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PDW Strategies for Managing Uncertainty: Hedging in the Energy Industry

  • 1.  PDW Strategies for Managing Uncertainty: Hedging in the Energy Industry

    Posted 07-31-2019 12:55

    Friday, Aug 9 2019
    12:00PM - 1:30PM

    Westin Copley Place Boston
    Room: Adams/Parliament


    The terms risk and uncertainty are interchangeable in ordinary speech. Nonetheless, Frank Knight, one of the major figures in early 20th century economics, distinguished between them. This symposium takes up the question of how major firms in the energy industry, defined here as the oil and natural gas and motor vehicle sectors, manage risk and uncertainty. Specifically, it deals with two major uncertainties they confront -- price volatility and climate change -- and how they have led to adaptations in their strategies in the 2012-2018 period.


    The period of 2012-2018 was one in which the price of a barrel of varied from a high of $100 a barrel to a low $30 a barrel. This period also was one of mounting pressure on energy companies to respond to climate change, which culminated in the Paris climate change agreement of 2015. How have different sectors and companies in the energy industry responded to these uncertainties? They had to make long-term strategic investments without knowing what future conditions would be and if these investments would be pay off. If the energy industry companies miscalculated and made imperfect choices, the effects could be devastating for them and for the planet. On the other hand, their choices also could have the beneficial effect of bringing about needed adjustments.


    The purpose of the symposium is to reflect upon how these companies hedged their bets, that is how did they react to a situation when the future was unknown and they could not predict with certainty whether the strategic bets they made would pay off. The participants in the symposium, in alphabetical order, will be:

    • Timo Busch (University of Hamburg)
    • Moshe Farjoun (Schulich School of Business)
    • Tobias Hahn (ESADE)
    • Alfred Marcus (University of Minnesota Carlson School)
    • Jonatan Pinske (University of Manchester)
    • Jorge Rivera (GWU)
    • Gurneeta Vasudeva Singh (University of Minnesota Carlson School)
    • Jeffrey York (Leeds School University of Colorado)

    Professor Marcus will discuss his new book Strategies for Managing Uncertainty: Booms and Busts in the Energy Industry published in 2019 by Cambridge University Press (20-25 minutes).

    There will be a moderated discussion with speakers and the audience. The workshop's purpose is to explore hedging mechanisms employed by integrated oil and natural gas as well as motor vehicle companies in the energy industry. In managing risk and uncertainty,  

    Hedging is a theory of decision making that is different from the efforts corporations make to optimize returns. It also differs from bounded rationality, which claims organizations cannot optimize, though they may attempt to do so, because they lack knowledge, their time is limited, and they suffer from other decision-making shortcomings. Hedging is more akin to the risk adverse biases that prospect theory has proposed, but it applies the notion of risk aversion to organizations as a whole. It attempts to define the mechanisms organizations use to protect themselves from losses and preserve their survival when the future is unknown and they cannot predict with certainty whether the strategic bets they have made will pay off, or if they actually turn out to be miscalculations of grand proportions, which can end their existence

    Alfred Marcus
    University Of Minnesota
    (612) 624-2812