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United States: Death Toll Climbs as Hurricane Katrina Hits US; Record Oil Prices, Insurers Braced

There is widespread devastation across the US Gulf Coast states of Louisiana, Mississippi and Alabama, although New Orleans was spared its worst-case scenario.    

Global Insight Perspective    
Significance Hurricane Katrina is one of the fiercest hurricanes to have hit the US in living memory, and despite mass evacuations there have been several dozen killed.
Implications While the US is used to dealing with hurricanes, the damage caused by Katrina is unusually severe. Although the full extent of the damage is yet to be assessed, the implications stretch well beyond the region - oil prices hit a new peak after production was closed down in the Gulf of Mexico, insurers face a huge bill, and the US economy as a whole will feel some strain. 
Outlook The Gulf Coast will clear up after Katrina in time, but it is predicted that the pattern of hurricanes will continue to worsen over coming years. Low-lying coastal cities such as New Orleans are especially vulnerable because of man-made damage to the coastline, and the authorities will come under additional pressure to rectify this.

Heavy Human and Physical Impact

With many areas still flooded and communication down, it remains impossible to gauge the full impact of Hurricane Katrina. The storm came onshore in eastern Louisiana on the Gulf Coast, just east of the city of New Orleans. It had previously swept across southern Florida with lesser intensity. At least 50 people are known to have died in Mississippi, but the figure is expected to rise sharply. Although New Orleans was not hit as badly as it might have been, whole neighbourhoods are under a metre or more of water, particularly in the east of the city. Hundreds of people are still being airlifted to safety. The population of low-lying New Orleans is some 1.4 million, around 80% of whom obeyed orders to evacuate. One of the levees built to keep the sea out was breached along a 200-metre stretch.

The situation could have been worse if the storm had not veered away from the city at the last moment. Predictions that the historic French Quarter would be left under 18 feet of water have thankfully not been realised. Wind damage is more widespread than flooding in that particular area. The storm ranked as a Category Four on the Saffir-Simpson scale when it hit land, a notch below the maximum Category Five that had been predicted, but still among the four worst storms ever recorded in the US. Now moving northwards through Mississippi, the hurricane has lost much of its intensity and ranks as a tropical storm.

The infrastructural disruption is of course huge. Airports in the region have been closed and some major roads will remain impassable for days. Over a million people across Louisiana, Mississippi and Alabama are without electricity. The hundreds of thousands of people who fled inland are being advised to remain there until electricity and other services are re-established. Looting has been reported in the affected areas, and the authorities warn that anyone taking advantage of the situation will be dealt with severely. President George W. Bush has offered federal disaster aid. 

Oil Prices Briefly Hit New Peak

The most immediate impact of Katrina was to spike oil prices to another record. After briefly attaining record highs of over US$70/b, they fell back somewhat as Katrina was downgraded from a Category Five to a strong Category Four. Markets now are waiting anxiously on the damage assessments to give a cue to prices. The disruption to the US's oil industry could range from 'quite bad' to 'extremely bad', depending upon the extent of physical damage to installations. Katrina passed through the heart of the Gulf of Mexico (GOM) oil infrastructure where a significant amount of the country's refining capacity resides and where offshore production connects to the national pipeline network. It is clear that substantial shut-ins will mean a significant amount of US oil and gas production and refining capacity will be lost for up to two weeks. While this is serious given the tight balance already causing price problems in the US, the consequences could be far more severe if it emerges that there is substantial damage that could take weeks or months to repair, particularly in the downstream sector. With capacity already stretched, major and extended outages will be extremely problematic. 

Full Regional Economic Impact Difficult to Assess

In terms of hurricane size, the closest comparison appears to be Florida’s Hurricane Andrew of 1992, which totalled more than US$30 billion in damage and ranks as the costliest storm in US history. But there are several key differences between Andrew and South Florida, and Katrina and New Orleans:

  • New Orleans is a significantly smaller economy that avoided a direct hit. South Florida suffered a near-direct punch and is a much larger, more densely packed economy than New Orleans. The real gross metro product (in 2000's US-dollar value) of Miami and Fort Lauderdale in 1992 was roughly US$85 billion; the New Orleans metro - with the same land area - is only half that today. Adding in Gulfport-Biloxi and Hattiesburg puts the larger region's output at about US$54 billion, but over a much greater geographic area. Furthermore, Katrina veered east in the morning, sparing the city the worst.
  • The New Orleans economy is less resilient. The Florida economy is vibrant with lots of in-migration, heavy demand for services, and a busy real estate market. Thus, all the pieces were in place for the economy to ramp up and rebuild. The New Orleans and Gulf metros are more mature and less dynamic economies, meaning the recovery could take longer. Additionally, New Orleans has more industrial activity - especially in oil refining and chemicals production - that could take a long time to get back online, further slowing the area's return to normalcy.
  • New Orleans's geography is unique. With much of the city below sea level, catastrophic flooding is possible. If the levees are overrun, getting the water out would be a difficult, prolonged task, as well as a potential environmental disaster. We have not seen that in previous hurricanes, and even local officials are uncertain just how severe the effects could be.

Lastly, a cautionary note about storm impacts: as was shown with last year’s Florida hurricanes (for example), great personal loss and media hype do not necessarily mean a large negative effect on the area's economy. Most estimates of the effects of last year's storms, even ones made weeks later, were vastly overstated. Even local economies are large and diverse and able to sustain hits without collapsing. That said, one big wildcard here is the ramifications for the large local oil-refining industry: an extended closure could send oil and gas prices even higher, severely hurting the national economy. With the storm not yet passed, it will take days or weeks to assess the damage and its impact fully.

Insurers Braced for the Worst

Although it is unwise to swallow the more dramatic media hype about potential costs, Katrina will undoubtedly prove one of the most costly natural disasters to date for insurers. Preliminary damage estimates range between US$9 billion and US$16 billion. Germany's Munich Re is today saying that the liabilities could be as high as US$20 billion. These may be over-estimates, but it is likely that Katrina will prove second only to 1992's Hurricane Andrew, which cost nearly US$21 billion in insured losses. Nevertheless, it is believed that most insurers will be able to cope with the losses this time round. In 2004 alone, four hurricanes registered almost US$21 billion in insured losses, combined, and insurers now factor in losses on this scale into their normal calculations. Insurers have moreover pushed up premiums in hurricane-affected areas in anticipation of repeats.

Environmental Context and Remedies

Most scientists believe that the frequency and intensity of hurricanes will continue to increase over coming years. However, this is not necessarily connected to global warming; many scientists argue that the region is suffering a normal extended cycle of higher ocean temperatures. These cycles can last several decades. Between 1970 and 1994 the situation was relatively quiet, but since then a more vigorous pattern similar to that of the 1950s and 1960s has transpired. It may be that global warming is exacerbating this, however, and rising sea levels would inevitably multiply problems of low-lying areas.

Louisiana is all the more vulnerable because of the man-made changes to its coastline, and correcting this appears to be the only effective longer-term remedy. The government has been pressed to spend billions restoring the state's lost wetlands. These should act as a natural buffer against storms, but they have been badly depleted, mainly thanks to the re-routing of the Mississippi River. Federal officials have been looking at the potential for a US$14-billion plan to restore meandering waterways that would in turn deposit silt on the wetlands. Without this effect, the coastline is shrinking by around 25 square miles a year. This plan runs contrary to the conventional wisdom that straightened waterways are desirable for shipping and flood control.

Outlook and Implications

It will take some weeks before a more accurate picture emerges of the damage to the economy and the costs borne by insurers, but it already seems that Katrina is second only to 1992's Hurricane Andrew on the latter front. The situation could easily have been much worse, moreover, and New Orleans has to take the formidable threat to the continued existence of large parts of its centre very seriously. Given predictions of worsened hurricane patterns in coming years, it seems that the authorities will have to bite the bullet and spend the billions required to restore the coastline.


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