Apparently, there was some kind of explosion in the Gulf of Mexico, and oil has been leaking in the gulf ever since. It’s been over 50 days and now oil seems to be everywhere there now. It’s a tragedy and an absolute disaster. My heart goes out to the people that lost their lives, and I feel so bad for the animals that are suffering because of the oil disrupting their habitat. But Weakonomics isn’t the blog for these topics. It’s the blog to talk about the realities of the situation from the business and economic standpoint.

Let’s first get a couple of things out of the way. BP is absolutely at fault, and their partner companies (such as Transocean, ticker: RIG) are probably also to blame. To what degree will be decided by investigators and courts. They are responsible for the cleanup, and for the most part BP seems to be doing what they can with that. The problem is their focus is still split on cleanup and fixing the leak. Until the leak is fixed they aren’t going to be able to devote the necessary resources to clean up. The government should be aware of such things and playing a larger role, but they haven’t been as involved. This is why some people are calling the oil spill “Obama’s Katrina”. Whether or not that’s true will be determined in the coming months and years. I have no opinion on the matter yet.

Something BP has been doing is paying people and business that have been impacted by the oil spill. Fishermen and such have not been able to work due to the spill and BP has been accepting claims to that fact. This is BP making payments as a result of a concept in economics known as an externality. There is a lot of debate in politics about how responsible we are for the externalities we create. An externality is some kind of cost or benefit that is not reflected in prices. The most commonly cited externality is pollution. Companies pollute, which can impact the way other people live or operate their businesses. For example, pollution dumped into the Mississippi River by farmers impacts the fishing industry in the Gulf of Mexico. But those farmers don’t pay a tax to compensate the fishers. This is an externality. If they did pay a tax, we’d pay higher food prices, and the externality is now priced. So BP is now paying people who have lost business because of the spill. It’s an externality that is now being priced in. In my observations, the more obvious the externality is, the more likely it is that the guilty party will have to pay for it. the BP oil spill is a fairly obvious externality, so much so that the White House wants them to pay back the entire economy. The pollution in the Mississippi is not.

But externalities are boring compared to the big debate of the future: will we not be allowed to drill offshore anymore? I couldn’t call myself a drill baby drill advocate, but I support it. But will the people living in the coastal states continue to support something that’s ruining their ecosystem and hurting many coastal businesses? You bet they’ll keep supporting it, they have to. The fishing industry in Louisiana employs about 16,000 people. That can sound like a lot in relative terms. But if you want to talk about someone that’s addicted to oil, it’s Louisiana.

The state of Louisiana thrives on the energy sector. Oil alone is responsible for 58,000 jobs in the state, and when you include companies related to oil you’ve got another 260,000 on top of that. All in all energy counts up as much as 17% of all the jobs in the state. Not all of that comes from deepwater drilling, but over 80% of offshore drilling in the gulf comes from Louisiana deepwater drilling.  While there is currently a moratorium on deepwater drilling, there’s no way the gulf economy can survive without it.  Drill baby drill will be back.

categories: economics, environment, government