November 26, 2008
By Charles Cresson Wood
The average US price of gasoline, according the US Energy Information Administration, was down to $2.22/gallon as of 10 November 2008. Current prices are all too reminiscent of those experienced by consumers in 2005. When it comes to the world oil production decline, many consumers look at the declining retail cost of gasoline, and conclude that things are just getting back to normal, that there is nothing to worry about. Much the same thing happened after the oil embargo in the 1970s. At that time, the price of gasoline went back down, and nearly everybody then forgot about our dependence on foreign suppliers, forgot about shortages, forgot about price controls, forgot about small fuel-efficient cars, and forgot about alternative fuel technologies.
The capacity of the human animal to deny bad news, to look the other way, to obscure the facts, and to otherwise avoid having to deal with negative information is amazing. Humans keep leaping at any little piece of information that supports this tendency, making that scrap of information out to be the justification why the scientifically-validated predictions of high petroleum prices, shortages, rationing and the like must have been wrong. Just because retail gasoline prices went down doesn’t mean that world oil production is not peaking. Just because retail gas prices recently went down doesn’t mean that we are not all going to be forced to transition away from petroleum on short order. Just because retail gasoline prices went down doesn’t mean that we don’t have an economy-wrecking peak oil crisis on our hands, a crisis that is coming on very rapidly, and we Americans as a country, are almost entirely unprepared.
The price went down because we had a significant contraction in the worldwide economy, not because producers found a whole lot more petroleum. So the demand went down dramatically, while the supply held approximately steady, actually went down some. If you speak to people in the large oil companies, they will tell you all about how oil is getting a whole lot harder to find these days. For example, a front-page article in the 30 October 2008 issue of The Wall Street Journal details the problems that Chevron is having finding significant new deposits of petroleum. So the situation about the peaking of world oil production is not a secret – to the contrary, the information is widely available at this point in time. But, with the exception of those conversions mandated by laws and regulations, virtually no businesses and virtually no government agencies are initiating efforts to convert to alternative fuels. So the issue is not the lack of widely available reliable information about this problem, the issue is whether we will be able to overcome human nature.
So how can we overcome human nature? If decision-makers genuinely understood that it took over 100 years to create the petroleum infrastructure that we use now, they would also appreciate that it will likewise take a long time to transition to alternative fuels. It takes a long time to set-up alternative fuel infrastructure such as in-house fuel refining facilities, in-house fuel storage tanks, in-house fueling stations, new parts for vehicles so that they can accommodate alternative fuels, new maintenance devices, etc. These new facilities need to be researched, evaluated, selected, ordered, received, installed, and tested. In addition, staff needs to be trained, safety procedures need to be changed, and a wide variety of other changes need to take place. Under the best of assumptions, all this can take a year or two. Business firms and government agencies will not be able to simply switch to alternative fuels when they discover that the gas station down the block is no longer selling petroleum-based fuels. If they are going to avoid many unnecessary costs associated with last minute transitions, if they are going to avoid severe business interruption problems, if they are going to avoid damaging their relationship with customers, they must seriously get underway with the transition now.
The need to start now is further underscored by the fact that there are no good substitutes for petroleum-based fuels. By that I mean that businesses and government agencies are not going to be able to use alternative fuels with all of the same equipment, the same distribution systems, the same suppliers, etc. A lot of this will need to be created, modified, and rearranged. An easy switch to alternative fuels is furthermore problematic because the alternative fuel supply chain is largely undeveloped in America today, with the exception of ethanol. Thus organizations will not be able to simply go out and buy sufficient quantities of electricity, hydrogen, ethanol, straight vegetable oil, natural gas, propane, bio-methane, butanol, DME, synthetic liquid fuel, or some other commercially-available alternative fuel when they have finally acknowledged that there is no gasoline or petro-diesel available. If organizations wait to convert until there is a severe crisis, it will be too late to economically, methodically, and rationally convert to alternative fuels. Besides everyone else will be trying to accomplish the same conversion at the same time. When everybody finally gets that we are in a crisis situation, no doubt demand for alternative fuel technology and alternative fuel will far exceed demand, and many organizations will have to wait a long time for the equipment and expertise that they need. Some will not be able to survive the wait.
As an exercise, I recommend that the reader engage management in the preparation of a scenario analysis at their organization. What would happen if gasoline or petro-diesel fuel were all of a sudden unavailable? What would happen if this shortage continued for a week, a month, or a year? How soon would the organization go out of business? How prepared is the organization to weather such a business interruption? The performance of such a scenario analysis is also a good opportunity to inform management about the real situation regarding the oil supply. For example, the reader can convey the fact that the worldwide supply of petroleum is predicted, by the International Energy Administration, to decline 9.1% in 2009 — that is unless producers significantly increase their investment in producing infrastructure. That is not a typo, the correct number is 9.1%, and each subsequent year will see yet another decline in the petroleum available worldwide. All this cannot help but have a very adverse impact on business activity. Ask management at your firm how long they are going to wait before they do something about this very serious matter.
Charles Cresson Wood, MBA, MSE, is an alternative fuels consultant with Post-Petroleum Transportation in Sausalito, California. His most recent book is Kicking The Gasoline & Petro-Diesel Habit: A Business Manager’s Blueprint For Action. You can find out more about the book at www.kickingthegasoline.com
November 19, 2008
by Charles Cresson Wood
The Wall Street Journal recently ran a front page article (Note 1) claiming that AIG management did not prepare computer models for all of the relevant risks related to credit default swaps. This oversight probably would have caused the gigantic insurer to go bankrupt, were it not for generous Federal government assistance. It is curious that, in this article, the Journal’s reporters claim that the risks related to credit default swaps were “hidden in the enormous market” for these contracts. Let’s be clear about this: AIG management chose not to look at all the risks, even though they had a gigantic amount of money involved. The risks were not “hidden” – AIG management simply chose to look the other way.
We see the same problem associated with the world’s production of oil reaching a peak in 2005. This is not speculation, it is a fact demonstrated by statistics from the US government’s Energy Information Administration (Note 2). From this point forward, businesses and governments are going to have to make do with considerably less petroleum. The International Energy Administration recently published a report called World Energy Outlook (Note 3), and this report indicates that oil production will decline 9.1% next year, unless extra investments are made to raise production. This means that output from the world’s oil fields is declining a whole lot faster than previously anticipated, and it will soon precipitate a wide variety of serious repercussions for the economy. These include very high prices, shortages, and rationing of both gasoline and petro-diesel fuels. And those are just the first order impacts. Second order impacts will include rapidly advancing inflation, very high food prices, high unemployment rates, and slow downs in business processes because certain oil-dependent products and services are unavailable.
Although the rapid rate of decline is news, the fact that petroleum is a limited resource, a resource that we must transition away from right now is certainly NOT news. For decades management has known that at some point we will be forced to get off of petroleum, and that time has now come. Will management at the reader’s organization continue to look the other way? Or will they embrace at least one of the twelve proven commercially available alternative fuels that can be used to conduct business and government operations? At some point in the future, after gigantic and unnecessary losses have been sustained, will they too apologetically attempt to claim that the risk of petroleum dependence was “hidden”?
Charles Cresson Wood is an Alternative Fuels Management Consultant with Post-Petroleum Transportation, in Sausalito, California. He is the author of Kicking The Gasoline & Petro-Diesel Habit: A Business Manager’s Blueprint For Action.
Note 1 – See “Behind AIG’s Fall, Risk Models Failed To Pass Real-World Test,” The Wall Street Journal, 3 November 2008, pp. A1 & A16.
Note 2 – Direct your browser to http://www.eia.doe.gov/emeu/international/oilproduction.html and choose the spreadsheet at the top of the web page related to All Countries, Most Recent Annual Estimates, 1980-2007
Note 3 – For more about this report, see the 29 October 2008 headline entitled “Global Oil Production Is Falling Faster Than Expected” at http://www.peakoil.net