Measuring the Impact on Seafood Prices of the BP Deepwater Horizon Oil

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EI Principal David A. Argue is one of the authors of The Economics of a Disaster: The Exxon Valdez Oil Spill, a book drawn from the study of Alaska seafood prices discussed in this article. A more detailed version of this article is available on-line at http://www.ei.com/publicationsonlinearticles.php.

The BP Deepwater Horizon oil spill in the Gulf of Mexico ultimately may cause unprecedented levels of commercial and natural resource damages. The Exxon Valdez oil spill in 1989 is often compared as the closest, if imperfect, historical example of how the Gulf spill will be treated. After the Exxon Valdez spill, fishermen claimed pure economic damages (now compensable under the Oil Pollution Act of 1990) related to alleged depression of seafood prices and to forgone catch in closed fisheries. To quantify such claims, estimates were made of the seafood prices that would have prevailed if the spill had not occurred. A study prepared after the Exxon Valdez spill undertook a comprehensive, multi-model estimation of price effects for twelve species of seafood in several fisheries at different levels of production. It based the estimation of price effects on the fundamental supply and demand forces that determine prices of Alaska seafood. This modeling approach could serve as a template for any estimate of price effects arising from the BP Deepwater Horizon oil spill.

The term “pure economic losses” refers to lost earnings that are unrelated to any accident-caused injury to the victim’s property. In the context of an oil spill, pure economic losses might include the lost profits of fishermen barred from a contaminated fishery. No injury occurred to the fishermen’s vessels, gear or other property, but they lost earnings in any event. More distinctively, allegations may arise that the accident reduced prices, thereby injuring even those parties who did not lose unit sales. Damage claims for price declines of this nature might yet be brought in relation to the BPDeepwater Horizon oil spill.

Although many types of accidents result in lost unit sales, only disasters are likely to have a large enough impact to affect market prices because they can greatly shift market supply and/or demand. An oil spill disaster may, for example, lead to the closure of contaminated fisheries, thereby reducing market supply enough to increase prices. At the same time, adverse publicity about the disaster may suppress demand from an entire region enough to reduce prices. The net effect on prices of changes in supply and demand conditions often are not obvious a priori, so an empirical study is necessary. The study of Alaska seafood prices used several empirical techniques and tested prices in different markets to determine whether seafood prices were abnormally low as a result of the spill.

Several factors related to the Exxon Valdez oil spill had the potential to affect the supply and demand—and ultimately the prices—of Alaska seafood. Supply was reduced by the closure of some Alaska fisheries for all or part of 1989. Supply may also have been restricted because Exxon employed many fishermen and vessels to help clean up the oil spill, diverting them from harvesting open fisheries. Both of these forces would have tended to increase seafood prices. Similar forces may exist in the BP Deepwater Horizon oil spill. For example, some Gulf fisheries were closed briefly and reopened, and others have remained closed. Early observations point to resulting increases in Gulf seafood prices. Demand-side factors were also at issue after the Exxon Valdez oil spill. One alleged factor was that the Exxon Valdez oil spill reduced overall demand for seafood from Alaska, thereby depressing the prices of seafood from both oil-touched and oil-free Alaska fisheries. The extent of the oil spilled from the BP Deepwater Horizon disaster and the vast news coverage it received may lead to similar claims about depressed seafood prices even for oil-free Gulf fisheries.

Many other factors unrelated to an oil spill could also affect seafood supply and demand. On the supply side, these factors include the number of fishing vessels in service, natural seafood population swings, weather events, and inventory levels. Among the factors that affect demand are consumer tastes, advertising, seafood quality, and foreign exchange rates. In modeling price effects attributable to a disaster, it is important to control for as many factors as possible. If the model adequately controls for the factors unrelated to the disaster, the impact of the disaster itself can be isolated with some degree of statistical confidence. In the Exxon Valdez study, a variety of supply and demand pricing models were used. One model focused on changes in consumers’ demand for salmon in Japan (the largest export destination) that would be consistent with demand suppression by the Exxon Valdez spill. The Japanese demand model was based on Japanese household expenditures and consumption of salmon. A second model estimated ex-vessel seafood prices directly using factors like inventories, harvest levels, food expenditures, and foreign exchange rates as well as variables for species, fishing gear type, and region, and a variable to isolate the spill effect. A third model considered seafood processor prices based on ex-vessel prices, quantities of seafood processed, and variables for species and region.

Benchmark comparison models were also employed, using statistical techniques to determine whether prices in oil-touched fisheries behaved significantly differently from those of oil-free benchmark fisheries. For Alaska salmon, fisheries in British Columbia were chosen as benchmarks because of similarities in fishing seasons, species caught, harvesting methods, and identities of wholesale purchasers and end users. For some non-salmon species, fisheries in northern California were used as benchmarks. Identifying specific benchmark fisheries for the BP Deepwater Horizon oil spill would require detailed research to determine the degree of similarity with affected fisheries.

Finally, the prices at which fishing permits in Alaska were exchanged were also studied. Not all Alaska fisheries required permits and the type of permit varied across fisheries, but permit prices could still be used to test for spill effects. Gulf fisheries that require permits could be examined in a similar fashion as long as information about permit transactions is available.

In the litigation that is likely to follow the Gulf spill, a variety of damage claims will need to be evaluated. Insofar as claims are made by fishermen for pure economic losses, it may be necessary to estimate prices that would have existed but for the spill as was done after the Exxon Valdez spill.