Economic Modelling a Game of Chance

Abstract

Abstract The requirements for project evaluation and acquisition analysis grow more complex daily, and demand the use of sophisticated computer assistance. What farm do the systems and models take? Can they really predict the future? The author sets "out a scenario for the use of computer models in this field and, while recognizing their value, cautions that such systems are only extensions of their human creators. As such, they contain not only the rigidity of machines, but also the fallibility of homo sapiens. INTRODUCTION The Rules of the Game In 1866, William Gladstone addressed Parliament with the words, "You cannot fight against the future. Time is on our side." Just over a century later, the future is certainly no more amenable to control, but there is a considerable question as to whether time is on our side. We are in an era of energy mega-projects the lifespans of which can exceed the working lives of those mortals who initiate them. The destinies of many corporations are entwined with these ventures into the uncharted future, and the risks are copious enough to test the most resilient captains of industry. This situation has in turn created a sharp increase in the importance of economic evaluations using advanced computer systems: a development which may" have far-reaching consequences for the traditional engineering role in projects. To see what is happening, consider some of the following points: The construction of an oil sands plant later in this decade may require average disbursements of around, eight million dollars per day during peak construction years. It may take six years from first production until the capital expenditure has been recovered (eleven years after detailed engineering design is completed), and this is against a background of reasonably proven technology and experience from two working oil sands plants. Estimates of Beaufort Sea and East Coast developments provide similarly mind-numbing statistics. Even these projections are made within a "comfort zone" which excludes such assumptions as wars or major catastrophes, wide divergences in price versus cost inflation or social revolution which might damage the fabric of free enterprise beyond repair. Thus, the worst ravages of the future are instantly negated by the elementary assumption that economic variables must be constrained within boundaries established by our current experience. Proponents of "Murphy"s Law" are silenced by the wisdom that major diversions from economically reasonable assumptions will either be offset by man"s infinite capacity to survive or we all go down the tube together (a convenient but hardly comforting, point to begin). Having defined the boundaries for our projections of future possibilities, we have to face up to reality number two: the rules of this game are complex and never static. As a starting point, we have a fundamental equation: Profit = Revenue - Costs - Taxation However, a glimpse at Figure I will show that this particular game is run by the state, and the house advantages are several.