“Now the rains had really come,” writes Chinua Achebe, in “Things Fall Apart,” a novel set in 19th-century Nigeria, “so heavy and persistent that even the village rainmaker no longer claimed He couldn’t stop the rain now, just as he wouldn’t attempt to start it in the heart of the dry season without serious danger to his own health. Achebe, the economic cycle and the climate move in tandem. When the rains come at the right time, the harvest is abundant and prosperity follows. On the other hand, drought brings the risk of famine and death. The rainmaker – a little like the modern central banker – can attempt to smooth out the economic cycle, literally toning things down when they get too hot.Ultimately, however, it is the power of nature that decides the outcome.
The energy crisis in Europe has led to the return of a weather-based economy. The crisis reminds us that, for all their technological sophistication, even the economies of rich countries must rely on the bounty of nature. European economists, financiers and policymakers are watching the forecast closely: a mild winter will bring relief, requiring less gas to burn to keep homes warm. If the temperatures are not too penalizing, energy prices will fall and growth will be stimulated. A freezing winter, on the other hand, will bring misery: pushing millions into poverty, increasing inflationary pressures and shutting down industries.
Fossil fuels originally promised to free economies from the vagaries of the seasons. Instead of relying on ambient solar energy – captured in grain, stored in livestock, or photosynthesized into biomass and then consumed as firewood – humanity could burn coal, releasing the prehistoric solar energy contained within . The use of fossil fuels made it possible to store, transport and release energy exactly when needed. They placed the power of the sun at the disposal of mankind, rather than the other way around.
Economic historian Ann Kussmaul has tracked the spread of the Industrial Revolution across England by assessing when regions moved beyond the seasonal economy. Parish marriage certificates measured the extent to which fossil fuels freed workers from the rhythms of nature and instead bound them to the whistle of the factory. Before industrialization, weddings in the lowlands often took place in winter after the harvest; in hilly areas this would be in the summer, once the lambing season is over. After industrialization these regional and seasonal marriage patterns disappeared, providing a clue as to which areas of England first adopted fossil fuel-based production techniques.
A hundred years later, seasonality is returning to Britain and other parts of Europe, as the continent weans itself off Russian gas. Part of the reason for this comeback is physical. Natural gas is much more difficult to transport and store than coal or liquid petroleum. In the past, Europe benefited from the abundant pipeline of gas provided by Russia, as well as the option of refills of liquefied natural gas shipped from abroad. Now supplies are limited and Europeans have to rely mainly on shipped goods. Storage facilities on the continent are already more than 90% full, and filling the last available spaces is expensive, as the contents must be kept under high pressure. Limited supply means that variations in demand determine the price of energy, and weather is the most uncertain determinant of demand.
Autumn spared Europe the worst: the continent experienced the hottest October on record. As a result, the price of a unit of gas at the Dutch Title Transfer Facility, which is the benchmark for the continent, fell to around €100 per megawatt hour, half the September rate. But now winter is starting to make itself felt. Germany’s first snowfall has arrived. Historically, there has been a relatively linear relationship between gas demand and temperature: the colder it is, the more gas is needed. This year, things are a bit more complicated. Home heating systems have been idle longer than usual. Overall sales are up. People are ready to wrap themselves warmly to resist Vladimir Putin.
The gas crisis is not the only reason for greater attention to the weather. Renewables now provide much more energy to Europe than just a few years ago, causing problems if the wind doesn’t blow or the sun doesn’t shine. Indeed, hydropower has also been a problem for Europe this year, after a hot summer dried up the reservoirs and rivers on which the dams depend. Improving and investing in the means of storing electricity, whether batteries, hydrogen or other techniques, could smooth out this variability in the future. The continent nonetheless faces years, if not decades, of nervously watching the sky as it adjusts.
Yet, in the absence of a transition to green forms of energy, the weather would begin to play an even greater role in the economy. A warmer planet is already driving more frequent and extreme events, such as summer heat waves in Europe or devastating floods in Pakistan. These events amount to what are known as real shocks to an economy: external changes that reduce productive capacity and thus cause both inflation and unemployment to rise.
Head in the clouds
This dual threat is more difficult for central bankers to manage than downturns resulting from shifts in business confidence or a financial crisis. Tighten policy too much in response and it will exacerbate the recession; too little and inflation can spiral out of control. According to IMF analysis of the Pacific and Caribbean islands, countries prone to natural disasters grow about one percentage point less per year and have significantly higher debt stocks than those less at risk. . Climate change will only exacerbate these differences. So a return to a weather-dependent economy will leave some central bankers looking even more like rainmakers: attempting to perform old rituals or demanding more sacrifices, with little ability to affect economic weather.
Read more from Free Exchange, our column on the economy: Only a revived economy can save China’s real estate industry (November 17) Interest rates have risen sharply. But is monetary policy really restrictive? (November 10) How to restart manufacturing (November 3)
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From The Economist, published under licence. Original content can be found at https://www.economist.com/finance-and-economics/2022/11/24/weather-is-again-determining-economic-outcomes