SEIFFE: The Economics of Katrina

Thursday, September 8, 2005

By Ralf Seiffe

OPINION - We now know that the disaster in New Orleans occurred when the levees failed and water poured into the city’s saucer-shaped topology. As profound as this event was and continues to be, another dyke, some 800 miles away, also broke and in the long run, it may be the more important event.

Right now, providing aid and comfort of the city’s remaining and dispersed unfortunates is the primary task. It has been made much more difficult by the apparent mental paralysis of Governor Kathleen Blanco and the unbelievable incompetence of Mayor Ray Naglin.

By failing to take advantage of President Bush’s disaster declaration and ignoring his own evacuation plan, these two corrupt politicians have killed people.

With the federal effort spooling up, the instant problems appear to be under control. Cities where the evacuees are going appear to be well-organized and able to provide for the basic needs of the people---in stark contrast to the Louisiana politicians.

Now, as the immediate needs of the victims is being salved, it’s time to consider the economic future of New Orleans and how it will effect the rest of the nation. Anyone who has ever visited the Big Easy prays for the Acme Oyster House and Antoine’s to reopen and for the rest of New Orleans and the Gulf Coast to recover as one of America’s most endearing tourist destinations.

A large shadow hanging over the economy is New Orleans contribution to the nation’s energy needs.

The metropolitan area produces 25% of domestic production and 43% of our refined petroleum products. Losing this portion of the nation’s energy supply translated into price increases of as much as a dollar a gallon as the market rationed available supplies. Complicating the supply situation is a burgeoning distribution problem: deliveries of diesel and jet fuel have begun to hamper the terrestrial and air transportation industries.

In addition to refining the same proportion as Bill Clinton’s wining popular vote in 1992, New Orleans is also the port which transfers many of the other commodities that America imports and exports.

The Midwest is particularly dependent on the Port of New Orleans to ship our agricultural products. The difficulty losing this capability represents will become more evident as the harvest come in.

Evaluating these economic shocks puzzle economists and businessmen. They rightly wonder what effect retail oil prices will have on the economic health of the nation. Radio and television have been full of famous economists and portfolio managers providing their opinions on the trajectory of GNP, inflation as well as oil and equity prices.

Their consensus seems to be that the economy will take an immediate hit of perhaps 400,000 jobs. The federal government is pumping a billion dollars per day into the Gulf Coast area and this should help blunt the short term, human effects .

Eventually, the locals will decide to re-invest in new homes and businesses and that will help the area recover. This “down then up” model has typically described the economics of natural disasters and, except for the scale of Katrina, there’s no reason to think the aftermath of this storm will be any different than others, at least regionally.

Using this standard predictive model only addresses restoration of the property and economy that the hurricane damaged. This cataclysm may be different because beyond the property damage, it has also changed entrenched, government thinking. In that, Katrina’s effect may be much more dynamic, and much longer-lasting than typical disasters.

In particular, this storm has highlighted our energy situation. Katrina has reminded us that our nation has not built a refinery in 30 years because the environmental lobby has vetoed any plan to build them. The storm has exposed EPA regulations that require refineries to produce some 45 different blends of gasoline. These reformulation regulations add as much as 10% to the cost of fuel even though the natural improvement of the nation’s car fleet has neutered the pollution fighting value of these blends. Not only are these blends more costly, they must be kept separate and this makes for nearly insoluble distribution challenges.

Maintaining this plethora of gasoline blends that do not produce a cost-effective environmental benefit means this the regulations are not a scientific verdict but a political choice.

The public’s growing awareness of this foolishness has created the political capital necessary for the president to waive the supporting regulations without suffering the usual terror from the environmental lobby.

Other good ideas are beginning to percolate.

For example, week-end radio was full of ordinary Americans suggesting that the soon-to-be-closed military bases would make good sites for new refineries or even nuclear power plants.

One thoughtful commentator even suggested that $3 gasoline would economically justify developing America’s oil shale deposits. These domestic resources may have the energy equivalent of all Saudi Arabia’s oil reserves.

Forbes Magazine doesn’t think this disaster will change much. The story in this week’s electronic edition reports that it will take $6 gasoline to motivate any change in environmental posture.

Despite this, one hopes that Katrina’s unanticipated consequence will be to illustrate the nation’s precarious energy position.

Professional “environmentalists” and kooks like Robert Kennedy Jr. have put us in this position by creating an intellectual dyke that permits no questioning of their science or motivation.

The opportunity for those who believe the nation needs more energy is to recognize that their dyke is of the same quality as those found in New Orleans. Perhaps the president’s tiny relaxation of EPA regulations signals a small leak that will eventually erode into a torrent of new energy freely flowing to Americans.

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Ralf Seiffe advises business start-ups and product launches from Chicago, Illinois and is a political analyst and columnist for the Illinois Leader.