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Experts assess Katrina's effect on economy
San Francisco Chronicle


August 30, 2005

Even though Hurricane Katrina's rampage across Louisiana and the other Gulf Coast states left a broad swath of destruction, its damage to the U.S. economy is likely to be slight - unless it turns out that the tempest seriously harmed the infrastructure that handles a significant share of the country's oil.

In that worst-case scenario, Katrina could be a catalyst that could tilt the economy toward recession by sending prices for oil, gasoline and natural gas skyrocketing to record levels.

"You can go from one extreme in which (the impact) is basically a blip to another extreme in which it is something like a tipping point for the economy, " said Nariman Behravesh, chief economist at Global Insight in Massachusetts.

"A lot will depend on the next couple of days - the extent of damage to offshore oil rigs, Louisiana oil ports and Louisiana refineries. If there's indeed extensive damage to all these facilities, we could be looking at a pretty nasty scenario, Behravesh said.

"Oil could briefly go to $100 a barrel. Gas could go up to $3.50 a gallon. That could damage consumer spending and the economy in the fourth quarter in the worst-case scenario."

The ripple effects of higher energy prices are well known - from pain at the gas pump to higher costs for all kinds of consumer goods that require energy to manufacture and ship.

It could take a couple of days to assess how badly oil equipment was damaged.

"We've been saying for some time that if oil hits $70 a barrel, that puts the economy at a tipping point where if there were some other serious problems, we could fall into recession," said Steve Cochrane, senior economist at forecasting firm in Pennsylvania. While the prices themselves might not be enough to trigger a recession, "they would leave the economy vulnerable to some other shock that might come along."

Katrina's direct economic impact in property damage and business- interruption losses paid out by insurance companies is likely to be $9 billion to $16 billion, said Rick Clinton, president of Equecat of Oakland, a catastrophic modeling and risk-management company.

Equecat reduced its earlier estimate of $12 billion to $25 billion in damage after the storm failed to directly hit New Orleans, averting more catastrophic losses in the low-lying city.

Bad as those amounts sound, they would barely dent the overall U.S. economy.

Behravesh said the impact would register as perhaps a 0.2 or 0.3 percent dip in national growth rate for this quarter. Ironically, that might be more than offset by a frenzied rush to rebuild that would actually add to GDP growth.

One reason the overall impact might be slight is that, aside from their prominent role in oil production, the Gulf States don't contribute significantly to the U.S. economy. released a table showing that the 10 biggest metropolitan areas in Louisiana and Mississippi together accounted for only 1.24 percent of national output during the second quarter. Metro areas in Louisiana alone comprised 1.03 percent of the total.

Experts said insurance companies are well positioned to handle Katrina's costs.

Still, Katrina's fallout could hurt a variety of industries from airlines to shipping.

The beleaguered airline industry, already beset by higher fuel prices, would be further hurt if Katrina caused another increase in energy costs.

All the airlines that fly to the Gulf Coast had to cancel dozens of flights on Monday as airports were closed in New Orleans; Baton Rouge, La.; Biloxi, Miss.; Mobile, Ala.; and Pensacola, Fla.

For Delta Airlines of Atlanta, a major carrier to the Gulf Coast, the flight losses could compound its already fragile financial state as it struggles to stave off Chapter 11 bankruptcy.

The shipping industry so far seems to be weathering the storm. APL of Oakland, an arm of shipping giant Neptune Orient Lines, said Katrina caused it to delay one vessel's scheduled arrival at Fort Lauderdale, Fla., from Central America by two days.'s Cochrane said Katrina potentially could hurt exports more than imports. "Huge amounts of grain from the Midwest get shipped out through New Orleans," he said. "If grain cannot get out through New Orleans, it could be lost if warehouses are flooded or ports close and barges are stuck in Mississippi. That could have a negative impact on farm income. It would be more costly to truck it to other locations."

Gambling is another industry that could suffer.

Mississippi, with 27 state-regulated casinos, including a dozen on barges along its coast and others along the Mississippi River, is the No. 3 state in casino revenue, taking in $2.7 billion in 2004, behind Nevada's $10.3 billion and New Jersey's $4.8 billion. At least 17 casinos shut down on Monday.


Distributed by Scripps Howard News Service,

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