The Cost of Katrina

Residents of Louisiana and Mississippi felt the wrath of Hurricane Katrina early Monday morning, as she ripped through the states, leaving behind her a wake of destruction and despair. Substantial personal losses aside, the financial effects of Katrina might be the most devastating hurricane damage in recorded U.S. history.

The extent of the damage is still being assessed, but preliminary reports have estimated insurance claims alone in the amount of $26 billion. When Katrina tore through Florida last week, she left upwards of $2 billion in damage there. Many small and large

businesses have been forced to shut down, and no one knows at this time when they’ll be back in business.

The aftermath of her fury, however, is not just insurance claims for property damage. On a larger scale, this hurricane has shut down a number of oil and natural-gas production stations in the Gulf of Mexico — sending the already high cost of crude oil even higher.

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“We are going to lose 15 to 20 million barrels of oil that won’t be refined,” Larry Goldstein, president of New-York based Petroleum Industry Research Foundation, said.

The area marred by devastation is normally a vital energy region, and this means that refineries might find they cannot meet the demand for oil and gasoline.

“The economy has been resilient [in the past] in the face of rising oil prices because the increase was driven by rising demand. The hurricane, and its possible disruptions, is a supply shock, and that does make a difference,” said Chief U.S. Economist at Morgan Stanley in New York Richard Berner.

He also added that, “If it disrupts production and the transportation infrastructure, then that will have collateral damage on the economy.”

Plans are being made to send planes and divers out to take stock of the rigs, pipelines, and platforms. Once there is a final damage assessment, they will be able to further assess where the country stands in terms of oil and shortages.

“A 10 percent reduction in oil and natural-gas supplies that lasts for a couple of weeks, together with similar cuts in gasoline and home heating oil that went on for a month, would reduce consumer spending by about 3 percentage points in the fourth quarter and bring the economy to the brink of recession,” said Chief Economist at Global Insight in Lexington, Massachusetts Nariman Behravesh.

Consumers will obviously see a marked increase in gasoline costs and heating bills because of Hurricane Katrina, and this will stall consumer spending and quash consumer confidence. This is clearly not what the American economy needs right now, and I wonder how much more financial pressure the average American consumer can take right now.

Hurricane Katrina is yet another kick to an economy that’s already down — and getting back up is going to be even harder now.