Scenario planning for the future now essential

Index Sept12.pngThe 25 year economic Supercycle between 1982-2007 led to a major change in companies’ budget processes. They could simply assume that growth would be more or less constant. And so they were able to focus on their own specific product silos, and better understanding customer needs.

Thus by the mid-2000s, for example, it was common for companies to assume that oil prices would remain in a relatively tight range. $22/bbl was often taken as a Base Case, with $20/bbl as Downside and $25/bbl as Upside. A decade earlier, they might have taken $15/bbl as the Base, $12/bbl as Downside and $18/bbl as Upside.

Of course, discussion took place around these numbers before they were finalised for Budget purposes. But basically, the conclusion was the same. Oil prices would remain low; consumers would therefore have plenty of spare cash to spend on the products that drove petchem growth.

Today, however, we are living in a VUCA world, where Volatility, Uncertainty, Complexity and Ambiguity dominate. The idea of stable oil pricing seems to belong to a different age. Instead, companies need to consider the impact of widely different prices:

• If Israel bombs Iran, then $200/bbl could easily be seen
• If China’s GDP growth slows to 5%, $50/bbl or lower would be possible
• Whilst one cannot ignore today’s price of $100/bbl

The monthly Boom/Gloom Index provides further evidence of these major uncertainties. Hopes of more US Fed cash have taken the Index (blue column) higher again. And the S&P 500 Index (red line) is back at its highest point since 2008.

Does this mean all our problems are now finally behind us, and sustained growth is about to return? Or are we to remain in the ‘stop-start economy’ or the past 4 years? Or could the combination of the Eurozone crisis, China’s slowdown and the US ‘fiscal cliff’ lead to something much worse?

Of course, ignoring these uncertainties might work out well, if one happened to guess right. But guessing wrong might bankrupt the business. Scenario analysis, as developed by Shell and ICI in the 1960s/1970s seems essential once more.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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