Course:ECON371/UBCO2010WT1/GROUP1/Article1

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Article 1: Oil spill damage spreads through Gulf economies

Summary

The article summarizes how the oil and gas industries, tourism, as well fishing and shipping, which are the four largest industries in the Gulf of Mexico's economy will be affected by the BP oil spill. All industries will be dramatically affected not only by the actual physical impact of the oil spill, but also by the perceptions of potential tourists. Also influencing all of the major industries is the fact that there is a severe lack of data available on large scale oil spills. The lack of available information results in all involved to make assumptions and fear the worst. If the attempts to stop the oil spill continue to prove ineffective, at the current rate of the spill (as many as 19,000 barrels of oil spewing into the ocean per day) it has the potential to be twice the size of the 1989 Exxon Valdez spill.

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Analysis

In the short run, the oil spill will have a minimal impact from an actual supply and demand standpoint because the amount of oil lost is relatively small compared to the actual amount of oil produced. The price of oil should increase only because marketers will cause it to do so, due to perceived increase in supply costs caused by uncertainties. In the short run, this disaster will probably have a greater effect on the fishing and shipping industry, as the "government has closed over 25% of federal waters for fishing activities". Tourism will also be impacted. The oil has yet to actually reach the beaches, but as said in the summary, the perception of the consumer is what will actually cause the largest impact. Basic economics tells us that the expectations of consumers can adversely affect demand and supply in the market. The oil spill will generate an additional external cost which will increase the marginal social cost. The new marginal social cost will shift left along the demand curve which will drive the price of oil up and quantity down. While the original benefit would have been selling the oil and generate external costs such as greenhouse gas emissions, but this disastrous incident has caused a greater surplus in cost than benefit. Thus, the Deepwater Horizon(name of the offshore drilling) should shutdown its underwater water oil extraction.

Conclusions

The four major industries in the Gulf of Mexico suffer. The cost for restoring the ocean to its previous state will rise until the oil leak is stopped. The amount of jobs available in the Gulf region will decrease, especially in the tourist and fishing industry, and unemployment will rise. At the very least, the jobs of self employed fishermen will be put on hold. Due to geographic location, many countries who originally traded with Central America will be more reluctant to trade by ship which will result a decrease in imports and exports. As labor decrease, output will fall and the prices' of domestic goods will increase, and this will affect their economy in the short and long run. In the long run, even if the Gulf of Mexico is restored, tourism and the fishing industry will suffer a stagnation until this event has been resolved and enough time has passed. Consumers of tourism will want to know that their is no potential for their vacations to be ruined by excess oil washing up on the beaches. The majority of the workers in the Gulf of Mexico will suffer more in comparison to BP(the company responsible for the oil spill). Where as the environmental damage done will be permanent and impossible to restore to its original state.

Prof's Comments

This article is a bit dated, and it would have been good to preface your discussion with 'as of June, 2010'. Spills also do not fit neatly into the marginal damage vs marginal abatement context. A spill is an uncertain event, so things are in terms of expected damages (expected values) rather than actual damages, when it comes to taking actions to control the risk of a spill.

The article does make a good point about the importance of perceptions, where potential tourist think that there is more damage than there actually is, at least at the time of the article. That would have been a good one to pick up on, in terms of the way that the demand curve for holiday trips has shifted. OOPS, missed the line where this was commented on. Mark corrected.