It's been three days since Hurricane Katrina made landfall, and the worst storm to hit the U.S. in recent memory continues to wreak havoc on the nation's energy markets—and the economy.
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Crude oil futures contracts, for example, continue to trade near record levels, as 1.4 million barrels of daily U.S. oil production remain off-line in the Gulf of Mexico. According to early estimates, a number of the oil rigs and production platforms that were damaged won't resume normal operations for another two to four weeks. As a result, Standard & Poor's estimates that crude oil prices will remain in the $70- to $75-a-barrel range for the near term.
To be sure, the Bush administration has agreed to release oil from the nation's Strategic Petroleum Reserve to help offset the lost production. But that's not likely to alleviate rising gasoline prices in the near term, analysts say. That's because "the magnitude of the refining disruption is so much larger than the magnitude of the crude oil production disruption," says Francisco Blanch, energy strategist for Merrill Lynch.
Indeed, Katrina's biggest financial blow may have been knocking out around 2 million barrels per day of the nation's refining capacity. Gasoline inventories are already considered tight, as the nation's stockpiles are 5 million barrels below the 5-year average.
Prices at the pump have already jumped 50 cents a gallon in Ohio and 40 cents on average in Georgia, according to several news reports. In many key markets, unleaded gasoline is now selling for more than $3 a gallon and is nearing $4 in some communities, especially in California.
"Clearly, bringing refineries back on-line will be key to ensuring that the U.S. does not face shortages of gasoline," says John Herrlin, energy analyst for Merrill Lynch.
Perhaps the biggest question facing the economy is how long it can sustain $3 or $4 gasoline—before talk of recession starts to come up.
The bond market is already indicating that it thinks the economy is likely to slow considerably as a result of higher energy costs. The yield on 10-year Treasury notes fell from 4.22 percent on the day Katrina hit the gulf to as low as 4.01 percent yesterday. Though bond prices have stabilized, the 10-year yield was still only 4.03 percent in early morning trading today.
Certainly, this is good news for homeowners who are looking for yet another opportunity to refinance their mortgages (mortgage rates are tied to 10-year yields). But low rates are also a signal that Wall Street thinks the economy—buffeted by rising energy costs and disruptions throughout the South—may be in real trouble.
