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U.S.: Damage From Katrina Poses Risks For Global Energy Market (Part 5)

The damage done by Hurricane Katrina has posed immediate threats to several key sectors of the U.S. economy, including energy, banking, and agriculture. But the damage to oil refining facilities on the U.S. Gulf Coast has also made the impact of the hurricane felt beyond the U.S. market, too. Fear that already tight global supplies of products refined from oil has prompted gasoline station owners in several countries to put up prices. But economists say the long-term impact could be minimal, as long as there are no new shocks to energy supplies. RFE/RL’s Julie Corwin and Robert McMahon look report on the disaster’s economic impact in part five of our five-part series on the hurricane.

Washington, 9 September 2005 (RFE/RL) -- This week, the governor of the Siberian region of Kemerovo Oblast was confronting the same problem as governors in the United States. He accused oil companies of robbing people at the gasoline pumps with arbitrary price increases.

But oil experts say what's going on at petrol pumps around the world is not robbery. Both the market for gasoline and crude oil were already operating on a razor's edge of tight supplies and rising demand before Hurricane Katrina removed 10 percent of the United States' refining capacity and about 30 percent of its oil production.

In global terms, this is not a huge amount. But in a tight market, any blow to supply is magnified. The effects of Katrina have been felt at gasoline pumps from San Diego to Moscow to Australia.

Tom Wallin, president of Energy Intelligence, a U.S.-based company that monitors global energy developments, describes the conditions caused by soaring oil demand.

“There’s no extra refining capacity to speak of -- except ironically in Russia and a few places like that -- but there’s very little extra refining capacity worldwide. There’s very little extra oil production capacity. Just a little bit in Saudi Arabia mainly but it’s mostly sour crude. That’s not very usable. There’s not much slack in terms of transportation, tankers, or anything like that so the whole system has gotten tightened up just by this demand growth. And now we have a supply shock on top of this demand shock so basically the system is vulnerable and can’t take it, and the prices go up,” Wallin said.

The energy market is what concerns economists most about Katrina’s broader impact. Many say the negative effects are likely to be temporary provided that speedy repairs are made to the U.S. infrastructure and there are no other shocks to the system.

The U.S. Congressional Budget Office released an analysis this week predicting a loss of 400,000 jobs from the storm. It said growth in U.S. gross domestic product (GDP) could be reduced by up to one percentage point in the second half of this year.

The director of the office, Douglas Holtz-Eakin, told RFE/RL that Katrina was not likely to knock the country’s economy off course. But he said it was crucial for the Gulf refineries to get back online.

“There’s been great progress already. Pipelines [are] coming back into operation. If there were other events on the world energy market that kept prices high or even higher, then most of the things that we were looking at in that analysis would be understated. [There would] be a much bigger negative impact,” Holtz-Eakin said.

Another critical question is whether U.S. consumers will curb their demand for gasoline or whether higher gas prices will cause them to suddenly reduce their spending on other goods. U.S. consumers account for an estimated two-thirds of total economic growth in the United States and any abrupt change in their behavior could contribute to a recession. And with five weeks remaining in the U.S. hurricane season, Wallin of Energy Intelligence warns of the impact of any future storm.

"Certain markets like gasoline, where stocks are low, heating oil going into winter, natural gas going into the winter, jet fuel going into the winter -- those markets are going to be real vulnerable. So if we get another storm, another accident, another problem, we will be really in the soup," Wallin said.

But Roger Kubarych, a fellow in international economics at the Council on Foreign Relations, says so far there is no evidence Katrina has sapped the strong global economy. Economists say storms such as Katrina usually create an immediate negative impact but over time can lead to an increase in economic growth through reconstruction and new investment.

Kubarych also points to the minimal national impact of the previous most costly U.S. storm, Hurricane Andrew in 1992. "Katrina is too small. The losses from Andrew were something like four-tenths of a percent of GDP and a trivial percentage of total wealth and it had no discernable impact of GDP during 1992 or 1993,” he said.

But the impact remains significant in many areas. The American Farm Bureau Federation, the nation’s largest farm group, says U.S. farmers face at least $2 billion in losses from Katrina.

More than 60 percent of U.S. corn and soybean exports pass through the New Orleans area but the Port of New Orleans remains shut and other nearby ports are working at reduced capacity.

Farmers in states already hit by drought, like Illinois, now face a situation of lower production, lower prices, and higher expenses.

Some experts have expressed concern the blow to the U.S. farm economy could halt a Bush administration plan to reduce farm subsidies, which was sought by developing countries. The experts say this could hurt important talks at a December meeting of the World Trade Organization.

Pollution and other damage caused by Katrina has also hit fisheries in the Gulf of Mexico. The National Fisheries Institute said two-thirds of the oyster harvest would be wiped out this year, costing almost $300 million over two years.

The region’s banking industry is reported to be proving more resilient. Most of the 280 banks and savings and loans in the stricken areas are operating, according to the Federal Deposit Insurance Corporation, an agency that insures deposits at U.S. banks. Banks are required to have extensive plans to deal with disruptions to operations such as natural disasters.

To assist individuals and businesses, the U.S. Congress is approving $63 billion in immediate relief aid. Some lawmakers said that figure could rise to $200 billion before the reconstruction effort, including the rebuilding of New Orleans, is completed.

Federal agencies this week began to provide housing aid and disaster unemployment insurance. They will soon begin handing out to hundreds of thousands of evacuees debit cards worth $2,000 for purchases of goods.

Audio Slideshow: Inside The Baton Rouge Shelter Real Audio, Windows Media

See also:

Despite Wealth, America Not Prepared For Disaster (Part 1)

Hurricane Devastates New Orleans, Unique American City (Part 2)

Only The Stench Drives Survivors From New Orleans (Part 3)

Volunteers Provide Shelter To Homeless Victims (Part 4)