How Natural Disasters Can Change Pricing Worldwide

by Kelly Kehoe on 6 January 2012 1 comment

Millions of natural disasters occur around the world each year, from volcanic eruptions to wildfires to tsunami. As implied by the term “disaster,” these events can have devastating effects on human life, local economies, and the environment itself. Historically, natural disasters have caused a lot of damage to pricing schemes, as we can see from the following. (See also: The Psychology of Pricing)

Earthquakes and Tsunami

With the United States’ Geological Survey’s most recent report on earthquakes stating that its National Earthquake Information Centers are detecting up to fifty earthquakes per day (approximately 20,000 per year) and millions more are suspected to occur without detection, it’s not surprising to see how earthquakes create not only tremors in the ground, but also in pricing for various goods in the market.

Case in point — the devastating 9.0 earthquake off the coast of Japan that occurred on March 11, 2011. As one of the biggest exporters of technological products in the world, companies based in Japan faced a harrowing situation with the subsequent blackouts and parts shortages correlated to the earthquake and tsunami that struck the region. TIME Magazine reported that items such as televisions, PCs, and phones were (and still are) likely to see a rise in prices following the catastrophe. With factories shut down or wiped out altogether, the streamlined creation process for these technologies experienced a severe disruption in wake of these events, and we can see from historical evidence that this isn’t the last time an earthquake will lead to a spike in prices due to industrial interruptions.

Global Warming

We’ve been hearing about this one for years. From Al Gore’s An Inconvenient Truth to the Kyoto Protocol (from which Canada recently withdrew and the United States has yet to ratify), global warming seems to be a major threat posed to our world today. While there are mixed views on the causes and even the very existence of this climate change, one thing is for sure — the regulations placed on corporations could potentially send prices soaring. This isn’t to say these policies are not beneficial — the debate over whether we should protect the environment or the economy first and foremost will never cease — but when the operating costs for these companies rise as a result, they are more inclined to pass these costs along to consumers.

As a 2009 Forbes article on the Cap and Trade Bill stated, politicians in countries across the globe are enacting legislative measures that would require corporations to buy emissions permits for every ton of CO2 generated. While this is a great step towards cleaner, more efficient energy usage, it could also further damage the economy by sending energy prices upward, thus hurting consumers. Regardless of the “correct” view on the existence and severity of global warming, one thing is for certain — this will continue to affect price levels for years to come.

Drought

Have you ever read John Steinbeck’s The Grapes of Wrath? The Dust Bowl of the 1930s — during which the story takes place — was more than just fiction. The droughts and unusually high temperatures during the Great Depression negatively affected thousands of farmers and people who couldn’t afford the food prices when the supply diminished, and we continue to see these problems persisting to this very day. The Horn of Africa is currently experiencing its worst drought in nearly six decades. Food prices are only making the problem worse for the millions of people in the region, as even staple items such as maize and milk are on the rise. Anyone who has taken an Economics 101 class knows that supply has an inverse relationship with the price of goods, so with less and less food being grown each year, the famine continues to worsen for those who can’t afford the surge in prices for food.

Torrential Rains

Contrary to a severe dry season, torrential rains can also lead to a terrible supply shock, as seen in the current Norwegian butter crisis. After an uncommonly wet summer season in Norway, the quality of grazing land for the cows diminished, leading to a sharp drop in the availability of this basic dairy good. As with the rest of the supply shortages as seen in other natural disasters listed above, prices have increased for Norwegians who have been waiting weeks for butter imports.

Torrential rains can also cause flooding, which generally devalues homes in the area and shuts down local businesses, economically hurting both the owners and customers in the region.

With the Earth’s carrying capacity being stretched to its limits, we are bound to see more natural disasters occurring in the future. With natural disasters comes a loss of life, as well as potentially destructive impacts on pricing in countries around the world. Our governments do what they can to alleviate the hazards before a disaster strikes, but the funding and technology in the status quo isn’t enough to prevent them from happening. Ultimately, only our mitigation efforts can be the keys to softening the blow when these catastrophes strike.

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Sally

Natural disasters affect greatly prices. Take for example, a place in Asia where floods frequently occur. The floods would result to higher basic commodity prices especially if the area grows rice as its main crop. This would lead to a shortage of rice supply therefore forcing the importation of rice thereby increasing rice prices unless that government provides mitigating measures.

The world is fudged up I tell you. If we don't take care of mother nature now, there won't be anything to take care of soon.