To put this into simpler terms, we can say that a black swan event has the following three attributes: 1) it is an “outlier”, beyond the realm of regular expectations, because experience cannot point to its possibility; 2) it carries an extreme impact; and 3) after the fact, we produce explanations for its occurrence, making it explainable and predictable.
We can therefore identify three characteristics of black swan events: rarity, extreme impact and retrospective predictability.
Given recent experiences, I think we can identify many black swan events. A classic and often-cited example is the case of the previously successful hedge fund named Long Term Capital Management (LTCM), which was driven into the ground in 1998 as a result of the ripple effect caused by the Russian government’s debt default. The Russian government’s default represents a black swan event because none of LTCM’s computer models could have predicted this event and its subsequent effects.
Other black swan events in history that have had a significant influence in shaping the world we live in are: the first World War, the Great Depression, the development of personal computers, the rise of the Internet, the September 11 attacks and the collapse of Bear Sterns and Lehman Brothers in 2008.
In the context of Thailand, I think we can also identify quite a few black swan events in our own country. Most recently, the flood crisis in late 2011 that inflicted severe damage on the Thai economy (official losses estimated at Bt1.3 trillion – about the same loss figure as our financial bailout during the 1997 financial crisis).
Obviously, although difficult to predict, we have to be vigilant against “black swans” flying our way. External shocks such as potentially devastating conflicts on the Korean Peninsula or in the Middle East could be black swans that we have to watch out for. However, these external shocks are often beyond our control. We have to be vigilant and on guard against domestic black swans that may be an Achilles’ heel.
In the coming years, I believe domestic energy supply could be Thailand’s black swan. Based on reliable estimates, Thailand’s proven domestic energy reserves (i.e. natural gas and crude oil) will last only for the next 7-10 years under the current rate of extraction and consumption. Any additional energy resources we can find in the Gulf of Thailand will be more difficult to extract and may be closer to environmentally sensitive areas (such as tourist destinations). Commercially viable energy exploration sites may now lie only in the disputed area of Thai-Cambodian territory in the Gulf of Thailand.
Policy-makers will soon have to make strategic decisions about Thailand’s future energy supply. We are increasingly reliant upon neighbouring countries, particularly Myanmar and Laos, to supplement our domestic energy sources. But these countries are rapidly growing with their own increasing energy demands to meet in the future.
The future of energy in Thailand could look grim indeed unless we properly plan ahead. Thai energy companies have been aggressively looking for energy sources far outside of Southeast Asia (i.e. Africa and Australia) – and this is now a necessity to cope with our demand. I can think of no better example of the potential effect of energy shortages in Thailand than the recent electricity shortage scare in early April.
As we all know, Thailand is very much energy dependent, and also an inefficient user of energy. At present, power sources for electricity generation in Thailand come mostly from natural gas at 67 per cent, of which 39 per cent comes from Myanmar. Everyone agrees that Thailand needs to diversify its energy supply sources as well as promote the efficient use of energy. Black swan events (i.e. a power supply disruption) would certainly cause havoc in the Thai economy. Obviously, we need to learn how to cope with black swan events. I think it is imperative that part of our national agenda should be to build a “robust” society that can deal with negative black swans as well as exploit positive ones.
Ultimately, we must learn to cope with uncertainties in the world today. We should be forward-looking and diversify in order to be resilient and flexible when shocks happen. This also means that we have to prepare exit strategies and contingency plans for potential black swan events. I think the motto “hope for the best, prepare for the worst” is very applicable to managing Thailand through the turbulence that we see in the world today and will continue to see in the future.
Dr Chodechai Suwanaporn is executive vice president, energy economics and policy, PTT Public Company Limited. [email protected]