I have been working on some models based on worst case scenarios. It started with energy prices and energy availability in the long run – the very long run – in excess of 25 years. The worst case scenario happens when the current price of energy is kept artificially low which, while being politically expedient and very convenient for consumers, doesn’t provide incentives to do the exploration and R&D needed to develop the next logical source of energy. Take this situation for example: If the price of oil roses to $140 per barrel and showed an upward long term trend then there is a good incentive for business to start to invest in commercializing alternative fuel supplies, like say hydrogen or sustainable bio-fuels (not those that take food off the table), and perhaps more importantly the infrastructure needed to harvest, transport, process, distribute and sell the new fuel. The reason the infrastructure issue is so important is more about time than money. It takes time to develop a viable fuel source but to put all the infrastructure elements in place all around the world to take advantage of this new discovery could go on for decades. Look at Nova Scotia’s adoption of natural gas as a fuel source for example. If someone had shut off their oil furnace in Bedford five years and said that “we have natural gas now so lets just wait for that” you would be pretty uncomfortable by now and still not have a source of fuel for you furnace in the near future.
An efficiently operating market would allow prices to rise as supply decreases or demand increases or both as is the situation in the carbon based energy market. Rising prices is the signal to the alternative suppliers in the market that it is time to gear up for the day when their product is financially viable knowing their time to market. It is also a signal to the capital markets that the alternative suppliers are becoming good investment targets (and that those with assets in the old scheme are entering their last days). If however, prices are kept artificially low the market will have much harder time justifying the investment in an alternative.
The worst case scenario is based on this premise; that prices are kept artificially low, thus preventing investment in the alternative and then there is a sudden shock to the supply of the original fuel (say a war in the middle east) and we are not prepared with an alternative in great enough supply to match demand. What happens is that price goes through the roof and if the magnitude of the shortages and the prices increases are great enough many people (perhaps hundreds of millions) are completely shut off from energy supplies as well as all the products that have oil as a basis for their existence. The markets will correct but it will take time to bring the alternative on line but in the interim be prepared for an adjustment that could range from inconvenience to discomfort to outright misery. (For more on this particular topic see November’s Business Voice).
Energy is just one of the worst case scenarios that I have thought about but they have the same market interference/market shock background and trigger. The interference does not have to be price per se, as in the Nova Scotia labour market for example, it can just be blindness to the real situation. But it always plays out as players not paying attention to the market forces, not taking action to correct or adapt to those market forces and being forced into a period of very uncomfortable transition when the real market forces exert reality on an unsuspecting world.
The lesson is that we must understand market forces and the role that interference plays on those markets. Smart business people need to be able to see through the fog of market interference and plan and invest for conditions that a free market would make very clear.