January is the prime month for making resolutions and predictions, and everyone knows how useless resolutions can be. Few, if any, are ever kept, especially when they involve personal behaviors such as eating less and exercising more.
Predictions can be equally useless, although there's the occasional exception. Economic forecasts, including those for such things as economic growth and inflation rates, many times are within “ball park” range.
But weather is a whole other story. Even with the wave of new forecasting technology, predicting the weather continues to be a most inexact science. This doesn't come as a surprise to farmers, who rarely make decisions based on long-range weather forecasts. Most believe it's raining only after the water hits them on the back — it's a healthy skepticism that usually serves them well.
But there are others who put more stock — literally — into long-term weather prognosticating, and for that, they paid dearly this past year.
You might remember that in May of 2006, U.S. government and private forecasters warned of another dire Atlantic hurricane season. Coming on the heels of hurricanes Katrina and Rita, the forecasts kept oil prices at near-record highs for months. They kept oil prices near a record for months and scared away some insurance investors. In addition, some hedge funds gambled big that natural gas prices would climb, only to lose billions.
So how accurate were these forecasts? No hurricanes stuck the U.S. coast this past year, deflating natural gas prices. And one of the most closely watched forecasters — Colorado State University — said that it had overstated the hurricane risk. “We did the best we could with the information we had,” said the forecasters.
The miscalculations made by weather forecasters in 2006 showed what can happen when energy traders and investors rely too heavily on long-term predictions.
Weather forecasts from Colorado State and others, including government agencies, universities and private firms, are used routinely by traders in the natural gas futures market, insurers calculating what to charge policyholders, investors judging how much to pay for insurance stock, and coastal residents.
Colorado State's hurricane reports have been considered authoritative largely because of the reputation of their founder, William Gray. He got his start as a U.S. Air Force meteorologist in the 1950s and developed the first seasonal forecasts for tropical storms in the 1980s.
In many years, “Dr. Gray's Tropical Storm Forecast” proved extremely accurate. Early in 2002, 2003 and 2004, the reports correctly predicted the number of named storms in the Atlantic Ocean and Gulf of Mexico for the entire year. In 2005, when a record 28 named storms formed in the Atlantic, the Colorado State report sounded an early alarm, warning in May of that year of “a well-above-average hurricane season” and predicting 15 named storms.
That impressive track record is one reason this past year's first forecast, published in April, drew so much attention. The report predicted another “very active” hurricane season, including 17 named storms, with five of them being intense hurricanes. Colorado State also said there was an 81 percent chance of a major hurricane striking the U.S., coastline. It put the risk of one of them hitting the Gulf Coast — the center of U.S. oil production — at 47 percent.
In the summer of 2006, the price of crude oil futures reached a record-high of $78.40, and fears of an active hurricane season boosted natural gas prices to a record $15.78. For a time after Katrina and Rita, all of the Gulf's oil production and 80 percent of its gas output was shut down.
If you're a coastal resident, you know too well that insurers raised prices to try and recoup the losses from 2005. Katrina alone cost an estimated $40.6 billion, and all 2005 hurricanes together cost about $57.3 billion. In addition, prices for commercial properties along the U.S. coast rose by as much as 500 percent in the second quarter of 2006.
The 2006 storm forecast resulted in insurers selling a record number of catastrophic bonds — which pay out in the event of certain disasters — but some investors steered clear of these insurers.
Farmers in the Southeast tend to have mixed feelings about hurricanes. If a hurricane comes in the middle or at the tail end of a hot, dry season, and it's downgraded to a tropical storm by the time it reaches land, it could mean a good finish for some crops. But a storm becomes a disaster when it sustains hurricane-force winds as it moves toward land, or when it drops substantial amounts of rainfall on cotton or peanuts that need to be harvested.
But a farmer isn't likely to bet on either outcome, and most will tell you there's a certain comfort in knowing that all things can't be predicted — that some things are still left to chance, or at least beyond our comprehension.