World Executive Summary: The Global Impacts of Hurricane Katrina

Hurricane Katrina was the worst storm to hit the United States in the last one hundred years. Moreover, its national economic impact will be larger than any prior storm because of the damage done to the trade and energy infrastructures.

Imports into the Louisiana ports (collectively the largest in the world) include coffee, sugar, fruit, steel, rubber, and petroleum. Exports primarily consist of agricultural commodities (wheat, corn, soybeans, etc.), which come down the Mississippi and are shipped to other parts of the world.

Fortunately, the track of Hurricane Katrina spared much of this trade infrastructure, and the impact on grain exports of any short-term disruption is likely to be limited, because the peak harvest and barge traffic on the Mississippi are still a few weeks away. With the mass evacuations of New Orleans and surrounding areas, however, there could be a shortage of skilled labor at these ports.

Southern Louisiana also plays a crucial role in U.S. energy markets. Not only are large amounts of oil and natural gas extracted offshore, but the Louisiana Offshore Oil Port (the LOOP) is a major entry point for oil imports. Even more important are the many refineries in this region. In the immediate aftermath of Hurricane Katrina, roughly 10% of U.S. refining capacity, 18% of crude oil production, and 17% of natural gas production were out of commission. Three weeks later, about 4% of refining capacity, 9% of crude production, and 6% of natural gas production were still off line.

The impact on energy prices was immediate and dramatic. World oil prices were (briefly) pushed up above $70 per barrel and U.S. gasoline prices rose to over $3.00 per gallon. Subsequent announcements about the release of crude and refined products from the U.S. Strategic Petroleum Reserve and by governments around the world helped to calm markets down and lower prices.

Global Insight believes that global energy market conditions will return to "normal" over the coming months and prices will continue to ease gradually. However, risks to energy prices are still predominantly on the upside. The full extent of the damage to the U.S. energy infrastructure is still not known, and a second hurricane (Rita) is moving through the Gulf of Mexico. Moreover, global market conditions remain very tight. Hurricane Katrina was a supply shock on top of a global "demand shock" that has been going on for a couple of years. Prices are close to record levels both in nominal and real terms. Another supply disruption (such as rebel activity in Nigeria, sabotage in Iraq, unrest in Venezuela, or terror attacks in Saudi Arabia) could easily send prices to levels never seen before.

As a result of the hurricane, annualized U.S. growth in the third and fourth quarters of this year will be reduced by 0.8 percentage point and 0.5 percentage point , respectively. This will translate into a 0.2 percentage point reduction in the 2005 annual growth rate to 3.5%. In 2006, the reconstruction effort can be expected to add 0.2 percentage point to the growth rate, bringing it to 3.4%.

The transmission mechanism of this storm to the rest of the global economy will be through weaker U.S. growth and higher energy prices. The latter will have a bigger impact than the former. A post-Katrina update, done using the Global Scenario Model, shows that global growth will be 0.2-0.3 percentage point lower in the next couple of years because of the hurricane and higher oil prices.