Strategy

The Costs of Katrina

A report from the Congressional Budget Office cites unexpected progress in opening oil refineries and restarting pipelines in the Gulf Coast region.
Stephen TaubSeptember 8, 2005

Hurricane Katrina may cut into GDP growth for the second half of 2005 by between a half-point and a full percentage point, according to a report from the Congressional Budget Office. The CBO had previously forecast that the economy would grow by 3.7 percent this year and 3.4 percent in 2006, reported Bloomberg.

The bi-partisan group also reportedly warned that Katrina could result in 400,000 lost jobs this year. Last week alone, about 10,000 people filed for unemployment benefits because they lost their jobs due to the storm, according to an estimate from the Department of Labor.

The CBO did note unexpected progress in opening oil refineries and restarting pipelines in the Gulf Coast region. These developments are expected to push energy prices downward from their recent surge. “Last week, it appeared that larger economic impacts might occur, but despite continued uncertainty, progress in opening refineries and restarting pipelines now makes those larger impacts less likely,” wrote CBO director Douglas Holtz-Eakin in a letter to congressional leaders, according to Bloomberg.

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Even so, a report from the Department of Energy predicted that home heating prices could jump as much as 71 percent in the Midwest this year, according to the Associated Press. In the Northeast, prices could climb 31 percent; in the South, around 17 percent.

Senate Majority Leader Bill Frist (R-Tenn.) said that initial recovery and relief operations for the four states affected by Hurricane Katrina are likely to reach between $100 billion and $200 billion, according to a separate Bloomberg report. “The ultimate cost, nobody knows,” he reportedly conceded, because the costs of rebuilding affected regions isn’t yet understood.

Meanwhile, costs from Katrina are showing up in less obvious places.

For example, Capital One Financial Corp. reportedly cut its offer for Hibernia Corp. by about $350 million, or 7.5 percent, to $5 billion; dozens of branches of Hibernia, Louisiana’s largest bank, were damaged by the storm.

The price of steel used to make cars and industrial equipment is expected to rise by as much as 20 percent over the next few months, reported The Wall Street Journal, mostly because New Orleans flooding has limited the supply of raw materials such as liquid hydrogen and scrap steel. Liquid hydrogen is used in the manufacture of higher-quality steels for products such as auto panels and garage doors, noted the Journal; scrap is used to make new steel.

And Katrina will cost U.S. farmers $2 billion, including $1 in direct losses and $500 million in higher fuel and other energy costs, according to an analysis by the American Farm Bureau Federation cited by The New York Times.

See the CFO Blog: Ron’s Rant for continuing analysis of the effects of Hurricane Katrina.

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