Drilling for oil is a tricky affair. The equipment and drilling fluid (aka “mud”) employed during the process must exert just the right amount of inward force to offset the enormous pressure within, but not so much that there isn’t enough back-pressure remaining to eventually assist in extracting the oil. If this delicate balance is lost, things can go very wrong very quickly. That is precisely what happened on April 20th, a mere 40 miles off the Louisiana coast in the Gulf of Mexico. For a still unknown reason, a well drilled by Deepwater Horizon, a rig that BP (BP) was using, exploded and sank a mile to the bottom of the ocean.
Since then, according to some estimates, over 30 million gallons have gushed into the Gulf’s waters, and there’s no end in sight. BP’s recent attempt to halt the flow by plugging up the hole with mud and debris was declared a failure after three days of efforts. Further, the current effort to cap the well and funnel oil to ships waiting on the surface may or may not prove successful.
Meanwhile, the damage appears to be going well beyond that done to the environment. Indeed, the U.S. economy has begun to feel the effects. Oil reached the Louisiana shore first, and now all fishing there, an industry worth $2.4 billion annually, has been halted indefinitely as precautionary measure to protect the public health. Alabama has now shut down all oyster harvesting. The closures so far represent nearly 40% of the Gulf’s area, with potentially more to come. Those who make their living from the industry are rightly concerned that serious supply and demand issues could arise.
For example, roughly 10% of U.S. shrimp production comes out of the Gulf. Because of reduced supply, prices have risen as much as 50% in some areas of the country. Some of this increase very well may be due to distributors taking advantage. A number of consumer favorites, like tuna and swordfish, which migrate through the affected waters, may well be harmed. Certainly some of the slower-moving invertebrates, such as lobsters, crabs, clams, and oysters, which are simply not capable of “outrunning” the influx of harmful toxins, will be harder to come by. On balance, consumers should prepare for higher seafood prices.
Moreover, increased costs stand to crimp the profit margins of seafood buyers, like restaurants, many of which rely on the seasonally strong summer period to promote seafood dishes. Darden Restaurants (DRI), which owns Red Lobster, and Landry’s (LNY), which runs a number of seafood chains, come to mind.
The governments of the Gulf states, of course, have a strong interest in supporting the local industry and are trying their best to prevent tainted seafood from ever getting to market. Closing fisheries is the first line of defense in this respect. The next course of action is to run interference between fishermen and their distributors. This week, fish inspectors from five Gulf states brushed up on their sniffing skills. While rudimentary, this method has proven extremely effective and time-efficient.
In addition to supply and pricing disruptions, seafood industry participants are concerned about a potential image problem. Consumers may spurn seafood after seeing one too many off-putting images of birds and other creatures covered in greasy sludge. This kind of negative sentiment could last for some time. Indeed, it took two years after Hurricane Katrina for people to recover their appetite for seafood. This kind of lengthy delay could easily cause some businesses to fail.