EconSouth (Fourth Quarter 2005)

Louisiana Struggles to Rebuild in Storms’ Aftermath

Rarely does a single state, especially one that makes up only 1.5 percent of the nation’s population, drive national events. Unfortunately, this development did occur in 2005 when Hurricanes Katrina and Rita struck Louisiana. The hurricanes disrupted the flow of oil and natural gas from the state’s offshore facilities in the Gulf of Mexico, which produce a disproportionate share of the nation’s supply of these resources. The storms further damaged petroleum refineries, natural gas processing plants, and onshore pipelines in the area. Short-term gasoline shortages and price increases were felt throughout the country, and natural gas prices have remained elevated. Additionally, damage and delays at Louisiana’s ports at least temporarily affected import and export activity (see “Katrina’s Effects Ripple Through Region’s Ports”).

Photo courtesy of the Port of New Orleans

Locally, the hurricanes extensively damaged infrastructure, residential housing, and business establishments. The impact on housing in and around New Orleans was devastating. According to the Red Cross, some 283,000 dwellings were destroyed by direct damage from Katrina and subsequent flooding. In addition, almost 74,000 dwellings suffered major structural damage. Because of the hurricane, the state experienced a 12 percent drop in employment in September, and more than 300,000 individuals have received state and federal unemployment assistance benefits. The overwhelming majority of the job losses were concentrated in the New Orleans area, taking employment back to levels not seen since the early 1970s and eroding three decades of job growth.

The employment declines are widespread across all industries, and in October most were still significantly lagging behind prestorm and year-ago levels. A few industries, though, have seen employment levels increase in the wake of the storm (see chart 1). The mining industry, for instance, has been restoring damaged platforms, rigs, and pipelines, thus adding jobs. Employment service payrolls are up over the past year, and demand for temporary employees during the cleanup and recovery period is likely to increase.

The long-term impact of the hurricanes is quite uncertain. The tourism and convention industry is moving ahead with repair and rebuilding. The sharp declines in employment in most industries suggests, however, that the bigger issue for New Orleans’ and Louisiana’s recovery is whether businesses and workers will return after the initial cleanup phase.

Chart 1
Louisiana Employment Momentum by Industry
Note: This chart compares short-term and long-term employment growth to provide an overall picture of the state’s employment momentum by industry. The size of each circle is in proportion to that industry’s share of total employment in the state.
Source: Bureau of Labor Statistics data provided by Haver Analytics.

Rebuilding will boost real estate and construction
The population of Baton Rouge, the state’s capital, swelled by an estimated 250,000 in the weeks following Hurricane Katrina, making it the largest city in Louisiana. This rapid population influx dramatically increased housing demand in the area. Real estate agents reported that September sales were up 150 percent and house prices rose an average of 32 percent. Residential construction will likely be extremely strong in 2006 as new construction and repairs get under way. But uncertainty surrounding potential changes in the building codes, the large backlog for building permits, and a shortage of workers are impeding the rebuilding process, as evidenced by the lagging levels of employment in the construction industry.

According to the U.S. Bureau of Labor Statistics, there were almost 19,000 business establishments in the most severely affected areas of Louisiana. Many of these firms have relocated to surrounding areas, including cities as far away as Houston and Mobile. There is concern that some firms will be reluctant to return to New Orleans, especially given the shortage of housing for employees. However, most analysts anticipate that commercial construction activity will be very strong in the coming year even though the industry will also face delays similar to those in the residential markets.

Tourism hopes to regain workers
The leisure and hospitality industry in New Orleans, which normally draws more than 10 million visitors who spend more than $5 billion a year, took a crippling blow from Hurricane Katrina. Fortunately, the famed French Quarter escaped the worst of Hurricane Katrina’s damage, and many of the tourist attractions that were damaged have either reopened or have announced reopening dates. The severely damaged New Orleans’ Morial Convention Center, one of the nation’s largest meeting facilities, has partially reopened and has its first major convention scheduled for late May. Restaurants and accommodations are reopening almost daily, and plans are already in place for a scaled-down New Orleans’ Mardi Gras celebration in late February. Harrah’s Casino—the largest casino in New Orleans, which employed approximately 2,500 workers before the storm—has announced ambitious plans to reopen in time for Mardi Gras. The Audubon Zoo has already reopened, and the Audubon Aquarium of the Americas is expected to reopen in June.

Oil and Natural Gas Prices in 2005
Source: Wall Street Journal

Although many analysts expect a relatively quick resurgence for the tourism industry in New Orleans, a major concern is that the housing shortage may make it difficult to attract a large enough workforce to sustain the recovery. Prior to Katrina, New Orleans employed over 85,000 workers in the leisure and hospitality industry, and many of these workers have found employment elsewhere. The revival of the industry will depend, at least in the near term, on the availability of trained workers.

Energy infrastructure remains afloat
During the first half of 2005, Louisiana’s oil and gas industry continued to make repairs from Hurricane Ivan in 2004 while enjoying strengthening demand and rising prices. Hurricanes Dennis and Emily in July 2005 brought only minimal production disruptions in the Gulf of Mexico, but Hurricanes Katrina and Rita resulted in a loss, as of mid-December, of 18.6 percent of the Gulf’s annual oil production and 14.4 percent of its natural gas production. These numbers represent 5.1 percent of the nation’s annual crude oil production and 2.7 percent of its annual natural gas production. And production levels in both industries are still below pre-Katrina levels. While the increased level of oil imports and the release of strategic reserves helped hold down the price of crude oil, those avenues are not available for the natural gas industry. Thus, the price of natural gas remains well above pre-Katrina levels (see chart 2).

In addition, hurricanes Katrina and Rita had a significant impact on Gulf Coast refineries and gasoline pipelines. Over 20 percent of U.S. refining capacity was shut down as refineries lost electrical power and suffered water and wind damage in the wake of the storms. Power outages also temporarily crippled the Colonial and Plantation pipelines, which deliver gasoline to the eastern portion of the United States. Roughly 5 percent of total U.S. refinery capacity remained off-line at the end of November.

Hurricane Rita delivered a hard blow to western Louisiana, causing additional damage onshore, particularly to natural gas processing plants. The Henry Hub, the intersection of 13 natural gas pipelines that move approximately 2 billion cubic feet of natural gas to market each day, was shut down for two weeks because of flooding, contributing to uncertainty surrounding the natural gas supply.

Pipelines in Louisiana suffered significant damage from both Hurricanes Katrina and Rita.

Despite these setbacks, the outlook remains positive for the oil and gas industry in the Gulf Coast area. Strong oil and gas prices have encouraged the industry to repair or replace assets in the Gulf of Mexico, and new deepwater production facilities continue to be announced. The national focus on disruptions to oil and gas supplies have revived interest in new exploration, expanding petroleum refining capacity, and providing new ports for liquid natural gas imports.

Manufacturing faces challenges in 2006
Although Louisiana’s manufacturing sector is relatively small, employing only about 8 percent of the state’s workers, it represents a substantial share of the nation’s chemical and shipbuilding industries.

Louisiana’s chemical companies, which employed almost 23,000 workers in August, account for more than 20 percent of all North American production of ethylene and its derivative products. Most of these plants, which produce ingredients for everything from pharmaceuticals to toilet tissue, sustained minimal direct storm damage. Production was temporarily disrupted after the storms because of shortages of inputs and damage to the transportation infrastructure. The new year will provide additional challenges if higher input prices push some producers to relocate to cheaper facilities overseas.

Shipbuilding is another large industry in the state, employing approximately 16,000 workers. New Orleans–area shipyards, which were already facing declining demand, suffered considerable damage from Hurricane Katrina that has caused production delays. However, demand for boats to service the offshore oil and gas production facilities should be strong, hopefully providing a boost for the industry in 2006.