It is interesting that we were discussing climate-related risks a few months ago, and now the problem we are facing has become the dominant discussion. Although epidemics are nothing new and we have examples like Sars or other flu types, there are hardly any articles about a possible epidemic’s effect on energy demand and energy supply.
During events like these, it is useful to look back a little bit and see why we missed it. One of the best journals in the energy area, Nature Energy journal, has a dedicated February 2020 issue to “Extremes in Energy Systems.” Before Coronavirus, the whole “extremes” debate was on climate change. Are we so much into the climate risks such that we missed the other “existential risks”?
We have to be fair to the energy modelers. You generally project the possible vision derived from current data and information. A pandemic at the current stage has not been a major issue for energy, leaving aside airline companies during Sars. In the article “Energy modelers should explore extremes more systematically in scenarios” written by D.L.McCollum et al., there are three types of categories of extremes. They are
- Category 1: Transient Events like subprime mortgage (maybe anticipated but not planned for)
- Category 2: Disruptive drivers like mass automation
- Category 3: Unexpected outcomes are “not even on the radar.”
So there is a categorization, an abstraction in the journal. Transient events can be part of the models and may have a raison d’etre since there are lots of historical events. Disruptive events are available from TEDx evangelists. Unexpected outcomes are hard to expect, and since they change the historic trends, the direction of new trends are hard to grasp. Major events create such a captive narrative that our mental mindset gets stuck with such events and fails to think outside this universe. Energywise, we even thought about volcano events, hurricanes but not pandemics. Because for the current generations, it didn’t create a captive narrative until now.
Interestingly enough article does not mention pandemics or epidemics once. The rest of the articles in that issue is oriented toward climate change, climate change finance risks, other extreme events. Coal bankruptcies, company filings on the risks, and stranded assets are well mentioned but not pandemics. If you think politicians are not ready for such a huge event, guess what the best minds were working on: climate change and related risks. But not other risks.
It is not to belittle the climate change debate, but the dominance of this issue on the political and scientific sphere leaves us vulnerable to other risks. But this is not without reason. Climate change teams have a model and have credible forecasts for a possible future. They were relying on these models. They produced agreements, cooperations, institutions, and economic outcomes. This positive feedback created even more climate change discussions.
On the other hand, pandemics do not even have these professional models, and they do not have strong institutions and solution sets for the next events. The forecast is completely random, and no one has any idea about when the next pandemic will hit, but it will hit. Incorporating such a vague issue in models and calculations is a very hard job. Even if I write here, “there will be another pandemic affecting energy demand and supply, I may act as a perfect forecaster in the next 30 years without giving a timing.” It is how undefined these events are.
If we think about what has motivated Nature Energy for an issue on extremes in energy systems, it was probably last summer’s wildfires in California and its effect on electricity supply as well as the bankruptcy of PG&E. Practically we can conclude that the issue was more about the lessons from past events.
Futurewise, there was no expectation of pandemics since a-no close pandemics happened, b-it was not a US issue. That concludes us to the geopolitical meaning of “extremes.”
The difficult issue is how to add “extreme forecasts” to our current energy modeling practices. We probably have to look at the issue in the tandem view. The first one is the standard modeling that is based on normal economic growth and energy demands. The second one should be a different regime than the first one. If we try to explain the “extremes,” there will be thousands of such events in this connected world. It is better to define normal forecasts as boundary and then change the regime to “beyond normality boundaries” modeling for risk purposes.
Even if our models correctly predict extremes like – 20% drop in world oil demand in a matter of months- there is little to do in terms of modeling practice. The timing, geography, and vector of this extreme are important. But we can create buffers for such hard hits. Also, there is an ever interconnecting constant across each extreme event, energy prices, and the effects on consumers and producers as well as a consumer-producer effect on energy prices.
Modeling is an exercise to simplify complex events into a bunch of mathematical and logical relations. It is a mental model of the real world. While simplifying the real world, we may miss a lot. But extremes are not limited to climate change or weather, yet we are not sure what to expect. The modeling practice for “unknown unknowns” does not exist, but we are living inside one of them. We should better learn to look in more abstract terms and beyond normality claims to have better models.