The Gulf of Mexico Oil Supply Disruption and National Job Losses

Am I the only observer of the Gulf of Mexico oil spill that has kept a level head and a sense of balance? In the panic-stricken weeks following the disaster that started with the death of 11 people, alarmism in the press went into overdrive. First, the leak was “thousands, millions of gallons”. It is a lot larger number than in barrels when you have to divide by 42. And as usual there were the images of oil sheen on water, “tar balls” on beaches and the ubiquitous oiled birds. Whether they were the result of the spill itself or not, it was immaterial.. For environmentalists even one part per million of oil anywhere is unacceptable.

But the national stupor did not occupy just the usual suspects.. Other than blowhards on the right, there were precious few knowledgeable people that came to add any sense of perspective on the accident. I have to confess personally that I have not had much love lost for BP for a couple of decades but this is too much even for them, unjustifiably arrogant characters, let alone the entire industry. To begin with nobody really knows what really happened that precipitated the accident, which has a lot in common with an airliner crash, an equally rare occurrence. This usually includes a combination of both physical causes and human error. Sometimes we never really know.

The furlor is also penchant of a public and journalists that stopped math education in grade school, unable to understand the real magnitude of a problem, other than the TV images. The stricken well is 40 miles from shore at a depth of 5,000 feet. The volume of a water cylinder 40 miles in radius and, let’s say an average of 2,000 ft depth, is (math warning, πr2h, and remembering that a mile has 5,280 ft) 280 trillion cubic feet. Dividing by 5.615 to convert to barrels this translates to over 50 trillion barrels. If a million barrels ultimately leak, even if none of the oil disintegrates naturally, the average dilution is less than 0.02 parts per million, a practically impossible to detect trace even with the most sophisticated instruments and clearly way below danger levels to animal or human health.

I am not trying to downplay the fact that the BP Gulf of Mexico oil leak has been an unmitigated disaster and because of the wind and sea currents oil has to be skimmed, oil-soaked birds have to be cleansed and beaches have to be purified. The press, Gulf coast politicians, and all sorts of people from fishermen to the tourist industry, want some action, any action and damages paid. It’s Exxon Valdez all over again.

But the reaction to the problem is likely to create an order of magnitude with more serious repercussions than the problem itself. An Obama Administration, sensitive to accusations of its own Katrina, and already ideologically averse to fossil fuels, grabbed the opportunity to declare a moratorium on all deep water drilling while “studying” the safety procedures.

On the surface there is nothing wrong with being prudent in averting a future disaster. But playing with the supply of oil from the Gulf of Mexico is not a playing matter because of another, far more important and lurking danger.

In 2001 Ron Oligney and I published a graph where we showed unambiguously that for the previous 35 years all negative job growth periods correlated directly to oil supply disruptions. I am reproducing and updating that graph here showing the rate of growth of US jobs from 1967 to today (Data from the US Bureau of Labor Statistics.). When the US economy is healthy it generates almost 4 million jobs per year. The longest sustained jobs growth in recent history was during the Bill Clinton era and before that during the second Ronald Reagan term and part of the George H.W. Bush presidency.



Starting with the first Arab Israeli war in 1967 and then the 1973 Arab oil embargo, the Iranian Revolution in 1978, combined with the Iran Iraq War that ended in the early 1980s, the Iraqi invasion of Kuwait in 1990 and the natural gas shortage in 2000 (in terms of oil equivalent) all those events, each causing an oil supply disruption greater than 2 million barrels per day, were followed shortly thereafter by a recession and a negative jobs growth. Jobs lost were never regained. The trends of interrupted job growth show that clearly.

One can also argue that the oil price that went to almost $150 per barrel in July 2008, created a phantom shortage that precipitated the brutal jobs contraction since then.

Here is the stark reality. Total US offshore oil production is 1.7 million barrels per day, almost all of it from the Gulf of Mexico, eerily close to the two million barrels per day of the historic correlation (http://www.eia.doe.gov/oog/special/gulf/gulf_fact_sheet.html.)

The Obama Administration is in a conundrum. Surely somebody there must be aware that shutting down offshore drilling, a space-age technologically demanding exercise, for an extended period of time cannot be restarted by just a wave of hand. Operators and contractors will move on internationally. Coming back in a hostile business environment will be slow and painful, if ever, and the type of reservoirs under deep water, while enormously prolific, decline very fast. The effect of drilling stoppage will be felt a lot quicker than people think.

Of course ideologues often do not want to be bothered with facts and Washington has plenty of those. Some may think what a great opportunity the drilling moratorium may bring to move on to the post-oil era. The President himself on March 6 talked about replacing the “energy resources of the last century,” with something else, usually nebulous and never clearly on what those new sources are, other than the thoroughly discredited without massive government subsidies corn-based ethanol which the president, a few weeks earlier, called a “boost to rural America.” No matter what one’s position is on alternatives and the long-term viability or desirability of fossil fuels, any transition will take decades and not related to the immediacy of the effect of oil supply disruption from US offshore.

And as history shows, oil supply disruption has a direct impact on jobs growth in the entire economy not just the oil industry and the current persistent jobs trough not only will not come to an end but is likely to worsen yet.