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US Economy Could Be Hard Hit by Katrina

In the wake of supply disruptions caused by Hurricane Katrina, gasoline prices in the United States have soared by as much as 40 percent this week and have prompted worries of both increased inflation and economic slowdown.

Energy economist Antoine Halff of the Eurasia Group in New York says Hurricane Katrina is triggering an oil price shock not unlike those of the early and late 1970s. Those earlier supply shocks were characterized by shortages, long lines to buy gasoline, and sharp price increases.

"I think we're seeing it today," said Mr. Halff. "I think we haven't felt the full effect yet in terms of gross domestic product growth and in terms of the broader economy. But I think this is an oil price shock and a supply shock."

A substantial part of U.S. oil production comes from the Gulf of Mexico and the drilling rigs there are currently not operating. In addition, numerous refineries along the Gulf Coast near New Orleans are out of service and that is causing gasoline and jet fuel shortages in some parts of the country.

In 1973 and 1979 oil supply disruptions caused recession and downturns in economic activity. Mr. Halff, speaking on the VOA program Press Conference USA, believes there is now a real risk of recession in the United States.

"Yes, I think we do have that risk," he explained. "Yes, the economy has been extremely strong, not just in the US but in China and across the globe. That strength in the economy, the growth in global gdp, has allowed demand to weather the very high [oil] prices we've had the past two years."

Oil prices have more than doubled in the past two years and currently trade in the range of $70 per barrel. Few economists anticipate an early decline in prices. Here in the United States gasoline prices have risen even faster with prices now having doubled in many areas over the past 12 months.

White House chief economist Ben Bernanke, a former professor at Princeton University, expects gasoline prices will eventually fall back. The principal problem, he says, is the temporary absence of adequate gasoline supplies from American oil refineries.

"That is really the bottleneck in this particular episode. And that is why the price increases are spreading out. I think they'll return to normal once refineries are up and running," he noted.

Sharply higher gasoline prices are certain to slow the pace of economic growth in the United States from the over three percent rate that has prevailed so far this year. Economists say it is too early to assess the overall inflationary impact of price increases that are likely to extend far beyond petroleum. The now crippled port of New Orleans is a principal access point for products like bananas, steel, and coffee entering the United States.