Oil spill will hurt U.S. economy, but not big enough to cause recession
The ecological damage in the Gulf of Mexico is a national tragedy and has been economically devastating for some coastal communities. But will all the spilled oil lead to significant economic losses on a national level? We don't think so.
After extensive research into the economic consequences of the spill, and crunching industry data as well as figures from several state and federal agencies, we estimate the disaster will lower U.S. economic growth in 2010 by roughly 0.1 percent -- and will dampen growth in the four states most affected (Louisiana, Mississippi, Alabama and Florida) by 1.6 percent of their combined gross domestic product.
In dollar terms, we see the oil spill leading to a net loss of just under $20 billion for the U.S. economy in 2010. This is a big hit, to be sure, but it's not a severe enough external shock to tip the United States into a double-dip recession.
Even factoring out the losses to BP, which are large but won't weigh directly on U.S. gross domestic product, the oil industry seems likely to suffer the most from the spill. Interestingly, the two factors most commonly cited -- the oil lost into the ocean and President Obama's now-sidelined moratorium on new deepwater drilling projects -- don't account for the bulk of the damage.
Our analysis shows increased expenses from regulation of deepwater drilling and insurance costing the industry roughly $6.5 billion; it would mean $2.3 billion in collateral losses for oil and gas support industries. By contrast, the costs of the moratorium should be less than $200 million in 2010, even if it continues for six months as originally planned. And even using the most extreme estimates on the size of the spill, the cost of the crude lost in the ocean will be well under $1 billion, assuming oil prices stay near current levels.
Nor do we see the spill creating a supply shock that significantly affects the price of oil. The U.S. oil market is well supplied, with inventories above their five-year averages, and consumption remains subdued. Shipping lanes do not seem to have been affected much, and the United States could always tap its Strategic Petroleum Reserve in a pinch. The Gulf of Mexico produces only 1.7 percent of the world's petroleum, and most of this production is continuing as scheduled.
After the energy industry, we estimate the biggest losses will be suffered by tourism: $8.4 billion regionwide, with Louisiana and Florida taking the biggest losses. Particularly in Florida, many of these losses won't necessarily result from actual pollution but, rather, from fearful tourists canceling trips.
The insurance industry has dodged a bullet. BP is self-insured and thus will cover most cleanup costs. Many of the coastal wetlands degraded by the spill were not insured for environmental damage. Still, using data from Moody's, we estimate that the insurance industry will lose $2.5 billion, given payouts to affected companies and private property owners.
Although fishing has received a great deal of media coverage, and losses will be painful for some local economies, we project the industry's losses at $1.2 billion, well below those of oil and tourism.
The long-term impact of the spill could be more profound for the environment, specific industries and the overall economy. It's possible the spill could hasten a shift toward energy companies forgoing insurance -- and planning to eat the costs in the event of spills. This could spell losses for the insurance industry and could create risks that a company won't be able to cover its losses and will file for bankruptcy in the wake of a future spill.
Another possibility is that the spill will change the calculus of countries considering offshore oil drilling projects, thereby suppressing global output in the long run. The chances of this are low, however, given the economic imperatives facing many of these countries' governments, particularly in emerging markets.
Finally, the Obama administration seems inclined to use the spill to rally support for a "clean energy" bill, which has been stalled in the Senate. Yet even if this effort succeeds, the legislation most likely to be pushed through doesn't have much in the way of teeth, meaning it won't radically alter U.S. oil consumption and thus won't represent a direct swipe at U.S. oil and gas interests.
The situation in the gulf is urgent. BP and policymakers should do everything in their power to speed the recovery effort. But economic prognosticators can take heart. This sunken oil rig isn't likely to sink the U.S. economy.
Lee Hudson Teslik is senior editor and commodities analyst at Roubini Global Economics. Christian Menegatti is head of global research at Roubini Global Economics. They are co-authors of a new paper, "Deepwater Doesn't Mean a Double Dip."