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The economic consequences of the oil disaster

Annie Lowrey -- who really, really hates oysters -- found an investor analysis from David Kotok of Cumberland Investors investigating the likely economic consequences of the oil spill. Here's the best-case scenario:

Containment chambers are put in place and they catch the outflow from the three ruptures that are currently pouring 200,000 gallons of oil into the Gulf every day. If this works, it will take until June to complete. The chambers are 30-foot-high steel configurations that must be placed on the ocean floor at a depth of one mile. This has never been done before. If early containment is successful, the damages from this accident will be in the tens of billions. The cleanup will take years. The economic impact will be in the five states that have frontal coastline on the Gulf of Mexico: Texas, Louisiana, Mississippi, Alabama, and Florida.

Party time! And the worst-case?

This spew stoppage takes longer to reach a full closure; the subsequent cleanup may take a decade. The Gulf becomes a damaged sea for a generation. The oil slick leaks beyond the western Florida coast, enters the Gulfstream and reaches the eastern coast of the United States and beyond. Use your imagination for the rest of the damage. Monetary cost is now measured in the many hundreds of billions of dollars.

Oof. We're talking tens of billions in increased deficit spending to hundreds of billions. Massive economic problems in five important states that will further harm a sagging economy, causing joblessness, loan defaults, reduced GDP growth, and on, and on. "We are at the highest level of cash in our U.S. stock accounts that we have seen in over a year and a half," Kotok writes. "We expect a market correction will present entry points at lower stock prices. We have exited the financial sectors, including the insurance ETF. We now worry about the banks that are exposed. We do not own the major oil stocks now."

According to Cumberland, this is bad enough that it's made a double-dip recession likelier. And, as Annie writes, "all of this on top of the tremendous environmental impact." Again: Oof.

By Ezra Klein  |  May 3, 2010; 9:59 AM ET
Categories:  Economy  
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Comments

Hang on, hang on. Mississippi and Alabama are important states?

Posted by: thehersch | May 3, 2010 10:03 AM | Report abuse

I assume, as a responsible corporate entity, BP will be liquidating its assets to pay for the damage it's caused.

*snerk* Nah, just kidding, they'll say that this was somehow caused by too much regulation, and taxpayers will be left footing the bill.

Posted by: Harbinger32 | May 3, 2010 10:05 AM | Report abuse

this is so deeply grim, from every perspective.
i keep thinking of the effect on sealife, marshlife, coral colonies, migrating birds, shore birds, the ocean itself., as a whole organism...the rivers..human beings who depend on the survival and well-being of the planet, the economic repercussions
the fragile nature of life, and the unexpected things that happen, especially when we do things and are unprepared for the consequences of our actions......we created these rigs, but were not at all prepared for a worst case.
i also want to say to british petroleum as i watched their green and yellow daisy commercials for years.....
"british petroleum, what does your "footprint" look like?"

i hope that we can see a better case scenario....but i think of the starfish, octopi and all of the exquisite sea creatures and the coral....and what has happened. and it is already a worst case for many creatures.

invest in seashells. there soon wont be anymore of them.

Posted by: jkaren | May 3, 2010 10:12 AM | Report abuse

I've seen many questions all over the media about using bombs to seal the offending wells. But no answers. Obviously it's about risk, but still, some informed answers would be nice.

For example, why can't they drill a new well next to an offending one, then place a bomb deep inside it, detonate it, and thus seal the offending well nearby? We could get Bruce Willis to do the job. :-)

Even if the sub-seafloor explosion fails to seal the bad well, because the bomb was deep under the seafloor the well casing where it leaves the seafloor is still intact and other traditional (but slower) methods can still be used subsequently.

My guess is that the reason they don't want to use bombs is they don't want to harm their ability to get at the oil pockets once this is all behind us.

Posted by: Lomillialor | May 3, 2010 10:17 AM | Report abuse

Bombs to seal off the oil well? Isn't that, to quote David Bowie, like putting out the fire with gasoline?

I've heard there was technology available to prevent this from happening, but BP did not implement it when drilling the well due to price. But I haven't seen any comparisons regarding the cost of implementing safety technologies to avoid spillage vs. the cost of containment now. I have to imagine that technologies to limit spills on all platforms would not be that much more expensive than the cost of containment (and legal liabilities) involved in just this single leak.

Posted by: Kevin_Willis | May 3, 2010 10:24 AM | Report abuse

What jkaren said. I am deeply depressed about what is happening in the Gulf right now. I can't even force myself to watch. The scale of what at this point will surely come - the devastation to ecosystem and culture and economy - is staggering. It is also inevitable, and was from the moment the prevention devices failed.

Posted by: wvng | May 3, 2010 10:27 AM | Report abuse

"I've seen many questions all over the media about using bombs to seal the offending wells. But no answers. Obviously it's about risk, but still, some informed answers would be nice.

For example, why can't they drill a new well next to an offending one, then place a bomb deep inside it, detonate it, and thus seal the offending well nearby?"

it sounds like they dont know what to do.
and i think there is the fear that if you really dont know what you are doing, anything can make it worse, and the stakes are already very high.
i dont have a lot of confidence in having bombs going off in the area.....i am not a geological engineer....but i dont trust them, doing any more potential damage than they have already done.
it was terrible when they were setting off bombs on the moon to find water.....


when all else fails, use bombs.
:-(

Posted by: jkaren | May 3, 2010 10:28 AM | Report abuse

And already the suits are crawling around the coast down here, trying to talk, cajole, and bribe affected businesses and residents out of suing BP.

From Bayou La Batre, Alabama (link here: http://ricksblog.biz/?p=9563 ):

"At the Bayou La Batre meeting yesterday, BP told the fishermen, business owners and local officials that they didn’t need to hire lawyer. They simply can call the BP 1-800 telephone number and claim total damages for themselves and their businesses of up to $5,000. The damaged individuals and businesses would be required to sign BP paperwork, company officials said. If their claim turned out to be more than $5,000, people were told they would be required to deal directly with BP’s legal department.

Bayou La Batre Mayor Stan Wright told the hundreds that packed the community center, “Let me say this as your friend. If you take one penny from BP make sure you don’t sign a release form.

“If you take a dollar from them and they may you sign a release,” Mayor Wright warned, “and if this thing last ten years, you can forget about it.”

He received applause when he told the fishermen to work through their trade associations and “don’t work through BP.”

Charming, don't you agree? *sigh* Thankfully, the mayor is stepping in with some wise words.

Apparently there is to be a similar town hall meeting to address the concerns of the Panhandle area of my state, too.

Posted by: litbrit | May 3, 2010 10:30 AM | Report abuse

How thoughtful of BP to allow affected businesses and individuals to sign up for a free gift certificate to the restaurant of their choice! All they have to do is sign this little itty-bitty piece of paper.

"And what's this part here? The really tiny type?"

"Oh, that just says that in case you end up shot twice in the head, it was legally assisted suicide. Nothing to worry about there. Go ahead and sign. Don't you want that nice fancy dinner?"

Posted by: Kevin_Willis | May 3, 2010 10:46 AM | Report abuse

It's like Watergate all over again. The conservatives create a disaster. The disaster creates a backlash against the conservatives. But because of the disaster, the political climate is more favorable to conservatives.

Posted by: theamazingjex | May 3, 2010 10:46 AM | Report abuse

Sounds like a screaming case for a pigouvian tax on oil (as if there wasn't already one).

Posted by: justin84 | May 3, 2010 10:52 AM | Report abuse

The definitive fix is to drill a new well intersecting the original one and pump in heavy mud and cement. A drill rig is being moved on site to start operations as quickly as possible, which will be several days. That's been reported in, oh, all the media stories since the rig first caught fire. I can't imagine any use of explosives that wouldn't make the situation worse.
The existing well is a total loss in any case. Nobody's trying to preserve it, just secure it. If BP's really lucky, they may in the future be able to use the relief well to produce the remaining oil.

Posted by: tl_houston | May 3, 2010 10:54 AM | Report abuse

But wait, shouldn't the White House agenda remain adding to the national deficit through more programs?

Posted by: truck1 | May 3, 2010 10:54 AM | Report abuse

Just a friggin nightmare of epic proportions. It always baffles me that we've willfully made ourselves so deeply dependent on something that carries with it this level of risk. Putting so many eggs in one deeply defective basket. We are nothing if not irrational in our consumption behaviors.

Posted by: slag | May 3, 2010 10:57 AM | Report abuse

"Under the law that established the reserve, called the Oil Spill Liability Trust Fund, the operators of the offshore rig face no more than $75 million in liability for the damages that might be claimed by individuals, companies or the government, although they are responsible for the cost of containing and cleaning up the spill."

i just read this on the "wonkbook." what is this???????
that's it???????????
and they will all make this money back, i bet, charging the government, in some way for the cleanup.
i bet there is money in this for the oil barons of the last administration also.

Posted by: jkaren | May 3, 2010 11:02 AM | Report abuse

This is the big crisis that has happened on the watch of this president. Yet where are the summits, the frantic overdrive that were so much a part of passing "healthcare."? One hears very little from the president about this, and hanging over it is a sense of fatalism. How about a meeting of top engineering minds from over the world? How about going to congress? How about a "we will leave no stone unturned" kind of attitude? How about the determination not to be defeated that has been shown when a "win" is in the offing for the president? It really seems like this is being neglected because there's no clear possibility of advantage in it.

Posted by: truck1 | May 3, 2010 11:19 AM | Report abuse

If there's one thing we can count on from the conservatives who championed less "government interference" in oil well safety requirements, it's that they will find a way to make this Obama's fault, and they will not be deterred from their duly sworn obligation to fling substance-free allegations until one sticks in the collective consciousness.

Just another week, in other words.

Posted by: BigTunaTim | May 3, 2010 11:53 AM | Report abuse

Why do you say they championed laxer oil well control requirements? While not making this Obama's fault, anymore than the hurricane was Bush's, the president's reaction is subject to judgment. He seems on autopilot, responding only to his pre-set agenda, and not dealing with the crises that inevitably come down the pike. This is a time for every single agenda item to be stopped in its tracks to make way for dealing with what is at hand.

Posted by: truck1 | May 3, 2010 12:25 PM | Report abuse

He seems on autopilot, responding only to his pre-set agenda, and not dealing with the crises that inevitably come down the pike. This is a time for every single agenda item to be stopped in its tracks to make way for dealing with what is at hand.


oh, for heaven's sakes....president obama is dealing with this.
i think no-one has any clue what to do.
if anyone knew how to stop it, they would be stopping it.
is all they have to fix this, those orange tubes, and some boats?
that is what BP had set up for a contingency plan.
dont blame the president.
if anything, i bet that cheney and bush and their cronies are heavily invested in the companies that are going to benefit from the cleanup.
and in some beyond-perverse way, the BP will end up benefiting too.
i wonder how much it is going to cost to fill our cars up with gas by the end of the week.
i lament that all of this is falling on obama's watch.
who knows if this is fixable. i am sure he is meeting with every known expert.
he should also be meeting with homeland security every second.
who was working on this rig?
do they even know what happened to cause this?
i can only think of the exquisite, and many rare creatures that are bobbing in these lethal rainbows of slick right now.

Posted by: jkaren | May 3, 2010 12:38 PM | Report abuse

They use bombs to snuff out above-ground oil well fires, so why not seafloor blow outs?

(if it will work)

We also use bombs to excavate bedrock when building skyscrapers and to build roads and many other constructive purposes.

Posted by: Lomillialor | May 3, 2010 12:58 PM | Report abuse

DRILL BABY DRILL!
DRILL BABY DRILL!
DRILL BABY DRILL!

We are governed by children.

Posted by: theorajones1 | May 3, 2010 1:17 PM | Report abuse

Lets not get ahead of ourselves here. They are already reporting that the detergent they are using at the pipe fractures is breaking up the oil quite well, as of today. In addition, the 'domes' will be ready in 7-8 days, and from what I understand would be able to handle up to 250,000 barrels.

Fortunately the currents have kept the slick away from the shoreline for the time being.

I agree, if it flows unstopped for 3+ months it will be a real problem, but as of right now its something like 2 Olympic swimming pools has leaked. Its not a freaking gusher.

Lets hold off on the doomsday scenarios from an investment analyst...if he's not an engineer/scientist with experience in this very complex issue, his opinion means as much as mine or anyone elses.

Posted by: truth5 | May 3, 2010 1:40 PM | Report abuse

truth5,

The exxon valdez spill was almost 11 million gallons of oil. In your terms that was only about 17 olympic swimming pools (each pool is about 650,000 gallons).

I'd like to see your source that says only about 1.3 million gallons (two swimming pools) have thus far spilled into the gulf. Maybe your source is BP?

Many reports suggest we are spilling upwards of 100,000 barrels per day. That's over 4,200,000 gallons per day, or 6.5 swimming pools per day.

Over a one month period of time, that would mean we would spill 126,000,000 gallons of oil, or 193 swimming pools. So if you're not going to get concerned until after 3 months, well, that's almost 579 swimming pools, or 34 Exxon Valdez's.

Your lack of urgency, and your estimates, seems way off. My math may be off too, I haven't double-checked it, but it's a more accurate representation of the situation than yours.

Posted by: Lomillialor | May 3, 2010 3:18 PM | Report abuse

"Many reports suggest we are spilling upwards of 100,000 barrels per day. That's over 4,200,000 gallons per day, or 6.5 swimming pools per day."
I'd like to see the source for that.

Posted by: tl_houston | May 3, 2010 3:32 PM | Report abuse

http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201005021109dowjonesdjonline000253&title=interior-secretary-salazar-us-gulf-oil-spill-may-be-worse-than-valdez


Posted by: Lomillialor | May 3, 2010 3:54 PM | Report abuse

How much oil is produced from naturally occurring deep-sea oil vents? Not that it's really relevant, I'm just curious.

Posted by: Kevin_Willis | May 3, 2010 5:16 PM | Report abuse

A defict adding, Socialist, Big Government TAKEOVER of the Oil Spill Clean Up industry.

Posted by: grat_is | May 3, 2010 6:27 PM | Report abuse

Kevin

Your question reminds me of that petroleum industry spokesman who gets paid to go around saying things like "plants need C02 so we need to pump more of it into the air--the more the better".

Posted by: Lomillialor | May 3, 2010 10:17 PM | Report abuse

When I am wrong I am wrong. And it looks like I relied on articles that incorrectly stated the amount of daily oil spillage. 100,000 barrels per day is way too high. Things I am reading this morning suggest it is more like 5000 barrels per day.

So truth5 you were more correct than I was.

Posted by: Lomillialor | May 4, 2010 8:01 AM | Report abuse

Lomillialor,

I'm not trying to downplay anything, but I'm not also convinced that this is certain to end up as an epic disaster. Even if the leak amounts to 2x or 3x the size of Valdez, its impact would still be much lower because of how much further offshore it is, and how deep the leak is. Remember, Valdez RAN AGROUND, so it was litterally gushing out right onto the beaches. This is 40+ miles off the coast, and over a mile under water.

Now, as I said, if they don't get it capped with these domes in the next week or two, and it flows 5,000 barrels a day for 3 months, it'll be a mess. That said, from what I've read the slick is actually shrinking in size as of today. In addition, the chemical detergents they are using at the leak souce seem to be breaking up a lot of the oil before it reaches the surface.

Posted by: truth5 | May 4, 2010 9:45 AM | Report abuse

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