Macroblog

May 10, 2010

Estimating the oil spill's impact in the Gulf

In this past week's SouthPoint, the Atlanta Fed's regional economics blog, we discussed some of the economics behind the oil spill in the Gulf of Mexico. We were careful to note that determining the impact of the spill is impossible because there are simply too many variables at work: the amount of time before the leaks are capped, the direction of the wind, wave action, water currents, the amount of oil that reaches the coast, the effectiveness of dispersion efforts, the efficiency of clean-up efforts on shore, the amount of federal spending, etc. Measuring the cost of the spill is simply out of reach at the moment.

We can measure the number of jobs at risk, however. Across Florida, Louisiana, Alabama, Mississippi, and Texas—the states likely to be affected most directly—total employment in tourism-related industries and agriculture was about 2.6 million (in 2008), or about 14 percent of total employment in those states. However, if we narrow our scope to metropolitan statistical areas along the Gulf Coast of the most affected states, the numbers are much smaller—just under 132,500—with most being in the accommodation and food services industry.

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At the Atlanta Fed, like most Reserve Banks, we not only monitor statistical data, but we also seek out anecdotal information from business contacts within the Southeast. We are hearing mixed reports on hotel cancellations, which could have a significant impact on not only employment in the region but also sales tax revenue. While there has been a flood of inquiries, cancellations are not widespread to date. But some areas are seeing an inflow of clean-up workers into their hotels. Although rather insignificant at this point, it does lead to a larger measurement issue. That is, it's also impossible to measure the degree that clean-up and containment efforts will offset losses in other industries.

Econbrowser estimates the cost of the spill to British Petroleum (BP) by measuring the change in the company's stock price:

"Stock prices give us a yardstick for the markets perception of a company's long run profitability. When an event, such as this oil spill, impacts a company it will also impact its long run profitability. The divergence of the stock price from what we would have expected had the event never happened is a measure of the net present value of the cost incurred by the oil spill. Event study analysis gives us a framework to answer just this question."

While the approach to determining the cost of the spill to BP is much more straightforward than guessing wind and sea currents, it doesn't get to the more complicated endeavor of determining the cost to local communities. For that we will have to wait and see what happens next. Here are some useful links to help keep up with events:

The U.S. Department of the Interior's Minerals Management Service, along with other agencies, has created a Web page dedicated to the Gulf of Mexico oil spill response that features regular updates, maps, and fact sheets. You can also register to receive e-mail notification of updates.

The National Oceanic and Atmospheric Administration is providing coordinated scientific weather and biological response services to federal, state, and local organizations.

A joint effort is under way from the Ocean Circulation Group and the Optical Oceanography Laboratory at the University of South Florida's College of Marine Science  to track and predict the Deepwater Horizon oil spill in the Gulf of Mexico.

The Wall Street Journal is also providing regular updates and coverage.

Finally, the Washington Post published a graphic of the spill and the affected areas of economic activity along the Gulf Coast.

By Mike Chriszt, assistant vice president, and Mike Hammill, economic policy analysis specialist, both in the Atlanta Fed's research department

• May 10, 2010 in
  • Energy
  • Energy
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September 9, 2008

Hurricanes put energy on center stage

Hurricane season is in full swing here in the Southeastern United  States. The Atlanta Fed pays particular attention to hurricanes for two reasons: (1) they have significant impacts on the local economies they strike, and (2) they can potentially have big impacts on the national economy.

For example, in 2005, even though the Katrina and Rita storm-damaged area of Louisiana represented only a small fraction of the nation’s gross domestic product (GDP), it cast an outsized shadow because of its very large role in oil and gas production and processing. Katrina and Rita’s disruptions of this production and processing spilled over into the national economy, destroying 113 offshore oil and gas platforms and damaging 457 oil and gas pipelines. This damage generated uncertainty about the availability and price of energy products, causing prices to immediately jump.

After relatively quiet hurricane seasons in 2006 and 2007, 2008’s hurricane season thus far has been quite active, with potentially significant national implications. That’s because the Gulf of Mexico remains a substantial source of oil and natural gas production—just as it was three years ago. In addition, coastal Louisiana is the home to upwards of 50 chemical plants, which produce 25 percent of the nation's chemicals that are used in a wide variety of products such as medicines, fertilizers, and plastics. Compounding the Gulf Coast’s concentration of oil, gas and chemicals is the fact the U.S. economy is in a weaker state today and, as a result, more vulnerable to economic shocks than in 2005, a point made in a recent CNNMoney article about Hurricane Gustav.

One of the questions we are often asked is, “what is the effect of a hurricane on the economy?” Not surprisingly, the answer depends on what “the economy” refers to. From a national accounting perspective, GDP is a measure of the nation’s current production of goods and services; thus GDP is not directly affected by the loss of property (structures and equipment) produced in previous periods.

However, there are usually second-round GDP effects that arise because of disruptions to production, income and consumption flows. The Bureau of Economic Analysis provides a good description. For example, in the short run after a hurricane, incomes in many industries are likely to decline because of cuts in production, while some industries involved in the cleanup and repair may see activity increase. Similarly, incomes and spending could increase in areas that are the recipients of evacuees. The net effect of these flow disruptions on GDP over time is often not large because lost output from destruction and displacement is offset by a big increase in reconstruction and public spending later.

But even if the effects are neutral on a national scale a storm’s impact can be long-lasting in an affected locale. For instance, the flooding associated with Katrina left the economy of New Orleans devastated, and in many dimensions it has not fully recovered three years after the storm. Air traffic through New Orleans International Airport increased 13 percent in June 2008 compared to a year earlier but still remained well below pre-Katrina levels. Hurricane Gustav resulted in another evacuation of the city and the cancellation of numerous tourist and other events. Clearly storms like this have the potential to wreak havoc on the prosperity of the Crescent City.

The Atlanta Fed regularly reports on regional economic conditions on its public Web site. As part of its efforts to monitor storm effects—both local and national—the Atlanta Fed is also providing information on post-storm conditions in the affected areas. So far, these reports have focused on Hurricane Gustav’s impact on key energy and transportation infrastructure. The Bank will provide similar updates on other storms, including Hurricane Ike, which had entered the Gulf of Mexico at the time of this posting.

By John Robertson and Mike Chriszt in the Atlanta Fed’s research department

Note: Macroblog will not feature postings on monetary policy issues during the Federal Open Market Committee meeting blackout period, which runs from the week before the FOMC meeting until the Friday after it. Also, David Altig, senior vice president and research director of the Atlanta Fed, will not post during this time frame.

• September 9, 2008 in
  • Energy
  • Katrina
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May 8, 2007

Pump It Up

From Reuters, the unhappy news that you already knew:

U.S. average retail gasoline prices rose to an all-time high over the past two weeks, due to a number of refinery outages, according to the latest nationwide Lundberg survey.

The national average price for self-serve regular unleaded gas was $3.0684 a gallon on May 4, an increase of 19.47 cents per gallon in the past two weeks, according to the survey of about 7,000 gas stations.

The prior all-time record was an average price of $3.0256 per gallon, that was reached on August 11, 2006.

One of the first things you learn in macro class is that these sort of figures can be extremely misleading if you don't adjust for inflation, so kudos to the Reuters folks for this:

However, the current price is 6.4 cents short of the inflation-adjusted high that was reached in March of 1981, at that time regular grade self serve gasoline was $1.35 per gallon, but on an inflation-adjusted basis today that would translate into $3.13 per gallon.

That said, feel free to file current gas prices in the "ouch" category. 

We were certainly warned this was coming, but maybe by now the worst is over?  A ray of hope from the Wall  Street Journal's Energy Roundup:

Crude-oil futures dropped to their lowest level in almost seven weeks and appeared ready to extend their five-session loss of nearly 7%. Traders were betting that U.S. data, due later this week, will reveal ample supplies of crude and little or no decline in product inventories...

John Person, president of NationalFutures.com, attributed the recent price weakness to “massive hedge-fund liquidation.” He points out that the Commodities Futures Trading Commission report shows non-commercial traders are long by a net 65,000 contracts and commercial traders are net short.

At the same time, he said, “last week’s tensions eased regarding Iran’s nuclear program, and as refineries come back on line, we are expecting gasoline supplies to build. Crude-oil inventories have climbed in recent weeks, so there is plenty of [inventory]. … [And] if refineries do get back up to speed, we will potentially see gasoline builds in the next few weeks.”

That last sentence is a big "if", and Mr. Person does advise you to temper the celebration:

Even so, Person said he doesn’t expect a massive decline in prices or any break below $58.

Hey, we can dream can't we?

UPDATE: The Energy Information Administration's update provided no comfort:

Continuing problems for refineries in the United States and abroad, combined with strong global gasoline demand, have raised our projected average summer gasoline price by 14 cents per gallon from our last Outlook.  Retail regular grade motor gasoline prices are now projected to average $2.95 per gallon this summer compared with the $2.84 per gallon average of last summer.   During the summer season, the average monthly gasoline pump price is projected to peak at $3.01 per gallon in May and again in August, compared with $2.98 per gallon last July.

• May 8, 2007 in
  • Energy
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April 25, 2007

Some Inconvenient Truths

The Financial Times has uncovered some stumbling blocks on the road to carbon neutrality.  Its multi-part report starts with a useful tutorial:

Offsetting is a fundamental principle of the Kyoto protocol – an agreement among more than 160 countries that came into force in 2005. It allows developed nations to meet emissions reduction targets by funding projects such as wind farms or solar panels in poorer countries through the so-called “clean development mechanism”. This awards such projects “carbon credits”. The credits, which can be traded on the international carbon markets, sell for between $5 and $15 (€3.66-€11, £2.50-£7.50) per tonne of carbon dioxide. To aid comparison, other greenhouse gases – such as nitrous oxide and methane – are measured as equivalents of CO2.

Carbon markets have grown rapidly since they were brought into being by the Kyoto treaty and the start of the European Union’s emissions trading scheme in 2005, under which companies were issued with tradeable permits to emit carbon. The price of carbon in the EU scheme more than halved last year after it was revealed that more permits had been issued than were needed in the first phase, from 2005 to 2007.

In the first nine months of 2006, according to the United Nations and World Bank, up to $22bn of carbon was traded. About $18bn of this was through the EU’s emissions trading scheme, and $3bn through the Kyoto mechanism.

The third element, the voluntary market, is where most offsets are bought. Businesses participating in this are not bound to reduce emissions, unlike companies under the EU trading scheme or governments under Kyoto. In 2005, the World Bank estimates, the voluntary market formed under 1 per cent of global dealings, trading fewer than 10m tonnes of carbon a year. But by 2010, the consultancy ICF International forecasts it will grow 40-fold to be worth $4bn.

Most companies going carbon-neutral use intermediaries to buy offsets on their behalf.

According to the FT, however, all has not gone well:

The FT investigation found:

■ Widespread instances of people and organisations buying worthless credits that do not yield any reductions in carbon emissions.

■ Industrial companies profiting from doing very little – or from gaining carbon credits on the basis of efficiency gains from which they have already benefited substantially.

■ Brokers providing services of questionable or no value.

■ A shortage of verification, making it difficult for buyers to assess the true value of carbon credits.

■ Companies and individuals being charged over the odds for the private purchase of European Union carbon permits that have plummeted in value because they do not result in emissions cuts.

In the end, the FT editors conclude that it's time to join the Pigou club:

The Kyoto protocol to fight climate change expires in 2012. The shape of a successor treaty is still in doubt, but one aspect seems certain: carbon trading will play a major role. A Financial Times investigation today reveals that carbon markets leave much room for unverifiable manipulation. Taxes are better, partly because they are less vulnerable to such improprieties.

I'm waiting to hear a good case made to the contrary.

UPDATE:  More on the topic, from Greg Mankiw and from Felix Salmon.

UPDATE AGAIN: Yet more at Reviving Economics: Here, here, and here.

• April 25, 2007 in
  • Energy
  • This That and the Other
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