Energy, Economics and ENSO in the US
Allan D. Brunner
Federal Reserve Board
Washington, D.C. USA
brunnera@frb.gov
Introduction
Over the past year or so, several local climatic events have occurred in the United States that have been attributed to the 1997-98 El Niño-Southern Oscillation (ENSO) warm event. ENSO has been credited, for example, with the complete absence of hurricanes during the summer and fall of 1997 and with flooding in California and in several states along the Gulf of Mexico during the winter of 1997-98. Unusually mild weather in the northern and eastern states and unseasonably harsh weather in the southern states have also been associated with the recent ENSO event. In addition, the media is already contemplating the possibility of an upcoming "cold" event, which reportedly has the opposite effects as a warm event.These fluctuations in local weather likely have significant economic consequences for some regions and for some industries in the United States. Their association with (Teleconnection to) a global and persistent weather disturbance, however, raises an important question for macroeconomists: Can weather really have large aggregate effects on the U.S. economy?
There is an extensive economic literature devoted to measuring the effects of changes in local weather (primarily precipitation and temperature) on economic activity (for example, on agricultural production, construction activity, and energy demand). The conventional wisdom seems to be that these influences vary greatly across geographic regions and across industrial sectors but that they do not have important aggregate effects on the U.S. economy. But, if ENSO does play a significant role in determining U.S weather patterns, then it is also possible that ENSO has statistically-significant and economically-important effects on the U.S. economy.
My Current Research Agenda: Over the past year, I have been working on a research agenda that has the objective of informing economists and policy makers about the economic consequences of ENSO warm and cold events. The main contribution of my work to the economic literature has been the development of a statistical model that relates ENSO conditions in the Pacific Ocean to state-level average monthly temperature and precipitation readings in the United States. An important feature of this model is the use of continuous measures of ENSO intensity (sea surface temperature and sea-level atmospheric pressure anomalies in the Pacific Ocean). This is an important improvement relative to previous studies that used dummy variables to designate years in which there was unusual climactic activity, since relatively weak ENSO events were averaged, therefore, with more severe episodes, likely biasing the estimated effects toward zero and, therefore, toward insignificance.
The dynamics of the model are quite general, allowing for varying effects across states and across time. Using the statistical model, one can answer such questions as "If sea-surface temperatures in the Pacific rise unexpectedly by one standard deviation in June, what will be the effect on average monthly temperature and precipitation in August in Alabama?" These effects can then be linked to the economic models (previously mentioned) that relate changes in temperature and precipitation to changes in U.S. energy consumption or in agricultural production.
Preliminary results for the effects of ENSO events on energy consumption can be summarized as follows. First, ENSO events have an important statistically identifiable influence on the local climates of the 48 contiguous states. Unexpected changes in ENSO intensity levels affect U.S. temperatures within a few months. ENSO shocks have varying degrees of impact, depending on what month they occur, and they have varying effects for different regions across the United States. In addition, ENSO shocks account for a sizeable portion of the monthly variance in U.S. temperatures, although their influence varies from month to month and from state to state. Second, ENSO shocks also have important aggregate effects on U.S. temperatures. During the 1982-83 ENSO event, for example, large regions of the United States were significantly warmer than usual, while other large regions were much cooler than usual. Finally, ENSO shocks also have a substantial aggregate influence on U.S. energy consumption. During the 1982-83 ENSO event, for example, there were $800 million swings in quarterly energy consumption as a result of the ENSO event.
What Economists Don't Know About: Still, there are many aspects of ENSO events that economists do not fully understand, and there is much to be learned, before we can make definitive and credible statements and policy advice about ENSO's economic consequences. (I'm sure that many of these questions can be answered through conversations with physical scientists.) I will group these questions into two broad categories -- (1)modeling issues and (2)calibration issues.
(1) Very few econometric (statistical) models contain measures or indicators of ENSO activity. How should ENSO events and their associated effects on the global climate be modeled? I have advocated (here and elsewhere) using continuous measures of ENSO intensity. Is this appropriate? Which measures are the most reliable? Which measures provide the most predictive power for future U.S. or world climatic activity? Is one measure adequate or should multiple measures be used? Does ENSO have nonlinear effects on the world climate: Does a two-degree change in sea surface temperatures have twice the effect as a one-degree change, and does a two-degree increase have the opposite effect as a one-degree decrease?
(2) Economists also need a better understanding of ENSO's effects on the global climate to better calibrate and elucidate their estimated statistical models. Is there an accepted taxonomy for identifying ENSO events? How much do we know about the origins of ENSO events? What about the progression and predictability of ENSO events and their influences on climates across the globe, once the ENSO events are identified? Does global warming have any identifiable effect on ENSO events?
Answers to these questions will certainly help economists (and other social scientists) build better econometric models and to provide better judgments and policy advice concerning the economic consequences of ENSO events.
Brunner, A. D., 1998: El Niño and world commodity prices: Warm water or hot air? International Finance discussion paper (IFDP) no. 608.