Analysis: BP disaster will slow Gulf states' recovery

The BP Plc oil leak contaminating the Gulf of Mexico will muck up for years the governmental finances and economies of America's Gulf coast region.

Beyond directly sea-related sectors such as fishing and offshore energy production, the gushing oil leak is fouling other drivers of the economy like lodging, casinos, real estate and governments as the overall U.S. economy emerges from the worst recession since the 1930s.

As BP's heavy spending to stop the leak, company compensation payouts and its $20 billion escrow fund blunts some immediate financial damage, policy makers, executives, business owners and economists are beginning to gauge the disaster's long-term consequences.

The spill and its consequences, such as the federal government's deepwater-drilling moratorium, threatens coastal property values, thousands of energy sector jobs and tourism businesses reliant on pristine beaches and sparkling waters.

"Right now tax revenues are a secondary issue to the economic growth over the long term," said economist Mark McMullen of Moody's economy.com. "What's scary is: when will it bounce back? And what will be the lasting damage to the economy and government coffers?"

Looking at those questions, Mississippi's governor last week ordered economists, state tax officials, business leaders and marine experts to put aside current finance pressures and spend a year studying the ramifications of the April 20 catastrophe.

"We need a clear grasp on how this oil spill will impact the State of Mississippi and local communities for years to come," Mississippi Governor Haley Barbour said.

Even before the disaster, in the first three months of 2010, the revenue of states in the Gulf region shrank, according to a report this week from the Rockefeller Institute of Government. While all 50 state governments across America had an overall 2.5 percent rise in revenues, Louisiana, Mississippi, Alabama, Florida and Texas all showed declines in year-over-year comparisons.

A scramble for revenue will remain feverish for the foreseeable future. The Center for Budget and Policy Priorities last month forecast states face revenue shortfalls of $140 billion in the coming fiscal year.

The projected fiscal 2011 budget gaps for Gulf states total at least $11 billion, including ones for Florida of $4.7 billion, Texas of $4.6 billion, and Louisiana at $1 billion, according to the center.

Beyond hiking taxes, lifting fees and cutting spending, some governments look to tax medical marijuana and sugared drinks. Others such as Florida are clearing the way for more gambling or casinos, at least in part to raise revenue.

In Louisiana, the Gulf state most reliant on energy businesses, the economic costs of the federal moratorium on deepwater oil drilling, in place through November 30, will be severe and long lasting, according to Eric Smith, associate director of Tulane University's Energy Institute.

Smith estimated the moratorium affects dozens of deepwater rigs that ordinarily employ as many as 10,000 crew making about $100,000 each annually, with most of those wages spent in Louisiana and nearby states.

The ripples from the moratorium may take the number of lost jobs in Louisiana to 24,000, according to Michael Hecht, head of Greater New Orleans Inc, an economic development agency.

"The economic impact from the oil spill itself, however broad and long-lasting, will likely be dwarfed by the impact from the moratorium," Hecht this week told a presidential panel investigating the disaster.

Many of the rigs, their high-paying jobs and supply requirements will move elsewhere, Smith said, and slow the region's economy for years. One big driller, Diamond Offshore Drilling, has already announced it is moving two of its five rigs in the Gulf to other regions.

The likelihood of tougher U.S. regulations after the BP disaster for Gulf offshore drilling may drive operators to send rigs to Brazil and other regions, Standard & Poor's said.

"This is a case of the regulators not understanding the business they are regulating," Smith said. "They don't understand the contracts. These things cost $500 million to $600 million to build. They need contracts. They have to operate."

In west Florida's Panhandle, an area with many tourist businesses, officials in Escambia County worry that property prices already hit by the prolonged U.S. housing market slump will fall further.

The county's property last year was appraised a total 6 percent less than a year earlier at $27.6 billion. That meant lower property tax revenue and a $24-million reduction in county spending.

Florida's tourist-dependent coastal economies stand to lose as much as 39,000 jobs and $2.2 billion or more in business because of the BP oil spill, according to University of Central Florida economist Sean Snaith.

"The idea that a great environmental disaster could become a great economic one isn't inconceivable, but neither is it a certainty," S&P said last week in a report that concluded state and local governments were so far managing the BP leak ably.

[Source: By Michael Connor, Reuters, Miami, 16jul10]

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