The Economic Impact of the Gulf Oil Spill

• Even under a pessimistic scenario, economic damage from the Gulf of Mexico oil leak will be confined to adjacent regions.
• As with most natural disasters, the oil leak's effect on the broader U.S. economy will be negligible.
• The Gulf region’s oil and gas production industry is threatened by the moratorium on new drilling.
• Thousands of cleanup jobs will help offset losses in tourism, fishing, and oil and gas production.

Though the full environmental and economic consequences of the Deepwater Horizon oil leak will not be known for some time, a study by Moody’s Analytics estimates that nearly $1.2 billion in output and 17,000 jobs will be lost in the Gulf Coast states by the end of this year. Even so, the spill's national economic impact is likely to be negligible. The accident's environmental costs will certainly be large, but the effect on national GDP, income and employment will be minimal. The output loss across the five Gulf Coast states amounts to less than 0.1% of national GDP.

Fishing and tourism

The greatest direct impact thus far is being felt by the Gulf Coast’s sizable fishing and aquaculture industry, especially in Louisiana. The National Oceanic and Atmospheric Administration has closed about 80,000 square miles of the Gulf to fishing, mostly along the Louisiana coastline, though the closure extends as far east as Panama City FL.

At least one Louisiana beach has been closed to swimmers and fishermen, and several Alabama and Florida Panhandle beaches are advising swimmers of the presence of tar balls and oil sheens, though the beaches remain open.

In response to the disaster, President Obama signed an executive order that places a six-month moratorium on new deepwater oil drilling. This order affects about 33 rigs in the Gulf of Mexico, most of them off the coast of Houma LA.

The Gulf economy

The economic impact of the oil spill will be concentrated in Gulf Coast communities. Of the five states affected—Texas, Louisiana, Alabama, Mississippi and Florida—the two hardest hit are Louisiana, with its heavy dependence on fishing, aquaculture and oil extraction, and Florida, with its tourist industry. The metro areas and counties that line the shores of the Gulf are already bearing the brunt. Yet these areas account for only 3% of national GDP and employment, so broad macroeconomic effects are unlikely, at least in the near term.

The outlook for beach tourism along the Gulf Coast has fluctuated amid uncertainty about the volume and reach of the spill. While advance bookings initially fell, there is some evidence that tourists are making last-minute decisions to vacation in areas perceived as clear of oil. This could mitigate some of the damage to Florida’s and Alabama’s tourism industries. The thousands of workers assisting with the cleanup, along with the media deluge along the Gulf Coast, will also offset some of the losses incurred by hotel operators, restaurateurs and retailers.

Louisiana's pain

The impact on Louisiana’s fishing and aquaculture industries is difficult to gauge, yet the industry accounts for less than 1% of that state’s total output. Most federal Gulf waters closed to fishing are off the coast of southern Louisiana in the Houma and New Orleans metropolitan areas, where most of the state's shrimp and oyster harvesting is concentrated.

Neither industry had yet fully recovered from the devastation wrought by hurricanes Katrina and Rita several years ago. Even before the leak, catches were still well below their 2004 levels. To put the potential impact into perspective, the hurricanes of 2005 cut the Gulf shrimp catch by a third and the oyster catch by a quarter, measured by weight.

While the hurricanes caused some pollution that affected fishing, oyster beds and coastal nurseries, the potential pollution from the oil leak is far greater. With oil reaching the coastal breeding areas for marine life, the industry could face years of disruption.

Drilling moratorium

BP recently estimated that more than 6,000 locally owned and operated boats were deployed to help with oil cleanup and containment. The company's payments to local commercial and charter fishermen will mitigate lost income from the closure of fishing and shrimping waters, at least temporarily.

Louisiana’s economy could feel a larger impact from the administration's six-month moratorium on new offshore drilling. Oil and gas infrastructure accounts for a large share of the state’s GDP—up to 20% in some Gulf Coast metro areas.

Though the number of jobs directly associated with the oil and gas industry is not enormous, many thousands depend indirectly on this industry. Manufacturing, transportation, and professional/technical service jobs associated with oil drilling are at risk if the moratorium stays in effect through early November, as ordered.

Adjusting the forecast

The Moody’s Analytics forecasts for the Gulf Coast economies have been adjusted to incorporate assumptions about the impact of the oil leak. Adjustments at the state level were small, mainly because the oil leak will affect only a handful of metro areas and counties in each state. The spill's biggest impacts are likely to be recorded in the third and fourth quarters of 2010. Florida and Mississippi are expected to suffer net declines in employment during the third quarter. No changes have been made to the Alabama forecast, since damage there seems to be limited to one county (Baldwin), which is not in a metro area and accounts for a tiny share of the state’s overall jobs and output.

Though forecast changes at the state level were relatively minor, some metro areas will see a significant impact. On the Florida Panhandle, the Crestview, Pensacola and Panama City metro areas, along with Tampa, were adjusted to reflect declining consumer confidence and cancellations by vacationers.

Losses would be much greater if not for increased bookings from cleanup and containment workers and journalists. News reports indicate BP has hired several hundred cleanup workers along the Panhandle, and these additions are factored into the forecast.

Mixed results through June

Employment data through June show only a very small oil spill effect. Employment in leisure/hospitality rose in May and June for all of Florida and fell only slightly in Crestview and Panama City. In Pensacola, leisure/hospitality employment rose in June; retail payrolls expanded in all three Panhandle metro areas last month, despite reported declines in tourism.

Some layoffs may already have occurred because of the drilling moratorium. Though the Interior Department has not released a list of the 33 rigs affected, most are thought to be based out of either southern Louisiana or Houston. Most losses are expected to come directly from southern Louisiana.

Across all industries related to energy extraction, the forecast calls for a gross loss of around 8,000 jobs in southern Louisiana by the end of the year. Bureau of Labor Statistics data show a loss of 1,200 jobs in natural resources and mining in Louisiana in June.

With a third of the Gulf’s federal waters closed to commercial and recreational fishing, plus state closures affecting Louisiana’s shrimp and oyster harvest, Moody’s Analytics estimates that several thousand fishing or aquaculture jobs will be lost over the next year, mostly in Houma and New Orleans. These losses, together with losses in oil and gas extraction, noticeably increase the unemployment rate forecasts for these two areas.

Household employment fell in both Louisiana and Florida in June, at least partly reflecting job losses among the self-employed and in industries not captured in the nonfarm payroll survey.

Long-term implications

As with other natural and man-made disasters, there are sure to be long-term environmental and economic consequences from the Deepwater Horizon accident that may affect the economic outlook for the Gulf Coast or the nation. Some of the most likely involve higher industry costs, through insurance premiums and stricter federal oversight, which may deter future oil drilling in the Gulf.

The federal Energy Information Administration assumes that in the near term, most new crude oil found in the U.S. will come from deepwater offshore drilling. While the EIA believes the six-month Gulf drilling moratorium will have no significant impact on prices or supply, a longer-term ban on drilling in the outer continental shelf would prevent about 700,000 barrels of projected supply from coming to market by 2035. Moody’s Analytics calculates that this could increase the price of a barrel of crude by less than 50 cents.