Air Canada

Northern Phoenix

By JONATHAN R. LAING

WITH JET-FUEL PRICES SOARING and many major North American airlines flirting with or mired in bankruptcy, few industries seem to have prospects so ugly.

Yet a few hardy souls, such as Sandy Prater of the hedge fund Ridgecrest Partners, have taken a flier in Ace Aviation Holdings, the reorganized holding company of flag carrier Air Canada. Says Prater: "The push-back I'm getting from Wall Street types for going into Air Canada is unbelievable, but there's an interesting fundamental story there that most people ignore because of their hatred of the industry."

Indeed, the company, whose shares have just begun trading in Toronto under the ticker symbol ACE, bears little resemblance to its beleaguered U.S. rivals. In fact, Air Canada completed the Canadian version of a Chapter 11 bankruptcy last fall and has emerged with dramatically lower costs as a result of union givebacks and debt forgiveness as well as renegotiated leases and vendor contracts. It's also prospering from a pickup in travel in North America and the recent demise of a low-cost domestic rival. Finally, it's in the early stages of a financial restructuring aimed at boosting value by selling stakes in non-core operations to the public.

Ben Cherniavsky of Raymond James in Vancouver estimates that Ace will earn 3.05 Canadian dollars a share this year and C$3.60 next year (excluding one-time items). The stock recently traded around C$36 a share, up sharply from the C$24 or so it fetched when it emerged from bankruptcy. Yet based on his sum-of-the-parts analysis, Cherniavsky has a six-to-12-month price target of C$48. Genuity Capital Markets, a Toronto investment-banking concern, sees it hitting C$54 in the same span.

The bankruptcy reorganization let Air Canada chop nearly C$2 billion in annual costs, a hefty amount for a company expected to generate slightly more than C$9 billion in revenue this year. About half the savings will come from new contracts reached with its sometimes fractious labor unions, according to Merrill Lynch analyst Michael Linenberg. These contracts will buy at least a modicum of peace until their expiration in 2009. True, wages will be subject to some revision next year, but any impasse would be subject to compulsory mediation. but productivity-enhancing work-rule changes are non-negotiable, and strikes and lockouts are forbidden.

The airline completed the Canadian version of a Chapter 11 bankruptcy last fall and has emerged with dramatically lower costs as a result of union givebacks, debt forgiveness and negotiated leases and vendor contracts.

Debt reduction and renegotiation of operating leases on equipment have lopped Air Canada's net debt obligations from around C$15 billion to under C$5 billion, according to Linenberg.

Air Canada now has a 45% share of international passenger traffic in and out of Canada, as a result of certain restrictions on foreign carriers. This high-margin business chips in about 40% of the company's revenue. The carrier's international business is also getting a boost from foreign travelers transiting through Canada rather than the U.S. to points overseas, thus avoiding the need for an American visa.

March saw the demise of the Canadian discount airline Jetsgo, which had mounted fare wars that made life miserable for both Air Canada and its primary, low-cost domestic rival, WestJet. Now the two effectively have a lucrative duopoly. They've boosted fares sharply and even imposed fuel surcharges without losing passengers.

THE BOTTOM LINE Shares of Air Canada's parent, Ace Aviation, could rise more than 30% in a year. But given the industry's penchant for disaster, they're more suitable for speculation than investment.

The restructured Air Canada, with 55% of the Canadian domestic market, is holding its own against WestJet, with a 27% share, because it has shifted much of its domestic passenger traffic to Jazz, its wholly owned regional carrier. That helped Air Canada generate a 7.2% operating margin in the second quarter, 1.5 percentage points better than WestJet's.

As a result of the bankruptcy reorganization, the U.S. private-equity firm Cerberus Partners has three seats on the ACE board and a 7.7% stake in the company, through convertible preferred stock. It certainly will encourage the company to unlock value.

A few months ago, Air Canada sold the public a 14.4% stake in its Aeroplan air-mile loyalty program, which boasts more than six million members and a number of blue-chip credit-card-issuer partners. Based on Aeroplan's current stock price, Air Canada's remaining holding in that company is worth some $2.3 billion.

The carrier recently announced plans for a similar spinoff of its Jazz operation and is likely to do an IPO of its highly successful maintenance, repair and overhaul unit, Air Canada Technical Services. ACTS, as it's known, already gets some 30% of its revenue from outsourcing agreements with carriers including JetBlue, Lufthansa and Delta.

That total is expected to jump as a result of a C$95 million investment Air Canada plans to make for 7% of the carrier that will be formed by the expected merger of US Airways and American West. In return, ACTS will likely receive C$1.5 billion in maintenance and overhaul work from the new carrier over the next five years -- if its bids are competitive, as is likely.

According to Raymond James' Cherniavsky, the enterprise values (actual or implied stock-market value plus net debt) of Aeroplan, ACTS and Jazz account for around half of ACE's current enterprise value of C$10.5 billion. But he thinks the mainline airline's enterprise value should be C$6.7 billion rather than the current implied total of C$5.2 billion. To reach that level, Ace Holdings shares would have to hit C$51.

Of course, lots can go wrong -- and has -- in the airline business. Jet-fuel prices could keep rising, or a major terrorist incident could cripple passenger demand. Thus, Ace Holdings shares probably are more suitable for speculation than investment. But betting men -- and women -- should be amply rewarded.

 

Mayor C. Ray Nagin's Interview

Mayor C. Ray Nagin lashed out at federal officials, telling a local radio station "they don't have a clue what's going on down here." The following is a transcript of the interview with WWL-AM.
Listen to the mp3

MAYOR RAY NAGIN: I told him we had an incredible crisis here and that his flying over in Air Force One does not do it justice. And that I have been all around this city, and I am very frustrated because we are not able to marshal resources and we're outmanned in just about every respect.

You know the reason why the looters got out of control? Because we had most of our resources saving people, thousands of people that were stuck in attics, man, old ladies. ... You pull off the doggone ventilator vent and you look down there and they're standing in there in water up to their freaking necks.

And they don't have a clue what's going on down here. They flew down here one time two days after the doggone event was over with TV cameras, AP reporters, all kind of goddamn -- excuse my French everybody in America, but I am pissed.

WWL: Did you say to the president of the United States, "I need the military in here"?

NAGIN: I said, "I need everything."

Now, I will tell you this -- and I give the president some credit on this -- he sent one John Wayne dude down here that can get some stuff done, and his name is [Lt.] Gen. [Russel] Honore.

And he came off the doggone chopper, and he started cussing and people started moving. And he's getting some stuff done.

They ought to give that guy -- if they don't want to give it to me, give him full authority to get the job done, and we can save some people.

WWL: What do you need right now to get control of this situation?

NAGIN: I need reinforcements, I need troops, man. I need 500 buses, man. We ain't talking about -- you know, one of the briefings we had, they were talking about getting public school bus drivers to come down here and bus people out here.

I'm like, "You got to be kidding me. This is a national disaster. Get every doggone Greyhound bus line in the country and get their asses moving to New Orleans."

That's -- they're thinking small, man. And this is a major, major, major deal. And I can't emphasize it enough, man. This is crazy.

I've got 15,000 to 20,000 people over at the convention center. It's bursting at the seams. The poor people in Plaquemines Parish. ... We don't have anything, and we're sharing with our brothers in Plaquemines Parish.

It's awful down here, man.

WWL: Do you believe that the president is seeing this, holding a news conference on it but can't do anything until [Louisiana Gov.] Kathleen Blanco requested him to do it? And do you know whether or not she has made that request?

NAGIN: I have no idea what they're doing. But I will tell you this: You know, God is looking down on all this, and if they are not doing everything in their power to save people, they are going to pay the price. Because every day that we delay, people are dying and they're dying by the hundreds, I'm willing to bet you.

We're getting reports and calls that are breaking my heart, from people saying, "I've been in my attic. I can't take it anymore. The water is up to my neck. I don't think I can hold out." And that's happening as we speak.

You know what really upsets me, Garland? We told everybody the importance of the 17th Street Canal issue. We said, "Please, please take care of this. We don't care what you do. Figure it out."

WWL: Who'd you say that to?

NAGIN: Everybody: the governor, Homeland Security, FEMA. You name it, we said it.

And they allowed that pumping station next to Pumping Station 6 to go under water. Our sewage and water board people ... stayed there and endangered their lives.

And what happened when that pumping station went down, the water started flowing again in the city, and it starting getting to levels that probably killed more people.

In addition to that, we had water flowing through the pipes in the city. That's a power station over there.

So there's no water flowing anywhere on the east bank of Orleans Parish. So our critical water supply was destroyed because of lack of action.

WWL: Why couldn't they drop the 3,000-pound sandbags or the containers that they were talking about earlier? Was it an engineering feat that just couldn't be done?

NAGIN: They said it was some pulleys that they had to manufacture. But, you know, in a state of emergency, man, you are creative, you figure out ways to get stuff done.

Then they told me that they went overnight, and they built 17 concrete structures and they had the pulleys on them and they were going to drop them.

I flew over that thing yesterday, and it's in the same shape that it was after the storm hit. There is nothing happening. And they're feeding the public a line of bull and they're spinning, and people are dying down here.

WWL: If some of the public called and they're right, that there's a law that the president, that the federal government can't do anything without local or state requests, would you request martial law?

NAGIN: I've already called for martial law in the city of New Orleans. We did that a few days ago.

WWL: Did the governor do that, too? NAGIN: I don't know. I don't think so.

But we called for martial law when we realized that the looting was getting out of control. And we redirected all of our police officers back to patrolling the streets. They were dead-tired from saving people, but they worked all night because we thought this thing was going to blow wide open last night. And so we redirected all of our resources, and we hold it under check.

I'm not sure if we can do that another night with the current resources.

And I am telling you right now: They're showing all these reports of people looting and doing all that weird stuff, and they are doing that, but people are desperate and they're trying to find food and water, the majority of them.

Now you got some knuckleheads out there, and they are taking advantage of this lawless -- this situation where, you know, we can't really control it, and they're doing some awful, awful things. But that's a small majority of the people. Most people are looking to try and survive.

And one of the things people -- nobody's talked about this. Drugs flowed in and out of New Orleans and the surrounding metropolitan area so freely it was scary to me, and that's why we were having the escalation in murders. People don't want to talk about this, but I'm going to talk about it.

You have drug addicts that are now walking around this city looking for a fix, and that's the reason why they were breaking in hospitals and drugstores. They're looking for something to take the edge off of their jones, if you will.

And right now, they don't have anything to take the edge off. And they've probably found guns. So what you're seeing is drug-starving crazy addicts, drug addicts, that are wrecking havoc. And we don't have the manpower to adequately deal with it. We can only target certain sections of the city and form a perimeter around them and hope to God that we're not overrun.

WWL: Well, you and I must be in the minority. Because apparently there's a section of our citizenry out there that thinks because of a law that says the federal government can't come in unless requested by the proper people, that everything that's going on to this point has been done as good as it can possibly be.

NAGIN: Really?

WWL: I know you don't feel that way.

NAGIN: Well, did the tsunami victims request? Did it go through a formal process to request?

You know, did the Iraqi people request that we go in there? Did they ask us to go in there? What is more important?

And I'll tell you, man, I'm probably going get in a whole bunch of trouble. I'm probably going to get in so much trouble it ain't even funny. You probably won't even want to deal with me after this interview is over.

WWL: You and I will be in the funny place together.

NAGIN: But we authorized $8 billion to go to Iraq lickety-quick. After 9/11, we gave the president unprecedented powers lickety-quick to take care of New York and other places.

Now, you mean to tell me that a place where most of your oil is coming through, a place that is so unique when you mention New Orleans anywhere around the world, everybody's eyes light up -- you mean to tell me that a place where you probably have thousands of people that have died and thousands more that are dying every day, that we can't figure out a way to authorize the resources that we need? Come on, man.

You know, I'm not one of those drug addicts. I am thinking very clearly.

And I don't know whose problem it is. I don't know whether it's the governor's problem. I don't know whether it's the president's problem, but somebody needs to get their ass on a plane and sit down, the two of them, and figure this out right now.

WWL: What can we do here?

NAGIN: Keep talking about it.

WWL: We'll do that. What else can we do?

NAGIN: Organize people to write letters and make calls to their congressmen, to the president, to the governor. Flood their doggone offices with requests to do something. This is ridiculous.

I don't want to see anybody do anymore goddamn press conferences. Put a moratorium on press conferences. Don't do another press conference until the resources are in this city. And then come down to this city and stand with us when there are military trucks and troops that we can't even count.

Don't tell me 40,000 people are coming here. They're not here. It's too doggone late. Now get off your asses and do something, and let's fix the biggest goddamn crisis in the history of this country.

WWL: I'll say it right now, you're the only politician that's called and called for arms like this. And if -- whatever it takes, the governor, president -- whatever law precedent it takes, whatever it takes, I bet that the people listening to you are on your side.

NAGIN: Well, I hope so, Garland. I am just -- I'm at the point now where it don't matter. People are dying. They don't have homes. They don't have jobs. The city of New Orleans will never be the same in this time.

WWL: We're both pretty speechless here.

NAGIN: Yeah, I don't know what to say. I got to go.

Disaster Zone: New Orleans

HURRICANE KATRINA

DOW JONES REPRINTS This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool at the bottom of any article or visit: www.djreprints.com. • See a sample reprint in PDF format. • Order a reprint of this article now. WALL STREET JOURNAL VIDEO • President Bush comments31 on the hurricane-relief effort, urging Americans not to buy gasoline if they don't have to. 9/01   • CNBC's Scott Cohn reports on the situation live from New Orleans32. 9/01   • FDIC Chairman33 Donald Powell says bankers will be "very receptive" to extending credit to those with legitimate needs. 9/01   • The White House's plan to tap the SPR34 and what can be done to lower gas prices.       DAMAGE REPORT The effects of Hurricane Katrina at a glance. Last updated: 5 p.m. EDT Thursday   Louisiana:   -- Deaths: Mayor says the hurricane probably killed thousands in New Orleans. Relief crews put aside the counting of bodies to concentrate on rescuing the living, many trapped on rooftops and in attics.   -- Estimated 80% of New Orleans under water, up to 20 feet deep in places. Engineers struggle to plug two breached levees along Lake Pontchartrain.   -- Authorities plan to clear out the tens of thousands of people left in the Big Easy and all but abandon the city.   -- Sections of Interstate 10, only major freeway leading into New Orleans from the east, destroyed.   Mississippi:   -- Deaths: At least 126.   -- More than 236,000 customers without power, utilities said.   -- Hundreds of waterfront homes, businesses, community landmarks and condominiums obliterated.   -- Casinos built on barges along the coast damaged or destroyed, some floated across beach onto land. Dozen casinos employed about 14,000 people, generated $2.7 billion in annual revenue.   -- More than 1,600 Mississippi National Guardsmen activated.   -- Major bridges damaged in three coastal counties, including those linking Biloxi with Ocean Springs and the connection to Bay St. Louis.   Alabama:   -- Deaths: Two.   -- About 325,000 homes and businesses without power.   -- Flooding reached 11 feet in Mobile, matching record set in 1917, according to National Weather Service. Water up to roofs of cars in downtown Mobile and bayou communities. Piers ransacked and grand homes flooded along Eastern Shore of Mobile Bay.   -- Major bridge over the Mobile River partially reopened; it was struck by oil drilling platform that floated away from a shipyard.   Georgia:   -- Deaths: Two as tornadoes leveled dozens of buildings in several counties. Multiple injuries.   -- Power restored to all but a few customers in extreme north Georgia.   Florida:   -- Deaths: 11.   -- Some 80,700 customers without power.   Washington, D.C.:   -- Federal Emergency Management Agency sent medical teams, rescue squads and groups prepared to supply food and water into disaster areas.   -- Navy sent four ships to the Gulf Coast with water, other supplies.   --Associated Press Disaster Zone Amid Chaos, Louisiana Calls for Help In New Orleans, Thousands Still Wait for Rescue, But Aid Comes Slowly Administration Cites Its Steps By JOHN D. MCKINNON and YOCHI DREAZEN in Washington and EVELINA SHMUKLER in Gulfport, Miss. Staff Reporters of THE WALL STREET JOURNAL September 2, 2005 5:41 a.m. Amid signs of a deepening human catastrophe in New Orleans and the continued inability of authorities to bring relief to devastated parts of three states, the governor of Louisiana called for a military force of 40,000 troops to help the effort. Federal officials vowed to do whatever it took to relieve the crisis, but help was coming slowly and sometimes not at all. While federal officials enumerated steps to exert control over the situation, wrenching scenes of disarray, suffering and desperation played out on television screens across the country. Frantic hurricane refugees marooned in downtown New Orleans scrounged for food near dead bodies, while lawlessness foiled attempts to empty the wrecked city of the tens of thousands who remained. Rain deepened the misery and complicated repairs to dam a canal where flood waters ruptured a levee and inundated the city. 1 Tired of waiting for help, New Orleans residents walked in search of an evacuation staging area on Interstate 10 in Metarie, west of the city. Michael Brown, director of the Federal Emergency Management Agency, defended the response so far. "We continue to meet the needs as communicated to us through the state," he said. "I think everyone in the country needs to take a big collective breath." But a chorus of critics assailed the handling of the tragedy. "FEMA has been here three days, yet there is no command and control. We can send massive amounts of aid to tsunami victims, but we can't bail out the city of New Orleans," said Terry Ebbert, homeland-security chief in New Orleans, according to the Associated Press. Mr. Ebbert, a city employee, called the federal effort "a national disgrace." Louisiana Gov. Kathleen Blanco, who had repeatedly thanked President Bush in a news conference Wednesday, said she has now asked the White House to send more people to help with evacuations so National Guard soldiers can focus on stopping looters. "I've actually asked for uniformed troops of any sort," she said yesterday, adding that she had been promised "as many troops as we need for as long as we need." (A post-Civil War law restricts federal military participation in law enforcement2.) The Louisiana governor said a body count still hadn't begun, but "we believe there will be thousands." In Mississippi, the official death toll rose to at least 126. 3 • Updated photos4 | Graphics: Hotspots5 | New Orleans Map6   • Prioritizing: If you had to flee your home, what would you take? Join the discussion.7   • Question of the Day: How would you grade the federal government's handling of the hurricane so far?8   • Katrina Wire: Latest Updates9   • Damage Pushes U.S. Closer to Energy Crisis10   • Vast Toll of Dead and Missing Sinks In11   • Damage Could Cause Lasting Problem for Vital River12   • See complete coverage13.   An estimated 20% of New Orleans's 485,000 residents stayed in the city when Hurricane Katrina struck Monday with 145 mph winds. By yesterday, it was clear the burden of rescuing, feeding and sheltering evacuees -- while keeping the sick and injured alive and protecting emergency workers safe from roving gangs -- was more than authorities could handle. New Orleans Mayor Ray Nagin described a chaotic situation at the city's Convention Center. Like the Superdome, it has become a place of refuge for thousands, while drawing little attention until yesterday. Mayor Nagin described the situation at the Convention Center as a "desperate SOS," according to a statement read by CNN. The local health-care system teetered near collapse, with overburdened hospitals preparing to shut down as quickly as possible. Tenet Healthcare Corp. said its 203-bed Meadowcrest hospital in Gretna, La., would be evacuated because of safety concerns. A group of "armed bandits" tried to hijack a supply truck on the way there, said Harry Anderson, senior vice president at the Dallas company. U.S. Homeland Security Secretary Michael Chertoff said, "This is without a doubt still a very, very dangerous situation on the ground." At an afternoon news conference, he confirmed that a National Guardsman at the Superdome had received a non-life-threatening gunshot wound to the leg. He said the shooter had been arrested. Fire and police agencies in the disaster zone continued to face extensive communications problems owing to downed antennas and equipment breakdowns. The communications centers of the Slidell, La., police and fire departments, on the north shore of Lake Pontchartrain, weren't functioning at all, said Willis Carter of the Shreveport Fire Department, who reached officials in the disaster zone by phone and email. Dire Conditions Conditions also appeared increasingly dire in other areas blasted by the storm. With so many refugees congregating in Baton Rouge, tensions escalated as locals battled with refugees for everything from space on the road to cash from the ATMs to gas at the filling stations. Traffic became a snarl, with tens of thousands of additional cars on the roads as evacuees and refugees sought government services, went to buy food and new clothing or hunted for temporary housing. VIDEO REPORT Watch an Associated Press report on the worsening situation in New Orleans Thursday. Windows Media: HIGH14 | LOW15 (Player required16) RealPlayer: HIGH17 | LOW18 (Player required19) The images of the growing suffering -- concentrated among poor, black residents -- threatened to pose a political problem for Mr. Bush. He plans an air and ground tour of several of the stricken areas today, but planned to limit his appearances in New Orleans to the airport. White House officials said they were being mindful of possible disruptions to the precarious relief efforts, but security concerns could be a factor, too. White House spokesman Scott McClellan denied that the federal government had failed to plan adequately and dismissed criticism as finger-pointing. "Assets were pre-positioned," he said, adding: "This storm is of an unprecedented nature. It's one of the worst, if not the worst, natural disasters in our nation's history." He noted that Mr. Bush had issued disaster declarations even before Katrina struck to help speed the flow of aid once the storm passed. (See full text of Mr. McClellan's comments20.) But Mr. Bush acknowledged on ABC's "Good Morning America" that officials hadn't counted on the main source of the continuing problems in New Orleans: the levee breaches that caused much of the city to flood. "I don't think anyone anticipated the breach of the levees," he said. "Now we're having to deal with it, and will." At midafternoon, Mr. Bush made another brief appearance with his father, the former president, and former President Clinton, who agreed to raise money for charities, even as Congress prepared to convene on an emergency basis to pass a supplemental spending bill requested by the administration. It was expected to include $10 billion for FEMA and $500 million for defense operations. The request for FEMA was based on estimates the agency is spending as much as $500 million a day and would be out of money this weekend without action. (See full text of Bush's speech.21) EMERGENCY MEASURES • Buses take first 3,000 of Superdome refugees to Houston's Astrodome   • Texas offers to house 25,000 people in San Antonio   • Pentagon sends hospital ship, other vessels toward area   • Bush prepares $10.5 billion aid request, will tour area today   • Funeral homes use refrigerated trucks to store bodies    • Louisiana Gov. Kathleen Blanco requests 40,000 troops   Officials said throughout the day that a series of massive problems and conflicting needs prevented them from getting more relief supplies delivered faster. Most notably, they clearly hadn't planned for the twin disasters of both a hurricane and a levee break in New Orleans, despite warnings over the years. That combination quickly overwhelmed whatever efforts had been made to pre-position emergency supplies. And when the flooding began, the most urgent priority quickly became using available soldiers and military helicopters to rescue trapped survivors, rather than to shuttle in supplies. Then the devastation of the area's infrastructure emerged as a large obstacle: Local officials had trouble communicating their needs because phone and radio service was spotty. The initial focus for troops was to clear and reopen clogged airports and railroads so there would be a staging area for bringing in supplies by helicopter or train. Subsequently, according to the Associated Press, attempts to land helicopters at the Convention Center were hampered by rushing crowds, forcing rescue officials to toss supplies from 10 feet off the ground. Thousands of New Orleans residents gather at an evacuation area. Rumors surged through Baton Rouge yesterday morning that evacuees in the Baton Rouge River Center, an arena, were rioting, prompting frantic calls from people elsewhere trying to check on friends in Baton Rouge or children attending the city's Louisiana State University. Though no rioting erupted, all nonessential employees in a government building next to the River Center were sent home. In Gulfport, Miss., more than 400 people stood in line at a grocery-store parking lot yesterday, some for three hours, as part of the first large-scale distribution of ice and water in the city since the storm. People shouted at one another not to cut in line, physically blocking latecomers from joining others closer to the front. Detective Charles Bodie of the Gulfport Police Department patrolled the line with his rifle raised, shouting for order. "He's fixin' to shoot us all," said Dishekey Cummings, 30 years old. Amid the rising criticism and tension, the Bush administration took pains to convey a sympathetic tone while rattling off the range and magnitude of relief efforts. For instance, the military moved to sharply ratchet up its contributions as it sought to rebut criticism that it was moving too slowly. Military commanders said they would put 30,000 National Guard troops on duty in storm-battered states to help search for survivors and control the looting reported in numerous cities, with at least 24,000 to be on the ground in Louisiana and Mississippi by the weekend. Many of the troops will be sent directly to New Orleans, with 4,200 military police to arrive in the next three days, said National Guard Commander Lt. Gen. Steven Blum. The reservists will effectively quadruple the number of police officers in the city. Still, the Navy hospital ship USNS Comfort, while headed for the region, remained moored in Baltimore and won't arrive until next week at the earliest. Various smaller naval vessels are on the way, but they lack the medical resources of the 1,000-bed Comfort. Naval officials declined to say why the Comfort hadn't been pre-positioned in the region, but said it was being sent there unusually fast. The ship normally keeps minimal supplies and a skeletal crew of 76 aboard and is meant to be ready for deployment five days after an activation order. The Comfort wasn't formally activated until Wednesday, meaning the Navy has been scrambling to load it with extra medical supplies and a full complement of approximately 350 engineers and medical personnel. The ship is scheduled to pick up more supplies and crew in Florida before reaching the Gulf Coast. Command Center The Navy said the USS Harry S Truman was on its way to the Gulf Coast to serve as a command center for relief efforts, along with smaller, specialized vessels like the dock-loading USS Whidbey Island and the amphibious assault ship USS Bataan. The Marine Corps said it would send at least eight helicopters, while the Air Force said it would put advanced surveillance aircraft to work photographing the area to help look for survivors and map relief efforts. The Department of Health and Human Services announced that it was accelerating the opening of 40 emergency medical shelters. But only one was open as of yesterday morning and it was in Baton Rouge, about 80 miles from New Orleans. Ten more were likely to be open within three days, the agency said, and another 10 four days after that. A man lays his head on a shopping cart across from the Superdome in New Orleans. The Department of Transportation said it had dispatched nearly 800 trucks that would move 6.7 million military Meals Ready to Eat. The department ticked off some of the other relief supplies the trucks would move in: 18.4 million liters of water, 20,960 tarps, 3.4 million pounds of ice, 10 mobile homes, 249 generators, 135,000 blankets, 13,000 cots. The DOT also said it had dispatched a team of 70 transportation experts to help state and local officials assess damage to highways, railroads, airports, transit systems, ports and pipelines. White House Budget Director Joshua Bolten told reporters the $10.5 billion emergency budget request represents a "stopgap" measure to ensure that enough money is available for the next two weeks, until a fuller cost assessment can be made. He declined to speculate on the total cost of the recovery until floodwaters are pumped from the city. Another funding request could come once the administration can make a better assessment of needs. Senate Majority Leader Bill Frist of Tennessee House Speaker Dennis Hastert of Illinois, both Republicans, said they had agreed Congress would "pass the emergency supplemental by unanimous consent so we can move quickly, and time will not be spent waiting to reconvene our members," scheduled to return next week. The House will take up the measure this afternoon and under an agreement ratified by Senate leaders, it is expected to go directly to Mr. Bush for his signature. Mr. Chertoff estimated that "hundreds of thousands of people" have been dislocated. Alphonso Jackson, secretary of the Department of Housing and Urban Development, said temporary shelters would be needed for at least four weeks and likely longer. Federal agencies have identified 322 shelters in eight states, including Reunion Arena in Dallas and the Houston Astrodome. Late last night in Houston, with about 12,000 people inside the Astrodome, fire marshals announced they would refuse additional refugees, citing crowded conditions at the stadium. Medical personnel also issued a call for volunteers, saying the clinic was overwhelmed with patients. Officials halted buses from unloading passengers for an hour, looking to re-route the passengers elsewhere. But the decision was reversed at about 1 a.m. Friday after a caravan of 30 more buses arrived, carrying another 1,700 people from stricken areas. Officials scrambled to find additional space at the adjacent Reliant Center. Mr. Jackson said he spent yesterday talking with governors and county executives who are starting to step forward with plans for more permanent housing once an assessment can be done in New Orleans and elsewhere. The situation across ravaged communities stretching for some 90,000 square miles grew increasingly dismal. In a low-income section of southwest New Orleans, men without shirts and shoes and groups of kids walked into looted stores picking over the remains. "We don't have water, we don't have gas. I've got nine children," said Deon Ricard, 37, tears streaming down her face as the rain started to fall in her neighborhood. "We're all sitting out on the corner waiting for someone to help us." New Orleans residents rescued by police boats walk from floodwaters in front of the Superdome. Heeding the advice of law-enforcement officials, BellSouth Corp. on Wednesday evacuated an office that houses important equipment for phone service throughout Louisiana as well as communications in other states. The workers were nervous because they'd seen people they feared were looters assembling in flooded streets outside the downtown office. With state police as their escort, about 60 employees filed past the people and got onto buses heading outside the city, with some setting up shop in Baton Rouge. The building wasn't looted, and yesterday morning a skeleton crew of BellSouth employees returned to man the switches and generators and other equipment, which was essentially left on autopilot overnight. Civil disorder and the lack of food, water, fuel and other basic necessities appeared to be spreading farther inland in Mississippi. Phyllis and Robert Brack had evacuated about 100 miles inland to Hattiesburg, Miss., after their home in Bay St. Louis on the Gulf Coast was destroyed. But Ms. Brack said the situation in Hattiesburg was "deteriorating" and they were preparing to go a relative's house in Texas once he brought them more gas. Ms. Brack said they saw a man's truck stolen in broad daylight as he went into a store for food. Gunshots ran out during the night and a nearby hospital was being evacuated. "We are scared to stay," she said. Water and ice reached some distressed residents along the Mississippi coast, but the lack of communication and gas shortages continued to plague the relief effort. Army National Guard troops in Gulfport distributed supplies from 10 tractor-trailer rigs in the parking lot of a shopping center. An initial attempt Wednesday led to pushing and shoving as hundreds of residents rushed the trucks on foot and no police were there. "They started the distribution without notifying us, so it was a madhouse," said Gulfport Police Sgt. Brian Smith. "The Guard is doing the best they can." Yesterday, at one location, police provided order and barred people from getting supplies on foot. There, only people in cars were allowed in, and more than 200 cars formed a line snaking onto a local highway. This process, however, frustrated many residents, some of whom were nearly out of gas. Dispatched to Mississippi Willie Caston, 57, who drove one of the trucks to Gulfport as part of the FEMA relief effort, said he wasn't dispatched to Mississippi until late Tuesday. He and many other truck drivers loaded with critical supplies spent three days in West Palm Beach, Fla., near where Hurricane Katrina made its first landfall last week. "I think we should have been here a whole lot sooner," Mr. Caston said. "People here need water and ice." VIDEO REPORT Watch an Associated Press report on the devastation in Mississippi. Windows Media: HIGH22 | LOW23 (Player required24) RealPlayer: HIGH25 | LOW26 (Player required27) Rescue crews from neighboring states showing up along the hardest-hit areas of the Mississippi coast were finding a widespread breakdown in communications among emergency personnel. "We're rolling into an area that has absolutely no communications in place," said Barry Luke, division chief of the Fire Rescue Department of Orange County, Fla., which sent about 65 people to the area. In some rural regions, Orange County crews have been the first rescue personnel to show up. "There isn't anyone to go up to and say, 'We're here,' " he said. In Pascagoula, an Orange County team found three seriously injured people and loaded them into an ambulance, only to realize they had no way to figure out the location of the closest hospital. The Army Corps of Engineers said work had begun to close a drainage canal leading to Lake Pontchartrain, in an attempt to seal off New Orleans from the lake as a prelude to draining the water that poured in when parts of levees failed. At the 17th Street Canal, which was breached, engineers began driving in sheets of metal about 50 feet by five feet to create a makeshift metal wall and close off the canal. Efforts were hampered by a moderate rain that made it hard for cranes to grip the sheets of metal, but an engineer said he expected the work to be finished early today. Contractors also hauled in rock to build a ramp so crews could reach the actual breach to repair it. Helicopters were seen continuing to dump giant sandbags on the breach, despite earlier accounts from officials who said the sandbag effort had been abandoned. Repair of another breach, on the London Avenue canal, which also feeds into the lake, was hampered by a lack of access. One engineer said crews were digging up asphalt from a nearby roadway and dumping it on that breach. No one could put a firm cost on the temporary repairs. "We're doing everything humanly possible to stop the flow of water," said Lt. Gen. Carl Strock, chief of engineers for the Corps of Engineers. "It's going to cost what it's going to cost." --Kris Hudson and Aaron Lucchetti in New Orleans, Gary McWilliams in Houston, David Rogers and Michael Schroeder in Washington, and Ann Carrns in Atlanta contributed to this article. Write to John D. McKinnon at john.mckinnon@wsj.com28, Yochi Dreazen at yochi.dreazen@wsj.com29 and Evelina Shmukler at evelina.shmukler@dowjones.com30 URL for this article: http://online.wsj.com/article/0,,SB112564607550630116,00.html

Many Speculators on High Oil Prices Bailed Too Soon

Many Speculators
On High Oil Prices
Bailed Too Soon

By PETER A. MCKAY and HENNY SENDER
Staff Reporters of THE WALL STREET JOURNAL
September 2, 2005; Page C1

Hurricane Katrina struck just as Wall Street's latest bout of bullishness on energy prices was waning, with some speculators having recently exited from trades that would have been profitable and at least some booking losses, according to government data and interviews with money managers.

Plenty of big-money investors have spent much of this year betting on the trajectory of the price of oil and other power sources -- and often getting it wrong, which is why relatively few speculators were in the energy markets when Katrina came ashore.

"The traders who fought the tape capitulated well before the storm," says the head of oil trading at one investment bank.

While the general sentiment regarding energy was still bullish, it was less so than before. Evidence of that can be seen in weekly data from the Commodity Futures Trading Commission that tracks the activity of energy-markets speculators and funds. In the week ended Aug. 23, these traders reduced their net holdings of bullish, exchange-traded contracts for delivery of crude oil by about 60%, heating oil by 15% and gasoline by nearly 5%, the data show. Traders also said that some market players who were betting on continued price increases before Katrina were waiting for another spike so that they could book profits, a typical strategy in late-summer markets, where trading volumes normally drop and trading becomes more difficult.

With the energy markets now being driven more by fundamental analysis than by the twin forces of speculation and momentum, many traders remain on the sidelines.

"Quite a few hedge funds took positions off because of the potential volatility and uncertainty," says Jonathan Taylor, head of commodities sales for Barclays Capital in New York. Given the increased volatility after the hurricane, traders are paying higher initial amounts on margin trades, Mr, Taylor adds.

However, the rally in oil futures and other energy products -- up as much as 25% since the storm -- suggests that some of the same players have rushed back in as buyers, analysts say. Likewise, the majority of hedge funds and trading desks that bet on oil in less direct ways -- for instance, by buying shares in oil-producing companies -- seem to have been emboldened all over again by the catastrophe.

"Katrina is a catalyst to accelerate what had been our market view coming into the year," says David P. Prokupek, chief executive of Geronimo Partners, a hedge fund and money-management firm. "To me, the hurricane is just one of the many factors that will keep energy prices moving higher for some time."

Although gasoline, natural gas and heating oil are all trading busily in the aftermath of the storm, the price of oil continues to be a catalyst for all other energy products, including lesser-known investments such as contracts based on freight transportation.

"Everyone is trying to figure out how much demand destruction there will be," says Thomas Leaver of RAB Commodity/Energy Fund in London, using a term of art that describes the point at which energy prices climb so high that consumers cut back their purchases. "This is all new territory. Nobody knows what the intrinsic value of oil is."

Indeed, there are other signs that the summer doldrums departed early because of Katrina-induced trading.

The Chicago Mercantile Exchange recorded its busiest day ever Wednesday, with total trading volume of nearly 10 million contracts. That news, in turn, boosted shares of the CME, which lists futures on stock indexes and interest rates. And the Chicago Board of Trade, where Treasury bond futures trade, reported record electronic volume Wednesday of almost four million contracts. While energy products don't trade at either of these exchanges, dealings there reflected bets on the direction of the economy, including the Katrina effect and whether the Federal Reserve will slow the pace of interest-rate increases to help consumers facing higher energy prices.

Mr. Prokupek says his firm, which handles about $500 million in client money, had been holding its energy weighting steady before Katrina, around 12%. But since the storm, Geronimo has ratcheted that up to 15% by buying shares in diversified energy companies such as BP PLC and Exxon Mobil Corp., as well as exchange-traded funds that represent ownership in baskets of energy stocks.

For him to become bearish on energy, Mr. Prokupek says, crude prices will have to dip below $45 a barrel -- a level that hasn't been hit since early February and that would represent a decline of around 35% from current levels near $70 on the New York Mercantile Exchange.

Some hedge funds have engaged in so-called relative-value trades in which they owned refined products -- where the squeeze on supplies has been especially sharp -- while adopting bearish positions on crude oil itself. Others going into the hurricane owned short-term contracts on both oil and gas but had bearish bets on longer-dated contracts, with a view that prices would decline in coming months. Many preferred to trade in options that gave them the right but not the obligation to buy or sell in coming months.

Analysts say it is too early to know whether any hedge funds had massive losses. One risk: In volatile markets, players whose trades have gone wrong may be reluctant to close out positions and take the losses, and will instead roll over those losing bets or even double them.

Meanwhile, the spillover of the volatility in energy markets continued to spook other markets. Metals companies were hit by fears that spiraling energy costs and slower economic growth would erode profits, while others argued that rebuilding would feed demand, particularly for copper. Those twin fears also put downward pressure on heavily indebted companies and the dollar.

And, of course, traders are debating bets on whether the refinery outages -- more than 10% of the country's refining gets done in the Gulf -- will create a crunch that will drive retail gasoline prices to the point that consumers cut back their demand.

Forecasters this week have theorized about $4 or even $5 a gallon as the price point at which consumers might finally hit their limit. People who actually make bets on the market have been less likely to endorse such a view -- but not because they see it as too bullish.

"No one really knows what the elasticity of demand is for crude or gas -- it's never really been tested," said one executive at a small hedge fund.

Write to Peter A. McKay at peter.mckay@wsj.com¹ and Henny Sender at henny.sender@wsj.com²

Slate on The Constant Gardener

Mr. Fiennes, I Presume?
In The Constant Gardener, Ralph Fiennes clams ups and goes to Africa.
By David Edelstein
Posted Tuesday, Aug. 30, 2005, at 2:08 PM PT

The anger that builds when you read John le Carré's novel The Constant Gardener is rooted in the term "proper channels." As in: "Be a good chap and go through the proper channels." Or: "There are proper channels for this sort of thing, old boy." How often le Carré must have heard that phrase in his time in the service. How often we all hear it, even outside the realm of diplomacy. It isn't long before you realize that "the proper channels" are the ones full of strategic blockages and diversionary tributaries. To find other ways to the source, you have to be something of a gardener.

The protagonist of Fernando Meirelles' film of The Constant Gardener (Focus Features) is Justin Quayle (Ralph Fiennes), an apolitical, midlevel British career diplomat posted in Africa—a mild, plodding fellow, evidently happiest when he's digging in the dirt in back of his house. He has to dig in a different way when the body of his wife, Tessa (Rachel Weisz)—a strident, rich-girl political activist who was an odd match for him to begin with—turns up mutilated in a dry North Kenyan lake bed. Justin knows that Tessa was going on about the fact that African men, women, and children were dying by the thousands for reasons that had less to do with malnutrition and infection than with … what? It had something to do with the multinational pharmaceutical companies—"Big Pharma"—but he doesn't remember the particulars. It wasn't really any of his business.

This is among le Carré's least twisty plots. The suspense isn't in whodunnit and why: What's happening is clear from the outset. It's in whether Justin has the wiles and the tenacity and the guts to dig through the cover-up in the face of friends, colleagues, and superiors telling him—as they told his wife—to go through the proper channels. In his case, those channels are the only ones he has ever known.

Is Fiennes miscast? Perhaps. He's a high-strung, somewhat clammy actor—not the first to spring to mind for this warmly self-effacing plodder. But he's remarkably fine. As Quayle retraces the steps of his wife and her colleague, a Kenyan doctor named Bluhm (Herbert Koundé) who has disappeared amid hints that he was both Tessa's lover and killer, Fiennes shows Quayle's self-protective mask beginning to melt under the vicious African sun. Jittery and disoriented, Quayle has nothing in this world to hold on to.

The Brazilian Meirelles (City of God) was not the obvious choice to direct The Constant Gardener—thank heaven. He's no Anglophile, and he doesn't seem drawn to the paneled studies and old-boys' clubs in which much of le Carré's work takes place. He plunges us into the maelstrom of African poverty, starvation, and disease—of raw-sewage-saturated shantytowns and clinics overrun with dying mothers and children. He has an Impressionist's palette: The emotion in the latter part of the film is in the funereal purple clouds against the stark white skies and the reds that leap out of the overbaked landscapes; in the swervy, streaky camera; and in the way the frame seems to expand or contract according to the characters' anxieties.

There's more of Tessa in the movie than in the book, and Meirelles and the screenwriter, Jeffrey Caine, keep their syntax swervy, too. They weave in and out of Quayle's memories—dredging up moments of revelation, as when he stood cringing while Tessa posed rude questions to high English and Kenyan muckety-mucks, or when she confronted him about his true loyalties.

Le Carré and the filmmakers make their own loyalties plain. They were working from documented cases in which Big Pharma conducted drug trials on the populations of developing nations. But how far up the ladder does the conspiracy go? Are the coldly formal diplomats and ministers willfully oblivious, or are they in bed with the rapacious capitalists who threaten them over rounds of golf while their African caddies watch impassively?

Danny Huston (John's son) is effectively squirmy as Quayle's friend and colleague Sandy—one of le Carré's familiar bureaucratic vacillators. But is the awkwardness in the character or the actor? The bogus English accent muddies the issue. The other actors playing members of the British High Command are perfect, among them Bill Nighy as a conscienceless minister—the exact opposite of the tender, halting bureaucrat he played in the recent HBO political drama The Girl in the Cafe (which was kind of a simplified, nonviolent version of The Constant Gardener).

Of course, if you'd like a summer vacation from all the conspiracy theories floating around (from Judith Miller's role in Plamegate to Tom DeLay's support for the sweatshop/sexshop paradise Saipan under the direction of Jack Abramoff), don't see The Constant Gardener. It's too infuriating and invigorating: It might inspire you to haul out those garden spades and get digging.

David Edelstein is Slate's film critic. You can read his reviews in "Reel Time" and in "Movies." He can be contacted at slatemovies@slate.com.

Article URL: http://slate.msn.com/id/2125293/

WSJ review of Constant Gardener

A Tale of Global Bad Guys,
'Constant Gardener' Putters,
But It Doesn't Dig Deep

Taut 'Memory of a Killer' Delivers
Subtle, Sophisticated Thrills;
A Fun-Filled 'Crimen Perfecto'

By JIM FUSILLI
September 2, 2005; Page W1

With the collapse of the Soviet Union and the end of the Cold War, novelist John le Carré was left without an iconic source of villainy for his cloak-and-dagger tales. In his 2001 best-seller "The Constant Gardener," he cast the world's pharmaceutical companies as the new global bad guys in his serpentine story of treachery, corporate corruption and murder set in Kenya. Now comes the film, a disappointment, even though director Fernando Meirelles and cinematographer César Charlone effectively illuminate the chaos and poverty of Nairobi and its neighboring regions as they did the slums of Rio de Janeiro in their previous collaboration, "City of God."

The brutal slaying in Kenya of the activist wife (Rachel Weisz) of British diplomat Justin Quayle (Ralph Fiennes) creates another sort of chaos. The murdered woman's male traveling companion has vanished, and there is evidence -- according to Justin's colleague Sandy Woodrow (Danny Huston) -- that her death was the result of a lovers' quarrel. The suggestion that the dead woman might have betrayed her gentle spouse adds a jolt of intrigue -- as does the information that she had been challenging the practices of a drug company conducting dubious clinical trails among the Kenyan poor.

The film sags under the weight of its unwieldy ambition to be a political thriller, an unlikely love story and a glimpse into daily life in Kenya all at the same time. The result is a work thick with lurches and leaps this way and that, until late in the film -- when the disparate elements finally come together. It also lacks Mr. le Carré's deftness with nuanced characters: Here the good guys wear halos while the villains -- read businessmen and government officials -- play golf. Worse, several characters are defined, initially, through concealment and misdirection, a wobbly foundation for any morality tale.

The cast performs with a solemnity appropriate to so polemical a film. Bill Nighy is properly oily as a British High Commission honcho who tries to warn Justin against taking up Tessa's cause, and Mr. Huston is a friend no one needs. As the waif-of-steel Tessa, Ms. Weisz juggles ingenuousness and indignity. Though Mr. Fiennes' gardener-with-a-gun makes for an unlikely action hero as he careens across remote regions around the Sudan border and through London, to harvest anti-Big Pharma data, he manages to embody the dizzying passion that rules the Quayles.

With their hand-held cameras and what feels like a natural simpatico, Mr. Meirelles and Mr. Charlone give us an intimate view of the cruel struggle of daily life for most Kenyans. But all too predictably, we're ripped from their midst to return to the Quayles' rather familiar saga. In the end, "The Constant Gardener" is hardly more than yet another study of white, upper-middle-class martyrdom rather than the hard look at third-world suffering it might've been

The relentless rise in oil prices

The Relentless Rise in Oil Prices

Demand Defies Cost Increases
Amid Razor-Thin Excess Capacity;
Pain at the Gasoline Pump Mounts

By CHIP CUMMINS, BHUSHAN BAHREE and PETER A. MCKAY
Staff Reporters of THE WALL STREET JOURNAL
September 1, 2005; Page C1

WHAT WILL STOP the great oil-price spike of 2005? Increasingly, it looks as if it will have to stop itself.

After Hurricane Katrina's damage to the Gulf of Mexico -- the largest fuel-production hub in the U.S. -- the world energy market is unlikely to see a big increase in supply soon. The Bush administration yesterday said the government would lend refiners emergency oil stockpiles to ease refining disruptions, but that won't provide significant, long-term relief.

SIGNS OF STRESS Many countries are beginning to show evidence of greater economic pain as fuel prices continue to surge. See a graphic below.

Any price letup, then, will have to stem from a drop in demand, which has proven resistant to the doubling of crude prices over the past two years. Signs of economic deceleration in the U.S. and China haven't abated petroleum consumption. In the U.S., for example, drivers have stayed on the road as low interest rates and rising home values offset the sting of prices at the pump -- so far. Yesterday, as images and news of Katrina loomed, some Americans paid more than $3 a gallon for gas, and there were reports of lines at the pump in some states.

At least some investors and analysts are calling a peak in oil, but tentatively.

"The stage is being set for lower prices in the future, but the timing remains uncertain," said David Kelly, economic adviser at Boston mutual-fund company Putnam Investments.

Jim Burkhard, an oil analyst at Cambridge Energy Research Associates, said oil demand is more affected by how long prices stay robust, not how high they spike. Oil futures, which are at nearly $70 a barrel, would have to rise to and remain at $75 a barrel for about three years to have the same economic impact as the oil shock of the early 1980s, he said. "There is no magic number at which we all decide to start driving less or turning down the heat," Mr. Burkhard said.

Benchmark crude-oil futures traded at more than $70 a barrel intraday, before closing at $68.94, down 87 cents from the previous day, on the New York Mercantile Exchange.

The pain is mounting for drivers and other end-users of fuel, especially in the U.S., which is both the world's biggest market and the main price setter. So far this year, gasoline demand in the U.S. has been rising despite prices that hit an average of $2.61 for a gallon of regular gasoline just before Katrina struck.

On futures markets, the gasoline price jumped 17.55 cents to $2.65 a gallon yesterday on Nymex. Since retail prices tend to be about 65 cents higher than wholesale, many forecasters said U.S. drivers could see $3-plus-a-gallon gasoline for months.

Things could get nastier. Yesterday, one of the largest independent U.S. distributors of wholesale gasoline, Petroleum Traders Corp. of Indiana, said BP PLC had cut off gasoline supplies because of Katrina. Earlier, Exxon Mobil Corp. and Royal Dutch Shell PLC cautioned that their customers also could suffer supply disruptions.

Marshall Adkins, director of energy research at Raymond James & Associates, predicted that crude will hold at current levels for the next few weeks, but retail gasoline prices could soar, possibly to $4 a gallon.

Philip Verleger Jr., an oil economist and senior fellow at the nonprofit Institute for International Economics, said that gasoline prices probably can't climb high enough to reflect Katrina's damages to refineries. Instead of soaring to stratospheric highs of as much as $10 a gallon to match demand and supply, he sees a much likelier scenario in shortages that lead to lines at the pumps. But in a cruel twist of fate, Katrina's ultimate legacy could be an energy glut, Mr. Verleger said, should it lead to a recession.

"I am betting that Gulf Coast refineries and natural-gas facilities come back on line just as demand starts to collapse," Mr. Verleger wrote in a research report.

Elsewhere, there are signs oil demand is slowing. In July, Japan's crude-oil imports fell nearly 5% amid mild weather from a year earlier and Italian drivers pumped 10% less gas.

Even in places where demand is still strong, there are dislocations: A handful of countries, including oil producer Indonesia and major consumer China, are groaning under the fuel subsidies they provide in their home markets, which are hugely popular but also hugely expensive. Of course, these subsidies protect everyday consumers and thus also feed demand, which could plunge were the subsidies to be cut or eliminated.

Eric Chaney, chief European economist at Morgan Stanley in London, said there are signs the Chinese already are switching fuels away from high-price oil to less expensive energy sources like coal, leading to what he sees as a flattening of demand there recently.

Back in the U.S., a slowdown in petroleum demand "is still a prospective" development, Mr. Chaney said. He believes oil will peak around $70 to $75 a barrel and fall back to the $40- to $45-a-barrel range as higher prices eventually erode demand -- but that fallback might not happen until 2007, he said.

Demand for crude oil from which gasoline and other fuels are refined never has been higher in the U.S, reaching 21.3 million barrels a day on average in June, according to the most recently revised data provided by the Department of Energy. That edges past the previous record seen last December.

So far, the global oil industry -- led by the biggest producer, Saudi Arabia -- has been able to supply that oil by pumping flat out. But with a razor-thin margin of excess pumping capacity, the unprecedented disruptions caused by the hurricane have ended any semblance of balance.

There is one possible upside from Katrina's destruction: Depending on how quickly crude-oil production facilities in the Gulf are put back on line, there may be a significant buildup of crude supplies in the region. Indeed, inventories of crude already were rising before Katrina struck, and even more stockpiling could mean lower gas prices once refiners get back up.

In other commodity markets:

COFFEE: Futures surged to one-week highs on the New York Board of Trade on speculative buying and short-selling. Industry members expect much of the 1.6 million bags stored in New Orleans may be lost to structural and water damage or health concerns. The September contract rose 3.25 cents, or 3.4%, to 97.75 cents a pound.

LUMBER: Prices climbed on the Chicago Mercantile Exchange to their daily exchange-imposed limit of $10 per 1,000 board feet. Television reports on hurricane damage sparked short-covering, said Brian Leonard of Rosenthal Collins Group LLC. September lumber rose 11% to $297 per 1,000 board feet.

-- Susan Buchanan and Lester Aldrich contributed