KATRINA RIPS INTO THE ECONOMY

[Anonymous]

Katrina Rips Into the Economy
Thanks
mainly to a body blow to the Gulf’s oil infrastructure, Action
Economics is already bumping its third-quarter GDP estimates downward.
The physical impact of
Hurricane Katrina, which slammed into the U.S. Gulf Coast on Aug. 29,
was immediately visible: high flood waters, caved-in roofs, smashed
windows, downed power lines and trees. But in economic terms, the full
brunt of the Category 4 storm will take some time to assess.

We at Action Economics will comb out the broader impact of Katrina on
U.S. economic data in an upcoming report, but for now we’ll focus on
the storm’s impact on one key segment: energy. Due largely to Katrina’s
blow to the energy sector nationally, as well as to the New Orleans
regional economy, our U.S. gross domestic product forecast for the
third quarter has been preliminarily bumped down to 4.4% from 4.6%.

It’s hard to gauge the storm’s impact at this early stage, but shipping
disruptions through the region even for just a few days could easily
cause a 0.2% subtraction from third-quarter GDP, vs. the 0.5%
third-quarter subtraction we assumed from last year’s “triple hurricane
punch” (See BW Online, 9/15/04, “Summer’s Tempests Twist the Numbers”).

MINI-SHOCKS. 
The Katrina effect might best be seen in the context of our oil-import
estimates, which have been revised to incorporate the effect of
disrupted oil shipping at the end of August. Though the distortion is
large, it will be temporary and should be offset by stronger import
figures through September and October to make up for the supply gap.

However, these assumptions are obviously sensitive to incoming reports
on the extent of the damage. The disruptions alone for the past two
days already, through Aug. 29, could easily prompt a petroleum-import
shortfall of $1 billion, and a domestic-production drop-off that’s
close to that as well.

Katrina will boost oil prices via the effects of Gulf oil-well
shutdowns (9 rigs and 12 platforms had been evacuated as of Aug. 29),
and gasoline prices will rise due to refinery shutdowns in Louisiana,
Alabama, and Mississippi, all of which are aggravating the energy-price
surge. These supply shocks will add to the much larger and prolonged
upside-demand shocks for oil that have dominated the market for the
last three years, and that have taken prices to the record levels
evident prior to the Katrina-related price spike on Aug. 29.


LINGERING EFFECTS. 
About a third of the petroleum produced in the U.S. (which meets 45% of
U.S. demand), is from the Gulf of Mexico, and 90% of that moves through
Louisiana, according to Biz New Orleans, which reports on business and
financial information. Also, New Orleans is a major port for importing
oil, via offshore facilities for unloading supertankers that send oil
to the mainland. The oil travels through underwater pipes via New
Orleans.

Supply disruptions will have a price impact that could linger through
the winter, given tight inventories of many refined products. But these
distortions reflect a small part of the hefty demand-led energy-price
gains of the current business cycle.

The oil-market disruptions from Hurricane Katrina will have a net
negative impact on GDP growth over the quarters ahead. But aside from
this adverse supply shock, most of the uptrend in oil prices through
this expansion has been due to unexpected and prolonged strength in
global demand for petroleum products, and aggregate demand overall.


PRODUCTION PROBLEMS.  As
such, markets may have focused too much on the negative ramifications
for future quarterly GDP growth rates from oil-price gains with each
new set of record high prices, and not enough on what rising oil prices
imply for upside risk in current GDP estimates.

The economy now faces production bottlenecks for exploration, drilling,
and refining that are prompting spikes in oil and gasoline prices each
time already-high world growth rates threaten to accelerate.

The upshot: Oil prices now act like a throttle on global economic
growth, keeping it in line with petroleum supplies via price spikes
that serve as the market’s “rationing” mechanism. And with the likely
disruption of supply caused by the devastating tempest known as
Katrina, those elevated crude prices may cause the global economic
engine to rev a little slower in the near term.

[Author]

September 3, 2005 at 11:05 AM