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Economic woes certain to spread

ATLANTA — A day after Hurricane Katrina roared across the Gulf Coast, oil traded above $70 a barrel, a string of casinos were closed amid soggy ruins and much of New Orleans was under water.

Devastation to hundreds of miles of coastline and the clogging of critical ports could trash local economies and raise prices on all kinds of goods for U.S. consumers: Expect to pay more for your coffee, as well as the sugar you toss into the cup.

Homes were destroyed or nearly submerged in the massive storm surge that left scores dead and tens of thousands of coastal residents homeless.

But no American was beyond the reach of the waves and wind.

Although the full impact of the storm was not yet clear, first reports were disturbing. The Coast Guard warned that the Mississippi River could be closed to trade for months, while the Gulf of Mexico was lined with hundreds of abandoned oil rigs and scores of shuttered refineries.

Soaring gas prices — or even shortages — have become a more likely scenario. Wholesalers say they already are paying 65 cents to 80 cents per gallon more in the wake of the storm.

More ominously, the pipelines supplying gas and oil to metro Atlanta are not working, and demand is being served with local inventories.

Typically, hurricanes are local tragedies. In some ways, that is Katrina's story, said Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University.

Local incomes and businesses are battered, but only briefly. During the next months, rebuilding — often with insurance money, bank loans or government help — is a boon to the economy. Construction is frenetic, jobs are created.

In Mississippi and Alabama, the painful Katrina experience will echo that of Florida's 1992 collision with Hurricane Andrew, Dhawan said.

In the quarter after that vicious storm, incomes plunged 13 percent. But in the three months after that, incomes leaped 38 percent.

But for the cities Katrina victimized, and the national economy, this story will be different, Dhawan said.

The New Orleans port and its river are critical both for imports and exports. The state is a crucial crossroads for natural gas pipelines headed for both the East and West coasts. And then there is the oil production and refineries — and the shipments of foreign oil.

Now, most of New Orleans is under water and the port is closed.

"It's a calamity that has never been seen before," Dhawan said.

"For New Orleans, we don't know how bad it is."

In the past, rising oil prices have seeped into other costs, carrying a poisonous inflation across the economy. This time, inflation has been muted.

Instead, the danger is that energy costs will steal from elsewhere in the economy. Consumers and companies will shift spending to cover gas and heating costs, while billions of dollars that would have been spent in the United States will flow to oil-producing countries.

Some businesses are especially vulnerable.

The already troubled airlines, for example, have seen jet fuel prices rise 17 percent in two days to record highs. Tuesday, the spot price for jet fuel from the Gulf Coast rose 13 cents to almost $2.18 a gallon.

Katrina cut through the heart of America's network of energy production and distribution.

About one-third of the nation's oil and natural gas production comes from the coast assaulted by Katrina. That same area handles 60 percent of oil imports.

One way or another, more than one-quarter of the nation's oil passes through Louisiana.

As of Tuesday, about 95 percent of the oil production in the Gulf of Mexico was shut down, according to the U.S. Minerals Management Service. About 735 oil rigs and platforms — roughly 70 percent of the total — were still evacuated.

But what matters most is whether that damage is long-lasting.

Traders briefly shoved the oil price above $70 a barrel on Tuesday, before letting it settle at $69.81 at the close of the day.

"I think we've already seen the effect on oil and gas prices," said economist Kathleen Camilli, president of New York-based Camilli Economics. "That $4- to $6-a-barrel premium — that will extend as long as it takes to determine the damage.

"And if the damage wasn't that bad, you'll see that premium come off."

Hurricanes before have savaged the oil sector's operations along the coast. Andrew sank or damaged 87 platforms and rigs. Last year's Ivan destroyed at least 40 derricks, leaving oil production 27 percent below normal three weeks later.

Both sent energy prices higher, but the danger now may be more acute.

Prices have been rising for several years because demand was up, but a shortage is a different, more dangerous , said economist Mary Bumgarner of the Coles College at Kennesaw State University.

"The economy has been growing at a healthy pace, and prices haven't been high enough to limit the expansion. This, however, is a supply shock."

Previous hurricane damage came with the world's oil suppliers capable of quickly making up any difference. But global production has little extra now, which makes every disruption of supply a potential crisis.

Despite the fretting, oil prices adjusted for inflation are still about $20 a barrel shy of their all-time high. And oil prices might drop if Saudi Arabia makes good on a promise to pump more crude or if President Bush taps into the nation's emergency oil reserve.

Heating homes and running cars are, for most Americans, necessities. And for many Americans who are coping with anemic pay raises — or none at all — higher energy prices mean spending less on something else.

"Maybe getting a haircut less often, maybe shopping less," Bumgarner said. "I expect [to see] lots of these little things."

Michael E. Kanell writes for The Atlanta Journal-Constitution. E-mail: mkanell@ajc.com