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Economics in action: Taking the BP oil spill from the headlines to the classroom

photo of oil spillA lesson experienced is one more likely to be remembered. Lessons in regional economic impact are played out every day in the Gulf Coast region. The Federal Reserve Bank of Atlanta is home to the areas affected by the explosion and oil spill of the BP Deepwater Horizon drilling rig in the Gulf of Mexico in April 2010. This disaster, declared the largest accidental spill in U.S. history, continues to grasp news headlines that provide a rich source for classroom discussion of economics in action.

Measuring the economic impact of any significant event in our national economy takes time. Because the measurement data are backward-looking and cover a vast geographic area, we are often not aware of the subtle changes to the economy until the event is in the history books. The effects of the BP oil spill are ongoing, which adds to the complexity of measuring. Nevertheless, because the impact is regional, it provides a sort of "economy-in-a-bottle" perspective that lends itself to discussion of current conditions that help students conceptualize the economic implications of the event.

The Atlanta Fed continues to publish information about the impact of the BP oil spill (see the Related Links). Online newspapers covering the Gulf region have sections devoted to the oil spill that cover real-time concerns of the area. Here are some ideas for taking the oil spill from the headlines to the classroom.

Economic concepts

Externalities occur when some of the benefits or costs associated with the production or consumption of a product affect someone other than the direct producer or consumer of the product. Externalities can be positive (benefits) or negative (costs). Unintended consequences are the unexpected and unplanned results of a decision or action.

A January 16, 2011, article in the New Orleans Times Picayune illustrates the old adage "In every crisis there is opportunity." The article cites many instances of decreased tourism spending along the Gulf Coast beaches but also says that hotel occupancy in New Orleans was up because of the influx of activity related to the cleanup efforts. In other words, the oil spill produced negative externalities related to the losses experienced by commercial fishing, tourism, and energy production, but it also produced positive externalities in the job creation and technology enhancements of the ongoing cleanup efforts.

In July 2010, U.S. Secretary of the Interior Ken Salazar announced a six-month moratorium on deepwater drilling, cautioning that additional deepwater drilling could cause "serious, irreparable, or immediate harm to life, to property, or to the marine, coastal, or human environment."

Discussion activity
Have students research articles about the oil spill in Gulf Coast newspapers (see Related Links). Working in groups, students should brainstorm a list of negative and positive effects created by the spill. Lead the students in a discussion about the moratorium on deepwater drilling. What are some of the unintended consequences to jobs that are not directly related to oil production but that service the oil industry and its workers?

Webquest activity
Send your students on a webquest through the resources listed in this article (see Related Links) to find the answers to the following discussion questions:

  1. What percentage of the U.S. economy does the Gulf Coast represent?
  2. Which sectors (industries) were affected by the spill?
  3. Analysts of the tourism industry anticipated that Florida tourism would be affected even if oil never reached its shores. Why?
  4. Are the effects of the oil spill considered to have regional or national economic significance? Why?
  5. Are any of the affected industries experiencing positive effects?
  6. What kinds of job losses are expected in tourism-related industries?
  7. Tourism along the beaches took a hard hit. Why are some areas experiencing increases in travel-related business?
  8. What are some similarities and differences between the BP oil spill and the Exxon Valdez spill of 1989?
  9. Despite the fact that the oil well is capped, what are some of the uncertainties that continue to shape the measure of economic impact?
  10. What are some of the risks to employment and production in the energy sector that the moratorium on deepwater drilling posed?
  11. How much did the Deepwater Horizon rig cost to produce and install? What were the annual costs to keep it running? How much oil did it produce during its lifetime, and what were the revenues from that oil to BP?
  12. How much has BP paid so far to compensate those affected by the spill? What percent is that of BP's annual revenues? What percent of BP's annual income?
  13. How can BP afford to pay compensation costs? What is the estimated cost of legal fees so far in the case?
  14. Do you think the cumulative benefits of the oil extracted during the life of the rig are greater than the costs to the economy and the environment?
  15. Who was responsible for monitoring safety procedures on the deepwater drilling rigs?
  16. How many other deepwater drilling rigs are currently in place in the Gulf?

 

By Claire Loup, economic and financial education specialist, New Orleans Branch

February 28, 2011