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 user 2005-09-03 at 11:05:00 am Views: 70
  • #12755

    Katrina Rips Into the Economy

    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”).

    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.

    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

    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.

    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.