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An Open Letter to BP From a Seafood-Consuming Economist

06/01/2010 12:17 pm ET | Updated May 25, 2011
  • Jodi Beggs Founder, economistsdoitwithmodels.com

Okay, so Top Kill failed. First, let me get the typical reactions to the BP/Transocean/whoever oil spill out of the way: RAWR! Oil everywhere! RAWR! Pelicans! RAWR! You should have been more careful! RAWR! Who would have thought that giant oil funnels wouldn't be the silver bullet? RAWR! Maybe Kevin Costner can save us!

Now that we're all caught up, I would like to share with you an open letter that I wrote to BP not only as an economist but also as a concerned citizen and avid consumer of fish and other sea creatures.

Dear BP,

In case you haven't noticed, people are very upset about what is going on with your oil in the Gulf of Mexico. That said, I do appreciate your PR department announcing that you would pay all of the costs of oil spill cleanup, and I'm guessing that there are others who echo my sentiment. (Personally, I am waiting with baited breath to see what actually happens, but I'll give you the benefit of the doubt for now.) This seems like a good start to making things right, but it's certainly worth noting that simply paying to clean up your mess isn't going to compensate everyone for their losses. You seem to understand this principle, and I thus also appreciate your clarification on what is covered under the heading of "cleanup costs":

In a fact sheet posted to the company's website Monday, the British-based BP also said it will pay compensation for "legitimate and objectively verifiable" property damage, personal injury and commercial losses.

I am heartened by the knowledge that you do seem to be aware of the strain that you're putting on people in the fishing industry, and I think that your vow to compensate the fishermen for the fact that it's kind of hard to sell fish that has been pulled out of an oil slick is admirable. (I've heard of oily fish before, but this is ridiculous.) What you doesn't seem to understand, however, is the way that the forces of supply and demand work. Consider the following:

The supply of Gulf Coast food -- and the cost of it -- fluctuates on a daily basis, with the NOAA Fisheries Services map of safe and affected fishing waters constantly being redrawn. ABC reports that in light of the reduced amount of seafood on the market, "Fish that normally sold for $2.50 a pound were going for $3.25."

As an economist, this information doesn't come as a surprise to me. The oil spill has made it more difficult for fishermen to find and catch untainted fish, so they are bringing in less fish than they were before, even though they are putting in the same levels of time, effort and other inputs. Economists categorize this as a form of reduction in technology, and a reduction in technology results in a reduction in supply, mainly because the decreased technology makes the fish more expensive and thus less attractive to produce. This reduction in supply leads to a higher market price for fish and a lower quantity of fish sold.

You seem to have some economists or otherwise smart people on staff who grasp this general concept, since you are supposedly reaching out to the fishermen who are hurt by your oil. The more subtle point that often gets lost, however, is that both consumers and producers of fish lose out when the fish becomes more expensive to produce. Fishermen can't push all of their cost increases onto consumers, and consumers can't make the fishermen eat the entire amount of the cost increase.

It's not surprising the consumers are worse off when supply decreases, since they get less fish and have to pay a higher price for what they do get. Some consumers lose out because they are still buying fish but paying a higher price for it, and other consumers lose out because they used to benefit from buying and consuming fish but the higher price has pushed them out of the market entirely.

The effect on producers is less intuitively obvious, since producers sell less fish but they get a higher price for the fish that they do sell. I already pointed out that the fishermen can't pass along all of the cost increase to their customers, which means that the margins on fish go down because of the supply decrease. Therefore, the fishermen are also losing out, since they are getting lower margins on less fish.

Who gets hurt more- producers or consumers? It's not immediately obvious, since it depends on the relative price sensitivities of the two parties. If consumers are more insensitive to price, for example, producers will be able to push most of the cost increase onto them and not have to suffer much in terms of a reduction in quantity sold. Therefore, if consumers are less price-sensitive than producers, they will lose out more from the oil spill and subsequent supply reduction, and vice versa.

I bring this up because none of your PR grandstanding, er effort, addresses the cost to the me as a consumer of your oil being all over what should be my fish, but it's a cost that is very much present and relevant. Granted, it's a harder cost to reimburse, since the buyers are more spread out than the sellers, and it's not clear how to find those people who stopped buying fish altogether because of the price increase. Economically speaking, if you reimbursed the fishermen going forward for their cost increases rather than just for their lost profits, the market should be able to adjust to distribute that reimbursement properly, but that doesn't address how to retroactively compensate for the damage that has already been done. Therefore, I am hereby requesting BP reimburse me 75 cents a pound for all of the fish I have bought in the last 40 or so days. I'm happy to provide "legitimate and objectively verifiable" receipts, and I'll even be generous and let the accrued interest on the amount slide.

Sincerely,

a concerned seafood-loving economist