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.
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.
But concerns aren't limited to distribution problems. Higher energy prices make it more expensive to fuel up tractors and move goods. Patrick Sullivan, director of market development for the Mississippi Department of Agriculture and Commerce, says that aside from crop damage, many farmers are concerned about high diesel costs. Michael Orr of Pattison Bros., a grain terminal in Clayton, Ill., is worried that higher fuel costs for river barges may hurt his business; he estimates that 80 percent of the cost of shipping is directly tied to the price of fuel.
With Gulf ports crippled, companies and shipping lines scrambled to find alternatives. Chiquita, the banana importer, diverted shipments from Gulfport, Miss., to Freeport, Texas, and Port Everglades, Fla. Last year, Gulfport handled 25 percent of Chiquita's imports, moving 15 million boxes of bananas.
Lumber prices surged last week, as Katrina devastated sawmills and plywood plants on the Gulf Coast and wiped out "vast inventories of wood products" at ports, according to one industry newsletter. Up to 1 million board feet of lumber on the docks in New Orleans was destroyed. Coffee futures prices also soared. About 27 percent of all U.S. green coffee stocks, some 1.6 million 60-kilogram bags, were stored in New Orleans.
$4 a gallon? Rail travel was diverted; one of the nation's four largest rail lines, CSX, had to curtail all traffic out of its New Orleans terminal, a key interchange for transferring freight traveling to and from the western United States. CSX reported damage to rail lines from New Orleans 100 miles east to Pascagoula, Miss.
But Katrina's biggest economic impact could be on the form of transportation most Americans know best--the auto. General Motors, which controls 54 percent of the large SUV market, has been banking heavily on a brand-new series of big utility vehicles, due next year, to help reverse a financial nose dive. But $3 gas--and the once implausible possibility that prices could hit $4 a gallon--could end America's love affair with big haulers. A new survey by Kelley Blue Book and Harris Interactive found that 59 percent of car shoppers said rising gas prices have influenced their purchase decisions. That's up 13 points from July and is the highest reading since the survey began in 2004.
If any good is to come out of the tragedy in the Gulf, it may be a major reassessment of whether such critical economic infrastructure should be concentrated in a natural disaster zone. "It's not a regional disaster," says Larry Goldstein, president of the Petroleum Industry Research Foundation. "It's a national disaster."
With Matthew Benjamin, Paul J. Lim, Richard J. Newman and Nisha Ramachandran
This story appears in the September 12, 2005 print edition of U.S. News & World Report.