Gulf Coast was the U.S. Achilles Heel


A Canadian dollar at 87 U.S. cents as a result of the terrible devastation in the Gulf region of the United States? That's where we could be headed, according to the chief currency strategist of Citigroup Inc., Steven Saywell.

As Hurricane Katrina drives up oil and natural gas prices, Canada is expected to gain significant export revenues, making our dollar a petro-currency. Canada is the largest supplier of oil and natural gas to the United States; our refineries will be under pressure to increase gasoline and aviation fuel exports as well.

Indeed, it is becoming increasingly clear that while the region of Louisiana, Mississippi and Alabama represents only about 3 per cent of the U.S. economy, the devastation there will have economic consequences that reach around the world.

In oil and gas markets, Hurricane Katrina may turn out to be the straw that broke the camel's back. Even before this event, which has hit hard U.S. oil and gas production facilities and refining in the Gulf, global oil markets were tense, with a precariously narrow gap between supply and demand that left little room for supply interruptions.

Now we have a serious supply interruption that can only be partly offset by releasing oil from the U.S. strategic reserve because about 10 per cent of U.S. oil refining capacity has been hit by Hurricane Katrina. No new oil refining capacity has been built in the United States since the 1970s, despite huge oil industry profits. So a loss of U.S. refining capacity has always been a risk for the United States.

But the ramifications go far beyond oil and gas prices. Hurricane Katrina is expected to cut U.S. economic growth in the third and fourth quarters this year, and perhaps next year as well. This is a new factor the Bank of Canada, next Wednesday, and the U.S. Federal Reserve, on Sept. 20, will have to consider when they hold their next meetings on interest rates.

While New Orleans is a long way from Canada, it is also a critical part of the North American logistics and supply system, and it could be out of operation for some time. The Mississippi River has been called the aorta of the American economy and New Orleans its entry point. Now that key port could be out of action for months.

The insurance industry is expecting claims of up to $20 billion (U.S.). That is just manageable, but it will lead to higher premiums certainly in coastal areas and could mean increases generally. This doesn't include flooding claims, since private insurers won't cover flooding. A U.S. government agency provides this insurance and about 1.3 billion businesses and homes in the Gulf region are covered.

The entire region is now a serious health disaster area. Hurricane Katrina has created a vast toxic pool of water, with heavy metals, oil and chemicals, along with industrial waste, human feces and the decayed remains of humans and animals that will eventually be flushed out to the Gulf of Mexico. There it could linger for a decade.

"There is not enough money in the gross national product of the United States to dispose of the amount of hazardous material in the area," said Hugh Kaufman, a senior analyst at the U.S. Environmental Protection Agency.

But the hurricane also raises key issues of U.S. priorities. In his bid to deliver huge tax benefits to wealthy Americans and, through the energy bill, to oil companies already reeling in vast profits, U.S. President George W. Bush has been cutting back on spending proposals to meet urgent public needs.

One example has been the well-documented need for better flood protection in the Gulf. But the Bush administration's most recent budget proposal cut back on that spending, and the Republican Congress was going along with this budget-slashing.

The grossly mismanaged U.S. response to Hurricane Katrina in the first few days will also raise questions. The United States was terribly unprepared for a storm it knew was coming, and painfully slow to respond once it hit.

Bush left his ranch ? but to attend Republican fund-raising events, not to make the hurricane his top priority.

We won't know the full consequences of Hurricane Katrina for some time. But already we know that we have to change many of the things we do. A place to start is to get rid of gas-guzzling vehicles, which is why we should not lower gasoline taxes despite higher pump prices.