from Follow the Money

Those Louisiana ports, once again

September 5, 2005

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They truly are of fundamental importance to the US economy - particularly the agricultural economy of the Midwest.  George Friedman of Statfor asks a good question?  How effectively can a port function without a city to house, feed and shelter its workers?

The oil fields, pipelines and ports required a skilled workforce in order to operate. That workforce requires homes. They require stores to buy food and other supplies. Hospitals and doctors. Schools for their children. In other words, in order to operate the facilities critical to the United States, you need a workforce to do it -- and that workforce is gone. Unlike in other disasters, that workforce cannot return to the region because they have no place to live. New Orleans is gone, and the metropolitan area surrounding New Orleans is either gone or so badly damaged that it will not be inhabitable for a long time.

Read the full Starfor report.  Southern Louisiana produces oil and gas offshore, refines crude, both local and imported, and then ships that gasoline inland.  Think of it as the inward flow of energy.   It also handles a very large share of the outward flow of the Mississippi river basin's agricultural bounty.   There are always alternatives, but I don't think there are good alternatives in either of these two areas.

That is why I found the both today's Wall Street Journal story on the "Economy's resilience" and the Washington Post's "Katrina and the economy" editorial "Disaster Economics" to be somewhat incomplete. 

The Journal story focused on the economy's flexibility and capacity for adaptation, the Post story focused on the boost likely to come from rebuilding.  But both tended to gloss over the possibility that New Orleans (and Southern Louisiana) might be home to some critical - and in many ways "almost impossible to replace" nodes of the US economy.  Refining capacity for one.  The least damaged refineries are now coming back online, but some refineries will be out for a while.   In the short-run, refined product can be imported, but that - obviously - costs a lot more.    Grain transportation infrastructure is another.   There really is no alternative to the Mississippi.  The real question is how quickly the key infrastructure can be repaired - and how much it will cost to store the grain harvest if the ports are not running at capacity in time. 

I thought both Buttonwood and the team over at Morgan Stanley did a better job of assessing the impact, recognizing the flexibility and potential resilience of the US economy while also underscoring that there are also some potential choke points (refining!) that will in the short-run at least push the price of refined petrol up and limit the United States' capacity to ship out some bulk commodities.

The economic impact of Katrina can be divided into the cost of rebuilding, the cost of feeding, housing and caring for the people displaced from their homes and jobs by Katrina, and the cost of the disruption of the energy and bulk commodity supply infrastructure.

Rebuilding has its own dynamic - as the value of the buildings and infrastructure lost does not count in the GDP data while the activity generated by rebuilding does.   The Washington Post oped focused on this aspect of the economics of natural disasters, ending with the standard conclusion: "The truth is that natural disasters disrupt economies surprisingly little."

However, the loss of the economic activity of an entire city, however, is something new.   The economic impact of Katrina should not be exagerrated, but neither should it be minimized.  Listen to the New Yorker's Nicholas Lemann.

A big American city has never before been entirely emptied of people, and had most of its housing rendered useless, and had all its basic systems fail at once. While the city is being cleared and drained and given an infrastructure, there will be no economic activity there at all. That will be the case for weeks (remember how devastating just a few days of inactivity in just a few industries and neighborhoods was after September 11th), so how will people live? How many will wait until they can move back and repossess their ruined homes and pray for the restoration of their jobs? Over the years, New Orleans has moved from being a top-ranked port toward becoming an economically optional city. Traditionally, it has had the kind of developing economy that runs on plantation agriculture, mineral extraction, and an intentionally impoverished, unempowered, and uneducated populace; its transformation into a tourist mecca was a form of going to ground, and it means that the city will be especially difficult to re-start. Every convention can always be held somewhere else.

Of course, the impact on the national economy is different from the impact on the New Orleans economy.  Rebuilding elsewhere (say Houston) is still rebuilding. 

However, I don't think New Orleans has become quite as "economically optional" as Lemann suggests.  The tourist and convention trade can move elsewhere.   Some goods can go to other ports.   But the mouth of the Mississippi also has certain intrinsic geographical advantages that are hard for other ports to match.   George Friedman puts it well:

Rather, it was geography -- the extraordinary system of rivers that flowed through the Midwest and allowed them to ship their surplus to the rest of the world. All of the rivers flowed into one -- the Mississippi -- and the Mississippi flowed to the ports in and around one city: New Orleans. It was in New Orleans that the barges from upstream were unloaded and their cargos stored, sold and reloaded on ocean-going vessels. Until last Sunday, New Orleans was, in many ways, the pivot of the American economy.

The ports of South Louisiana and New Orleans, which run north and south of the city, are as important today as at any point during the history of the republic. On its own merit, the Port of South Louisiana is the largest port in the United States by tonnage and the fifth-largest in the world. It exports more than 52 million tons a year, of which more than half are agricultural products -- corn, soybeans and so on. A larger proportion of U.S. agriculture flows out of the port. Almost as much cargo, nearly 57 million tons, comes in through the port -- including not only crude oil, but chemicals and fertilizers, coal, concrete and so on.

A simple way to think about the New Orleans port complex is that it is where the bulk commodities of agriculture go out to the world and the bulk commodities of industrialism come in. ... . If these facilities are gone, more than the price of goods shifts: The very physical structure of the global economy would have to be reshaped. Consider the impact to the U.S. auto industry if steel doesn't come up the river, or the effect on global food supplies if U.S. corn and soybeans don't get to the markets.

The problem is that there are no good shipping alternatives. River transport is cheap, and most of the commodities we are discussing have low value-to-weight ratios. The U.S. transport system was built on the assumption that these commodities would travel to and from New Orleans by barge, where they would be loaded on ships or offloaded. Apart from port capacity elsewhere in the United States, there aren't enough trucks or rail cars to handle the long-distance hauling of these enormous quantities -- assuming for the moment that the economics could be managed, which they can't be.

A city will rise up again in Southern Louisiana; it just may be a smaller city, one shorn of the tourist trade and entirely based around the hard work of a bulk port and servicing the region's energy infrastructure.

The basic economic case for a city at the mouth of the Mississippi is why, now that most have been evacuated from New Orleans, attention is increasingly focused on the impact of the hurricane related disruption in the key energy and transportation infrastructure around New Orleans.   For now, the key disruption stems from the loss of offshore oil and gas production and the loss on onshore refining capacity.   Some of those losses can be made up (temporarily) from stockpiles - US stocks of crude, European stocks of refined petrol.  But obviously, the longer the basic infrastructure is down, the bigger the impact -- and not just on the US market.

The same is true with infrastructure handling the outward flow of bulk commodities from the Midwest.  The longer it is out, the bigger the potential disruption.  Current estimates suggest the Port of New Orleans will be out for three to six weeks.   I have not found an estimate for the Port of South Louisiana.  According to the Los Angeles Times, the ports may not operate at full capacity until early in 2006 ... .

Clearly, workers can be brought in and housed in temporary shelters, and if you pay people enough, generally you can find the workforce you need.   Think Halliburton and Iraq.   So the ports will get back online.   And US grain can be stored elsewhere and stockpiled until the ports are back on line.   There are always options.  But they all increase the cost of getting the grain harvest out and on the world market. 

One final note.  Congress is already talking about helping out Midwestern farmers should they take a hit from the loss of the port ...  there is a very strong case for increasing the federal deficit to manage the one-off spending associated with reconstruction.   But the Post oped page is right to note that not every group impacted by the Hurricane should have an equal claim to federal help, or as strong as case as they think ...

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