Katrina's big imprint on economy

The storm that flooded New Orleans, obliterated Gulfport, Miss., and hit Biloxi, Miss., with fatal results is putting a dent in the entire nation's economy.

Even as rescuers pushed Wednesday to contain a mounting death toll and help stranded residents in the ravaged Gulf Coast, hurricane Katrina's financial impact was also emerging as an issue that reaches far beyond Louisiana levees or Alabama inlets.

Whether that cost proves to be relatively modest - shaving perhaps half a percentage point off of an economy growing at a 3.3 percent pace - or a more severe shock depends on one key factor: energy.

The Bush administration moved Wednesday to open the Strategic Petroleum Reserve to ease looming supply shortages. With 10 percent of the nation's refining capacity, plus pipelines through which much of America's domestic and imported oil passes, the region has an outsized oil and gas role that makes this storm's impact much broader than that of other major hurricanes, or even the combined wallop of four hurricanes in Florida last year.

"This is more significant," says economist John Silvia of Wachovia Corp., a banking giant in the region. And if supply disruptions prove difficult to fix quickly, "it's a very big complication."

The prospect of $3-a-gallon gasoline, rising airline ticket costs, and soaring winter heating bills is accompanied by Katrina's more local effects: insured losses that could exceed the record (in current dollars) of $21 billion set by hurricane Andrew in 1992.

While the damage is devastating to residents, it promises to spur local economic activity as homeowners and businesses repair and rebuild in the months ahead.

Moreover, Katrina may prove to be a catalyst for longer-term changes - such as better fortifying New Orleans against storm surges or lessening the nation's energy dependence on the region - at a time when the intensity of tropical storms appears to be rising.

Still, the storm left thousands homeless, killed at least 100 in hardest-hit Mississippi alone, and damaged homes far inland in states such as Tennessee and Georgia. Estimates of insured losses go as high as $26 billion.

The Gulf region accounts for only about 3 percent of US economic output, but financial markets are focused on its much greater role in energy production. Stocks crept higher in early trading Wednesday as oil prices retreated when the government released oil from the strategic reserve. Before the announcement, prices had surged above $70 a barrel.

Still, the government's move does not remedy the damage to refineries that churn out much of American's gasoline.

Katrina's effect on America's gross domestic product are mere guesswork at this point. The government reported Wednesday that in the second quarter of this year, GDP grew at an annual rate of 3.3 percent, down from a 3.8 percent pace at the beginning of the year.

An assessment by Merrill Lynch is among the most positive: that the post-storm building boom in the region could outweigh the negative impact of higher oil costs, thus leaving no net loss to GDP. Global Insight, in Lexington, Mass., sees a more pessimistic "best case" scenario (shaving 0.5 to 1 percent from GDP as the year ends). The firm's "worst case" outlook: Oil could soar above $100 a barrel for a month, gas-pump prices could exceed $3.50, and economic growth could fall to nearly zero by the fourth quarter.

Beyond the immediate damage, it's possible that Katrina could permanently alter consumer prices for things like insurance and gasoline, Mr. Silvia says.

"Retail prices have to rise," he explains, if energy companies invest in new refineries (none has been built in the US for three decades) or if insurers reassess the likelihood of major storms.

A high hurricane level over the past decade is seen by many as cyclical, but one recent assessment found that global warming, too, is playing a role in a rising intensity of storms traceable over the past 30 years.

"If you get a storm like this every 20 years," instead of every 100 years, "you're going to have to price that in," says Silvia.

The questions of risk assessment go beyond insurance companies. A disaster such as Katrina has billions of dollars in indirect but very real impacts that aren't captured in tallies of insured losses, notes Frederick Krimgold, director of the disaster risk reduction program at Virginia Polytechnic Institute in Blacksburg.

In Katrina's case these include disruptions of businesses, from restaurants to fishing and shipping. They include the ordeal of residents who may go without phone service for days or electricity for weeks. Workers lose income, and state and local governments lose tax revenues, in part because some properties such as boats or homes no longer exist.

"You have a cascading pattern of economic consequences," says Dr. Krimgold. "We tend to underestimate the cost of these events, and we tend to underinvest in their mitigation."

He's not sure if the Katrina experience will change that, but it is surely bringing home the potential magnitude of these indirect impacts.

New Orleans didn't face the full fury of the storm, yet the city is for now virtually uninhabitable. Flooding has affected everything from electricity to potable water supplies.

"They built those levees for an 18-foot storm surge," Krimgold says. With a better understanding of the costs of a breach in the levees, officials could have spent a bit more "to build those levees for a 25-foot storm surge."

How to better protect New Orleans has already been a concern in Washington in recent years, but a multibillion-dollar cost has complicated the debate. Katrina promises to refocus the discussions.

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