An economic overview of the fires in California
On November 6, 2019, after two weeks of burning through the Sonoma counties of Geyserville, Healdsburg, and Windsor, the Kincade fire was contained (Gorman, 2019). The blaze destroyed 374 structures and threatened over 90,000, scorched 120 square miles, and forced more than 200,000 individuals to evacuate (California Department of Forestry & Fire Protection, 2019). While the physical threat has been mitigated, in the wake of California’s largest wildfire of 2019, the economic consequences remain, impacting individuals, businesses and California’s budget.
The effect of the fire was coupled with the California’s largest utility, Pacific Gas & Electric’s (PG&E), mandatory power outages in October, which cut power to 43 counties of Northern and Central California. The decision, referred to as a Public Safety Power Shut Off (PSPS), came after the utility company’s electrical transmission lines were deemed responsible for The Camp Fire of 2018, which killed 85 people (Eavis and Penn, 2019). PG&E called the outages a necessary step in “[preparing] and [keeping] your home, family or business safe during extreme weather” (Pacific Gas and Electric, 2019).
The preventative power outages, widespread and elongated by numerous fire threats, impacted businesses, the education system, and had other indirect negative impacts on California residents. Schools, restaurants, grocery stores, and hospitals were forced to close (Svrluga, 2019). Restaurants lost inventory when refrigerators stopped working, and demand for their products decreased, threatening to significantly slash revenues crucial for year-round profitability. University of California at Berkeley, Humboldt State University and Santa Rosa Junior College had their classes cancelled as a result of power loss. Sonoma State University dorms were evacuated, forcing more than 3,000 students to find other accommodations. Other negative externalities include the increased healthcare cost of worsened air quality on residents and overall productivity loss associated with natural disasters (Diaz, 2012). According to the San Francisco Chronicle, economists predicted the power cuts could cost residential customers $65 million (Moench, 2019). When accounting for small commercial and industrial customers, the cost could increase to $2.5 billion. According to Moody’s Analytics, the total lost economic output could be estimated at $500 million (Ratz, 2019).
Another concern is the tourism industry. In the midst of the 2018 California wildfires, a study by Visit California found that 11% of would-be travelers to California claimed the fires directed their decision to cancel (Reyes-Velarde, Martin, and Tchekmedyian, 2018). These lost tourists cost the industry approximately $20 million that month. In 2018, the tourism industry brought in $79 billion, or 2.5% of the total state GDP (Dean Runyan Associates, Inc., 2018). A blow to the tourism can severely impact state revenue. The 2019 numbers likely reflect the similar fire conditions.
California allocates emergency wildfire funds for the fiscal year. In two months in 2018, the state had nearly used all the allocated funds (Reyes-Velarde, Martin, and Tchekmedyian, 2018). In 2017, California set aside $427 million, but the total costs were approximately $896 million. In contrast, during the previous period, between 2007 and 2018, the fund was $82 million and the total cost was $372 million. This brings up the question of whether the increasing costs associated with wildfires will be sustainable for the California budget.
PG&E is also facing concerns of threats to profitability and declines in share prices. It officially filed for bankruptcy protection in January, facing an estimated $30 billion USD in wildfire damages as a result of fires in 2018 and 2017 (Penn, 2019). Shares fell over 70% in the following days (MarketWatch, 2019). In the first days of the Kincade fire, PG&E stock prices fell as individuals speculated about their involvement in the fire’s outbreak (Reuters, 2019). Within the first week of the fire, PG&E’s stock price fell nearly 50%. In the past year, its market value has decreased from $25 billion to under $3 billion. Facing higher costs based on insurance claims, PG&E is fighting to remain profitable, which includes requesting California lawmakers allow utility price increases to offset the incurred costs, a move that has been largely unpopular.
While short term solutions have arisen for damage control and risk mitigation, the fires do not seem positioned to stop threatening California residents. Since 2012, California has not had one month wildfire free (Amadeo, 2019). A National Academy of Sciences study found that the number of acres burned since 1980 had doubled as a result of climate change fueled heat waves (Abatzoglou and Williams, 2016). A Goldman Sachs report quantified the economic impact of the 2018 Camp Fire and Woolsey Fire, stating the combined impact on annualized U.S. GDP was around .1% in the fourth quarter (Malas and Torry, 2018). PG&E financial problems loom, threatening to impact the 16 million people it serves. Clearly, the economic impacts of fires in California are severe and potentially long-lasting, and require immediate addressing to prevent their consequences from hampering long-term growth.
Gorman, Steve. (2019, November 7). Year’s most destructive California wildfire declared extinguished after two weeks. Reuters. Retrieved from https://www.reuters.com/article/us-california-wildfire/years-most-destructive-california-wildfire-declared-extinguished-after-two-weeks-idUSKBN1XI0BA
California Department of Forestry & Fire Protection. (Updated 2019, November 6). Kincade Fire. Retrieved from https://www.fire.ca.gov/incidents/2019/10/23/kincade-fire/#incident-news
Eavis, Peter and Penn, Ivan. (2019, May 15). California Says PG&E Power Lines Caused Camp Fire That Killed 85. The New York Times. Retrieved from https://www.nytimes.com/2019/05/15/business/pge-fire.html
PG&E. (2019). Public Safety Power Shutoff. Retrieved from https://www.pge.com/en_US/safety/emergency-preparedness/natural-disaster/wildfires/public-safety-power-shutoff-faq.page
Moench, Mallory. (2019, October 9). ‘A cool billion’: Economists estimate PG&E outages could have big impact. San Francisco Chronicle. Retrieved from https://www.sfchronicle.com/business/article/A-cool-billion-Economists-estimate-PG-E-14505047.php
Ratz, Laura. (2019, October 11). Lights Out in California. Moody’s Analytics. Retrieved from https://www.economy.com/dismal/analysis/376639
Svrluga, Susan. (2019, October 29). Campuses evacuated, classes canceled as wildfires rage in California. The Washington Post. Retrieved from https://www.washingtonpost.com/education/2019/10/29/campuses-evacuated-classes-canceled-wildfires-rage-california/
Diaz, John M. (2012). Economic Impacts of Wildfire. Southern Fire Exchange. Retrieved from https://fireadaptednetwork.org/wp-content/uploads/2014/03/economic_costs_of_wildfires.pdf
Amadeo, Kimberly. (2019, June 25). Extreme Weather, Its Effect on the Economy and You. The Balance. Retrieved from https://www.thebalance.com/extreme-weather-definition-effects-on-the-economy-4589684
Reyes-Velarde, Alejandra, Martin, Hugo, Tchekmedyian, Alene. (2018, August 24). California’s wildfires are deterring tourists and hitting taxpayers hard, officials say. Los Angeles Times. Retrieved from https://www.latimes.com/local/lanow/la-me-wildfire-costs-california-20180824-story.html
Dean Runyan Associates. (2019, July 7). Economic Impact of Travel in California 2010-2018p. Visit California. Retrieved from https://industry.visitcalifornia.com/research/economic-impact
Penn, Ivan. (2019, January 29). PG&E’s Bankruptcy Filing Creates ‘a Real Mess’ for Rival Interests. The New York Times. Retrieved from https://www.nytimes.com/2019/01/29/business/energy-environment/pge-file-bankruptcy.html?searchResultPosition=1
Market Watch. (Updated 2019, November 11). PG&E Corp. Retrieved from https://www.marketwatch.com/investing/stock/pcg
Reuters. (2019, October 29). California Utility PG&E’s Stock Tumbles as Wildfire Spreads. The New York Times. Retrieved from https://www.nytimes.com/reuters/2019/10/29/us/29reuters-california-wildfires-pg-e.html?searchResultPosition=1
Amadeo, Kimberly. (2019, July 8). Wildfire Facts, Their Damage, and Effect on the Economy. The Balance. Taken from https://www.thebalance.com/wildfires-economic-impact-4160764
Abatzoglou, John T. and Williams, A. Park. (2016, October 18).Impact of anthropogenic climate change on wildfire across western US forests. Proceedings of the National Academy of Sciences Oct 2016, 113 (42) 11770-11775; DOI:10.1073/pnas.1607171113. Retrieved from https://www.pnas.org/content/113/42/11770
Malas, Nour and Torry, Harriet. (2018, December 11). Economic Damage From California Fires Spreads Further Than Blazes. The Wall Street Journal. https://www.wsj.com/articles/economic-damage-from-california-fires-spreads-further-than-blazes-11544524201