Now that the immediate danger has passed, we look at how companies with expatriates on the Gulf Coast can approach the complicated task of adjusting compensation packages to reflect life in the aftermath of Katrina.

Increased petroleum prices trigger renewed fears of inflation

On 29 August 2005, Hurricane Katrina scored a direct hit on the Gulf Coast of the United States.  In the following days, levees protecting New Orleans from the waters of Lake Ponchartrain broke, flooding the city.  Weeks after the storm, an estimated 100,000 homes have been damaged beyond repair in the city of New Orleans alone.

Among the 1.4 million people displaced by Katrina were hundreds of expatriates posted to the oil-rich Gulf of Mexico coast. 

Now that the immediate danger has passed, the question has started to turn toward adjusting compensation packages of these expatriates to reflect life on the Gulf Coast after Katrina.

Immediate ripple effect on other Gulf Coast cities

Like the evacuees from the Superdome in New Orleans, many expatriates in New Orleans also made their way to Houston, Texas. 

The move towards oil companies' headquarters offices in Houston, only a little more than four hours' drive from New Orleans, was a logical one.  Not only could families be quickly and safely relocated to the US's fourth largest city, but jobs could be relocated to corporate headquarters as well.

The impact was felt almost immediately on the accommodation market in Houston. 

According to published reports in the wake of the hurricane, over 100,000 hotel rooms in the greater Houston area were being occupied by families from Louisiana.  Apartments and houses were snatched up by companies in order to house families relocating from New Orleans.

With the immediate after-effects of the hurricane beginning to normalise, the business of measuring the lasting impact of the mass evacuation on rental markets such as Houston and Baton Rouge, Louisiana has begun.  Because of the extent of the devastation in New Orleans itself, it is far too early to contemplate measuring prices in the Crescent City.

We can expect that the spike in demand in both Houston and Baton Rouge will lead to increased rental prices in both cities.  Expatriates relocating to either city from outside the US can thus expect higher rents, increased waiting periods and longer commutes in their new location.

Moreover, there is a general scarcity of temporary accommodations such as business flats and hotel rooms - meaning increased costs to companies expatriating employees to these cities.

Rising fuel costs drive inflation

The effect of hurricanes Katrina and Rita had an immediate effect on the cities along the Gulf of Mexico.  However, the storms will have lasting effects on the US economy that will be felt in far flung expatriate centres such as New York, Chicago and Seattle.

Only weeks after Katrina hit the Gulf Coast, hurricane Rita delivered a follow up punch to the oil exploration and refining capacity of the US Gulf Coast.  As residents fled Rita's wrath, scenes developed which no one ever expected; filling stations ran out of gasoline in the cities at the heart of America's energy industry.

Damage from hurricanes Katrina and Rita resulted in the loss of almost 20 percent of the United States' oil refining capacity.  As a result, prices for regular gasoline in Houston rose to approximately USD 3.00 per gallon (EUR 0.66 per litre) at the beginning of September, up from just USD 1.95 (EUR 0.43 per litre) at the beginning of June.

Since that high, prices have stared to fall again, and are currently at USD 2.40 per gallon (EUR 0.50 per litre).  Nevertheless, the increased petroleum prices have sparked renewed fears of inflation among expatriates posted to the USA, where driving long distances is a matter of necessity, rather than one of choice.

The United States Consumer Price Index jumped to an annual inflation rate of 4.7 percent in September, fuelled primarily by a 17.4 percent increase in the cost of energy products relative to August.  Analysts worried about the knock-on effect of higher fuel prices, as deliveries of all goods and services are made more expensive for suppliers.

Beyond the Gulf Coast, assignees posted to cold-weather climates such as New York and Chicago will expect to see increased costs for home heating oil as the winter months approach.  The US Energy Information Association predicts a 31 percent increase in the prices of home heating oil in 2005 relative to 2004. 

Of course, for expatriate programmes, CPI figures and inflation measured by data providers vary for several reasons.  For example, inflation statistics published in the country of assignment are based on the average local national patterns of living and average local income levels - not those of business expatriates. CPI figures also include housing, utilities such as home heating oil and other items such as schooling, that are not included in the analysis which data providers use to arrive at the expatriate inflation.

Nevertheless, prices are going up, and with them, the number of emails from assignees complaining of eroding purchasing power.

The rebuilding begins

The evacuation of New Orleans followed an evacuation of hundreds of expatriates from oil rigs located in the Gulf of Mexico.  Almost 75 rigs and platforms operating in the Gulf of Mexico were damaged or destroyed in the two storms.  Refineries were heavily damaged and had to be taken off line.

With the price of oil hovering over USD 60 per barrel and demand in the US market high, oil companies cannot afford to leave refining and production capacity along the Gulf Coast in its current state. 

If the history of other hurricane-affected areas like Florida is a guide, the rebuilding will begin in earnest, and is, in fact, already underway.  Due to the highly specialised nature of the repair work to be done, we will likely see an increase in non-US-based talent brought into the region to get production back on its feet.

These expatriates will flood into a region where housing and international schooling is already at a premium.  IHR managers with expatriates in these areas can certainly expect to see more pressure on the expatriate infrastructure in Houston, Baton Rouge and other cities.

Even as these storms pass into memory, their effects on the US economy and the packages of expatriates on assignment there will linger for months and maybe years to come.

November 2005

John Pfeiffer is the Managing Director of Belgium-based consultancy AIRINC Europe SA/NV (www.air-inc.com). He can be reached by telephone at: +32 2 650 0970

Subject: expatriates on the Gulf Coast, the effect of Katrina on expat packages