Hurricanes Can Strike an Economic Blow

We are in the midst of the 2005 hurricane season, and it’s already a record breaker. If you live in an affected area or one with a history of storm damage, you are probably fully aware of the devastation wrought by hurricanes. But you don’t have to live in hurricane country to be affected by the damage caused by these awesome storms.

Even though hurricanes and tropical storms damage scattered geographical areas, they can rain on the national economy as well.

Oil Price Spikes

You only have to look back to Hurricane Dennis a few weeks ago to see how storms can interfere with oil and natural gas production and distribution. Even though Dennis did not damage any important oil platforms and refineries in the Gulf of Mexico, the storm caused some facilities to be shut down or evacuated, cutting output by five million barrels between July 8 and 12.¹ In 2004, Hurricane Ivan was not so kind. Widespread damage to oil and gas equipment in the gulf, the source of 25% of U.S. production, hampered energy output for months.^2,3

Such supply disruptions have the potential to cause tighter energy inventories, which can contribute to higher prices. U.S. refinery capacity is limited, so experts are predicting that the loss of a big production site or refinery could push prices as high as $80 a barrel.⁴ Higher gas prices have been blamed for contributing to recent declines in consumer confidence.

Homes and Homeowners

Hurricanes Charley, Frances, Ivan, and Jeanne accounted for 83% of all insured catastrophe losses in 2004, damaging more than 700,000 homes and causing insurers to pay out more than $22.6 billion.⁵ Many insurance companies have raised and continue to raise rates for homeowners living in high-risk areas, and it is possible that the insurers have also passed on some of the costs of hurricane-related claims to the rest of their customers.

Hurricane damage can pinch supplies of building materials and affect construction in other parts of the nation. For example, crushing demand for storm shutters has contributed to a 30% spike in aluminum prices since last hurricane season.⁶ That’s good for aluminum suppliers, but it could increase the cost of doing business for companies that consume aluminum. Some roofing materials are also in short supply, and customers in Florida have had to endure months of delays.

One other consequence has been increased interest in hurricane survival equipment. Demand is rising for generators, propane tanks, shatter-resistant glass, and storm shutters.⁷

Business Disrupted

Hurricanes and other natural disasters are especially hard on small businesses. In the past three years, almost one in three U.S. small businesses has had to close its doors for at least 24 hours because of a natural disaster. Sixty-six percent said that loss of sales and customers is the biggest problem associated with natural disasters.⁸

Although winter storms affect more small businesses, hurricanes, tropical storms, and typhoons cause more destruction. Businesses not only suffer property losses, but they may lose sales because their customers also have had their lives turned upside down.

Thanks to the Internet, many companies now do business across the nation. They may have customers and suppliers who rely on them and are affected when they have to shut down.

The hurricane season can send shockwaves across regional and U.S. economies, and may have some short-term and long-term influence on the financial markets. Having a solid understanding of how the economy might be affected may better prepare you for the next few months.

1, 3, 4) Investor’s Business Daily, July 13, 2005
2) The Wall Street Journal, July 12. 2005
5) Insurance Information Institute, 2005; The Miami Herald, May 29, 2005
6) The Miami Herald, May 29, 2005
7) The Wall Street Journal, July 11, 2005
8) National Federation of Independent Business, 2005

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