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Economic Forecasts

Gauging the Gulf Oil Spill's
Economic Cost

The environmental disaster isn’t guaranteed to be an economic one as well.

It’s still too soon to say exactly how grave the environmental damage from the oil spill in the Gulf of Mexico will turn out to be. Certainly there is potential for a disaster that would take a decade to recover from. The economic impact isn’t much clearer, and a lot depends on how long the flow continues and how well the resulting slick is contained.

Here’s our best judgment on key questions about the oil spill:

Will the disaster derail economic recovery? No. That would take a sustained hike in world oil prices, and that’s not in the cards. In and of itself, the loss of the BP Deepwater Horizon platform isn’t significant. Although it’s causing an environmental catastrophe, the amount of oil being lost is a drop in the economic bucket.

In the worst case scenario -- if oil slicks close the ports of New Orleans and Houston, which is not considered likely:

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•A temporary jump in the price of gasoline -- between 25¢ and 50¢ a gallon. Total closure of ports to prevent harbor fires would end Gulf refiners’ access to oil arriving by ship -- about 20% of the refiners’ supplies. The spike would likely last just a week or two while refiners scramble for other sources, including the government’s Strategic Petroleum Reserve.

•A hit for agriculture. Closures of Gulf ports would bottle up exports of grain and soybeans, pushing down prices. That would slam the crop producers but provide a short-term boon for livestock and poultry feeders as well as ethanol makers.

•And problems for steel users. New Orleans is a major hub for the importing of girders, rods and tubes plus slabs used by steel manufacturers to make finished products.

Plus, if oil were to wash ashore on the Florida Panhandle, tourism would take a dive, hurting the Sunshine State. Plenty of other small communities in Alabama, Mississippi and Louisiana would feel the pain as well.

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And devastation for the fishing, shrimping, oystering and allied industries if their grounds are fouled. According to Paul Bingham, a managing director of IHS Global Insight’s Global Commerce & Transport Group in Lexington, Mass., a long closure of the Gulf’s fishing areas would hit the seafood industry very hard. “It’s a $700-million annual business for the region,” he says.

Is this the end of deepwater offshore drilling? Not by a long shot. About 30% of U.S. oil production comes from offshore wells, with those in waters deeper than 1,000 feet accounting for about 60% of total offshore oil output. Moreover, the best bets for large new reserves are in deep water -- and not just off the U.S. coast, but in waters near Brazil, Mexico, Angola, Ghana and several other nations. “Oil companies must replace their dwindling reserves, and the opportunities to do so are greatest in offshore, deepwater fields,” notes Alan Heburg, senior fellow at the Center for Strategic and International Studies in Washington.

But it will delay the awarding of new leases until 2013 or 2014, a year or two after they were expected under the plan outlined earlier this year by President Obama.

Will new safety regulations significantly cut output or raise costs on current wells? Not likely. You can bet new safeguards will be implemented -- for example, requiring the installation of backup systems like those already mandated by Brazil and Norway to prevent blowouts. “The (Deepwater Horizon) accident will be investigated and, if necessary, new requirements will be put in place, just as they were after oil tanker spills,” says Heburg. “Today’s double-hulled tankers are far less likely to leak any oil if they encounter problems.”

But new safeguards won’t necessitate a halt in pumping, and the costs will be manageable -- in the neighborhood of $500,000. Not too onerous, considering the typical $500-million price tag for the oil platform itself.