Professors Survey Storm’s Economic Consequences

Nearly two months after Hurricane Katrina ravaged the Gulf Coast and shook the nation's economy, the Haas School of Business held a forum Friday bringing together an audience of 60 faculty and community members to examine the economic impact of the disaster.

After the disaster wiped out a large number of oil refineries off the Southern coast, the nation's oil refining capacity dropped off, driving up gas prices, professors said.

"There has been a real shortage of refined products. Even today we have 20 percent refining capacity knocked out," said Haas professor Severin Borenstein.

Though retail gas prices are expected to drop down to pre-Katrina levels within the next month, Borenstein said that California residents should not expect to pay less than $2 per gallon for gas again.

"The fact is, oil is $60 a barrel. Those high prices are what is driving high gas prices," Borenstein said. "It's time to start adjusting (to the fact that) we're in a high oil-priced market and the hurricanes didn't help, but they didn't do much."

But the impact the hurricane has on the oil industry is not limited to soaring gas prices, as it threatens to have a sizeable impact on the energy industry.

A shortage in heating oil will change the distribution of production in the nation, at least for the short term, he said.

"Given the heating oil shortages, most of that burden is going to fall on other regions, in the northeast and the midwest," Borenstein said.

Despite the ripple effect being felt in the energy industry, the economy is not expected to suffer greatly in the short run, although the long-term effects are hard to predict, said business professor James Wilcox.

According to Wilcox, the private sector is expected to recover faster than the public sector, which is characteristic of disasters.

"There's going to be a spurt of purchasing of furniture and sheet rock, and other things like that," he said.

As the rebuilding in the South begins, business could pick up in other parts of the country, said Wilcox, but the government could suffer greatly financially.

"There is going to be a lot more spending by the federal government," Wilcox said, pointing to the $60 billion in aid approved by Congress and the request from Louisiana senators for $250 billion to rebuild.

He said that since the Bush administration is not likely to raise taxes, the result of the relief spending will be an increase in the federal deficit by as much as $180 billion.

The negative financial effect the disaster relief threatens to have on the government should be of leading concern in deciding what the course of action should be in rebuilding, said Haas professor Thomas Davidoff.

According to Davidoff, government-sponsored relief measures such as retroactive flood insurance, which allows uninsured hurricane victims to receive reparations from the government, are not conducive to avoiding similar financial burdens in the future.

"You should have to think it's very expensive to have a home in a flood or earthquake area. We have to be a little careful with our generosity," he said. "We want to avoid the idea that the government is going to be be on the hook in a disaster."

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