Natural gas the real economic problem
When it comes to the average Joe, the economic disaster that will spin out of the Gulf storm isn’t about gasoline, it’s about natural gas.
“The story is not oil, the story is gas,” said Joseph Clark, a certified financial planner and managing partner of the Financial Enhancement Group LLC in Anderson.
Yes, the gasoline supply line is squeezed by damage to refineries, the extent of which is being kept under wraps until next week, but there’s more economic fallout.
No new gasoline refineries have been built in the United States since the mid-1980s. President Bush recently advocated that another be built, but it wouldn’t be operational for seven years after approval, Clark said.
“So much of our oil and gas comes from Louisiana,” said G. Logan Jordan, Ph.D., associate dean of Purdue University’s Krannert Graduate School of Management. “Those effects are going to be long-lasting.
“We’ve lost a significant portion of our domestic oil and refineries. It’s a one-two punch. Thirteen percent of our oil consumption is off our off-gulf platforms.
“We’re not losing slack, we’re losing usage capacity. That’s a major hit,” Jordan said.
The whammy, Clark said, will come this winter. “Natural gas bills could go up 50 to 80 percent,” he said. Much of the nation’s natural gas comes from the Gulf region. Up until now, hurricanes had been concentrated in Florida.
“Florida’s not strategic. It’s a bunch of retirees. New Orleans is strategic.”
Jordan ticked off the many reasons the Gulf is critical to the nation’s economy.
n Shipping. A huge amount of commerce is transported up and down the Mississippi River. “A lot of that will need to be rerouted,” Jordan said. Some moved to the St. Lawrence Seaway. “That’s going to add cost and time.”
n Trucking. He referred to the Interstate-10 corridor. “We’ve pretty much cut that off,” Jordan said. Moving goods from Florida and Georgia to Texas and California just got more complicated.
n Board feet of lumber. “The Southeast is where we raise a lot of that lumber. It can’t be inconsequential.”
The impact will be felt through rising prices. “Commodity prices are going to go higher,” Jordan said. “We’re not going to see a lot of the economic benefit of the reconstruction because of the prices.”
Morton Marcus, a retired economist with Indiana University, disagreed.
“Natural disasters stimulate the economy,” Marcus said. “The long-term rebuilding will have very positive economic ramifications.”
He predicts that energy prices will fall in the next month or so.
Jordan steered clear of predicting where gasoline prices will go. “I can’t even hazard a guess. I can see them going higher. The markets have to get their heads around the loss of production.
“Pump prices are higher than the barrel prices. It shows the effect of the loss of refineries. I don’t think it’s been wildly irrational. Some of the pump prices are, I’ve heard of $5 pump prices.”
Stephen Martin, professor of economics at Purdue University, said the hurricane just accentuated trends already under way.
“It’s going to set up a ripple effect, using an earthquake analogy, along the fault lines that were already there.”
Gasoline prices already were increasing. “My wife and I calculated that it will cost us $7.50 to drive out to the mall. Not all of that is an increase, but previously, gas was so low, we never thought about it. The kinds of lives we’ve all led based on extremely low transportation costs are going to change.”
Clark cautioned against overstating the effect of gasoline prices. Two weeks ago, when Wal-Mart reported lackluster financial performance, economists opined that people couldn’t afford to spend money at Wal-Mart because of rising gas prices.
Clark strongly disagreed. “Wal-Mart is failing to execute its business plan,” he said. “Their stores look like they should be in the Soviet Union.”
Meanwhile, Target’s sales are up 6 percent.
“The average American person controls the economy and it all comes down to discretionary income,” Clark said. As people begin to pay down their debt, they have more money to spend. So far, they’ve been able to maintain their spending, despite rising gasoline prices.
And those prices will stay where they are, Martin said, because of increasing energy demands in China and to a lesser extend India and because “in the United States we’ve simply not continued to make investments in energy that we were making in the ’80s. That all stopped. It didn’t backslide, but there was no further progress.”
He used as an example the fact that Indiana just raised the speed limit to 70 mph on interstates and other highways. “The state administration should have been saying, ‘no, we’re not going to raise the speed limit.’”
The same goes for the federal government, Martin said. The feds could have boosted energy taxes to prompt energy efficiency and fund energy advances. Instead, gas prices rose only because of OPEC’s self-imposed production limits.