The (Big) Ripple Effect
Katrina's blow to the energy industry will be felt all across the economy
Most Americans watched the ravages of Katrina's Category 4 winds and floodwaters from a safe distance, but they won't be able to escape the storm's economic aftershocks. From California to Maine, the commute to work will cost more. The price of a morning cup of joe is soon to rise. Anyone visiting a hardware store for building supplies should expect sticker shock. And it might be a good idea to stow away some extra cash to pay this winter's home heating bills.
One of the worst storms to hit the United States in modern times chose as its landfall one of the nation's most vital industrial hubs--a key shipping center and a crossroads of the energy business. As a result, Katrina is not expected to have the silver lining that has been typical of hurricanes and other natural disasters: job creation and the economic stimulus of rebuilding. This hurricane's long-term impact is murky, primarily because it has crippled a quarter of the country's oil and natural gas infrastructure when supplies already had been tight and prices painfully high. "Katrina is something new," says Joel Naroff, president of Naroff Economic Advisors. "Until the levee broke, most economists had a reasonable way of evaluating a natural disaster like this. This time we have the effects on the energy sector and a city under water, which is something we have no idea how to evaluate."
Stormy weather. The economic outlook for the rest of 2005 dimmed as the extent of the hurricane's damage became clear. Ian Shepherdson of High Frequency Economics in Valhalla, N.Y., adjusted his third-quarter-growth forecast down a whole percentage point, from 3 to 4 percent growth in gross domestic product, to 2 to 3 percent. He also predicted the economy will lose 500,000 jobs in September as a result of the storm. Wal-Mart, the nation's biggest retailer, warned Wall Street that Katrina might crimp its sales (the discounter had to close 126 stores in the South because of the storm). Yields on 10-year treasury notes fell sharply, a sign that Wall Street expects a slowing economy.
But few economists were talking recession. The fact that the economy was growing above 3 percent before the storm struck will prevent a downturn, says Anthony Chan, senior economist at JPM organ Fleming Asset Management. In contrast, the 9/11 terrorist attacks happened as the economy was already in recession (though that was not known until later) following the bursting of the Internet stock bubble. Indeed, the unemployment rate for August of 4.9 percent announced last week was the lowest in four years. Post-storm cleanup and rebuilding may create jobs and spur retail spending. The past 10 major hurricanes added 500,000 jobs, on average, to nonfarm payrolls, says Chan, who believes Katrina will cut third- and fourth-quarter growth by about 0.5 percent but will end up boosting the economy over the next 12 months.
Clearly, the energy industry bore the immediate economic impact of the storm. Photos captured the industry's dislocation, such as the oil rigs loosed from their moorings in the Gulf of Mexico that landed on Alabama beaches. But industry officials were hampered in assessing the damage, especially to the eight refineries knocked out of commission. Without electricity, it was impossible to test systems immediately. Power problems also meant a slow restart and reduced operations at the two major pipelines that deliver fuel from the region to the mid-Atlantic and Northeast.
advertisement
