Hurricane Katrina destroyed oil platforms in the Gulf
of Mexico and disrupted oil delivery and refining, which
caused gasoline and other petroleum product prices to increase
sharply. Natural gas production and pipeline distribution
were also disrupted.
In the week following Katrina’s landfall in late
August, the national average retail price of gasoline rose
by 18 percent and diesel fuel by 12 percent. As of October
10th, retail gasoline prices remained 9 percent higher
and diesel fuel prices were 22 percent above prices before
Katrina’s gulf landfall. Wholesale prices of nitrogen-based
fertilizer (produced using natural gas) were at record
levels prior to Katrina. Although post-Katrina Federal
data are not yet available, most analysts expect that these
prices have risen since.
ERS researchers can provide a perspective on the impacts
of such shocks, such as assessing the ramifications for
commodity markets, farm income, and food prices. For example,
before Katrina, fuel and oil prices had already increased
substantially during the year. Higher prices for gasoline
and diesel fuel increase farm production costs, which may,
in turn, affect farm income. Before Katrina, farm expenses
for fuels and oils were projected to reach $10.2 billion
in 2005, up from $8.2 billion in 2004 and $6.8 billion
in 2003. However, strong sales and other farm sector indicators
suggest that farm net income will not be significantly
reduced by higher energy costs in 2005.
Looking forward, any rise in farm production expenses
in 2006 will depend on the duration of price increases.
For every month that the cost of fuels and oils (but not
including fertilizer) remains 10 percent higher, farmers
incur additional expenses of about $85 million. Everything
else equal, sustained changes in prices for fuel, oil,
and natural gas may cause producers to re-think their cropping
patterns away from energy- and fertilizer-intensive crops,
such as cotton and corn.
Questions also arise about the effects of higher energy
costs on retail food prices, which are also forecast by
ERS. Because energy and energy-related costs represent
a relatively small share of the retail cost of food, higher
energy prices are expected to have only a small effect
on food prices.
Unforeseen events somehow seem more commonplace than
years ago, and the world seems more uncertain. These events
provide ERS researchers with the opportunity to re-think
their models and how they analyze forces shaping world
markets. For example, ERS has recently developed a stochastic
modeling framework that allows us to develop more accurate
estimates of economic outcomes (such as production and
prices) by taking into account random shocks. By better
incorporating unforeseen events and putting them in the
appropriate economic context, we’re in the best possible
position to provide policymakers with economic counsel.
Download
PDF version