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Storm Damage Could Cause Ripple Effect

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August 30, 2005 by   Leave a Comment

Hurricanes and other natural disasters rarely have a large and long-lasting effect on the economy, but Katrina could be an exception.
While most storms have only a regional impact, Katrina could be the rare beast that has national or even international consequences, according to CBS MarketWatch.
“There is a real sense of foreboding about the economy now that Katrina has struck with full force,” said Bernard Baumohl, executive director of Economic Outlook Group. “The Louisiana and Mississippi Gulf region represent the soft underbelly of the U.S. energy industry.”
Katrina took aim at a vulnerable chokepoint for U.S. energy markets. The region not only produces a large percentage of domestic oil and gas, it is also a transportation hub for both imported and domestic production.
And much of the petroleum that Americans use is refined at facilities along the ravaged Gulf coast.
Less supply of energy means less production and consumption.
In addition, New Orleans and other Gulf ports handle $150 billion in cargo each year, accounting for about a fifth of U.S. imports and exports. The cities hardest hit account for about 7% of U.S. trade.
Major exports include grain, poultry, paper, rice and chemicals. Major imports, aside from petroleum, include steel, rubber, plywood and coffee.
The magnitude of the storm’s destructive swath is only gradually becoming clear. A complete assessment of the damage to the region’s economy could take months or even years, said John Norris, chief economist for Morgan Trust Management.
Even in the best-case scenario, production of crude petroleum, natural gas and refined gasoline are likely to be severely stunted for at least several weeks as Gulf production and refineries go back on line.
Last year, Hurricane Ivan, which tracked further east than Katrina, knocked out about 10% of U.S. energy production for about four months.
About 22% of Gulf oil and 5% of Gulf natural gas production can be expected to be disrupted for more than a month from Katrina, according to a Kinetic Analysis Corp., which has developed a computer model for hurricane assessment. About a quarter of all U.S. domestic oil and gas is produced in the Gulf.
About 50% of oil and 28% of gas production in the Gulf can be expected to be disrupted for 10 to 30 days, the company said.
The storm likely caused $24.3 billion in damages, said Chuck Watson, director of research for Kinetic Analysis. If the breaks in the levees in New Orleans are not repaired within the next six hours or so, damages would increase by $8 billion to $10 billion, he said.
If disruptions in Gulf energy supplies are limited, retail gasoline prices could top $3 a gallon for a couple of months, said Nariman Behravesh, chief economist for Global Insight. High energy prices would likely cut consumption and knock 0.3 to 0.5 percentage points off U.S. gross domestic product.
“We are not at the worst-case scenario,” Behravesh told MarketWatch. “But we are moving in that direction” as companies assess the damage to their facilities.
In a worst-case scenario, the storm could shut down deliveries of as much as 25% of U.S. energy needs for several months.
In that case, gasoline prices would average $3.50 a gallon for the next four to six months, Behravesh said, cutting U.S. growth to zero in the fourth quarter.

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