January 1, 2009
Hurricanes Katrina and Rita caused severe economic disruptions without warning in Louisiana and surrounding areas. These natural disasters temporarily created production losses in the oil-industry and lead to further economic losses via inter-industry linkages. Because oil is a key resource in the national economy, estimation of the economic impacts of these disasters can be accomplished with a supply-driven input-output (IO) model. However, a common limitation of IO models is over-estimation of total impacts when applied beyond the immediate short term because of the linear and fixed nature of IO coefficients. But economic agents respond to price changes. The price changes in response to capacity losses are reflected in price elasticities. Therefore, by constructing a new supply-driven model using price elasticities of demand for oil refinery products, that is, a price-sensitive supply-driven model, this study analyzes the national economic impacts of the disrupted oil-industry after Hurricanes Katrina and Rita. The price-sensitive supply-driven model is an expansion of supply-driven IO studies. This study is, probably, the first empirical application of a price-sensitive supply-driven model for the U.S.