BIG PICTURE: Another Look At Oil Spill's Spillover Effects

21st Jun 2010 12:36

(This article was originally published Friday.) By Kathleen Madigan A DOW JONES NEWSWIRES COLUMN NEW YORK (Dow Jones)--Almost two months after the lethal explosion on the Deepwater Horizon oil rig, economists are still trying to assess the impact on the U.S. recovery. The oil spill itself isn't expected to hurt growth much. The bigger worry is the moratorium on deepwater drilling announced in late May. The oil spill has directly hit the Gulf economies. While job and income losses are having a devastating impact on the region, the numbers are too small to drag down total U.S. gross domestic product. Michael Feroli, economist at JPMorgan Chase, points out that commercial fishing in the Gulf accounts for only 0.005% of the U.S.'s $14 trillion economy, and 68% of the Gulf remains open to commercial fishing. In addition, the ports of New Orleans and Corpus Christi are still open, so trade--including shipments of oil, grains, steel and coal--has not been curtailed. Tourists are avoiding the Gulf area--including spots not swimming in oil. Those vacationers, however, are very likely heading elsewhere in the U.S. That means their spending will still add to gross domestic product this summer. Moreover, the Gulf isn't losing out entirely. In discussing Gulf tourism, the Fed's June beige book noted: "In some cases, vacation lodging cancellations have been replaced by bookings from clean-up crews, laborers, and the National Guard." Indeed, BP PLC's (BP) clean-up efforts will boost economic activity. The oil giant has agreed to a $20 billion escrow fund for clean-up and other expenses, and it has set up a process to pay claims that could cost the company even more. The result will be a transfer of earnings from a multinational corporation to U.S. personal income. That spending will offset the economic activity lost by the moratorium. Up to 50,000 jobs either in or supported by Gulf drilling could be lost this year or next. U.S. oil production could drop 3% by 2011. Early evidence of the spill's drag came in this week's industrial production report. Oil and gas drilling operations were flat in May, after the industry had been growing by an average of 6% in the first four months of the year. Analysts at Barclays Capital estimate the stoppage this year will cut planned spending by about $1.6 billion. Even so, Barclays expects oil and natural gas exploration spending in the entire U.S. to increase 18% to $85 billion this year. Further out, the spill and moratorium could push up energy prices. David Kotok, chief investment officer at Cumberland Advisors, says renewed scrutiny and regulation will probably push up costs for the energy industry. "This will eventually be reflected in higher oil prices," he says. The result would be a drag for consumer spending as households have to pay more at the gas pump and for industries that use oil. Kevin Swift, chief economist for the American Chemistry Council, says every $1 increase in the cost of 1 million BTUs of natural gas costs the U.S. chemical industry $3.1 billion yearly. (The chemical industry uses 4.4 billion cubic feet of natural gas per day.) For crude oil, every $1 increase per barrel costs about $175 million. The situation remains in flux, and so do the forecasts of the ultimate hit from the oil spill. Calculations will become more definite when the leak is finally capped. As Michael Chriszt, regional economist at the Federal Reserve Bank of Atlanta, wrote on the bank's Southpoint blog, "The truth of the matter is that what we do know is still far less than what we don't know." (Kathleen Madigan, a special writer, is the primary author of the Big Picture column. She covered the economy for over two decades at BusinessWeek and Wall Street firms. She can be reached on +1-212-416-2466 or via email at: [email protected].) (TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at [email protected]. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.) (END) Dow Jones Newswires June 21, 2010 07:36 ET (11:36 GMT)