The Efficiency Gains from Probabilistic Weather Forecasts: A Case Study of Oil and Gas Producers in the Gulf of Mexico

Pennsylvania State Univ University Park, University Park PA

Investigators

Abstract

The U.S. Weather Research Program (USWRP) is an interagency activity designed to perform and implement the research necessary to improve the delivery of weather services to the nation. Under this Program, the National Science Foundation, the National Oceanic and Atmospheric Administration (NOAA), the National Aeronautics and Space Administration and the Office of Naval Research are jointly evaluating and supporting research of high priority to the USWRP. Research that is directed towards determining the value and use of weather information has been identified as one of these high priority areas. The Principal Investigator proposes to investigate the value of hurricane forecasts to crude oil and natural gas producers in the Gulf of Mexico. The threat of hurricanes often forces producers to temporarily halt production and to evacuate offshore drilling rigs. The potential efficiency gains from improving hurricane forecasts may be substantial, perhaps approaching $50 million per year. The National Hurricane Forecast Center has been issuing probabilistic hurricane forecasts for more than 10 years. The Principal Investigator will estimate the value of these forecasts and the potential gains from improving them. The proposed analysis will estimate the value of this information using a decision model that requires the costs from protective actions, the potential losses from inaction, and the joint density function of forecasts and weather conditions. The Principal Investigator also will perform an econometric analysis that will measure the marginal effect that probabilistic forecasts have on production decisions. Successful completion of this research will establish the value of improved forecasts for this sector of the economy. Further, however, the evaluation techniques developed will have applicability to determining the value of other probabilistic forecasts.