As an economist, I am a strong advocate for quantitative risk analysis. I believe that risk analysis/management should be utilized heavily to support strategic decisions of all kinds.
In particular, I am fascinated with risk analysis in the energy sector. For instance, oil price fluctuation affects the composition of Indonesia’s state budget. In early 2011 the government of Indonesia estimated that the price of crude oil would stay in the vicinity of $80/barrel. With that assumption, it predicted that it needed to allocate energy subsidies roughly equal to $10 billion for gasoline usage and $5 billion for electricity generation. The estimates were off: oil price has hovered around $100/barrel. In June, the government proposed a revision to increase the subsidy to $15 billion for gasoline and $7 billion for electricity, giving a total subsidy of $22 billion.
Each $1 increase in the price of crude oil (above $80) will increase oil subsidy by USD$320 million and electricity subsidy by USD$117 million. The subsidized gasoline price is below its “natural” clearing price, resulting in excess demand and shortage of supply. Subsidy creates a price disparity that causes smuggling (illegal export) to non-subsidised markets (10%–15% of the total subsidized gasoline is lost).
The government of Indonesia should deal with the consequences of oil price fluctuation by way of comprehensive risk management as follows:
- Decrease the expensive diesel-generated electricity
- Increase coal, gas, and geothermal-generated electricity
- Shift some natural gas from export to domestic market
- Decrease gasoline subsidy to decrease gasoline demand
- Increase electricity tariffs
- Reduce gasoline smuggling by imposing stronger penalties and better policing
- Oil price hedging
- Increase oil production
Below is my compilation of risk analysis material with focus in the energy sector and a backdrop of Indonesia. I also have developed a small risk analysis program that estimates the value (Net Present Value) of an oil field based on reservoir simulation output and depending on several parameters (fluctuation of oil price, and different cost parameters).
If you are a decision maker in the energy sector and are looking for something tangible for assessing the resilience of your strategies, this material might be a help.
Darmawan Prasodjo, PhD