The Economic Impact Of the Napa Earthquake

Sunday morning, the San Francisco Bay area awoke to shaking; a 6.0 magnitude earthquake, California's strongest since the 1989 Loma Prieta earthquake, rocked Napa and Sonoma counties. While injuries are currently just a fraction of the Loma Prieta total, initial damage estimates suggest the price tag could reach the 1989 6.9-magnitude's $6 billion estimated cost.

The epicenter struck the heart of wine country, a region that is still sluggishly recovering from the recession. In real terms, between 2009 and 2012, wine country's real GDP actually shrank 1.3 percent compared to 2.9 percent growth for the state as a whole.

But wine country's slow recovery doesn't mean it isn't an important component of California's (or even the nation's) economy. There are roughly 800 wineries in the Napa Valley selling approximately 50 million cases of wine representing almost $6 billion in sales. Almost 35 percent of all California vineyard acreage is in the Napa Valley alone. On average, the Napa Valley sees over 13,400 visitors spending $3.82 million a day. Napa wine yields a total of $26 billion in economic activity for the state rising to $50 billion for the U.S. as a whole. Over 100,000 Californians are employed directly or indirectly because of Napa wine production, bringing in almost $5 billion in wages. And the Napa wine industry is responsible for $1.2 billion in state and local taxes.

Because of its role in the California economy and its stagnant economic growth, the Napa earthquake is going to create large challenges - in addition to those caused by the drought that UC Davis says could cost California $2.2 billion in lost economic activity.

Anecdotal evidence suggests damage to both property and inventory is large. As of Monday, some 150 buildings have been either red- or yellow-tagged meaning they are either too dangerous to enter at all or can only be entered for limited purposes by the owners. Some vineyard owners are saying that upwards of 50 percent of their product has been damaged. Initial reports suggest that the costs will surpass $1 billion and could be as much as $4 billion. However, because just a fraction of Californians have earthquake insurance (and even fewer - approximately 6 percent - in Napa), insurers are only expected to cover between $500 million and $2 billion of the damages.

Repairing the damage and who pays for it, however, is just one challenge. The Wall Street Journal estimates a reduction in economic activity by as much as $100 million for the region due to reduced sales and tourism. And reduced tax revenues and possible relief aid from the state could severely impact an already-stretched state budget. In the longer-term, because vineyards were beginning to harvest this year's crop and now will likely be delayed, vintage quality could be reduced leading to lower future sales.

Unfortunately, for Napa and the state, there is little that could have been done to prevent the disaster. An earthquake alert system would have given residents notice, but not enough time to secure the barrels and bottles of wine, something that probably should have been done years ago.

But there is even little the government could do to boost earthquake coverage rates - California already has a quasi-public earthquake insurance consortium. The problem appears to be a demand issue: for most Californians, the cost of coverage appears greater than the benefit. Despite California's above average risk, problematic earthquakes are still quite rare. With an average premium of $700 per year and deductibles of between 10 and 15 percent, earthquake insurance is quite expensive and policies are quite strict - typically covering just the property directly damaged by the earthquake, which in this case creates ambiguity of whether the inventory would be covered. Dissuading a property-owner even more is the implied guarantee of a state or federal bailout after the fact. For Instance, following the 1989 Loma Prieta earthquake, President George H.W. Bush signed a $1.1 billion relief package for California. But asking politicians to guarantee there won't be any bailouts is asking them to do the impossible: deny those in need of help, especially when the aid has enormous public support.

The actual cost won't be known for months or even years, but the Napa earthquake will have serious economic and budget impacts. Maybe the only positive out of this is it'll give other California wine regions, like Paso Robles in San Luis Obispo County or the Sierras, a chance to crawl out from under Napa's shadow, which in the long-run could mean an even more robust California wine industry.