A new study released by Entergy Corporation reports that climate change, economic development and land subsidence risks could cost communities in the Gulf Coast states over $350 billion in cumulative economic losses in the next 20 years. Already, wind and storm surge damage today cost this region $14 billion annually. But by 2010, such losses could reduce GDP by 2 – 3 percent each year.

The study on the economics of climate adaptation across the Gulf Coast states examined 77 coastal parishes and counties in four energy-producing states, including Texas, Louisiana, Mississippi and Alabama. The analysis focused on the potential impact of natural hazards on key sectors to the regional economy, particularly the electric utility and oil and gas industries. My former employer, Swiss Reinsurance Company, contributed its expertise to this research. To read the report, “Shaping Climate-Resilient Development”, click here.

The Obama administration lifted the moratorium on deepwater drilling, citing new environmental and safety regulations that it believes significantly reduce the risk of another major accident. The moratorium was originally scheduled to end on November 30. Whether the early release will have any benefit to the economies of the Gulf Coast states remains to be seen. Oil companies believe that ending the moratorium was a meaningless gesture, because they continue to face lengthy processes for drilling permits required to resume their work. For small businesses in the Gulf Coast states, where the oil and gas industry is a major contributor to employment, it will be some time before they see normal business activity.

A draft report released by a White House commission charged with examining the government’s response to the Gulf Coast oil spill revealed responses that are consistent in our national approach to disasters:

• An initial assessment by the White House that was “over-optimistic” as to the extent of the damages, resulting in delays in bringing the necessary resources to bear in containing the damage;
• The government’s initial reports to the public concerning scientific data on the spill damage were misleading; and
• Conflicts between state and local officials and the federal government confounded recovery work.

The New Orleans Times-Picayune presents an excellent summary of the report. With respect to disaster response and recovery, we are simply wasting too many resources reinventing the wheel. You could redact the words “oil spill” from the report and replace them with “Hurricane Katrina” and the findings would be largely unchanged. We need a forward-looking approach to disaster response that reflects what we have learned to date.

Hungary suffered an unimaginable environmental disaster last week when toxic sludge leaked from an alumina plant, prompting an evacuation of nearly all 800 residents of the town of Kolontar. Red sludge is the byproduct of refining bauxite into alumina, the essential component of aluminum. The sludge is typically treated to reduce its alkalinity, resulting in a final byproduct of harmless red clay. Unfortunately, that treatment was not practiced at this particular plant such that when the sludge leak flooded local villages, it killed at least seven people and injured more than 100 more, causing severe burns. Approximately 184 million gallons of the toxic red sludge were released into the environment.

But there may be more leaks to follow. Local authorities just discovered expanding cracks on the plant reservoir wall. They believe that the wall could collapse within the week. Emergency teams are racing against time to fortify the facility against a second leak before the next rainstorm. Sadly, environmental disasters continue to increase in frequency and severity.

This photograph shows a view from space of the toxic mud leak in Hungary, courtesy of NASA.

ExxonMobil, Chevron, ConocoPhillips and Shell Oil Company pledged $1 billion to create a “rapid response system” to address any future oil spills in the Gulf of Mexico. The system is still under development, but preliminary plans calls for “capture vessels” to contain and store oil in the event of an underwater well rupture. The system will be operational at depths of up to 10,000 feet with containment capacity of 100,000 barrels daily. The Marine Well Containment Company, a non-profit organization, will operate and maintain the system. The four oil companies plan to begin immediately the engineering and design of the containment equipment and vessels for the system.

No doubt the announcement was welcome by Louisiana Governor Bobby Jindal who spoke at an “Economic Survival Rally” to call for an end to the ban on deep sea drilling for oil and natural gas. Jindal estimated that the ban could cause the loss of 20,000 jobs in Louisiana over the next year. The situation with Louisiana’s oil and gas industry is analogous, in some respects, to our own situation in New York City. An entire ecosystem of small businesses is built around the principal industries of oil and gas in Louisiana and financial services in New York. When that mainstay industry experiences a reversal of fortune, the consequences to the community small businesses are especially severe. The difference, of course, is that we need energy to fuel our economy. Arguably, reduced employment on Wall Street, while painful locally in New York, might not be bad for the rest of the country.

Spread Scenario

The National Oceanic and Atmospheric Administration has performed a simulation analysis on the possible dispersions of the oil spill, assuming leakage of 33,000 barrels per day that continues for 90 days. NOAA believes that under this scenario, there is an 80% probability that the oil slicks will move east of Florida and then north, effectively going around the peninsula into the Atlantic Ocean. There is a 20% chance that the oil spill could continue north up the Atlantic as far as Charleston, South Carolina, while also dispersing to the west to travel as far as Corpus Christi, Texas.  In the worst-case scenario, to which NOAA assigns a less than 1% probability, the oil slick could spread down to southern Mexico and the Caribbean region. We really should have immediately accepted the offer of the Netherlands to contain the spill quickly using their technology. Washington’s dithering and blame game puts our own interests and the interests of other countries at risk.

A Tin Ear in Washington DC

Kenneth Feinberg, the man appointed by President Obama to administer a $20 billion fund to compensate Gulf Coast oil spill victims, promised to speed claims payments even as a federal judge considers a lawsuit to lift the moratorium on offshore drilling. The U.S. Department of the Interior stopped the approval of any new permits for deepwater drilling and suspended drilling at more than 30 existing exploratory wells in the Gulf of Mexico. But Hornbeck Offshore Services of Louisiana filed a lawsuit in which it claimed that the government acted arbitrarily without any proof that the operations posed a safety risk. Hornbeck claims that the moratorium causes additional hardship to Louisiana, which stands to lose thousands of jobs in the oil and gas industry, even as its fishing and tourism industries are already devastated by the oil spill. Today, Judge Martin Feldman heard arguments in the case in New Orleans federal court. He will issue his ruling by Wednesday. Louisiana Governor Bobby Jindal filed a brief with the court supporting the plaintiffs’ lawsuit. What is most outrageous about the federal government is that it did not consult Louisiana officials before imposing the moratorium, in violation of federal law. U.S. District Judge Nancy Atlas in Houston listened to the New Orleans court hearing today by telephone. She is hearing a similar case against the federal government filed by a Texas-based operator of drilling rigs. Let’s hope that the judges send the federal government a clear message about abuse of power and overreach.

Still Yummy

On June 6, I wrote a blog posting about the importance of perception with respect to the safety of seafood harvested in the Gulf Coast. Today, The Economist asks “No mo’po’?” meaning “no more poor boys?” reflecting concerns about the fate of Gulf Coast oysters after the Deepwater Horizon spill. The po’boy, or poor boy, is a sandwich for which Louisiana is famous. My favorite is served at Brennan’s in New Orleans. Fresh oysters harvested from the Gulf Coast, which have a uniquely sweet flavor, are served in a sandwich made with French baguette breads. The taste is exquisite. The five Gulf Coast states (Texas, Louisiana, Mississippi, Alabama and Florida) harvest more than 20 million pounds of oysters annually, which sell on the market for about $60 million. Two-thirds of the oysters consumed in the U.S. come from the Gulf and while oysters are a less valuable harvest than shrimp, they are more difficult to replace. But the immediate concern, reports one fisheries owner quoted in the article, is the perception that the oysters are not safe to eat. Media reports of the oil spill have led consumers to shun Gulf Coast seafood, further compounding the economic losses. This is when small businesses in the Gulf Coast need us most; the seafood that has been harvested to date has been collected in areas unaffected by the spill and has been tested by authorities. And the Gulf shore is still a great place to take a vacation. I look forward to my next trip there.

Safe and Delicious

Food safety officials are taking a two-pronged approach to ensure that tainted seafood doesn’t reach consumers. First, one-third of the fishing areas of the Gulf of Mexico are closed because of the oil spill, ensuring that the fish are harvested in unaffected waters. Second, fish samples are tested for evidence of contamination, to add a second layer of protection to ensure food safety. Unfortunately, perception matters and these measures have not reassured consumers. The Director of the Louisiana Seafood Promotion and Marketing Board reports that buyers are canceling orders and more restaurants are posting notices that they are not selling seafood caught in the Gulf. Sadly, history may be repeating itself as buyers shunned Gulf seafood for two years after Hurricane Katrina, even though fishing waters were cleared as safe a month after the hurricane. The impact is significant as Louisiana’s seafood brand accounts for one-third of all U.S. production. For the commercial fishing businesses it is a triple impact: reduced harvests (Worldwide Shrimp reports that it would normally pack 250,000 pounds of Gulf Coast shrimp daily at this time of year versus 15,000 pounds now as a consequence of the oil spill); lower sales volumes owing to consumer fears and this occurring when shrimp prices are 50% higher than they were at this time last year. Perhaps one thing we could all do to help Louisiana is to purchase their seafood and spread the word about the adequacy of food safety measures.

Clear For Now

The tourism industry in the Gulf Coast states is coming under pressure as the oil spill continues to expand its coverage area. Consumers are understandably reluctant to go forward with their vacation plans owing to concerns that oil slicks may effectively close the beaches. In Florida and Alabama, vacation resorts are changing their cancellation policies and offering oil-free beach guarantees, by which guests who see oil on the beaches may claim full refunds for their stay. It is similar in concept to the sunny day guarantee, whereby hotels comp guests when rain or inclement weather interferes with their plans. The Resort Collection of Panama City Beach proclaims on its Facebook page “The only oil on our beach is suntan oil!” The tourism in Louisiana is harder hit, as vacationers to that state don’t typically relax on the beach, they engage in activities such as sport fishing, which take them into deeper waters. Recreational fishing is closed for the moment. The hotels are occupied, not with tourists, but with recovery workers and journalists who are there because of the oil spill. Most of our tourism industry is in the small business sector, with individually owned, managed or franchised hotels, restaurants and tour operators. No doubt these businesses were under pressure to begin with as the recession is crimping consumer spending. On top of the economic disaster, the oil spill is another blow.