Katrina's Domino Effect

Hurricane Katrina Damaged Refineries

The Gulf Coast contains the majority of oil refining capacity in the U. S. Most of these refineries shut down before the hurricane and will take time to come back to full capacity once needed repairs are estimated and repairs completed. But it will take time. There are even some oil rigs that have broken loose from their mooring and were driven 60 miles by Katrina's winds.

Katrina's Domino Effect on Distribution Problems

Meanwhile, while there is no shortage of oil, there is a major distribution problem. The Gulf Coast facilities refined oil into several fuels, gasoline for one, jet fuel for another. Major supply lines are inoperable. This means costs for transporting goods and supplies will increase across the board, as business owners put in place more costly alternatives to shipping than previously used.

Gasoline Headed for $4 a Gallon

And even as these more costly transport and distribution systems are in place, costs will continue to increase. The price of diesel nudged above $3 per gallon before Katrina. Don’t expect to see it decrease but to increase again and remain high. The same with gasoline. Costs per gallon hit $3 per gallon before the hurricane. Expect it to sharply increase in the short run, and settle to a level higher than the previous benchmark before Katrina hit. Shortages will drive the costs per gallon above $4, possibly higher.

Katrina's Domino Effect: Prices on the Rise

Agricultural products from most of the Midwest and east coast are shipped to the Port of New Orleans before distributing these materials throughout the U.S. and overseas. The costs for food related supplies will increase as shipping alternatives are put into play. Until the levee systems are repaired in New Orleans and power is restored, shipping will continue to be affected. Power supplies are off-line and will continue to be for several weeks, if not months. Systems cannot be repaired until the water is drained away.

Coming up with alternative means of economically transporting supplies, goods and services will fast become a major challenge for business, as rising costs cut into margins. Inflation will increase as the costs for everything is related to fuel costs, from manufacturing to shipping raw materials and parts, to the shipment of manufactured goods and products, to the costs of service companies rendering offered services to their customers.

Costs across the board will sharply increase due to this massive distribution problem. And those costs will have to be passed on to customers in one form or another. Oil prices may shoot higher than $70 a barrel, but they will retreat at some point. Fuel costs will decrease somewhat after the refineries come back on-line.

But the aftermath of Katrina will continue to be felt throughout the year and well into next year. The heating season is fast approaching. Heating oil prices will jump and remain fixed at higher rates through the season. Businesses will struggle as to how to pass on costs. Housing costs will increase as lumber shortages appear. The costs for commuting will continue to climb.

Every Adversity Has An Equal Or Greater Benefit

Now is not the time for finger-pointing, nor to politicize the problem. Now is the time to develop alternatives to the challenges we face. Refineries and shipping centers will have to be redistributed and expanded. It makes no sense to have most of our refinery capacity in one basket. Hurricanes will come again. Just because Katrina hit us hard in a critical area, doesn’t mean that another Katrina will never hit again in the same location. We need to prepare.

Business operations plans must be changed. From Katrina's domino effect can rise solutions previously disregarded or undiscovered. An admirable characteristic of United States entrepreneurs is how we react to disaster. We are a hardy nation with a culture built on overcoming adversity. We will do so now. Business will continue. Life will go on. And business will continue to operate and grow, dealing with the setbacks caused by events beyond our control.