Analysis: Katrina's Cloudy Economic Picture

Solution providers will feel the impact on both the revenue side and the cost side. The main effect will be higher energy prices that could soar through the fall and winter. The Gulf of Mexico region is a major hub for the production, refining and distribution of oil and natural gas, and the damage to these facilities could take weeks to repair.

With market conditions for oil and gas tight as a drum, prices for gasoline, heating oil and natural gas have already leaped as storm damage is being assessed, and they are likely to rise more as the winter heating season approaches. Retail price increases of 20 percent to 40 percent--or more--by next spring are not out of the question. A colder-than-average winter in the northern tier of states would only aggravate this situation.

Higher energy costs will have a direct impact on the amount of money businesses have to spend on IT, which for solution providers would mean slower revenue growth.

In addition, as energy prices rise, the overall inflation rate could climb as well. This almost certainly would lead the Federal Reserve to raise interest rates to higher levels than economists and business leaders had expected (in the absence of the hurricane) as a way to keep inflationary pressures in hand. Higher interest rates would boost the cost of borrowing and the cost of floating interest rate debt for solution providers and other businesses, creating another drain on profits.

Moreover, if consumers see their purchasing power being sapped by ever-higher energy costs, they could decide to limit their spending in other areas, which would have a negative effect on overall economic growth. Given the close relationship between economic growth and business capital spending, this could be yet another factor working against the growth of solution provider revenue.

Could businesses increase the prices of the goods and services they produce to compensate for higher energy and interest rate costs? To a degree, but competition from imported products would likely limit the extent to which prices could be raised.

Also, could solution providers raise the prices of their own products and services? That depends on the individual company. Solution providers have other weapons at their command to boost sales, such as technical expertise and deep customer knowledge. However, given the circumstances outlined above, VARs will more than ever need to demonstrate the cost-effectiveness of technology solutions to their business customers to keep up sales growth.

Standard and Poor's estimated that damage from Hurricane Katrina could climb to as much as $50 billion, once damage to infrastructure such as roads and bridges is taken into account. That's more than double the initial damage estimate of $17 billion to $25 billion by AIR Worldwide. In addition, the storm has shut down 92 percent of Gulf oil production and 83 percent of Gulf natural gas production, according to U.S. government data. The Gulf region accounts for about 25 percent of total U.S. oil production.

And we aren't out of the woods yet, since the hurricane season has a long way to go, running through the end of November. Should another hurricane develop, enter the Gulf of Mexico and pass over oil and gas production facilities, the scenario outlined above would only get worse.

JOHN ROBERTS is director of editorial research at CRN.