Extended supply chains and energy shortages are among the biggest risks facing the global economy over the next decade, according to a report by the World Economic Forum.
Outsourcing of both manufacturing and services to lower-cost countries, facilitated by improvements in technology, logistics and a reduction in trade barriers, had been “a major driver of global prosperity”, the report noted.
But it warned: “As the global economy has become more integrated, vulnerability to disruption of the supply chains which hold the global economy together may have increased.”
These vulnerabilities “are generally poorly understood and managed”, according to the authors. This is partly because supply chain risks are obscured, “thanks to a complex range of sub-supplier arrangements”.
The report, Global Risks 2008, published ahead of the World Economic Forum’s annual meeting in Davos later this month, acknowledged that developing risk management and mitigation strategies was “daunting”.
Companies could take steps to address the issue by understanding the value added at each stage of their supply chain; developing a clearer picture of key areas of risk; quantifying that risk where possible; and assessing the opportunities for risk transfer and financing.
But the heightened potential for individual supply disruptions to have global ramifications meant that governments and international institutions also needed to take action. “Effective management of global risks requires a collaborative approach in public-private partnerships at an international level,” the report argued.
On energy, there were “few reasons” to believe that prices would fall and several to believe that they would continue to rise.
Speaking at the London launch of the report, David Nadler, vice-chairman of Marsh & McLennan Companies, a global insurer and risk adviser, and contributor to the report, said: “The global economy has demonstrated remarkable resilience to increases in energy prices since 2004. But the limits of resilience may be close to being reached.”
Capital expenditure estimated at $11.6 trillion would be required to 2030 to ensure that capacity keeps pace with demand, the report noted. But uncertainty about future returns and regulatory controls on greenhouse gases meant that this investment could not be guaranteed.
In the case of oil, the International Energy Agency had predicted a 37 per cent rise in demand by 2030, to 116 million barrels per day (bpd). Yet some experts believed that production was unlikely to exceed 100 million bpd.
“The objectives of secure, reasonably priced energy and reductions in emissions of greenhouse gases seem both out of reach and in conflict,” the report said.
Without “difficult trade-offs” and “a major shift in thinking about risk”, it was “almost inevitable” that the European Union would face future energy shortages; while the US was also vulnerable, thanks in part to its dependence on foreign energy supplies.
Better dialogue between developed and emerging countries and between companies and government officials was required to improve the management of risk and unlock investment and innovation in the energy sector.
