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Financial Damage Beginning to Seep from Gulf Disaster

Image has not been found. URL: /wp-content/uploads/2010/05/oil-spill-480x332.jpgA NASA satellite photo of the Deepwater Horizon oil spill. The bulk of the spill appears as a dull gray area southeast of the Mississippi Delta. (EPA/ZUMApress.com)

This much everyone agrees is true: The 5,000 to 60,000 barrels of oil leaking from the ocean floor 50 miles off of the coast of Louisiana, caused by an explosion on BP’s Deepwater Horizon rig on April 20, will cause serious economic damage to the Gulf Coast. For the past two weeks, the question has been: How much? How many jobs and dollars lost?

Analysts, politicians and businesses are now starting to grasp the extent of the financial damage of the ecological disaster. The Gulf Coast economies in Louisiana, Mississippi, Alabama and Florida are heavily reliant on three interconnected industries: Energy, fishing and tourism. Ironically, the energy industry that caused the spill looks likely to emerge relatively unscathed from the disaster, while the service industries, including fishing and tourism, are already starting to suffer from its effects.

[Economy1] Of the Gulf Coast’s prominent sectors, oil and gas might seem to have the most exposure to losses from the Deepwater Horizon incident. Approximately one quarter of the United States’ crude oil comes from the offshore rigs in the Gulf of Mexico and the industry employs around 100,000 people in the area. But experts admit the disaster has not and will likely not have much of an impact on the industry, its employment figures or gasoline prices in the United States.

Why? The massive explosion caused the shutdown of just three other rigs — out of more than 700 in the Gulf. The slick remains small enough that most pipeline and shipping routes have not been impacted. And the legal and cleanup costs for the disaster will be concentrated on the federal government and BP, which as a single company in a competitive industry with price-sensitive customers will not pass its new costs on.

Of course, BP is on the hook for a considerable amount. The company is spending $6 million a day on cleanup; recently granted $25 million each to the states of Louisiana, Alabama, Mississippi and Florida; is drilling two “intervention wells” at a cost of $300 million; has civil liabilities estimated in the low billions; and has watched its stock drop from around $60 to around $50 a share, where it has stabilized. But the oil industry has a $1 billion trust fund to tap to help BP pay for damages, and its liability for non-clean-up costs beyond that are capped at a mere $75 million. BP — an international company with hundreds of rigs — made $5.6 billion in the first three months of the year alone.

As for the industry-wide outlook: Some speculate that the Deepwater Horizon incident has accounted for and will continue to account for rising oil prices, with The Chicago Tribune, for instance, writing, “No one knows exactly how much oil is leaking from [BP's] blown gusher in the Gulf of Mexico, but this much is certain: It’s enough to send energy markets higher.”

Analysts argue that rising oil prices across the United States are not tied to Deepwater or BP at all. “Oil prices, particularly for gas and crude, are incredibly tidal, and they peak in April or May. If you look at 28 years of oil and gas futures and prices, the average day of peak annual prices is May 6, with retail about 14 days later than that,” explains Tom Kloza, the chief oil analyst at the Oil Price Information Service. “This is no different than the temperature hitting 100 degrees in Washington in August. It’s when it happens.”

Thus, the economic fallout looks to be light for oil and gas — something that will not be true for the Gulf Coast’s service industries, including fishing and tourism. The extent that those businesses turnaround depends on the extent of the ecological damage, impossible to assess now. But in the near-term, the National Oceanic and Atmospheric Administration has banned fishing for the impacted area from Louisiana to Arkansas, worrying fishing experts and scaring off tourists.

The Gulf Coast generates 40 percent of the lower 48 states’ annual commercial fishing catch. To Louisiana, the state with the biggest commercial fishing industry on the Gulf Coast, that is worth $2.4 billion. Right at the beginning of the shrimping season, losses are at least $8 million a day. David Yoskowitz, a professor of socioeconomics at the Harte Research Institute for Gulf of Mexico Studies at Texas A&M University, says the region’s catch is expected to fall by hundreds of millions of pounds, costing hundreds of millions of dollars.

And of all the industries effected, tourism — hotels, restaurants and tour-guides — might be worst-hit. In Louisiana and Mississippi, hotels are reporting cancellations in droves. Industry experts there point to the problem of perception: Beaches from Texas to Florida might be viewed as contaminated, and the thought of the spill is enough to convince tourists to rebook elsewhere. Janice Jones of the Mississippi Gulf Coast Convention & Visitors Bureau, based in Gulfport, says, “The sound is open for all types of recreation, including fishing. I know some folks who were out this morning on charter boats, and said they came back with awesome catches.” She notes, still, “The issue is definitely more of perception,” and says that the state is launching a massive public-relations campaign to convince holidaymakers to come, including offering $75 gift cards to hotel guests.

Wall Street analysts have also extrapolated that the perception of oil wash-up on the coast — again, the extent of which is unknown as of now — will severely strain the industry. For instance, Neil McMahon of Bernstein Research recently estimated the exposure of Florida’s tourism industry alone to be $3 billion, even though the state has not seen a drop of oil yet, and might not. (The Florida Tourism Board is blaring the message that, “There are no impacts on travel in the state of Florida” and that “beaches are clear and open.”)

Yoskowitz points to one further cost, as of yet unknown and worrisome. It is with the “multiplier effect” that hurting the coastline and damaging the environment will have. And as fishing and tourism turn down along the coast, selling fewer goods and hiring fewer workers, businesses that support them, from shipping to restaurants to tackle sales, look certain to suffer as well. “If you have a fisherman who can’t go out and bring shrimp or oysters, there’s a processor who isn’t processing, a shipper who isn’t shipping, a gas salesman selling less gas. It also means that all of those families impacted are spending less money, further hurting the economy” — underscoring that the worst effects of this disaster will be local.

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