The Kangaroo gas station in Gulfport, Mississippi, is ripped apart by Hurricane Katrina
Frank Polich / Reuters
The Kangaroo gas station in Gulfport, Mississippi, is ripped apart by Hurricane Katrina Aug. 29. The impact on the broader oil industry is much greater.
Special to
updated 8/31/2005 10:09:45 AM ET 2005-08-31T14:09:45

Even as emergency workers and others slosh through the soaked, debris-strewn streets of New Orleans and other areas torn up by Hurricane Katrina, some economists fear American policy-makers will take the wrong lesson from the storm and ignore America’s larger vulnerabilities.

Katrina’s “immediate effect will be a bump in gas prices of maybe 20-25 cents a gallon -- although that might be mitigated now the Bush administration has released some crude oil from the Strategic Petroleum Reserve. But the price of gas is going higher anyway,” said Stephen Leeb, president of Leeb Capital Management.

With gas prices already at record highs, a further jump is likely to have a negative impact on the U.S. economy.

The more serious issue, Leeb argued, is how quickly one strong storm can tip America’s energy needs at a time when global oil supplies are tight and getting tighter.

“Ten years ago we could have turned to the Saudis and asked them to pump more oil. Now, the tap is 100 percent on,” he said. “This is a different world but that has not sunk in to the minds of the policy-makers.”

Major oil producing countries like Nigeria, Iran, Venezuela and Saudi Arabia risk political upheavals that could pack a much more serious punch to America’s economic center, he added.

Reconstruction activity
Despite this, other observers note that the billions of dollars of devastation wrought by Katrina will be offset by billions in reconstruction activity.

Lynn Reaser, chief economist of Bank of America’s investment strategy group, said Katrina’s financial impact will likely follow the traditional V-pattern.

“The local effects including the loss of lives, homes and other property, businesses losses, retail sales and tourism in New Orleans and parts of Mississippi are going to be very costly,” she said, adding a lot “will depend on how quickly power is restored.”

Over time, however, there will be a huge economic boost from emergency funds and rebuilding efforts as was seen in Florida after last year’s deadly storm season.

After the Asian tsunami the affected areas came back rather quickly, she said, “but it remains to be seen how quickly the recovery is in New Orleans.”

Major Market Indices

Aside from oil, Reaser explained the storm may also have damaged regional crops like cotton and grains.

While reconstruction activity will bring some relief, Professor Rodney Green of Howard University notes reconstruction doesn’t benefit everyone. The low-lying — and worst effected — areas of New Orleans are generally the poor neighborhoods. These people can’t afford $150 a night for a hotel and the city’s Superdome — a shelter of last resort during the storm — has been damaged, he said.

So, the question is whether the various authorities will use the emergency funds to build affordable housing or if developers will buy that land to build expensive housing, he added.

Natural gas worries
Matthew Simmons, president of Simmons and Co., a major investment banker in the energy industry, said there are serious problems developing, noting that Katrina has left an estimated 1 million homes without power, and that means the refineries and pipelines are also down. As a result, it doesn’t matter if supplies of crude oil are released from the SPR because “there’s no place to refine them” into gasoline and other fuels, he continued.

“We are on the bubble of a severe finished [oil] product shortage,” he said, “and the only question is where will it manifest first — in jet fuel, diesel fuel, gasoline or all three?”

But Simmons said the biggest cause for concern is not oil or crops or housing, but natural gas.

At the start of the summer, because the two previous winters were abnormally mild, “we had a nice cushion of natural gas and analysts were predicting a collapse in prices,” he recalled.

But by the end of the summer, after the hurricanes, the heat wave and mishaps in the coal industry that saw train rails collapse and shipping blockages on the Mississippi River, “we’ve eaten through what we had in storage and we are now in a deficit,” he said.

Americans can tolerate a gasoline shortage, but a shortage of heating supplies would be “unbelievably intolerable,” he added.

With forecasters predicting a severe winter ahead, all eyes should be on the Gulf of Mexico hoping its underwater gas lines sustained no major damage, he explained.

“I’ve been muttering for the last year that the winter of 2005-’06 is when we could see global demand [for oil] exceed supply by 2-5 million barrels per day,” he added.

Adding to the confusion in the energy markets is the promise by Saudi Arabia to boost its production by 500,000 barrels per day if necessary to stabilize oil demand and price. But many analysts are questioning whether the country with the world’s largest oil fields can fulfill that pledge or, if it does, whether that increased production will bring with it more harm than good.

“They could collapse their [aging] oil fields by over-production,” he warned. “It’s like an elderly person forced into a big race. Our only way out is to practice conservation by lowering  production, which is the exact opposite of what we’re doing.”

If a shortage comes and the Saudis do not bump up production, “then people will think they lied to us” and promises about their oil reserves would be questioned, he added.

The world isn’t running out of oil, he explained, but the time when everyone could have all they want is.

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