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Hurricane Katrina leaves economic waves

WASHINGTON—Hurricane Katrina is sure to leave behind higher gasoline prices, strain the homebuilding sector and stretch insurers.

Crude oil prices leapt above $70 a barrel on the New York Mercantile Exchange Monday as trading started, driven up by Katrina fears. Prices retreated to close slightly above $67 after it appeared that Katrina's wallop, while devastating, wasn't the feared knockout.

Energy analysts fear oil supply disruptions will spark a jump in gasoline prices later this week. The first evidence came late Monday when Valero Energy Corp. of San Antonio, Texas, announced its St. Charles, La., refinery would be closed for at least a week. It processes 260,000 barrels of crude oil per day.

"Our St. Charles refinery manager reports that he estimates one-to-two weeks before our St. Charles refinery can start up again," spokeswoman Mary Rose Brown said in an e-mail update detailing structural damage and flooding. "More complex refineries like St. Charles would typically require 5-7 days."

The hurricane hit east of New Orleans, sparing a direct blow to one of the busiest seaports in the world. But barges and railroads heading to or from New Orleans and Mississippi ports such as Pascagoula and Gulfport ground to a halt.

Today's economy depends on just-in-time delivery of components ranging from tiny electronics to grains to huge steel beams. Among those suffering supply disruptions were inland steel manufacturers, Midwest grain farmers and retailers across the United States.

The Port of New Orleans is served by six major U.S. railroads, and trains were moved out of the area over the weekend. That disrupted transportation flows across the U.S. rail network. The Kansas City Southern and CSX halted port-related rail activity in Louisiana and Mississippi. Barges along the Mississippi River also were held out of service.

Katrina may bring unexpected consequences far from the Gulf region.

James Lee Witt, a former Federal Emergency Management Agency director, told Knight Ridder that housing reconstruction and repairs and the need for temporary housing could strain homebuilding supplies. That's likely to drive up national housing prices, which many experts fear may already be inflated, he said.

Michael Carliner, an economist with the National Association of Home Builders in Washington, D.C., said Katrina's cleanup efforts might drive up the nationwide cost of housing materials such as windows and plywood for roofing.

"If the supply were not already tight, then it would be less of a concern," he said. "Things are already tight for several products."

By the time Katrina made landfall, it was a Category Four hurricane, not the worst-case Category Five that had been feared, and that prompted a revision in preliminary damage estimates made by the insurance industry.

"It was looking pretty ominous. Although this is still a tragic event, it looks like it's not as ominous as we feared," said Thomas Larsen, senior vice president of Eqecat, Inc., an Oakland, Calif.-based risk modeler for the insurance industry.

Eqecat warned Sunday that damages could top $30 billion, but by Monday afternoon projected losses between $9 billion and $16 billion. That would replace last year's Hurricane Ivan, with claims above $10 billion, as the second worst hurricane for the insurance industry. The record still belongs to Hurricane Andrew, which tore through Florida in 1992 and led to nearly $21 billion in claims, when adjusted for inflation.

Energy analysts believe a risk remains for $70 a barrel oil later in the week. The Gulf Coast accounts for one-third of U.S. oil production and 46 percent of the nation's gasoline refining. Little was known late Monday about damage to pipelines, offshore oil platforms and other oil infrastructure.

"Everyone is on pins and needles to see what the depth of the damage is and what it means to supply," said Steve Bellino, an oil trader with Fimat in New York. He added, "If crude starts trading at $70 or $75 a barrel, it's going to crush the economy."

Royal Dutch Shell's Houston-based U.S. operations reported late Monday that two drilling rigs under contract to Shell had drifted off location during the storm. Katrina was a Category Five storm—the strongest possible—as it passed over many oil rigs and platforms on the Gulf of Mexico. The oil giant didn't expect damage estimates before Tuesday.

"A minimum number of staff will be deployed as soon as possible to reestablish power and communications systems and to regain control of the drifting oil rigs," the company said in a statement.

Federal authorities Monday said that more than 75 percent of manned oil platforms and 72 percent of oil rigs were evacuated. That brought to a halt about 92 percent of the oil production in the Gulf, which exceeds 1.3 million barrels per day. Offshore oil platforms in the Gulf account for about a third of U.S. oil production.

Global oil prices climbed in recent months on fears that strong global demand has left the world with little spare production capacity.

"It's everything we didn't want and more," Peter Beutel, an independent oil analyst at Cameron Hanover in New Canaan, Conn., said after Katrina's landfall.

The Louisiana Offshore Oil Port, the largest oil import terminal in the United States, closed Sunday ahead of Katrina. That halted the import of 1 million barrels a day of crude oil—10 percent of U.S. oil imports.

At least eight Gulf Coast refineries were believed in Katrina's path. They collectively process at least 1.3 million barrels of crude oil a day, making everything from motor gasoline to jet fuel to asphalt.

In its statement, Valero welcomed word that the Bush administration might lend refiners crude oil from the Strategic Petroleum Reserve to make an expected shortfall.

"This gives us confidence that we will have the crude we need when our St. Charles refinery is ready to start up again," spokeswoman Brown said in a statement.

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(Knight Ridder Newspapers correspondent Seth Borenstein contributed to this report).

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(c) 2005, Knight Ridder/Tribune Information Services.

GRAPHIC (from KRT Graphics, 202-383-6064): 20050829 KATRINA oil

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