1. How did the flooding affect commodity markets? Describe, in detail, what happened to energy prices. Look at the markets for the following commodities: crude oil, unleaded gas, and natural gas. Does Ike constitute a supply or demand shock? Explain yourself clearly.
Hurricane Ike moved inland from the Atlantic Ocean in the second week of September 2008. The magnitude and scale of devastatation was not as great as that of Hurricane Katrina that preceded it, but it still caused a turmoil in the commodities markets. The Southeastern coastal regions of the United States were the worst affected during Hurricane Ike. Since most of the nation’s oil and gas refineries are located in this region, the supply-demand equillibrium was disturbed by the temporary shutdown of these industries. The state of Texas in particular, which is home to some of the biggest oil corporations in America, was badly affected during the hurricane. The off-shore oil drilling operations of these companies were also affected during the hurricane. As a result, the prices of various forms of energy, including crude oil, unleaded gas and natural gas shot up in the aftermath of Hurricane Ike. To take the example of gasoline, the price of one gallon shot up from $2.86 to $3.30 in a matter of days, due to the unexpected supply shock (www.msnbc.msn.com, 2008). The supply continued to be inadequate for some time to come. The only reason why the energy prices declined eventually was due to judicious and conservative use of energy by the consumers. But this dip in retail prices of energy was only short lived, as the crude oil prices across the world rose to unprecedented levels in the months to come.
2. Compare and contrast Hurricane Ike with the flooding caused by Hurricanes Katrina and Rita in Louisiana during 2005. Which markets were affected during the hurricanes? What were the effects?
The twin hurricanes of Gustav and Ike (which occurred within a week of each other) had caused as much turbulence in the energy markets as did Hurricane Katrina and Rita in 2005. Hurricane Katrina had devastated residential areas of cities and towns causing heavy human fatalities. Hurricane Ike’s destructive force, on the other hand, was largely confined to the production of various commodities in general and energy production in particular, due to the location of latter’s facilities in and around the Gulf Coast. Along with the energy prices, the cost of gold also rose during the period, due to an increase in demand. Needless to say, the agricultural output in the subsequent harvest was also badly affected, including that of corn. Insurance premiums went up as well, in tune with the increase in claims for damage. In the case of Hurricane Katrina, commodity prices rose across the board due to widescale looting and thieving that were the result of a law and order breakdown (www.timesonline.co.uk, 2008). The criticism directed at the Bush Administration’s handling of the crisis was thus two-fold: inept execution of relief measures and the inability to maintain civil order. Such situations did not repeat themselves during Hurricanes Ike, probably because the authorities were better prepared with the hindsight gained during Katrina.
3. Have the policies enacted for Katrina and Rita been successful? Explain.
One explanation for the relatively few human casualties during the Ike episode is that the disaster management policies enacted in the aftermath of Hurricane Katrina have proved adequate. One of the criticisms of the Bush Administration was that it did not take emergency action in evacuating the inhabitants of New Orleans before Katrina struck. In the fallout after Hurricane Katrina, the Bush Administration, in consultation with local authorities, set about redrawing disaster management plans. It is evident from the preparedness and communication displayed during Hurricane Ike that the redrawn plans have been successful. While there is still scope for improvement, the regular news updates and evacuation warnings in the hours leading up to Hurricane Ike, along with provisions for accomodating displaced people, underline this improvement. The relief programs enacted for those disadvantaged by Hurricane Ike were appreciated by the media and the general public alike for its timely execution. All these facts, strongly suggest that the policy changes enacted after the Katrina and Rita fiascoes have been successful. The key parameter for measuring its success is the relatively few human casualties reported during Hurricane Ike.
4. What (if any) government policy should be considered to assist the areas affected by Ike? Do you feel as if the government is promoting moral hazard by providing hurricane assistance to those who built along these shores? Or do you feel as if hurricanes are low probability events that no one can truly be prepared for?
There have been reports in the news media about the abuse and opportunistic exploitation of hurricane assistance provided after Ike struck. The U.S. Department of Housing and Urban Development set aside a substantial sum of money toward this end. In collaboration with FEMA, the government agency had garnered $110 million for this project. As the State Coordinating Officer for Texas, Joan Haun noted, “housing is our first priority… the most important thing is helping people devastated by Ike have a safe place to live while they plan their recovery and get their lives back on track. Safe housing during this rebuilding period is essential” (www.fema.gov, 2008). Under this program houses for rent were provided for the displaced people at nominal rates for a temporary period of time. But recent reports suggest that some people have taken advantage of the subsidy and are unreasonably extending their stay. Reports such as this, as well as the regularity with which hurricanes strike the Southeastern coast, should prompt the governing agencies to rethink their approach. Seen in this context, it is prudent to think of preventative measures as opposed to disaster management approaches. For example, a preventative program that purports to permanently move people to safer locales (possibly through providing housing incentives) would prove to be beneficial in the long run. Such an initiative would not only reduce human casualties in the future, but also reduce wastage of tax-payer money presently devoted to relief efforts and temporary shelters.
References:
By John W. Schoen, Hurricane Ike brings spike in gas prices: Storm expected to strike the heart of U.S. oil refining capacity, retrieved from msnbc.com <www.msnbc.msn.com/id/26676331>
Texas Ike Update: $110 Million In Disaster Assistance Approved, report released on October 3, 2008, retrieved from <http://www.fema.gov/news/newsrelease.fema?id=46060>
Hurricane Ike could be worse than Katrina for US, The Times, September 13, 2008, retrieved from <http://www.timesonline.co.uk/tol/news/world/article4742952.ece>