The first place I went for an economic assessment of the impact of Hurricane Katrina was James Hamilton’s, because of his expertise in energy. I was not disappointed. For example, he wrote,

One of the questions I am almost always asked by reporters is, “will the price Americans pay at the pump go even higher?” My stock answer is, “I’m not sure.” But in the present circumstances, having just seen a 55 cent per gallon rise in the price of September gasoline futures, the question is a no-brainer– American consumers are in for a huge shock at the pump within a very short period.

And the next question I get asked is, “will that put the U.S. into a recession?” If it were just the consequences of the storm itself, my answer would have been, “probably not.” The reason is that I think most people would see this as a special event, tragic but thankfully short-lived. But this event did not arrive out of the blue. Instead, it came in an environment in which there was already considerable anxiety about gas prices and sound basis for worrying about a possible recession even if Katrina had done no harm.

Could this be enough to tip the whole economic cart over? I’m not certain that it will. But it would seem foolish to deny the very real possibility that it could.

I think that he has mis-spoken a bit here. Suppose that the hurricane reduces our annualized economic growth rate by three percentage points over three quarters. Suppose that this drops growth from a without-the-storm baseline of two percent to negative one percent. Then it will have caused a recession, to be sure. But the phrase “tip the whole economic cart over” is a bit strong, in my view.

I am rooting for very high gasoline prices–$5 or $6 a gallon. I believe that is what it will take to cause people to sharply curtail unnecessary use, which in turns is what will be needed to cope with the loss of refinery capacity. Once the infrastructure is rebuilt, then gas prices can and will come back down.

This is not the start of a long-term energy crisis. However, oil production capacity in the Gulf has been reduced, at least for a while. But the near-term issue, as James points out, is the loss of refining capacity. The price of crude oil may or may not spike, but the prices of refined products will certainly spike.