The (Big) Ripple Effect
Katrina's blow to the energy industry will be felt all across the economy
Motorists quickly saw pump prices climb, topping $3 per gallon in many locations and nearing an all-time high, even adjusted for inflation. Many oil refineries and fuel wholesalers rationed deliveries to gas stations, supplies ran out at some wholesale terminals, and there were lines reminiscent of the 1970s in some places.
The crude oil markets were calmed somewhat by President Bush's decision to release oil from the Strategic Petroleum Reserve, and prices eased on news that allies would also tap their stockpiles. Still, the outlook for pump prices remains grim. Even refineries outside the stricken region had to cut back operations because crude oil imports and deliveries had been curtailed. Bush suspended environmental regulations and took other steps to increase foreign imports of gasoline--steps that might slow, but not stop, the rising costs for consumers. "Potentially, this could be one of the biggest energy-supply disruptions the world has seen," says Jim Burkhard, director of oil market analysis at Cambridge Energy Research Associates. Before the hurricane, the Gulf of Mexico provided 29 percent of all U.S. oil production and 19 percent of the nation's output of natural gas. After the storm, 95 percent of the Gulf's oil operations and 88 percent of natural gas production were completely shut down.
And the worst may be yet to come. "Consumers are going to get an awfully ugly surprise when they start to get their heating bills" this winter, says Ted Harper, vice president and energy analyst for Frost National Bank, assessing last week's skyrocketing natural gas prices. Harper expects home heating costs will be up 20 percent over last year. And consumers who rely on electric heat will not be immune if their power company uses natural gas to generate electricity. Florida utility companies, which rely heavily on Gulf of Mexico natural gas, have warned that they might resort to targeted brownouts.
High energy prices also delivered a body blow to the nation's already struggling airlines. Damage to Gulf Coast refineries caused jet fuel prices to jump by 19 percent, said the Air Transport Association. "If you're on the precipice of Chapter 11 [bankruptcy reorganization], you're now much closer to it. And there's a threat of liquidation for those already in Chapter 11," says John Heimlich, the ATA's chief economist. Delta Air Lines and Northwest Airlines are now scrambling to avoid bankruptcy protection. US Airways and United Airlines parent UAL Corp. are working to emerge from bankruptcy.
The nation's breadbasket is also reeling. The United States, the world's largest exporter of corn, soybeans, and wheat, sends about 70 percent of its grain export shipments through facilities in the Gulf of Mexico. The grain industry will watch nervously to see if ports are reopened for peak harvest season, nearly a month away. Dale Griffiths, whose Colusa Elevator Co. in Illinois has five grain elevators along the Mississippi River, has already seen transportation prices jump. With Katrina knocking out ports where grain-filled barges can unload, fewer empty barges are coming upstream to reload, pushing demand--and prices--up. Last week, Griffiths paid 42 cents per bushel of corn; this week, he's paying nearly double, at 71 cents a bushel. "I'm extremely worried about keeping my doors open during harvest," says Griffiths, who sends almost 99 percent of his grain to the Port of New Orleans.
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