Economics

Weather Forecast

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Science  17 Sep 2010:
Vol. 329, Issue 5998, pp. 1443
DOI: 10.1126/science.329.5998.1443-a

To manage the risk of your company's gas pipeline business hemorrhaging money during a warm winter, or of your string of beachfront condominiums lying empty during an especially intense hurricane season, you could enter the weather derivatives market. Traders bet on weather, with payments made when temperatures, precipitation, and other meteorological indices reach target levels. This market originated in the U.S. energy sector in the mid-1990s and was valued at $32 billion in 2007–2008. Randalls explores how the U.S. and UK me teorology systems influence, and are influenced by, the market. The U.S. system features a core of basic public data and services, allowing a larger private sector to flourish, whereas the UK government system exerts more control over data and services, charging for access. The demands of the market vary. Some contracts require highly accurate data, where a single degree can affect profits dramatically, whereas other contracts depend on marketwide consistency (that is, having the same averages and standard deviations as the rest of the market). Public meteorologists' attempts to market new products, such as probabilistic forecasts, which may promise greater scientific understanding, confront resistance from traders who may prefer simpler, yet more business-ready deterministic models. With increasing pressure to justify government investment, meteorology must strike a fine balance between the pursuit of science in the public interest and provision of services of commercial value.

Soc. Stud. Sci. 40, 10.1177/0306312710378448 (2010).

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