Deja Vu?

The automotive Deja Vu is DeLorean. It was this day 34 years ago that the DeLoreanMotor Company went to the wall, leaving us thinking we were destined only to see these stainless steel cars in the movies. Well, thanks to a recent change in US regulations, smaller volume auto manufacturers will be allowed to produce up to 325 vehicles a year without all the automotive red tape of modern manufacturing. DeLorean is hoping to be re-producing their classic gull-wing as soon as 2019 in the United States.

The energy markets are giving me a similar sense of Deja Vu!

It was back in 2003 that energy consumers used only market fundamentals as the prime market price indicator on which to base decisions. As energy prices began to lift upwards (against the fundamental view), organizations were adamant this temporary blip would correct downward. It didn’t, eventually reaching $12 d/th….twice (2005 & 2008). But, then came the financial crisis, demand uncertainty, and a significant amount of shale gas, providing the entire economy with much-needed relief.

So, here we are again, with low energy prices and a mass of invincible fundamental market data predicting a low future, so what are energy consumers doing differently to prevent a re-occurrence?

Zip – Nada – Nothing – Niente – Nichts

Interesting eh.

The massive price shocks which saw so many companies shutter their doors for good in 2005 and 2008, can be avoided and managed – so why aren’t energy consumers doing anything about it. I mean, we all hope that energy prices remain low, but it is the canny energy buyer who introduces mechanisms to protect against rising prices and benefit from falling ones too for years into the future.

It seems that #1. we don’t learn lessons from the past and #2. provided all consumers are doing the same thing, it’s okay (we call that the herd instinct).

Dan Egan, director of finance and behavioral psychology at Betterment, said, “We should be benchmarking and improving on our performance relative to our own goals. Not others. Every day we are presented with benchmarks that have nothing to do with our goals, yet challenge us to beat them. It takes real thoughtfulness and control to craft a benchmark for yourself and measure performance relative to it, not others.”

Well, if you review your decision-making processes and the way you apply them to buying an indirect spend that is a commodity, you will find that you need to change your approach in the way you benchmark, measure, and control positions.

Annie Duke – author of Thinking In Bets, says that “wrapping our arms around uncertainty and giving it a big hug will help us become better decision-makers.” Fair enough. If we’re going to have to eat our uncertainty broccoli anyway, it may be best to swallow it down before it goes cold and limp.

The canny energy buyer will hope for the best but always plan for the worst.

Luckily, any chance of an energy Deja Vu is removed thanks to pioneering work in the area of risk management and energy procurement. Energy consumers now have access to the same tools as their supplier or bank use to manage the risk they take buying energy. While energy consumers are not traders, they adapt the mechanisms, and the principles remain. There is a valuation of the risk you take every single day using (VaR). This includes a supplier agreement that allows fixing and unfixing to take place, a set of controls on the amount of risk you can take (risk limit) expressed as a dollar value to achieve your objectives and a procedure that manages the process.

This instantly removes emotion and speculation from decision making – you transact because the market is doing something you want to act on. I happily challenge anyone to argue that our price risk management tool for energy procurement is not the logical conclusion of how an energy consumer should buy energy.