Scenario Planning Effect Of Oil Prices On The Global Economy

Scenario Planning IMBA 2011

IMBA 2010/11
BLOCK 3/ SCENARIO PLANNING:
GROUP 1 LEADERSHIP DEVELOPMENT

Submitted By,
Carlos Rodriguez, Satpal Daryanani, Stephan Meijers,
L E A D E R S H I P D EKemper andN T | B LShankar | G R O U P 5
Tobias V E L O P M E Uday O C K 3 A B Page 0


Table of Contents

Introduction ..............................................................................................................................................2
Step 1: Define the Future to Explore and Agree on the Scope. .....................................................2
Step 2: Brainstorm, Log and Discover .................................................................................................2
Step 3: Uncertainty - Impact Matrix ...................................................................................................3
Step 4: Two Key Uncertainties/Key Drivers from the Matrix .........................................................4
Step 5: Quadrant/Scenario Stories ....................................................................................................4
Scenario 1: Perfect World ............................................................................................................................................................... 5
Scenario 2: Al Gore? Is that a football player? .......................................................................................................................... 6
Scenario 3: Chaos Picnic and an Alternative Ride!...................................................................................................................... 7
Scenario 4: A Crude World ............................................................................................................................................................. 8

LEADERSHIP DEVELOPMENT|BLOCK 3|GROUP 5 Page 1


SCENARIO PLANNING

Introduction

“Scenario planning, also known as scenario thinking or scenario analysis is one of the strategic planning methods that
some organizations use to make a flexible and thought of long-term plans. It is an effort to create a clearer vision though
with a certain amount of ambiguity and uncertainty.

Scenario planning may involve aspects of Systems thinking, specifically the recognition that many factors may combine in
complex ways to create sometime surprising futures. The method also allows the inclusion of factors that are difficult to
formalize, such as novel insights about the future, deep shifts in values, unprecedented regulations or inventions. Systems
thinking used in conjunction with scenario planning leads to plausible scenario story lines because the causal relationship
between factors can be demonstrated. In these cases when scenario planning is integrated with a systems thinking
approach to scenario development, it is sometimes referred to as structural dynamics”1.

In the below sections we will go through the different steps involved in the scenario planning process.

Step 1: Define the Future to Explore and Agree on the Scope.

The business scope we have chosen in terms of industry, country and phenomena is, “Rising Oil Prices and Its Effect On
Global Economy” with a phenomenon that the price will reach $300 per barrel.2

Time Horizon : 2016
Geographical Scope : OPEC Countries and the World.

Step 2: Brainstorm, Log and Discover

Some of the main uncertainties that are seen in this area are,

 Political Stability/Instability in OPEC Countries.
 Adaption of Alternative Technologies/Energy Sources in Transportation.
 New Oil Reserve Discoveries by Non-OPEC Countries.
 New Path Breaking Technologies enabling Water or Hydrogen Powered vehicles.

1 Scenario Planning, http://en.wikipedia.org/wiki/Scenario_planning
2 Oil Price History and Analysis, http://www.wtrg.com/prices.htm


Step 3: Uncertainty - Impact Matrix

Political Stability in the OPEC nations has been one of the major concerns with respect to the global crude oil prices.
Since the time OPEC was established, from 1960, the OPEC cartel has been a significant influencer in the global oil
prices. The collective agreement of OPEC nations to increase the price in 1970 was the first time that the influence of
OPEC was made evident. However many of the 12 developing OPEC countries have/are suffering from high political
instabilities. It is primarily due to lack of democracy or/and lack of a non-authoritative government.

The 1980 Oil Crisis attributed to the Iranian revolution sent the oil prices soaring, during which the country’s oil
production plummeted to 2.5 million barrels/day. The 1980 Iraqi invasion worsened the situation by which the
combined production of both the countries reduced to one million barrels/day from 6.5 barrels/day in 1978. This
lowered the global oil production by 10% and oil prices rocketed to $35 per barrel.3

Path Breaking Technologies like water or hydrogen powered fuel cell would revolutionize the automobile industry and
would significantly reduce the dependence on oil and petroleum industry by a large factor. Though there have been many
researches on this area there has been no significant results that could be used in mass production. However gauging
the changing landscapes in technology such path breaking technologies cannot be completely ruled out.

New Oil Discoveries is an uncertainty which if hugely successful & sustainable can help reduce dependency on OPEC.
However impacts of such discoveries are considered low due to the already existing considerable oil reserves.

Adopting Alternative Technologies is one such activity that requires a coordinated effort from all the stakeholders
involved such as government, agencies, manufacturers and consumers. If alternative technologies such as wind, thermal,
nuclear, hydro and solar energy are embraced at a larger scale, it could help in reducing the dependence on OPEC
nations. However the likelihood of such event happening is considered less, i.e. highly uncertain, due to the many factors
involved such as inability to mass produce such technologies, huge sunk costs, lobbying by existing petroleum industries
which are dependent on consumption of oil and petroleum products by customers.

Based on the four main uncertainties discussed above, the Uncertainty - Impact Matrix can be plotted as below.

HIGH
Uncertainty - Impact Matrix
Political Stability
Uncertainity

Positive Adaption of
Alternative Technologies

New Oil Discoveries Path Breaking Technologies

LOW LOW HIGH
Impact
3 http://www.economywatch.com/world-industries/oil/historical-prices.html


Step 4: Two Key Uncertainties/Key Drivers from the Matrix

It is evident from the above matrix analysis that the two uncertainties with the highest impact and highest uncertainty (or
un-likelihood of occurrence) are Political Stability and Adaptation of Alternative Technologies.

Using these two uncertainty dimensions a 2x2 matrix with the four quadrants would look as below. The quadrants now
formed are equally plausible but fundamentally different.
Political Stability

Al Gore? Is that a football player? Perfect World

Political Stability/ Political Stability/
Adaption Of Adaption Of
Alternative Technologies Alternative Technologies

High Adaptation
Low Adaptation

Political Stability/ Political Stability/
Adaption Of Adaption Of
Alternative Technologies Alternative Technologies

A Crude World Chaos Picnic and an Alternative
Ride!
Political Instability

Step 5: Quadrant/Scenario Stories

The four scenarios as evident from the previous step are elaborated in the below section.

Note: An important trend we see going forward is the Growing Environmental Concerns on Climate and Pollution and
Environmental Laws that will shape many industries and their future growth strategies.


Scenario 1: Perfect World

[High political stability in OPEC countries, High adoption of alternative technologies/energies in transportation]

Highlights/End state:

 Alternative technologies to power transportation means (cars, airplanes, trains and ships) have advanced rapidly.
 About 50% of these means are powered by alternative types of energy (electricity, hydrogen) other than oil.
 Worldwide demand of oil (provided by OPEC countries) is significantly declining.
 OPEC countries have commonly agreed on a significant reduction of oil production, aiming to secure oil price
level. The agreement includes exact quotas for each member country regarding the amount of oil it is allowed to
produce and export each year.
 Oil price has stabilized at a level of USD 100 per barrel
 Political stability in OPEC countries (Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi
Arabia, the United Arab Emirates, and Venezuela) is generally high.
Description/highlights of logic behind path towards end state:
 Environmental consciousness is growing worldwide.
 Demand for automobiles powered by alternative/environmentally friendly energy sources is increasing.
 Worldwide economy is strongly rebounding after the crisis in 2009. Accordingly, wage levels are increasing and
people are willing to pay the relatively high prices for environmental friendly means of transport.
 Increasing environmental consciousness (especially in China, India and the US) and the fear of an increasing oil
prices cause more and more people to prefer transport means based on energy sources other than oil.
 Due to the potential threatening by nuclear weapons, the US and other countries tried to influence Iran to
abandon it nuclear activities (and were finally successful in doing so).
 Due to increasing public pressure, US government has to call home major parts of the US army forces from
Iraq.
Early warning signals (newspaper headlines) that would identify that this scenario is unfolding:
 R&D investments related to alternative energies and alternative drive engineering at an all-time high
 Five major automobile companies launching purely electrically powered cars in 2012.
 German automotive company BMW planning to launch its first purely hydrogen-powered vehicle in early 2014.
 Number of gas stations offering electricity and hydrogen increasing rapidly.
 Airbus is developing an airplane fueled by hydrogen.
 European Union plans to restrict CO2-emission rights policies.
 Special tax on cars with high CO2-emission launched in the US.
 Iranian president Ahmadinedschad eats a poisonous Apple and dies.
 Iran agrees to stop all its nuclear activities (e.g. nuclear enrichment facilities) by the end of 2014
 Number of terror attacks in Iraq decreased significantly in 2012
 Major parts of US army forces in Iraq will be called home by the end of 2013
 Conflict between the Nigerian government and the MEND (Movement for the Emancipation of the Nigerian
Delta) finally settled (2015)


Scenario 2: Al Gore? Is that a football player?

[High political stability in OPEC countries, Low adoption use of alternative technologies/energies in transportation]

Highlights/End state

 On the New York Nymex Exchange January future contracts for West Texas Light have broken the magical
USD 300 level.
 The weak dollar and the continuously surging demand from Asian markets created a short- squeeze among
traders. Insiders mention that current high price levels are not sustainable in the near future.

Highlights of logic behind path towards end state/ How we got there?

 Evaluating the measures taken by the Federal Reserve Bank to offset the impact of the 2008 financial crises,
we can conclude that Bernanke’s failing exit strategy initiated the free fall of the dollar. Fueled by a further
appreciation of the Chinese Yuan, inflation rates in the US have reached the astronomic level of 9%. As a
result raw material prices have surged again and are traded on all time high levels.

Early warning signals that would identify that this scenario is unfolding:

 Being privatized again, the board of General Motors decided to stop producing electric and hybrid cars due
to a lack of demand. While there are still some charging stations in a few small European countries, it turned
out to be impossible for the former early adopters to use their cars and plan their routes as they use to do
before. The hybrid market has also collapsed due to uncooperative mayor markets like China and the US.
Furthermore most of the other countries were not able anymore to fund financial incentives and tax-reductions
for the hybrid car owners.
 The EuAm GreenFlight Aircraft Engine Company has filed for bankruptcy. Only 3 years after the company
was started, its mayor shareholders EU and USA did not want to continue this money consuming project.
Production of the 25% hybrid light kerosene engine needed to be delayed until 2020 and the last clients
have lifted the option to withdraw the contracts. Furthermore consumer research pointed out that only 2% of
the passengers are willing to pay the expected 200% premium compared with tickets for flights in normal
aircrafts.
 Aljazeera reports that the Israel-Palestine trade union has invited Iran to join the Jewish-Arabic Wealth
Council. They will meet next month to further discuss how to slow down the region’s economic growth and
prevent it from overheating. Furthermore they will discuss how to the deal with the large amounts of western
immigrants applying for a residence permission in the Arabic subcontinent.
 India has now officially taken over the second place as economic superpower. Only outranked by China, the
Indian miracle has ended the era of western influence. In addition Tata cars new CEO Satpal Daryanani was
delighted to announce that the company had sold 400 million cars since the beginning of the decade and
expected growth to continue in the coming year.


Scenario 3: Chaos Picnic and an Alternative Ride!

[Low political stability in OPEC countries, High adoption use of alternative technologies/energies in transportation]

Highlights/End State:

 Many Middle East and African Countries are in a major political and socio-economic disorder across the globe.
 UN, along with many other member nations, is trying to help these nations resolve the internal conflicts and bring in
political order.
 High mismatch in crude oil supply and demand, with oil production in OPEC countries falling down to 30 year low.
 Crude oil prices soar to never seen levels of $300/barrel causing major disruption in global economy resulting in
slump in consumer demand due to high cost in goods.
 Double digit inflation in many countries across the world due to high commodity prices caused due to high
transportation costs.
 High oil prices forcing people to adopt many other alternative technologies or energy sources in transportation and
other related sectors that are now rendered cheaper than petroleum.

Highlights of logic behind path towards end state/How we got there?
 The riot/revolution in Egypt, Nigeria and many OPEC countries are making better aware of their rights.
 The conventional media, social media and internet played a crucial role in unfolding of this political turmoil.
 Lack of sufficient sustainable oil reserves and new exploration activities resulted in high dependence on OPEC
countries and with the current turmoil resulted in rise in oil prices.
 OPEC cartel was, unlike EU, only an association for collaboration on oil and petroleum prices. It thus did not
provide any platform for cooperation on many other fronts like economic, social and insurgency issues.
 Alternative technologies being costlier than petroleum made it less attractive due to high initial costs.


 Starting from Tunisia, on early 2011, the revolution spread to Egypt.
 It was a Facebook status message of an unemployed boy whose complaint was not allowed to register that triggered
the Tunisia revolution.
 When internet was totally banned during the Egypt riot, Google started a voice tweet service that enabled people to
share information in twitter by calling up a phone number, which was then translated to text.
 Purdue University’s system to harvest heat from car’s exhaust, Plant mimicking machine produces fuels using solar
energy, CSIRO’s Brayton Cycle Project4. Pure platinum alternative promises breakthrough in fuel cell technology5
 150,000 Solar Jobs in the UK by 2016 6

4 Top 10 renewable energy technology breakthroughs in 2010, http://pennalternativefuels.com/content/top-10-renewable-
energy-technology-breakthroughs-2010
5 http://www.gizmag.com/platinum-grade-breakthrough-in-fuel-cell-technology/15220/
6 http://www.capitalgreen.eu/blog/150000-solar-jobs-in-the-uk-by-2016/


Scenario 4: A Crude World

[Low political stability in OPEC countries, Low adoption use of alternative technologies/energies in transportation]

Highlights/End State:

 Highly difficult and expensive for companies to find and extract crude from wells.
 Religious differences reach a crescendo. Total lockdown in Nigeria.
 The conflict in the Middle East shows no signs of dying down. Heavily monitored by the U.N and the
developing world.
 The global demand for oil reaches a new high with the emergence of new developing economies in Latin
America.
 Increased air travel in the developing world.
 High switching costs hampers mass technological usage of alternative fuel cars.

Highlights of logic behind path towards end state/How we got there?

 Reduced oil findings in the traditional settings. Companies are heading to more remote areas to dig for oil.
 Increased wealth is shared among the enterprising people in the developing world while populations living in
rural areas do not have access to this wealth.
 Continued terrorist threats given to the developed world
 Sensitive conflict regions in the Middle East and Africa.


 Air India orders 100 new A380’s to catch up with domestic demand.
 MEND overthrows government. Dictatorship glooms in Abuja.
 Iran successfully tests its new biological weapons, face even more sanctions
 Ahmadinedschad issues a fatwa over the internet. Closes all communication line to the outside world
 GM loses big bet on electric car Panther, Bankruptcy looms.
 Barrack Obama announces plans to curb insurgency in Iraq
 50 new skyscrapers in 5 years. Brazil bulldozes ahead.
 India, China among the most economically disproportionate countries in the world.
 Oil discovered in Ivory Coast. Abdijan burns as rival parties are locked in battle with funds from the oil world
 Shell goes to the Amazon in hope of oil. States that it will ensure that the ecological balance at ANY cost.


Scenario Planning Effect Of Oil Prices On The Global Economy

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