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The Looming Economic Implications in the Gulf

The latest gambit by BP to plug the underwater volcano in the Gulf has “hit a snag,” according to Interior Secretary Ken Salazar. The President has sent in a ragtag bunch of scientists, engineers and MacGruber to brainstorm the mess. It’s depressing that the long-awaited, much-anticipated Apollo Project for energy has been reduced to coming up with a way to stop a fountain of oil at the bottom of the sea. By the way, has nobody thought of my solution, to put the Pacific Garbage Patch to good use by just airlifting it over the floating oil island? Win-win!

As the futility continues, Annie Lowrey forwards along an interesting take from investment advisor David Kotok on the economic impact of the disaster. Apparently, the impact shifts with the winds – whether the oil slick moves east or west. There’s not really a good direction for the slick to go, but west seems pretty awful:

My biggest concern for the country is that the slick will move to the West. If it does there are two serious issues. The first is that that is where the great majority of the producing platforms are and most of the few active drilling rigs. If the slick gets under those platforms — as you pointed out — will the MMS or Coast Guard require those platforms to be abandoned for security reasons (fire)? Some can be remotely operated, but not forever. Even if they can remain manned, there is a huge fleet of supply boats operating around the clock supplying those platforms with potable water, food, supplies, etc. Will the Coast Guard allow those supply boats to motor through the slick to make their deliveries? If the answer is no, then the platforms will have to be abandoned. About 31 percent of our domestic oil supply will be shut off. You can imagine the impact on fuel prices.

But eastward presents its own problems:

People come there to get in the water. For most of these communities their entire economy is based on tourism and the military. Just the prospect of the slick coming onshore is hurting bookings from Gulf Shores, Alabama to all along the western coast of Florida. The good news is that this should be a short-run problem. Sandy beaches can be cleaned up. New sand can be brought in. If this thing goes to the West — where Louisiana has no sandy, or even identifiable coast — and gets into Louisiana’s marshes, that is another more difficult cleanup altogether.

And if the slick goes in its current directory, it could shut down the Louisiana Offshore Oil Port, home to about 10% of the domestic oil supply. I think that Kotok isn’t taking into account that oil has a global market and the domestic supply is pretty small in the grand scheme of things. But there’s no doubt that, even if the bulk of the oil doesn’t wash ashore (and the dispersants being tossed into the water to ensure that may cause more harm than good), the consequences are truly horrible, and it’s verging on impossible to mitigate them.

We’re already seeing this. The seafood shortages have begun – forget about that shrimp cocktail for your next party, unless you like them pre-oiled. Tourism has waned because most vacationers don’t appreciate teams of government officials in hazmat suits poking around their beach towels looking for evidence of environmental threats. Thousands of jobs are on hold and tens if not hundreds of thousands more are at risk.

Raising the liability cap for BP and the other companies involved will be helpful, but ultimately, I can’t see it covering all the costs, in lives and in treasure.

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David Dayen

David Dayen