Negative and Positive Externalities of the Gulf Oil Spill

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In every crisis, there is always an opportunity for someone. This is the case of the oil spill in the Gulf of Mexico. In reality, the general perception that the oil spill is something that must be disdained could be a biased position as many sectors of s

As the old adage goes " In every crisis, there's always an opportunity for someone."  This is quite true in the notorious case of extensive oil spill in the Gulf of Mexico. A lot of effort was made to plug the oil leak albeit unsuccessfully. Various strategies were employed to contain the leak thereby address the problem at source then clean up the spill. These efforts require people, machines, technology, money, time, among others to sustain. There are threats to wildlife due to water pollution and to people's livelihood dependent on the products of the sea.

But there are benefits to be gained from such event. How could this be? The truth is, some sectors also benefited from the oil spill in terms of employment opportunities and work generated to clean up the oil spill. While the harmful effects to wildlife are negative externalities this is counterbalanced by the positive benefits derived by people in terms of additional income from work generated, i. e., by the clean up activity which is considered a positive externality in economic terms. 

What is an externality?

An externality is the cost or benefit incurred by a party who did not agree to the action causing the cost or benefit or is outside of the transaction between two parties. A benefit is called a positive externality and a cost is a negative externality.

In a competitive market, prices do not show the full costs or benefits or producing or consuming a product or service. Producers may not bear all the costs of their economic activity while the consumers may not reap all the benefits of the economic activity.

For example, in the production of oil in the Gulf of Mexico, the costs or negative externalities of the people living in and around the Gulf of Mexico due to oil production are in terms of water pollution that impact on their livelihood such as fishing and tourism as well as water pollution effects to wildlife. The oil spill, however, also has positive externalities in terms of work generated and opportunities offered by the clean up activities. The overall cost and benefit to society of the oil drilling and production activity by BP is the sum of the benefits and costs associated with it.

Wikimedia Commons / US Government public domain

To illustrate further, the following list enumerates the negative and positive externalities of the oil spill in the Gulf of Mexico.

Negative Externalities of the Oil Spill

  • Millions of dollars lost due to production of shrimps, fish and other fish products by the fishers
  • Lost income derived from the billion dollar tourism industry of Louisiana if the gulf oil spill continues
  • Cost of wildlife and wildlife breeding grounds lost due to the oil spill
  • Increased cost of oil prices due to the moratorium on deep water drilling operations
  • Lost jobs due to the suspension of deep water drilling operations
  • Health costs of cleanup workers in the frontline
  • Cost of air pollution that will pose respiratory related ailments

Positive Externalities of the Oil Spill

  • Millions of feet of boomers were employed to prevent oil from spreading uncontrollably. Boomer production means increased income for the manufacturers of this material.
  • Millions of dollars were spent on dispersants that benefited the producers of this chemical
  • Thousands of kiddie scoopers were sold at $2 each benefiting the manufacturers
  • There is an increased demand for respirators. This means increased income to producers of this device.
  • 30,000 cleanup workers were hired
  • 200 portable toilets were rented at $200,000 a month increasing income of providers more than three times
  • Small four-bedroom houses near the location of the oil spill were rented at $45,000 per month at the lowest
  • Hotels in the gulf area are fully booked for six months which means increased income
  • $360 million for a project to build six sand berms meant to protect Louisiana's wetlands from spreading oil
  • Income derived from production of technologies to cap like robots and capping domes, etc.

The above is not an exhaustive list. A great deal of money is involved just to bring back (or at least try to reduce the impact) the state of the environment before the oil spill. BP has already spent $1.6 billion in cleanup operations and committed a $20 billion fund to President Obama to cover the costs related to the Gulf spill. Experts at Standard Chartered Plc estimate, however, that the whole thing would cost BP $40 billion for cleanup and liabilities.

Despite the benefits associated with the oil spill, many Americans say they are willing to trade all these things to get back to April 19, the day before the oil spill. The Gulf oil spill incident just shows how valuable the environment is in terms of the its direct and indirect uses as well as non-use values that are not normally given monetary value and sold in the market. Among these non-use values are intangible values like the value placed on the continued existence of wildlife habitat, bequest value of the natural endowments of the coastal areas surrounding the Gulf, among others. All of these use and non-use values are called collectively as the total economic value of the natural environment. The latter values are usually captured using people's willingness to pay for enjoyment of such attribute of the environment.

The conclusion of the matter is that however unfortunate the gulf oil spill may be, it also opened new opportunities that can keep the economy going. It just takes an open mind and pragmatic thinking to widen one's perception and take things in a broader light.

Update

By July 2016, British Petroleum (BP) put a final price tag on the 2010 explosion and oil spill in the Gulf of Mexico at $61.6 billion. The company reported that it expects to spend a total of $44 billion after tax deductions are figured in.

As of now, BP has settled the majority of claims that were filed against them by companies, local, state and federal governments and individuals, such as scores of fishermen and others that lost money due to the oil spill and ruined beaches.

Earlier in 2016, a federal judge approved a $20 billion settlement over environmental and economic damage between British Petroleum (BP) and state and federal governments, one of the largest corporate penalties in the history of the United States.

References

Associated Press Report on Gulf Oil Spill Costs

Don Miller on Cost of Gulf Oil Spill

Matt Gutman's report on the 'spillionaires'

Voice of Russia on Oil Prices Going Up

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