The Application of System Dynamics (sd) Simulation to Volatile System Management

One of the most volatile market environments of our time is the energy business. Whether the energy medium is gasoline, electricity, or natural gas, traditional market forces do not seem to exert the same influences as in other markets. Indeed, the behavior of the energy market sometimes seems to defy traditional understanding of the law of supply and demand. Management of, and survival within, such a system requires deep understanding of the system’s potential behaviors under many different scenario settings. System Dynamics (SD) is posited as the most appropriate first methodology to apply when a system with highly volatile behavior is under scrutiny. This paper presents the background and some of the lessons learned from projects in which SD simulation was applied to analyze and understand the highly volatile energy market. Two projects are described in which different aspects of the energy market were modeled. A natural gas strategic acquisition simulation provides a tool for examination of market dynamics with a focus on acquisition strategy, while a gasoline business simulation provides insights into the supply side of the energy business. The simulations were used to examine system physics, understand endogenous and exogenous influences, validate performance measures, and to produce a systematic process for energy strategy development. The application of SD to volatile environment management is not new; the scale of these simulations, and some of the techniques used for design and rollout potentially make the projects unique.