Paisie: Assessing an Uncertain Energy Future in Three Scenarios

Several years ago, Stratas Advisors developed three long-term energy scenarios covering the period through 2050: 

Scenario 1: Muddling Through One “Crisis” After Another

Scenario 2: Shifting to a New Global Framework to Facilitate Energy Transition 

Scenario 3: Breaking Down into Multi-polarization with a Focus on Energy Security 

The first scenario describes the world through the lens of reality and pragmatism in which policymakers need to strike the appropriate balance between basic societal and economic needs and more ideological objectives within the context of addressing short-term disruptions and crises. Since the development of the scenarios, the first scenario most closely resembles our reference scenario that is used as the basis for our forecasted supply, demand and prices.

The alternative scenarios, in simple terms, can be equated with a more optimistic view of the world (Scenario 2) and a more pessimistic view of the world (Scenario 3).

The macro-level inputs, along with the associated supply and demand fundamentals, lead to dramatically different scenarios with each scenario encompassing unique risks, challenges and opportunities. 

Three scenarios

The first scenario, “Muddling Through One ‘Crisis’ After Another,” presents a future in which the energy transition is happening but progress ebbs and flows with the potential for shifts in policies. Within this scenario, oil prices remain relatively high until oil demand finally peaks later in the forecast period. This dynamic creates strategic ambiguity for decision-makers in the energy sector.

The second scenario, “Shifting to a New Global Framework to Facilitate Energy Transition,” presents a future in which there is global buy-in and cooperation in pursuing carbon reduction and energy transition. Within this scenario, oil prices can move higher during the earlier part of the forecast period because of tighter supply/demand conditions resulting from reduced oil-related investment coupled with lagging availability of low-carbon alternatives.

The third scenario, “Breaking Down into Multi-Polarization with a Focus on Energy Security,” presents a future that is a return to a global dynamic that is more akin to the 1960s and 1970s when there was less integration, more economic friction and more potential for conflict, including conflict between the major powers.

Within this scenario, oil prices bounce between an upper band and lower band of prices. The future described by this scenario can present the most significant challenges, given that there will be the need to manage the non-market risks more proactively and ensure appropriate level of strategic and operational flexibility to react to “shocks” and the resulting aftermath.

Multitude of challenges

Based on the last couple of years—and recent events—the third scenario has the potential to be a more likely description of the future than the first scenario and certainly more likely than the second scenario. There are ongoing regional conflicts with the risk of becoming broader in nature, including geographically, as well as involving the major powers in direct conflict. There is also the threat of trade wars that will affect economic growth and market conditions.

While it is not a given that this pessimistic scenario best represents the future, it seems that an inflection point is close to being reached. Additionally, each region and major economy are facing not only short-term challenges, but also long-term challenges that are structural in nature and with the potential to have substantial consequences that only add to the uncertainty about the future.