U.S. Will Tap SPR; Some Wholesale Fuel Rationing Begins

U.S. Will Tap SPR; Some Wholesale Fuel Rationing Begins

Future economic historians may look back on Hurricane Katrina as the start of the 2006-07 recession.

This hurricane may prove to be so disruptive that it tips the US economy over into a major correction of equity markets and regional housing bubbles.

10% of US refinery capacity is in areas affected by the storm. Ports have been damaged. Oil rigs have been damaged. Highways have been damaged.

That means that farmers may have to spend more getting their crops to market, i.e., sending them by more expensive rail links rather than barge. That puts more upward pressure on fuel prices.

Granted, there will be a rebuilding boom in construction, but for right now, there will be a lot of people without jobs.

My guess is that the net effect of this will be higher fuel prices, regional shortages. At least one major airline will go out of business permanently or be purchased by asset strippers. Domestic car manufacturers will see an absolutely dismal fourth quarter, the result of "Employee Pricing" flushing the fall buyers out early as well as the results of having put most of their eggs in the truck/SUV basket. The new hybrid pickups that generate their own 110V power should sell like hotcakes as the reconstruction of the South takes off.

Expect layoffs in the airline industry, auto manufacturing (and those who supply them). As the regional real estate bubbles collapse, expect layoffs in this industry, as well as sharply increased foreclosure as speculators get caught having bought at the top of the bubble.

As people's paper wealth deflates, they will be more conservative regarding their spending, and Christmas 2005 should be disappointing for retailers. Watch for Wal-Mart to significantly miss earnings forecasts.

As earnings decline, watch for the equity market to turn bearish. Money may start flowing into bonds as the Treasury Department has to unload increasing quantities of debt to finance the ever-increasing budget deficit. That means a lot of people with variable rate mortgages are in for some painful surprises. Watch for gold to go up, up, up.

What does this mean for our industry? Well, if you're a manufacturer, be prepared for canceled orders. If you're an owner operator, look for that fuel cost to gobble a bigger chunk of your gross. In general, however, people are still going to need to move cars around. There may just be fewer cars to move around for a little while. It's not really the end of the world, but it could be the beginning of the next recession.