March 21, 2009
By Charles Cresson Wood
One of the big risks in the financial world, that caused our current banking crisis, was the level of exposure taken on through derivatives. For example, AIG admitted that they did not include certain scenarios in their models about the risks associated with the selling financial instruments such as these. They knew these risks existed, but they didn’t closely examine them, and as a result they didn’t factor them into their decision-making. The bloodbath we are all suffering is the result.
The same problem is found in the information security and business contingency planning fields. In the information security field, we worry about intruder break-ins, the latest zero-day attack, and some new phishing attack used to perpetuate identity theft. Our examination of risk is superficial, and it does not consider what would happen if we don’t have electricity to run a data center for an extended time. Likewise, in the contingency planning area, we worry about workplace violence, a fire in the headquarters building, and a chemical spill that keeps people away from the manufacturing plant. Again, we still fail to come to terms with the systemic risk that underpins everything that we do: the extent to which our economy is dangerously dependent on abundant and low cost energy.
While there are certainly other systemic risks, one of the most serious and unexamined risks that is not getting the attention it deserves is the fact that we are running out of petroleum. The International Energy Agency, a part of the United Nations, wrote a report in October 2008, which indicates that world oil production is now declining at the rate of 9.1% per year. This can’t help but have a profoundly negative impact on business and government. But where are our scenario analyses? Where are our transition plans to alternative energy? Where are our contingency plans, enabling us to deal with rapid increases in the price of petroleum-based fuels, rationing, and intermittent shortages?
It’s time we honestly dealt with the fundamental systemic risk on which the industrialized nations of the world have been built: the fact that we are running out of fossil fuels. People need to know that we do have viable solutions that can be used to deal with this risk, such as 12 different commercially available alternative fuels. It remains to be seen whether we will adopt these technologies before massive structural damage is done to our economy because we insist on remaining in denial about the systemic risk that we face. It is time to brace ourselves for the Bernard Madoff Ponzi scheme equivalent of a meltdown in the energy area.
Charles Cresson Wood is a technology risk management consultant based in Mendocino, California. His latest book is entitled Kicking The Gasoline & Petro-Diesel Habit: A Business Manager’s Blueprint For Action. More information can be found at www.kickingthegasoline.com.
March 3, 2009
By Charles Cresson Wood
Based on the many horrific stories appearing in the financial news these days, it appears as though the banking sector is permanently broken. The trend is clearly down-down-down. The Obama White House keeps optimistically talking about a recovery, and how the stimulus package is going to get things back on track. But the medicine that is being proposed is just more of what got us into trouble: extravagant spending, excessive debt financing, and short-term band-aid solutions. The trend will indeed continue to be down-down-down until we can collectively muster the courage to tell the truth: the banking system that we have created is seriously broken, it doesn’t reflect ecological reality, and this system must be changed soon, that is if we are ever going to be able to create a new sustainable society.
It’s time that we acknowledged that the myth of never-ending resource consumption (particularly the consumption of fossil fuels) is in fact a fiction. It has been possible to temporarily support this myth because we have been enjoying the benefits of plentiful fossil fuels, notably petroleum. These fossil fuels provided much more energy than the energy invested to get them, and that bonus meant that we could, for a brief period in history, support an extravagant high-energy-consumption lifestyle. The extensive mining and production of these fossil fuels also allowed us to, for a few generations, maintain the fantasy that this “American” always-better and always-more way to live life would go on forever.
In terms of the banking system, this myth allowed banks, mortgage companies, and other financial firms to pay high interest on money, year after year, allowing investors to make very large amounts of interest over time via compounding. The related mathematics currently taught in business schools have been similar to a continuous motion machine, where we all get richer over time — but we know this is not possible. There must come a day or reckoning, a day when we come to terms with limits. It is no mistake that the Bernard Madoff scandal, and many other large Ponzi schemes, are coming to light these days — they can in fact no longer be sustained. The famous book entitled The Limits To Growth in 1970 talked about a day of reckoning, but its conclusions were, at the time it was published, politically unpopular, and, from an advertiser’s standpoint, certainly they did not help to sell more products and services.
Intellectually it seems obvious, but our actions still do not support the fact that we humans must now confront the fact that the earth is a limited place. There are only so many resources such as petroleum to go around. We must get our overpopulation problem under control, and we must stop destroying the earth (climate change is just one of many pressing examples). We must rapidly create a new society that has an energy infrastructure that is sustainable. We now have much of the necessary technology for this new infrastructure, for instance we know about creating sustainable transportation systems with alternative fuels such as renewable natural gas (bio-methane).
The fact that the financial sector is one of the most seriously hard-hit sectors of the economy makes a great deal of sense if one sees these events through the eyes of what is happening ecologically. The financial sector is perhaps the most dependent on the myth of never ending progress, of unlimited natural resources, and continuing advancements in consumer spending over time. In fact, the financial sector is one of the first casualties of peak oil (and the soon-to-be-experienced peak natural resources). No, the financial sector doesn’t use much oil itself — it is profoundly affected by a change in worldview that must go along with the fact that world oil production has now peaked. It is the limits of natural resources such as oil that will break the back of the economic Ponzi scheme, the fictitious perpetual motion machine, that we Americans have been riding.
Before we can get underway with the construction of the new alternative energy infrastructure that we desperately need, we must openly and collectively tell the truth about what’s happening. Notice that the problems that bedevil the financial sector continue to be characterized in the media as a “credit crisis” or a “sub-prime mortgage crisis.” These are just symptoms. We need to acknowledge that the cause is the fact that we have not been living within the realistic limits of the earth. As the writer William Catton put it, we have overshot the capacity of the earth to support us. The sooner we acknowledge this truth, and start to live within the earth’s limits, the sooner we will create a real possibility of a sustainable future.
I hope this time of telling the truth will come soon, and that we will stop believing that we can just once again patch up the junk-heap of a vehicle we call the economy, and hope we can get still more miles out of it. We need to stop proposing band-aid solutions like the current stimulus package, and we need to deal with the underlying infection which is a philosophical disease called refusing to live within one’s limits. It is a disease, an addiction in fact, and we must clearly understand where it will take us, and publicly tell the truth about it, or it will in fact take us all down with it.
Charles Cresson Wood, MBA, MSE, is an alternative fuels management consultant with Post-Petroleum Transportation, based in Mendocino, California. He is the author of the new book Kicking The Gasoline & Petro-Diesel Habit: A Business Manager’s Blueprint For Action. For more information, including his blog, go to www.kickingthegasoline.com.