Hurricane Isaac: How Will It Affect the Economy, Oil Prices?

Hurricane Isaac: How Will It Affect the Economy, Oil Prices?

Exactly seven years after Hurricane Katrina traumatized New Orleans, Category 1 Hurricane Isaac swept through 45 miles southwest of the city, testing the levees rebuilt and strengthened in the wake of Katrina’s disaster.

Water topped at least one levee in an area called Plaquemines Parish (though this one was not fully rebuilt after Katrina). Some reports have people hiding on roofs and in attics, with 12-14 feet of water in their homes.

Although Hurricane Isaac is “only” Category 1 (Katrina was Category 3 when it made its second landfall), it’s a very wide and slow-moving storm, which makes it more damaging because it lingers longer, dumping more water.

In addition to the flooding and wind damage caused by Hurricane Isaac, the storm may come with additional consequences: How do Isaac, and other hurricanes like it, affect the economy?

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Hurricane Isaac’s Impact on the Stock Market

As we know, the stock market doesn’t move solely on news from companies about their earnings—investors are people, too. They (and we) make emotional decisions and try to premeditate how events will impact their portfolios.

Typically, a disaster like a hurricane or tsunami doesn’t cause a huge plunge in the market at first, but the aftermath can hurt a tourism industry, lead to job loss and require a huge cost for reconstruction. For example, even though Hurricane Katrina didn’t have a drastic impact on the stock market in the two months following the disaster, it may have cost the U.S. economy as much as $45.15 billion, and 400,000 jobs.

But, in the near term, Hurricane Isaac doesn’t seem to be having a dire impact on the stock market.

Hurricane Isaac’s Impact on Oil Prices

Before the hurricane, the cost of oil was up, at least partially because of U.S.-led sanctions on importing oil from Iran, intended to curb that country’s nuclear program. (Here’s more on the tensions with Iran that brought us to this point.) Iran is a leading oil producer, so that means less oil to go around. Although politicians initially hoped that Saudi Arabia would be able to supplement oil for the rest of the world to make up for the loss, that hasn’t quite happened, whether because Saudi Arabia can’t loosen up that many reserves, or doesn’t want to.

As a result, U.S. oil prices have skyrocketed, increasing 22% in just a few months, and consumers have been feeling it at the pump. That puts more pressure on the U.S.’s own oil operations, including those in the Gulf of Mexico region. That’s where Hurricane Isaac comes into play.

Counter-intuitively, the shutdown of refineries in the area (94% of Gulf oil product closed down in preparation for Isaac) actually lessens demand for crude oil, because refineries are where crude oil is processed and refined into other products like gas, diesel and kerosene, which are more directly useful. Paired with comments from the G-7 (an international group of finance ministers from seven industrialized nations) calling on oil-producing countries to increase their output, gas prices dropped 1.3% after Isaac made landfall in Louisiana.

Hurricane Isaac’s damage could have longer-lasting implications if the storm seriously damaged any of the infrastructure and if there will be a long delay in production, but for now, it looks like the hurricane wasn’t as destructive as some analysts feared. As long as the infrastructure is intact, refineries will work overtime in the wake of the hiatus to make up for lost time. As a result, the storm may not have a big long-term impact in the cost of oil.

Hurricane Isaac’s Impact on Real People

This is where the financial burden will almost certainly be the greatest. The unemployment rate in the Gulf Coast region is still over 8%, and running away from a storm is expensive: According to an article on CNN, the average family fleeing the hurricane will have to pay about $250-$300 a day to pay for food and alternate lodging. Although the levee system in the region is way stronger than when Katrina struck, there are still low-lying areas in Mississippi, Louisiana and Alabama that are unprotected by levees, and people living in those communities will have to bear the burden of reconstructing damaged homes and businesses.

As the CNN story points out, charitable giving is down because of the economy, meaning that social services through churches and community-based organizations may not be as well equipped to assist struggling populations. In other words, low-income populations in the region may be hit particularly hard because they have less of a safety net.

Damages will take a toll on uninsured property, and cause a loss for insurance companies covering property that was insured. In some cases, insurance companies paying out tons of money for damages can lead to higher insurance premiums for homeowners wishing to insure their property. That’s not to mention potential tourism dollars lost, which would otherwise bolster the local economy.

All in All …

Luckily, Hurricane Isaac looks like it will be manageable compared to other devastating natural disasters, but that’s not to downplay the impact that the storm will have on all the homes, businesses and lives in its path.

Our world today is more interconnected than ever, with events in one part of the world rippling in another. As with any natural disaster—or any significant current event, really—the effects are long-reaching, complicated and change many lives and livelihoods in its wide swath.

One thing we can learn? To protect ourselves. Whether dealing with Hurricane Isaac, a fire, theft, medical emergency, financial disaster or anything else, we're not just victims of fate. We can protect ourselves with insurance (we break down 13 types of insurance and which you need), and we can plan for the unexpected, whatever it is, by storing up a solid emergency fund--so we have a security blanket to fall back on.

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