Gauging the Impact of the Gulf Oil Spill

June 22, 2010

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In addition to being one of the largest ecological disasters in U.S. history, the ongoing oil spill in the Gulf Coast will likely have a huge effect on industry regulations and the overall economy for years to come.

On April 20, an explosion on the Deepwater Horizon oil rig killed 11 people and started an enormous oil spill from a leaking wellhead on the sea floor. Despite numerous attempts at capping the gusher, federal experts this month estimated that the well continues to leak 35,000 to 60,000 barrels a day, meaning that approximately 56 million gallons of oil have been spilled into the Gulf as of mid-June.

Although the problem is ongoing, the projected long-term effects of the spill are likely to have a severe impact not only on the environment, but on the United States industrial sector and the economy as a whole.

The ecological repercussions may be difficult to measure, because while past oil spills may give an indication of the potential effects of the Deepwater Horizon disaster, scientists have little experience with spills from such a deep underwater source. At present, the Gulf region's most vulnerable areas remain the top issue.

"For Louisiana in particular, a key area of concern is coastal marshes," Christian Science Monitor reports. "They are the breeding ground as well as home base for a wide range of marine life vital to the region's fishing industries. Moreover, the wetlands provide a first barrier against storm surges from hurricanes."

USA Today cites the best-case scenario: if the bulk of the oil remains in the Gulf of Mexico's Loop Current, it would eddy the spill and keep it from reaching the shore. Eventually, the eddied oil would form "relatively inert" and less-toxic tar balls. The worst-case scenario is if the oil gets caught in the Gulf Stream and lingers until hurricane season, when winds would push it onto the coastline.

"Once it got there, the real nightmare would begin: Oil swamping the coastal grass marshes that are nurseries for a large percentage of coastal marine life and mammals. There it would remain a sticky mousse and a contact hazard to anything that gets near it," USA Today adds. "It would damage water fowl, turtle and marine mammals and possibly the embryos and larvae of invertebrates and fish."

However, the fact that the oil is leaking from such a great depth may actually lessen the environmental impact.

"The good news is that the oil has to rise through 1,500 meters of water, and is exposed to the elements for days or weeks before hitting the shore," New Scientist explains. "The most toxic components — benzene, toluene, ethyl benzene and xylenes — are likely to dissolve in the water column and become greatly diluted, or evaporate at the surface."

While it may be a long time before the full environmental damage of the spill can be determined, its economic effects are already being felt. Yesterday, BP Plc announced that the cost of the oil spill response had risen to $2 billion, up from the $1.6 billion estimated the previous week. This figure includes the cost of the containment efforts so far, relief well drilling, federal costs, claims payments and grants of $25 million each to Florida, Mississippi and Alabama. These three states are at the highest risk of continued damage from the oil spill. On June 16, BP agreed to create a $20 billion fund to "satisfy certain obligations arising from the oil and gas spill."

Florida, which has the largest coastline exposure to the Gulf of Mexico, may lose up to $10.9 billion in business activity and property value, and as many as 195,000 jobs due to the disaster, according to an analysis from economist Sean Naith for CNNMoney.com.

A late-May report from the Democratic Policy Committee outlined the key economic sectors likely to experience the immediate effects of the oil spill, including the Gulf Coast's $20 billion annual tourism industry and the $21 billion commercial fishing industry. Most estimates have yet to measure the potential long-term impact on the broader economy, particularly energy and food prices.

"The ultimate cost of the disaster remains uncertain. Wall Street estimates have put the bill for BP at anywhere from $17 billion to $60 billion, including penalties, damages and cleanup costs for the Deepwater Horizon disaster," the New York Times explains. "Beyond the financial costs...[t]he company is almost certain to face tougher scrutiny from regulators."

New regulatory efforts aimed at addressing the ongoing crisis are likely to have a wide influence on the U.S. energy sectors and the various industries dependent upon it.

President Obama's six-month moratorium on deepwater oil exploration, announced in May, is intended to provide "time to hear from a newly appointed presidential commission and to reevaluate safety regulations and other federal oversight," according to the Los Angeles Times. Although operations will continue at existing drills, the regulation will freeze progress at 33 deep-water rigs poised to drill and directly affect between 2,970 and 4,620 jobs.

The measure is "sending shudders down the spines of industry leaders who previously considered offshore exploration to be one of the last lucrative frontiers in the domestic oil business," the Wall Street Journal reports.

"Now, the repercussions of the Deepwater Horizon accident are spreading broadly through the industry," the Journal adds. "Analysts at J.P. Morgan Chase & Co. said that drilling companies are facing pressure to lower their rates. Companies that operate oil-service fleets are fighting efforts to cancel their contracts."

In regions where the economy is focused on drilling and related industries, the impact may be disproportionately higher due to the number of jobs that indirectly depend on oil extraction.

For example, "[t]he Louisiana Economic Development department estimates the six-month moratorium on exploratory drilling announced by Obama last month will translate into the loss of up to 10,000 jobs within a few months," Agence France-Presse notes.

Even when the moratorium period ends, the permanent regulatory changes that will be introduced in reaction to the oil spill are already a source of concern to industry experts.

"Worries about future liabilities that firms may face for oil spills are also weighing on companies," the Journal explains. "Proposals to increase the liability they face under U.S. law to $10 billion from $75 million could pose a tall hurdle for smaller companies, analysts predict, keeping many out of the Gulf altogether."

Although it may be premature to judge the long-term effects of the Deepwater Horizon spill, the current priority for the nation's economic and environmental health is to stop the leak from incurring further losses. Concerned engineers, inventors or do-it-yourselfers who want to help with the crisis can go to the Deepwater Horizon Response Web site and propose their own method for dealing with the spill.

Earlier

U.S. to Curb New Drilling as Oil Spill Hits Shore

Capping the Gusher

Resources

BP Well Leaking as Much as 60K Barrels/Day: U.S. by Robert Schroeder MarketWatch, June 15, 2010

How Much Oil Has Spilled in the Gulf? by Marino Ecchner The Boston Globe, June 2010

Gulf Oil Spill's Environmental Impact: How Long to Recover? by Mark Guarino and Peter N. Spotts Christian Science Monitor, May 10, 2010

How Bad Could BP Oil Spill Get for the Gulf and the Nation? by Elizabeth Weise and Doyle Rice USA Today, June 9, 2010

Gulf Leak: Biggest Spill May Not Be Biggest Disaster by Peter Aldhous, Phil McKenna and Caitlin Stier New Scientist, June 14, 2010

Update on Gulf of Mexico Oil Spill Response - 14 June BP Plc, June 14, 2010

For BP, Toll Likely to Extend Past Cleanup by Jad Mouawad and Clifford Krauss The New York Times, June 14, 2010

Oil Spill Could Cost Florida 195,000 Jobs, $10.9 Billion by Blake Ellis CNNMoney.com, June 8, 2010

Economic Statistics of the BP Oil Spill Democratic Policy Committee, May 27, 2010

AP Impact: BP Spill Response Plans Severely Flawed by Justin Pritchard, Tamara Lush and Holbrook Mohr The Associated Press, June 10, 2010

A Closer Look at Deep-Water Drilling by Jim Tankersley The Los Angeles Times, June 10, 2010

Drilling Moratorium Reverberates Throughout Industry by Angel Gonzalez and Perry Stein The Wall Street Journal, June 7, 2010

Anger Mounts Over Offshore Drilling Moratorium by Mira Oberman Agence France-Presse, June 14, 2010

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