The paper is the result of the attempt to subject the socio-economic world of energy to an analysis regarding a phenomenon called the ‘Black Swan’. This concept has been made popular by Nassim Nicholas Taleb, who has become a popular point of reference ever since the beginning of the financial crisis in 2007. Based on his work, the paper first defines the concept of the ‘Black Swan’ as an extremely unlikely high impact event, which is evidently unpredictable ex ante; however, is regarded as potentially avoidable by most observers ex post facto. The underlying assumption is, that against commonly held believe, it is not a long chain of incremental and statistically relevantly many events that makes history, but a seemingly insignificant number of outliers, or hence, ‘Black Swans’. Consequently, in its second part the paper focuses on a critical examination of the strategic prediction models used in the energy business today, which are mainly based on driver based models. Relying on Gaussian Bell Curve type normal distributions in order to predict future supply and demand, these models try to predict future price and value chain developments, ultimately searching for a strategic direction. Using historic data and experiences in order to review to what extent the ‘Black Swan’ influenced the development of the energy world in the past, the paper questions this approach by showing that time and again similar predictions have been rendered obsolete by real developments. In order to apply the necessary methodological rigor, ‘Black Swans’ and their impact are measured according to predefined criteria and indicators, elaborated in the first part of the paper. These indicators are mainly qualitative, however, as an empirical anchor the paper uses the historical development of the oil price, focusing on peaks and lows. The most striking historical cases of sudden price rise or decline are examined in detail in order to find commonalities and differences. Finally, based on the findings of this historical analysis, the paper raises the question, whether it is possible to draw any practical conclusions for the future, looking for methods, which could provide protection from ‘Black Swan’ events.
At a glance
- Applies Taleb’s Black Swan criteria to historical energy events
- Uses crude oil and electricity prices as indicators alongside qualitative analysis
- Examines the California electricity crisis and its deregulation framework
- 72 sources in the bibliography
- 4 tables
Table of Contents
1. Introduction
2. Methodological framework and definitions
2.1. The ‘Black Swan’ – a concept and its application
2.2. How to measure ‘Black Swan’ impact - energy prices as an indicator
2.3. A critique of Energy outlooks – predictions in the light of ‘Black Swans’
3. Analysis – The ‘Black Swan’ in the history of oil and electricity
3.1. Oil – a global commodity in turbulent times
3.1.1. 1945-1970 – A phase of stability
3.1.2. The oil shock and how it changed the world
3.1.3. The Iran Crisis
3.1.4. The 1986 oil price collapse
3.1.5. The late 80s, the demise of Communism and the first Gulf Crisis
3.1.6. 9/11 and its aftermath
3.2. Electricity – a versatile necessity in times of crisis
3.2.1. The role of electricity prices
3.2.2. The California Energy Crisis
3.2.3. The 2008 Central Asia Energy crisis
3.2.4. The 2011 Tsunami
4. Is protection possible? Discussion and outline of risk mitigation measures
5. Summary and Conclusion
Objectives and Themes
This thesis investigates how rare, unexpected, high-impact events affect oil and electricity systems and asks how their consequences might be mitigated. It applies Nassim Nicholas Taleb’s Black Swan framework to historical energy crises while questioning the reliability of conventional forecasts.
- Black Swan events and the limits of prediction
- Oil and electricity prices as indicators of extreme impacts
- Historical oil shocks and regional electricity crises
- Energy outlooks and scenario-based forecasting
- Redundancy, system fragility and risk mitigation
Excerpt from the Book
2.2. How to measure ‘Black Swan’ impact - energy prices as an indicator
By energy we henceforth mean oil and electricity and the scope of our examination will be limited to roughly the period starting from the aftermath of WWII. This makes sense in so far, as the current framework of world affairs and economics was largely fixed by the results of that war and has not been changed fundamentally ever since. The boom in the western world following the war was fueled by oil and electricity and the global economy became largely depended on them. Patterns of trade and reliable markets emerged, resulting in global commodity prices. We ought to use this to the advantage of our investigation.
After all, if we are going to search for the ‘Black Swan’, a common variable regarding the examined system is needed. Let us recall: Taleb proposed three elements that constitute the ‘Black Swan’: “[…] rarity, extreme impact, and retrospective (though not prospective) predictability […]”. As a counter balance to the historic narrative, which – we remember – is usually quite misleading but delivers a retrospective explanation, we need an empirical indicator that allows us to identify sudden shocks to the system. These shocks would indicate an extreme impact and at the same time allow us to separate the usual from the rare. Consequently, the best indictor in the given field of interest of this paper seem to be the market prices for crude oil and electricity, which shall be used as a proxy, helping to identify ‘Black Swans’, alongside the qualitative analysis. Changes, be they gradually or abrupt, are reflected by the prices, which mirror the relevant market developments and reflect external shocks. Finally, it is relatively easy to retrieve the widely available price data and to put it into a common framework. This makes energy prices a reliable and robust indicator that allows us to make comparisons and will underpin the qualitative examination.
Chapter Summaries
1. Introduction: Introduces the importance of energy security and outlines the investigation of unexpected, high-impact events in the energy business.
2. Methodological framework and definitions: Defines Taleb’s concept, explains the use of energy prices as indicators and examines the assumptions behind energy outlooks.
3. Analysis – The ‘Black Swan’ in the history of oil and electricity: Examines historical oil-market disruptions and electricity crises in California, Central Asia and Japan through the proposed framework.
4. Is protection possible? Discussion and outline of risk mitigation measures: Discusses redundancy, organizational size and system fragility as ways of considering exposure to extreme events.
5. Summary and Conclusion: Brings together the historical analysis and the discussion of potential approaches to reducing exposure.
Keywords
Black Swan, Nassim Nicholas Taleb, energy security, oil prices, electricity markets, risk mitigation, energy forecasting, price volatility, systemic risk, redundancy, California energy crisis, Fukushima, historical analysis
Frequently Asked Questions
What is the thesis about?
It examines the effects of rare, unexpected events on oil and electricity systems and considers ways to mitigate their impact.
What are its main themes?
The main themes include energy-market shocks, forecasting, historical crises, system fragility and redundancy.
What is the central research question?
The thesis asks how Black Swan events have affected energy systems and whether their consequences can be mitigated.
What method does the author use?
The author applies qualitative Black Swan criteria to historical cases, using crude oil and electricity prices as indicators alongside historical evidence.
What does the main analysis cover?
It traces oil-market developments after the Second World War and examines selected regional electricity crises.
Which keywords characterize the work?
Key terms include Black Swan, energy security, oil prices, electricity markets, forecasting, systemic risk and redundancy.
How does the thesis approach the California energy crisis?
It examines deregulation, market incentives, corporate conduct and weather conditions in relation to the crisis.
Why does the work consider the 2008 Central Asian energy crisis?
The case allows the author to examine electricity shortages and blackouts in a regional system affected by cold weather and low water levels.
What role does the 2011 Japanese tsunami play in the analysis?
It provides a case for examining the effects of an earthquake, tsunami and nuclear accident on electricity supply and interconnected energy systems.
- Quote paper
- Magister Artium Ullrich Müller (Author), 2012, Oil, electricity and Taleb’s ‚Black Swan‘, Munich, GRIN Verlag, https://www.grin.com/document/204104
