Okay, so the U.S. economy was barreling along with gasoline around $2.30 a gallon. But what happens when the price shoots above $3 and motorists are stuck in gas lines reminiscent of the 1970s?
That was the big question confronting economic forecasters late last week in the wake of the devastation that Hurricane Katrina inflicted on the Gulf Coast. Government figures released Friday concerning employment in August showed that in the weeks before the storm, economic growth was picking up, notwithstanding grumbling from consumers about the cost of filling their tanks. But the economy's resilience will be tested as the hurricane's impact on Americans' wallets hits with full force.
Normally, hurricanes register little more than a blip on economists' radar screens, because despite the horrific toll on lives and property, the effects are mostly localized and fairly quickly offset by the stimulus that comes from reconstruction. Katrina, however, laid waste to some of the nation's most crucial energy infrastructure -- the affected area accounts for a significant portion of U.S. oil refining capacity -- at a time when gasoline supplies were stretched particularly tight. Before the storm, U.S. refiners could turn about 17 million barrels of oil a day into gasoline and other products; the shutdowns of facilities forced by Katrina reduced that figure by about 11 percent. Crude oil prices topped $70 for the first time ever, and gas prices surged over $3 in many parts of the nation, as rumors spread of far worse damage to underwater pipelines and other facilities than was publicly disclosed.
By Friday, there were signs of hope. A few refineries were regaining power and preparing to resume operations, and so was the deepwater port that receives much of the nation's oil imports. The Bush administration and European nations announced plans to release crude oil and gasoline from reserves, helping to drive prices on futures markets down sharply on Friday. But it was still far from clear how quickly other facilities would be brought back on line. Admittedly engaging in guesswork on the future course of prices and how consumers would react, economists slashed their forecasts for the third and fourth quarters, though many were still predicting respectable growth in the 2 to 3 percent annual range.
The stock market took all this in remarkable stride, with the Dow Jones industrial average gaining 0.5 percent for the week. Investors were reckoning that many big companies would benefit -- oil companies, obviously, as well as home repair and construction firms. Their optimism was indisputably cold-blooded; in coming weeks, we shall know whether it was foolhardy.