Katrina's Economic Impact

By Mark Trumbull, Christian Science Monitor. Posted September 1, 2005.

The storm that ruptured the roof of the Louisiana Superdome is also putting a dent in the nation's economy. Even as rescuers pushed Wednesday to contain a mounting death toll and help stranded residents in the ravaged Gulf Coast, hurricane Katrina's financial impact was also emerging as an issue that reaches far beyond Louisiana levees or Alabama inlets.

Whether that cost proves to be relatively modest -- shaving perhaps 0.5 percentage points off of an economy growing at a 3.3 percent pace -- or a more severe shock depends on one key factor: energy.

The Bush administration moved Wednesday to open the nation's Strategic Petroleum Reserve to help ease looming supply shortages. With 10 percent of the nation's refining capacity, and pipelines through which much of America's domestic and imported oil passes, the region has an outsized oil and gas role that makes this storm's impact much broader than that of other major hurricanes, or even the combined wallop of four hurricanes in Florida last year.

"This is more significant," says economist John Silvia of Wachovia Corp., a banking giant in the region. And if supply disruptions prove difficult to fix quickly, "it's a very big complication."

The prospect of $3-a-gallon gasoline, rising airline ticket costs, and soaring winter heating bills is accompanied by Katrina's more local effects: insured losses that could exceed the record (in current dollars) of $21 billion set by hurricane Andrew in 1992.

Indeed, even as it ripples through the economy in coming weeks, this storm's effects could be big enough to spur longer-term changes at a time when the intensity of tropical storms appears to be rising. These issues range from the local -- how to better fortify New Orleans in its below-sea-level vulnerability -- to whether the nation's energy infrastructure is too geographically concentrated and whether disaster planning is hampered by incomplete forecasting of risks.

The storm left hundreds of thousands homeless in the region, at least 100 dead in hardest--hit Mississippi alone, and homes damaged by floods and winds well inland from Tennessee to Georgia. Estimates of insured losses go as high as $25 billion, although many experts believe the total will come in lower.

The Gulf region accounts for only about 3 percent of US economic output, but financial markets are focused on its much greater role in energy production and processing. Stocks crept higher in early trading Wednesday as oil prices retreated because of the government's decision to make an unspecified amount of oil available from its strategic reserve.

Before the announcement, prices had surged above $70 a barrel. Light, sweet crude for October delivery on the New York Mercantile Exchange fell to $69.55 a barrel, down 26 cents from Tuesday's settlement price. Still, the government's move does not remedy destruction to refineries that churn out much of the unleaded regular and premium grade used in the United States. That damage, the extent of which is still being assessed, is expected to drive up gas-pump prices.

Katrina's effect on America's gross domestic product are mere guesswork at this point. The government reported Wednesday that in the second quarter of this year, GDP grew at an annual rate of 3.3 percent, down from a 3.8 percent pace at the beginning of the year.

Global Insight, an economic forecasting firm based in Lexington, Mass., offered a "best" and "worst" scenario for Katrina. In the best case, oil prices stay at $70 or so per barrel for a few weeks, gasoline tops $3 for a few months, and the nation's economic growth is reduced by 0.5 percent to 1 percent for the year's second half.

In Global Insight's pessimistic projection, oil could soar above $100 a barrel for a month, gas-pump prices could exceed $3.50, and economic growth could fall to nearly zero by the fourth quarter.

Beyond the immediate damage, it's possible that Katrina could permanently alter consumer prices for things like insurance and gasoline, Mr. Silvia says. "Retail prices have to rise," he explains, if energy companies invest in new refineries (none has been built in the US for three decades) or if insurers reassess the likelihood of major storms. A high hurricane level over the past decade is seen by many as cyclical, but one recent assessment found that global warming, too, is playing a role in a rising intensity of storms traceable over the past 30 years.

"If you get a storm like this every 20 years," instead of every 100 years, "you're going to have to price that in," says Silvia. The questions of risk assessment go beyond insurance companies. A disaster such as Katrina has billions of dollars in indirect but very real impacts that aren't captured in tallies of insured losses, notes Frederick Krimgold, director of the disaster risk reduction program at Virginia Polytechnic Institute in Blacksburg.

In Katrina's case these include disruptions of businesses, from restaurants to fishing and shipping. They include the ordeal of residents who may go without phone service for days or electricity for weeks. Workers lose income, and state and local governments lose tax revenues, in part because some properties such as boats or homes no longer exist to be taxed.

"You have a cascading pattern of economic consequences," says Dr. Krimgold. "We tend to underestimate the cost of these events, and we tend to underinvest in their mitigation."

He's not sure if the Katrina experience will change that, but it is surely bringing home the potential magnitude of these indirect impacts.

New Orleans didn't face the full fury of the storm, yet the city is for now virtually uninhabitable. Flooding has affected everything from electricity to potable water supplies.

"They built those levees for an 18-foot storm surge," Krimgold says. With a better understanding of the costs of a breach in the levees, officials could have spent a bit more "to build those levees for a 25-foot storm surge."

How to better protect New Orleans has already been a concern in Washington in recent years, but a multibillion-dollar cost has complicated the debate. Katrina promises to refocus the discussions.

Mark Trumbull is a staff writer at the Christian Science Monitor.

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