the other hand, non bank dependent firms tend to shift between bank debt and public debt markets. It can therefore be ascertained that the leverage ratios and debt placement structures are not wholly determined by the changes in firms demand for capital structures. It would appear that supply frictions in the credit market are also important determinants of firms capital structures and more so for the bank dependent firms (Leary, 2005). This would imply that the same capital market imperfections that create linkages between the banking sector and the economic growth also create linkages between credit conditions and firms financial structures.

Conclusion

The discussions presented in this paper have shown that tragedy like the BP oil spill will have an impact on the cost of debts as assessed by the capital structure theories of hotel firms. It is has been established that the impact, to a large extent will be moderated by the characteristics of the hotel. These will largely depend on the impact of shifts in the availability of bank loans on the capital structures for the bank-dependent businesses relative to firms with access to public debt markets. The frictions in credit supply impacts on the flow of capital through the banking system are seen as having considerable impacts as ascertained by the time series and cross-sectional variation in debt placement structures and leverage ratios. The availability of bank loans following the periods of credit crunches results largely in the leverage ratios for the bank dependent to increase relative to the firms with public market access. These have been ascertained as occurring as a result of the convergence of the constrained access to bank debts and the associated reliance on equity financing by the smaller firms in the periods of credit crunches as well as the substitution from private to public debt by the larger firms.

In conclusion, it is evident that the effect of the oil spill on micro economics is so far greater than can be simply estimated. The complexity that surrounds the whole affair makes it almost impossible to ascertain the extent this tragedy could have on the hotel industry. One fact that remains quite clear is that American citizens whose livelihoods depend on fishing in the Gulf of Mexico must be prepared to hold their breaths for any good news. The lifting of the fishing may not come immediately after success in contacting the spill because damage to the ecosystem is already done. It is important that hotel and ship owners adjust very first and adapt to the new challenges. This may involve a back up plan in any case things are set right, they must have the capacity to ensure that they return business back to normal as fast as possible.