Hurricane Katrina: The Economic Impact of Natural Disasters

Running head: Hurricane Katrina: The Economic Impact of Natural Disasters

Hurricane Katrina: The Economic Impact of Natural Disasters

Timothy T. Boyd

Embry-Riddle Aeronautical University

Abstract

Major natural disasters can do and have severe negative short-run economic impacts. Disasters also appear to have adverse longer-term consequences for economic growth, development, and poverty reductions. Natural disasters cause significant budgetary pressures, with both narrowly fiscal short-term impacts and wider long-term implications for development. On August 29, 2005, one of the most deadliest hurricanes slammed into the Gulf Coast region of the United States. Hurricane Katrina, once a category 5 storm, dropped slightly in intensity, to a major category 4 storm, before causing her destruction and devastation of the Gulf Coast region. This research paper will identify the economic impact of natural disasters, focusing on Hurricane Katrina.

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Overview

Hurricane Katrina was the eleventh named tropical storm, fourth hurricane, third major hurricane, and first Category 5 hurricane of the 2005 Atlantic hurricane season. It first made landfall as a Category 1 hurricane just north of Miami, Florida on August 25, 2005, then again on August 29 along the Central Gulf Coast near New Orleans, Louisiana, as a Category 4 storm. Its storm surge soon breached the levee system that protected New Orleans from Lake Pontchartrain. Most of the city was subsequently flooded by the lake's waters. This and other major damage to the coastal regions of Louisiana, Mississippi, and Alabama made Katrina the "most destructive and costliest natural disaster in the history of the United States." ("Hurricane Season", 2005)

Introduction

Hurricanes and other natural disasters rarely have a large and long-lasting effect on the economy, but Katrina could be an exception. While most storms have only a regional impact, Hurricane Katrina could be the rare exception that has national or even international consequences. Katrina took aim at a vulnerable chokepoint for U.S. energy markets. The region not only produces a large percentage of domestic oil and gas, it is also a transportation hub for both imported and domestic production. A complete assessment of the damage to the region's economy could take months or even years. It is believed that "a full reassessment of the economic and financial impact of a major disaster should be made 18 to 24 months after the event." ("Understanding", 2004)

Experts anticipated Katrina to be the costliest natural disaster in U.S. history. Some early predictions in damages exceeded $100 billion, not accounting for potential catastrophic damage inland due to flooding [which would increase the total even more], or damage to the economy caused by potential interruption of oil supply, and exports of commodities such as grain. Other predictions placed the minimum insured damage at around $12.5 billion [the insured figure is normally doubled to account for uninsured damages in the final cost]. Before the hurricane, the region supported about one million non-farm jobs, 600,000 of them in New Orleans.

Unemployment

"Hurricane Katrina's initial toll on the U.S. economy is beginning to add up, with a series of reports showing a jump in new claims for unemployment insurance benefits, plunging consumer confidence and lost industrial production." (Henderson, 2005) Hundreds of thousands of residents of southern Louisiana and Mississippi including nearly everyone who lived in New Orleans, are now unemployed. No paychecks are being cashed and no money is being spent in the city, thus no taxes are being collected in the city. The lack of revenue will limit the resources of the affected communities and states for years to come. The U.S. Department of Labor has saw a rise in initial jobless claims due to the effects of the hurricane, which could possible force closure of thousands of business in the Gulf Coast region. Many individuals in the region already leave below the poverty line and the effects of Hurricane Katrina could potential increase this rate, and government assistance or "good-free riders". (Arnold, 2005) Many believe the U.S. economy is in a recession period and the effects of the hurricane will further damage the U.S. economy.

Oil Production & Gas Prices

Katrina has interrupted oil production, and refining in the Gulf area, thus having a major effect on fuel prices. A tenth of all the crude oil consumed in the United States and almost half of the gasoline produced in the country comes from refineries in the states along the Gulf's shores. An additional 24 percent of the natural gas supply is extracted or imported in the region. The Strategic Petroleum Reserve is stored along the Gulf. The hurricane accelerated the Oil price increases of 2004 and 2005. The power outages in the wake of Katrina have also caused distribution problems for oil and natural gas. Pipelines, which move petroleum products from places like Houston to areas of the east coast, have had their flows interrupted because power outages shut down the pumps that kept materials flowing.

Gasoline prices reached and exceeded $3 USD per US gallon in the U.S. within days as a result, setting record highs; in Atlanta, Georgia, prices are already as high as $3.50 USD per US gallon, as consumers rush to fill up. However, this is partially due to a consumer panic in Georgia on August 31, 2005. One CNN report showed a BP gas station selling regular unleaded gasoline for $5.87 per US gallon. Many gas stations ran out of fuel despite the high prices. "The prices in Europe are also increasing. In Germany, a unleaded gasoline costs about Ђ1.45/L [$6.70 per US gallon];