Looks like a nice day for making money - Weather conditions affect $3 trillion U.S. in North American economic activity

www.canada.com DEIRDRE MCMURDY Freelance Thursday, February 27, 2003

TORONTO - There was jubilation in Whistler, B.C., on Sept. 30, 2002. While the rest of Canada was still easing gently from summer into autumn, the resort town two hours north of Vancouver embraced the first snowstorm of the season - and the eight centimetres of powder it deposited in the surrounding mountains.

For local residents, that premature blast of winter ensured a strong start to a seasonal tourism industry that represents millions of dollars in annual revenue for multinational corporations like resort-owner Intrawest and Fairmont Hotels - as well as the thousands of people they employ and scores of small, independent businesses that serve the market.

Weather has become much more than the subject for stilted small talk in awkward social encounters. In an intensely competitive global economy, it's a variable that affects the performance of almost $3 trillion U.S. in North American economic activity.

In fact, it's now considered such an important determinant of business success or failure that Environment Canada's quarterly seasonal outlook is carefully guarded until its release. At the annual meeting of the American Meteorological Society earlier this month, some experts argued that the federal government must start treating its weather data like insider information.

"Details about the weather can move commodity prices - especially when it comes to trading futures contracts," explained David Phillips, senior climatologist with Environment Canada. "We treat that seriously."

Weather is now taken so seriously, that even the Central Intelligence Agency has started tracking weather patterns based on the rationale that they directly affect economic conditions, which in turn influence political trends.

"Weather is no longer seen as a random act of fate. It's very much part of the long-term decision-making process for business now," Phillips said.

Last year's mild winter in the United States is credited with staving off a full-blown recession by some economists. They claimed that lower heating costs, reduced snow removal bills, higher construction income, reduced transportation costs, fewer insurance losses and stronger retail sales combined to generate about $21 billion U.S. in economic activity - all because of the balmy temperatures. Housing starts, for example, jumped 6.3 per cent in January 2002, the highest level in two years.

That's not about to happen this year, however. Record cold spells - along with geopolitical turbulence in the Middle East and Venezuela - have created an imbalance in the supply and demand for heating fuel and gasoline. Normally at this time of year, refiners begin to build their inventories of gasoline in anticipation of increased driving volumes in the spring. This year, they're still struggling to meet the demand for heating-grade fuel - which could create a gasoline supply shortage later this year.

Natural gas prices have spiked by as much as 40 per cent - again, a function of robust demand outstripping easily-available supply.

Many electric power utilities have also faced a crunch, especially in light of their recent deregulation. Previously, when they encountered sharp increases in demand and soaring costs, regulators would allow them to pass along expenses directly to consumers. Now that they must compete in an open market, it has become tougher to pass along the costs to consumers.

Technology has played a critical role in the business sector's effort to get a grip on variables like weather. Intricate computer models fed by satellite data can now map out where high pressure ridges and storm systems will form weeks in advance. As a result, a three-day forecast is now about as accurate as a 24-hour forecast was 20 years ago.

This technology has also allowed weather to morph into a sophisticated financial product that has even begun trading on the Chicago Mercantile Exchange. The weather derivative market emerged around 1997, and less than three years later, it was valued at $8 billion U.S.

Weather derivatives let a corporation limit its weather-related losses by transferring a portion of the risk to an investor.

Given the heightened emphasis on forecasting weather and its economic effects, a growing number of companies are hiring in-house meteorologists. Transportation companies, oil and gas producers, utilities - even large brokerage firms now have them on staff to track conditions for futures traders and their clients.

Despite its formidable scientific and economic force, however, weather will never cede its place in our social interaction. After all, there's no subject quite as relevant anywhere in Canada: So is it cold enough for you?

Deirdre McMurdy is host of Moneywise, Monday to Friday at 12:30 p.m. on Global Television.