Unlike Other Big Storms, This One Could Have Longer-Term Impact [WSJ]
September 1, 2005; Page A1
Hurricanes and earthquakes, even when devastating to the places they hit, rarely cause more than a temporary shudder in the sprawling U.S. economy. Katrina could be different.
Unlike destructive hurricanes of the recent past, Katrina is both destructive and disruptive. The storm has interfered with production of oil and natural gas in the Gulf of Mexico and oil refining along the coast, pushing up oil and gasoline prices that already were rising. And the storm has shut important ports that carry oil, grain and other goods in and out of the U.S.
"Hurricane Andrew [in 1992] was a destructive hurricane, the most destructive of the past 30 or 40 years," said Bruce Kasman, an economist at J.P. Morgan Chase Bank. "But if you look at the macro-economy, it had negligible effect. It didn't really disrupt national economic activity. What may make this event unique: It does have the potential to do some real damage to the flow of oil -- through the ports and refinery system -- and to the flow of goods up the Mississippi."
How large and lasting the impact on the national economy turns on questions that can't yet be answered accurately: How severe is the damage, particularly to refineries? How long before some oil and gas production, refinery and port activities resume? How much higher will oil and gasoline prices go and for how long? How quickly can cargo be diverted to other ports? Will it take weeks? Or months?
The vulnerability of the nation's economy to Louisiana and Mississippi -- which account for only 2% of all the economic activity in the country -- is painfully becoming evident. Like others who track the economy, Richard Berner of Morgan Stanley ticked off the unsettling facts yesterday: "The Gulf accounts for 30% of the nation's oil production, and 20% of its natural-gas production." About 10% of the nation's refining capacity is in the Gulf. "Of the 14 refineries, nine are shut," he said. "Without electricity they can't run, and some are flooded."
Economists (and, to be fair, journalists) often exaggerate the economic effects of discrete events. And economic forecasters are notoriously bad at predicting a turn in the economy, while they excel at explaining the causes of recessions or sudden downshifts after the fact.
The 2001 recession, which wasn't widely predicted, was caused not by Sept. 11, but began in March 2001, according to the arbiters at the National Bureau of Economic Research. So far, few forecasters are sounding the recession bugle. "Slower growth for a short period is a more reasonable risk," said Goldman Sachs's Edward McKelvey, reflecting the consensus.
Katrina arrived at a moment when the U.S. economy was doing reasonably well despite a surge in oil prices. It grew at an inflation-adjusted annual rate of 3.3% in the second quarter, the government said yesterday, and economists had been forecasting much stronger third-quarter growth. Unemployment has been falling, and profits soaring. Low mortgage rates have kept housing prices up, in effect allowing Americans to tap home-equity lines to fill their SUVs and still go to the mall.
Although there were hints that consumer spending might be cooling off as gas prices neared $3 a gallon and the Federal Reserve was marking down its forecasts for 2006 economic growth, rising oil prices hadn't hurt the economy very much. The big reason: The price increases were driven not by OPEC tightening its supply spigots nor by war disrupting shipments, but by very strong global demand. "The economy isn't going to go into the tank because demand is strong. You don't get recessions by increased demand," said Laurence Meyer, a former Federal Reserve governor.
Katrina has pushed prices still higher by curtailing supply as it interrupts oil and gas production in the Gulf of Mexico as well as refining of oil into gasoline, diesel and jet fuel. That makes the latest increase in oil prices a bigger economic threat. Releasing crude oil from the Strategic Petroleum Reserve or pumping more in Saudi Arabia won't solve the bottleneck at U.S. refineries.
The best-case scenario, says Nariman Behravesh of forecaster Global Insight, is that oil, natural gas and gasoline supply are cut by only about 5% for several weeks. Oil prices rise to $75 a barrel, and then slip back to the low $60s. Gasoline prices go above $3 for a couple months and then fall back to $2.50 by year's end. That would shave economic growth by between half a percentage point and one full point later this year.
The worst case is that energy supply is reduced twice as much, and oil prices soar to $100 before sliding back to $70 by year's end and gasoline prices average -- ouch! -- between $3 and $3.50 a gallon for four to six months. That would cut GDP growth by as much as three percentage points, and bring the economy dangerously close to recession by year's end.
So which scenario is the most likely? "We're certainly not at the best case," Mr. Behravesh said yesterday. "There been quite a bit of damage. We're creeping towards the worst case -- but we're not there yet."
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