The damage that Katrina could still wreak
- From: "GWhyte" <gwhyte3003@xxxxxxxxxx>
- Date: Wed, 31 Aug 2005 15:10:29 -0400
The damage that Katrina could still wreak
Aug 31st 2005
>From The Economist Global Agenda
http://www.economist.com/agenda/displayStory.cfm?story_id=4339099
Officials say they can only guess at the death toll after Hurricane Katrina
struck the Gulf of Mexico coast, but it is already known to be in the
hundreds. Besides its devastating cost in lives, Katrina could do
substantial damage to the American economy
AROUND four-fifths of New Orleans was under water on Wednesday August 31st,
two days after Hurricane Katrina slammed into Louisiana, with winds roaring
up to 140mph. Much of the city is below sea level and its ageing levees-a
system of flood walls, earthworks and pumping stations designed to hold the
waters back-could not resist Katrina's might. "The devastation is greater
than our worst fears," said Louisiana's governor, Kathleen Blanco. "It's
totally overwhelming."
As the hurricane travelled on across Mississippi, Tennessee and Alabama, it
left a trail of death and devastation. Officials say it is impossible to
know how many people have been killed in the disaster, but the official
count has already moved into the hundreds; at least 30 died in a single
catastrophic collapse of a seaside apartment building in Biloxi,
Mississippi. There is no tally of the dead and wounded in New Orleans yet
but reports of bodies floating in the floodwaters herald a dreadful
accounting to come. With many roads blocked by the floods and fallen trees,
rescue workers are struggling to reach the uncounted number in need of food,
medical attention and uncontaminated drinking water.
America's National Hurricane Centre reports on Katrina. For information on
the oil industry see America's Energy Information Agency, Alexander's Gas &
Oil Connections and the Joint Oil Data Initiative. The New York Mercantile
Exchange has the latest energy prices. The Central Bank of Indonesia has
raised its interest rates.
More than two million people were left without electricity on Tuesday, and
some are warning that it could be a matter of months, not days or weeks,
before service is restored to everyone. With average temperatures in the
humid New Orleans area around 23-30°C (73-86°F) in September, that means
long hot days of misery ahead for battered residents.
More worrisome still is the toll of disease. Floodwaters can be contaminated
with a toxic mix of industrial chemicals and raw sewage. Doctors worry that
this may mean an increase in the sorts of gastrointestinal diseases commonly
seen only in the poorest countries. The water is also an excellent breeding
ground for mosquitoes, particularly in the warm, wet climate of the Gulf
Coast, which could mean a spike in mosquito-borne illnesses such as West
Nile virus.
With the waters still rising on Wednesday, officials were working feverishly
to get everyone out of New Orleans. Despite evacuation efforts ahead of the
storm, thousands had remained behind in the city. Many have had to be
plucked off roofs and out of attics as the waters lapped at the eaves. As
many as 20,000 have taken refuge in the Superdome stadium, and plans are
afoot to bus them to Houston's Astrodome. Looting has broken out in some
parts of New Orleans, presenting emergency services with a difficult choice
between rescuing flood victims and preserving public order.
Once the floodwaters have receded-which may take weeks-insurers expect a
deluge of claims. Estimates of the losses range from $9 billion to $25
billion. The high end of this range would make Katrina the most expensive
natural disaster in America's history for underwriters, topping the $21
billion paid out after Hurricane Andrew in 1992.
To the insurers' losses must be added the cost to the government of rescue
operations, plus many uninsured losses that will ultimately be met by
private individuals or the taxpayers. For instance, homeowners' insurance
typically does not include flood coverage, which is underwritten by the
federal government, and business-interruption insurance may not cover losses
from looting. There will undoubtedly be wrangling between insurance
adjusters, homeowners and the feds over what water damage was due to the
storm, and what is attributable to the rising flood.
The ripples widen
Nor will the effects of Hurricane Katrina be limited to the Gulf Coast and
the offices of a few agitated insurers. Analysts are busy rewriting their
forecasts of America's fourth-quarter GDP growth to take into account the
expected economic repercussions of the devastation. The affected area's
ports move a large fraction of the nation's imports-including critical oil
and gas supplies-as well as roughly half its exports of agricultural
commodities like corn and soyabeans. Action Economics, a market-analysis
firm, has already nudged its forecast for GDP growth down to 4.4% from 4.6%,
at an annualised rate, for the current (third) quarter.
While big hurricanes like Katrina destroy wealth, they often have a net
positive effect on GDP growth, as the temporary downturn immediately after
the storm is more than made up for by the burst of economic activity that
takes place when the rebuilding begins. In the case of Katrina, however, any
output boost may be modest thanks to the effect on the area's energy
infrastructure. In a research report from Merrill Lynch, David Rosenberg
says that while rebuilding could add $40 billion to America's GDP,
disruptions to energy supplies could raise prices enough to claw back $30
billion of that gain.
The Gulf of Mexico provides about a tenth of all the crude oil consumed in
America; and almost half of the petrol produced in the country comes from
refineries in the states along the gulf's shores. The Department of Energy
reports that nine refineries, processing 1.8m barrels per day, have been
shut down, though it is not known how long they will be out of commission.
Oil companies are busy assessing how much damage was done to drilling rigs,
refineries and port facilities; but even if the infrastructure is largely
intact, shipping delays threaten to idle refinery production.
This is bad news considering that refineries have been running flat out in
recent months to keep up with high demand. The White House has said it will
tap the Strategic Petroleum Reserve to supply refiners caught short by the
hurricane, but the pipeline and refinery shutdowns in the region mean that
petrol may hit $3 a gallon heading into this weekend's Labour Day holiday;
motorists are already paying that much in some cities.
As the extent of the damage became apparent, the oil price hit a new
nominal record of just under $71 a barrel on Tuesday. Though in real
(inflation-adjusted) terms prices are still lower than in the wake of the
Iranian hostage crisis in 1979, that reassuring mantra has worn thinner in
recent months as real prices have edged closer and closer to those
historical highs. Furthermore, while much of the recent oil-price increase
was demand-driven, and thus expected to have relatively benign economic
effects, any sizeable outages owing to Katrina could cause a supply shock
similar to those that repeatedly battered the world economy in the 1970s.
Those fears may be overdone, not least because Katrina is neither as
powerful nor as enduring as the OPEC-induced shocks of earlier decades.
Indeed, the market signs are that the rise in oil prices resulting from
supply interruptions in the Gulf of Mexico will be fairly modest and
short-lived. But with oil breaching $70, some analysts think that consumer
spending is bound to suffer-especially since the refinery troubles have
caused petrol futures to keep climbing even as crude oil prices have fallen
back. Another report by Mr Rosenberg calculates that every one-cent rise in
the price of a gallon of petrol takes $1.3 billion out of consumers'
pockets, which could trim as much as a full percentage point off consumer
spending this winter. That would not be good for the GDP numbers.
It would also be bad news abroad, where many nations, particularly in Asia,
are already heavily dependent on robust American demand for their exports.
Those countries are also being hit by higher oil prices. Indonesia's central
bank was forced to tighten the money supply sharply on Tuesday, raising
interest rates by three-quarters of a point and increasing banks' reserve
requirements, to stem a near-10% drop in the rupiah. Partly thanks to lavish
fuel subsidies, Indonesia's oil imports, financed in dollars, have touched
off fears of a balance-of-payments crisis, driving the currency sharply
downwards. On Wednesday, Indonesia's president, Susilo Bambang Yudhoyono,
said that the government would need to curtail its fuel subsidies in order
to stave off a currency crisis. While rich countries are much less dependent
on oil than they used to be, thanks to increases in fuel efficiency and a
shift from manufacturing to services, middle-income countries are still big
energy guzzlers: India and South Korea use more oil per dollar of GDP today
than they did in the 1970s.
There are also fears that Europe's recovery could be choked off in its
infancy by the steady upward march of prices for petrol and heating oil.
That would weaken another of Asian exporters' main markets and leave the
world economy looking vulnerable. If Katrina has damaged America's capacity
to pump and refine oil, forcing Americans to shop abroad for more fuel to
feed their appetites, it could be a long cold winter for everyone
.
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