July 31, 2012
The Fukushima Nuclear Accident Independent Investigation Commission submitted their findings in a Special Report to the Japanese Diet on July 5, 2012. From the executive summary comes a very important point that Americans, and in fact all industrialized countries, desperately need to notice. The central point is that the nuclear disaster was preventable, that all of the damage thereby created, was in fact a function of the ways in which we run both our organizations and our economies. All of this very serious Japanese destruction was a function of the mindset used by people to approach problems, challenges, and “bad news.” Consider this direct quote from the cover letter to the executive summary:
“What must be admitted – very painfully – is that this was a disaster ‘Made in Japan.’ Its fundamental causes are to be found in the ingrained conventions of Japanese culture: our reflexive obedience; our reluctance to question authority; our devotion to ‘sticking with the program’; our groupism; and our insularity.”
So what specifically has this message got to do with other industrialized nations besides Japan? We are all dangerously following in the same footsteps as the Japanese — we are all way too passive and accepting of the party-line that we get from the major media. Do you honestly think you are going to get the truth about peak oil and non-renewable natural resource depletion from the major media? In America, we have a profound degree of media consolidation, media concentration, and media integration. When a few large media conglomerates own a vast swath of the media outlets, do you really think you are going to get a wide diversity of viewpoints? When this level of concentration of power exists, do you really think that reporters have the freedom to tell the truth, if that same truth might in some way be perceived to be against the interests of the sponsors or the media conglomerates? Do you really think that anything remotely approaching editorial independence can exist for the news related staff at these media conglomerates?
Anybody who has taken the time to investigate the ownership and actual editorial coverage of the major news media will answer all of the questions in the prior paragraph with a resounding “no.” So what then is to be done about this deplorable state of affairs? The answer: it’s time for us to pay a lot more attention to the “outsiders,” to those who may not be getting the attention they deserve. It’s time for us to seek out the alternative viewpoints, because it is those alternative ways of looking at things that we desperately need to hear right now.
The same is painfully true in the arena of American politics. There the political conversation is pervasively dominated by Republicans and Democrats, when increasingly there is no significant difference between these two parties. For example, both parties consistently look away from the important truths that we desperately need to come to terms with, and among these are peak oil, non-renewable natural resource depletion, climate change, severe environmental degradation, and financial system collapse. There is no significant third political party presence in American politics. It is high time for us to hear from these alternative parties, for the major media to help publicize what they have to say, for the public to pay attention to these different messages, and for many important changes to be made.
But we the members of the public aren’t going to hear about these alternative viewpoints through the major media. The major media are all a part of what President Eisenhower called the “military industrial complex.” They are all tied together in a self-reinforcing stand against the changes that must now take place. There is no question that these changes will eventually take place for they must. If nothing else, if humans do not get their act together in the very near future, nature will reestablish its own order, through earthquakes, tsunamis, plagues, famines, and other mechanisms that will restore balance.
But we don’t have to suffer these severe consequences. If we humans can proactively deal with the truth, and make the required changes now, we will not be forced to suffer through pervasive chaos and overwhelming crisis. If we humans are to avoid these and other dire consequences, citizens must take back the responsibility for management of their governments (on all levels). Citizens must also coral, direct, muzzle, and ethically correct the corporations. If we are to avoid these dire consequences, we the citizens must once again create a government and corporate system that is in harmonious support of all people, animals, plants and other parts of our environment. We the citizens must throw off the shackles of groupthink, we must go beyond the party line, we must stop thinking that everything is “just fine.” In truth, we are now in the midst of massive worldwide changes, and we desperately need to come to terms with the truth of our situation. If we the citizens do not embrace the truth, and do so now, we cannot make the right decisions, and if we don’t make the right decisions, certainly many more preventable disasters like Fukishima await us.
There really is a better way, but that way requires that individuals have the courage to stand-up, speak out, and publicly make themselves known. It requires that average citizens, whoever they may be working for to get the money they need, it requires that they tell the truth, that they take a stand for what is right, and that they speak out for what is going to work in the long run for all those concerned. These individuals must develop a deep connection with the new truth, the grounded and in-the-world all-encompassing truth regarding the big issues about which they are taking a stand. But how will they do this in an era of such massive group-think, in the wake of an onslaught of so much propaganda, in the midst of mass consumer-oriented hypnotism of denial and avoidance? These people — and this author hopes the reader is one, or will soon become one, of them — must seek out the greater truth. We must investigate the situation, must go beyond the easy explanation coming from the military-industrial complex.
Just as the fax machine was once the way that news about the massacre in Tianamen Square was released to the public around the world, the communications technology is now in support of and greatly helping the wider dissemination of the most important truths. It is no mistake that the Chinese government is using censorship to block what Chinese people can see on the Internet. The leadership knows that the truth is dangerous, is a threat to the powers that be. So for all of you citizens that will carry the banner for the truth, to facilitate all the many changes that must now take place, we must embrace the open and widespread dissemination of the truth via the Internet. The net is a great physical manifestation of the larger truth, which is that we are all connected. Use that new computer-linked connection with others, use that access point to the truth, to bring us back to sanity, to bring us back to a world that works for everyone.
Charles Cresson Wood, MBA, MSE, is an independent technology risk management consultant with Post-Petroleum Transportation, in Mendocino, California. He is also the author of the practical book entitled “Kicking The Gasoline & Petro-Diesel Habit: A Business Manager’s Blueprint For Action.” You can reach him via www.kickingthegasoline.com.
August 2, 2011
So, the proverbial excrement is starting to hit the fan. The situation can be summed up by Bank of America – Meryll Lynch economist Ethan Harris, quoted in The Wall Street Journal (9 July 2011): “Every major component of the report [US government report about jobs and hiring] was weak. That doesn’t happen very often — usually there’s some ray of hope.” If one includes those workers who are discouraged, and therefore no longer looking for work, the unemployment rate is now 16.6%. We’re getting progressively closer to the 24.9% unemployment rate experienced during The Great Depression (1933). Looking at another economic indicator, the S&P/Case-Shiller 20-city composite index of US home prices is down about 45% from its 2007 high. Similarly, according to the US Courts, business bankruptcies have increased for the third straight year in a row. Pick your favorite indicators — they nearly all look bad, and they’re getting worse.
The world is running low on non-renewable natural resources — very importantly including petroleum — and these inputs to production have been a big part of why we have been able to grow the economy for over a century. We now need to shrink the economy, and that process is in fact already underway, so that we will come back into balance with nature, and use only a sustainable amount of natural resources. Unfortunately many businesses, government agencies, and non-profits are still geared to the growth model that prevailed in decades gone past. Organizations urgently need to retool their thinking so that they consider the downside of the business cycle that we are now entering. Organizations also need to examine exactly what that shift of direction is likely to mean in the years ahead.
Among other painful adaptations, the downside will involve a massive liquidation of debt. As the rate of growth slows, and then later shifts over to a steep decline, many indebted organizations will no longer be able to make the principal and interest payments that they were able to service in expansive times. Our economy is way overstretched and overcommitted when it comes to debt. Much of this debt will not be paid, but will instead be forgiven, dismissed in bankruptcy, negotiated down to pennies on the dollar, assumed as part of a merger or acquisition, or otherwise handled in non-standard ways. All organizations need to be seriously examining which of their business partners (sales network associates, raw materials suppliers, transportation firms, insurance companies, banks, utilities, etc.) might not make it through this upcoming period of rapidly declining business activity.
The very nature of solvency will also be redefined as we shift from expansive to contracting times. In expansive times, depending whose definition you go by, “solvency” may have been defined as the possession of assets which in total have a current value greater than the total existing debts (including contingent liabilities such as loan guarantees for third parties). But a significantly different approach is called for in contracting times. Financial markets will become increasingly driven by psychology rather than analytical valuation methodologies (as happened in 1929 with the stock market), for example many alarmed investors will want their money now (think runs on the bank). Thus it won’t matter if assets could be sold at a certain time in the future, what will matter is the cash that assets can generate now. This shift in investor psychology means that liquidity will become the primary factor determining solvency. Thus, instead of total assets, it be more important to calculate total liquid assets such as the sum of cash in banks, Treasury bills, money market funds, and the like. Solvency will then be defined as the ability of these liquid assets to service total existing debts on schedule. Avoiding any additional technical details, suffice it to say that accounting methods used to determine solvency by necessity will also be changing in the near future. The continued use of traditional models for determining solvency, models employed in expansionary times, will then be dangerous.
In light of this shift over from expansion to contraction, the process of strategic planning must now be radically changed. Traditionally, this work focused on expanding the size of operations, adding new product and service lines, gaining more market share, buying other firms, and the like. Now the practice of strategic planning needs to be incorporating both new adaptive business strategies appropriate for, and new contingency planning strategies related to, a contracting business environment. Strategic planners need to be asking questions like: “If our number one supplier of raw materials goes bankrupt, then what happens to our business?”
Such questioning is especially critical for those businesses that use inputs that are unique. Custom ASIC (application specific integrated circuit) chips, for example, cannot readily be provided by another supplier. This reality is painfully clear to many businesses that formerly were supplied by Japanese semiconductor companies, companies that are now hampered, if not fully out of business, thanks to the recent tsunami and nuclear disasters. In an expanding business environment, what was considered a business advantage (having a unique part that competitors could not easily copy), in a contracting business environment can become a liability (because no alternative supplier is readily available).
Unfortunately, what economic theory dictated in a prolonged expansion is going to be very different from what economic theory dictates in a steep and prolonged contraction. For example, in an up-slope phase of the business cycle, firms cut inventory in order to lower their holding costs, using models like just-in-time inventory keeping. In the down-slope phase, it will be important to keep extra inventory on hand, to be able to continue service when a supplier goes bankrupt, so as to provide some extra time to find another supplier. Similarly, during an expanding phase, it was prudent to use outsourcing, to reduce costs and focus on the core business competencies. But during the a contracting phase, having major dependencies on third parties, especially when they are overseas and subject to different laws and customs, and therefore not easily supervised, third parties that might go bankrupt with very little if any notice, that is a risk that many businesses won’t want to take in the years ahead. I expect that soon more businesses will start reversing the outsourcing trend, bringing essential operations in-house, where they can be better controlled, observed, and managed. Vertical integration of business operations will soon again become an attractive business strategy.
Top management at progressive firms can now get a competitive advantage if they perform what I call a “business partner solvency analysis.” This will yield a scorecard that indicates where business partners stand when it comes to being “going concerns,” when it comes to going out of business. Just as businesses in 1999 sent out questionnaires to suppliers asking them if they were prepared for the Y2K roll-over in computerized dates, so too should proactive management teams now be sending out questionnaires to important business partners asking them about their financial strength and ability to withstand major business reversals.
In some cases, for example for publicly held companies, a good deal of this business partner solvency information will be relatively easy to obtain, because it is already published publicly. Nonetheless, in many instances this information can be quite misleading. For example, the absence of mark-to-market accounting practices for assets means that many financial assets (like residential mortgages) are on the books at cost, when they should instead be significantly written down to reflect current market value. Thus standard financial statements may not accurately reveal insolvency risks. So even if standard financial statements are provided, that doesn’t mean the true risks of a business partner’s failure has been disclosed. Some other business partners will consider financial statements to be confidential, even for their major business partners. Alternatively, some businesses may deliberately lie about their financial situation, knowing full well that if they came clean about their situation, then they would lose that account.
So what should be done? This is where quantitative risk analysis can play an important role. Progressive management at organizations needs to numerically estimate the risks of a business partner bankruptcy, factoring in what they know about the partner’s current situation, and also the possibility that the supplier may be painting their situation in misleadingly complimentary colors. A variety of questions should then be asked. Maybe it’s time to get another supplier who would be more financially stable, and more forthcoming with its financial information? Maybe a series of contracts should be signed with several suppliers who all can provide the same essential input? Maybe it’s time to acquire this particular supplier? Perhaps it’s time to perform the operation in question entirely in-house? Maybe it’s time to get out of this line of business entirely, while somebody can still be found to buy it? Only after the numbers are prepared, can the best course of action be determined. What needs to be done now is to run the scenarios, and get some business impact numbers, to come up with some probabilities, to ask “what if this were to happen?” and “what if that were to happen?”
Organizations that do this type of business partner solvency analysis will not only be able to get out of harm’s way before something major happens, but they will also be able to monitor, track, and follow the status of business partner solvency over time. Modern business intelligence software now allows the collection of an unprecedented amount of information that was not for example available during the 1930s as people suffered through The Great Depression. Many of the solvency risks that business partners pose can now actually be known in advance, or at least immediately detected when a negative event takes place, even if the involved business partner refuses to disclose its financial statements. Credit reports, notices about collection lawsuits, Google alerts, electronic clipping services, and many other automated mechanisms can be used to create a real-time dashboard to indicate where major business partners stand from day to day.
It’s time that organizations discovered the truth about their major business partners’ financial situations. Transparency and additional financial information is very valuable at this stage in the business cycle. That additional information will in turn enable progressive management teams to do contingency planning, and then some informed maneuvering to establish back-up plans such as alternative suppliers. There is still time to set contingency plans in place, but during a full-out crisis, such as the severe financial crisis that we will soon be seeing, that is no time to start coming up with contingency plans. By researching business partner solvency information now, management can be proactively defensive, and avoid being caught blindly unaware and therefore thrown into a difficult situation, a situation from which it may later be impossible to recover.
Charles Cresson Wood, MBA, MSE, is a technology risk management consultant with Post-Petroleum Transportation. He assists organizations with strategic planning and contingency planning so as to deal with the many changes brought about by peak oil, climate change, ecological degradation, and financial collapse. He is the author of the book “Kicking The Gasoline & Petro-Diesel Habit: A Business Manager’s Blueprint For Action.”
March 24, 2011
In response to the recent tsunamis, the resulting nuclear power plant breakdowns, and the ensuing environmental releases of radioactive materials, one Japanese governmental official claimed that contingency plans “failed to anticipate the scale of the disaster.” In 2001, Australian nuclear engineer Tony Wood indicated that probabilistic risk assessments (PRAs) failed to anticipate the events that led to the world’s worst nuclear disaster at Chernobyl (in 1986 in what is now the Ukraine). He also indicated that PRAs did not anticipate the worst reactor accident in the UK (in 1957 at Windscale), nor did PRAs anticipate the worst nuclear accident in the USA (in 1979 at Three Mile Island in Pennsylvania). There appears to be a pattern here.
Probabilistic risk assessment involves the estimation of a probability that a serious threatening scenario will actually take place. Although some related ISO standards have been released, there are no generally agreed-upon standards for conducting PRAs. Likewise, there are no requirements that the PRAs that have been completed be updated in light of new information — such as the problems encountered in Japan. Furthermore, PRAs do not need to be accurate, and according to a 2002 report written by the (US) Nuclear Regulatory Commission (NRC), the quality of these risk assessments varies considerably from one licensee to operate a nuclear power plant to another.
Typically, PRAs are based on many assumptions and subjective estimates, and the combination of all these factors, not so surprisingly can be way off the mark. Even credible sources can come up with unbelievably optimistic estimates. For example, a 2003 multi-disciplinary study done at the Massachusetts Institute of Technology (MIT) estimated that the risk of an accident damaging the core of a nuclear reactor in the US was about 1/10,000 per reactor per year. The Japanese nuclear disaster reminds us that the likelihood is in fact actually much greater than this study indicates.
So why are these PRA estimates so wildly optimistic? There are a number of serious problems with this risk assessment approach, but this author specifically calls out five problems below. It is of note that all of these problems also apply to peak oil, and the disastrous consequences that we are all on track to experience, unless business, non-profits, and government wake-up to the very serious dangers that peak oil poses. These peak oil dangers include: precipitous fall-off in demand for products and services, unexpected supplier bankruptcies, dramatic stock market crashes, financial system lock-ups, widespread unemployment, localized famines, and serious civil unrest.
The first of these problems has to do with who actually conducts a PRA. In many cases, employees or consultants paid by a certain organization promoting a nuclear power plant are the ones who conduct a risk assessment. A bias toward their benefactor no doubt is built into the assessments performed by these analysts. The pressure is to have a risk assessment be a marketing tool, rather than an objective review of the actual risks involved. The way to get around this bias is to have independent third parties, such as government regulators, either perform the analyses themselves, or else hire independent expert risk assessment consultants to do the work. A process to establish true independence rather than sham independence also needs to be in place.
The second problem involves groupthink, where established organizational biases color the way that the analysts look at various threat events such as a nuclear accident. It should not be surprising that the chosen risk analysts are often insiders, and/or are known by, and accepted by, those who would be assessed. Since it may adversely affect their careers, these insiders are loathe to “rock the boat,” and loathe to be the messengers bringing bad news. The fact that nuclear plants are run by utilities, which are for-profit operations, indicates they are under great pressure to keep costs down, and this too many cause the operators to chose insiders, particularly those who can offer the least cost deliverables. Thus the groupthink, augmented by efforts to minimize costs, will in turn will lead to cutting corners whenever possible. Cutting corners in a PRA is particularly dangerous because the result is likely to be that top management is not aware of what they don’t know. This insider approach can lead to “surprising events,” where top management claims that they couldn’t imagine that something like this would happen (as was apparently the case with the Japanese official mentioned at the beginning of this article).
A third problem involves the increased variability surrounding the occurrence of rarely encountered events. The world is now going into a phase of increasing volatility in many sectors. The financial meltdown of 2007-2008 showed that the economic world is becoming more variable in its ups and downs. Hurricane Katrina revealed the climate variability that we are increasingly experiencing around the globe. The recent revolutions in Egypt and Tunisia indicate how the public in many countries has become increasingly unpredictable in its acceptance of governmental control. The increasing incidence of ocean-going boat piracy, now taking place off the coast of Somalia, indicates that the delivery of oil to major oil consuming nations like China is becoming increasingly unpredictable. Wars fought over oil, such as the US Iraqi invasion, are likewise indicating that the supplies of fossil fuels are increasingly tenuous, and that the availability of these fuels will in the future be more variable than has been the case over the last few decades. These and many other types of variability need to be more directly incorporated into PRAs — that is if the PRAs are going to be anywhere close to accurate.
A fourth problem has caused PRAs to be wildly off the mark. That is the great faith in technology, the belief that it will save the day. When we play with dangerous technologies, such as nuclear power, or for that matter oil drilling (don’t forget the Gulf of Mexico oil spill), or still more dangerous — natural gas drilling (fracking has its own serious environmental side effects), then in order for us to act responsibly, we must in advance accurately predict the downsides and the side effects that come along with these powerful and dangerous technologies. In the nuclear power realm, these downsides and side effects for example include the need to safeguard nuclear waste for hundreds of thousands of years. To be more accurate, risk assessments should be performed by, or at least involve the active participation of, technology skeptics and cynics. To get a more balanced PRA, at least some of the risk analysts should seriously doubt the merits of complex technology, and they should have diligently studied the historical experience when it comes to the side effects of the technologies involved.
A fifth problem with many PRAs involves the failure to adequately consider the systemic interactions that go along with an accident, an attack, or a natural disaster. Disasters like the one recently taking place in Japan, involve disruptions caused by the failure of multiple centralized systems such as those providing water and electrical power. These systems are unfortunately often interdependent and linked-up with feedback loops. The difficult-to-understand interactions surrounding these systems means this level of analysis is often left out of PRAs, or at least unduly truncated, but this multi-level complexity must be closely examined and modeled. For example, if nuclear reactors need water cooling in order to remain safe, and if water cooling systems require electrical grid power in order to operate, what happens when the grid is down due to a natural disaster such as an earthquake? How will water cooling systems continue to run? Perhaps diesel powered generators will do the trick — but only until they consume the fuel stored on-site. What then? What if the roads are blocked due to an earthquake? How will more fuel come in? And what if the cooling pipes are broken by an explosion or an earthquake? Much more thought needs to go into the analysis of multiple system failures, and how we will deal with these simultaneous multiple system failures. Of course this is going to take more money, time, and expertise.
Based on the results of the current Japanese nuclear situation and many other technologically induced disasters, it is clear that our collective ability to accurately predict problems through PRAs is somewhere between weak and non-existent. Unless we markedly upgrade the way we are doing risk assessment, and take the process much more seriously, this deficient situation will continue to cause extended business interruptions, unnecessarily large financial losses, unwarranted deaths, and avoidable public health issues.
It is time that we came right out and said that: “It is simply not believable for top management to claim that they couldn’t have imagined that certain serious problems could take place.” The Japanese nuclear accidents, and many other technological disasters, could of course take place. And the PRAs that management paid for should have seriously examined and planned for these occurrences.
If the modern societies are going to use dangerous and powerful technology — such as nuclear power, or for that matter petroleum — then there is a significant price to be paid, a price that is currently not being adequately paid. This price includes the increased cost of performing accurate risk assessments, assessments that honestly estimate the probability of various serious attacks, accidents, and mishaps. This price additionally includes doing extensive up-front research that examines the downsides and side effects of the proposed technologies. This price furthermore includes adding more safeguards and controls, so that the downsides and side effects are dealt with as part of the initial design, not added later. What we don’t need now is still more “build it now and deal with the consequences later” approaches to the deployment of complex technologies.
Charles Cresson Wood is a technology risk management consultant with Post-Petroleum Transportation, in Mendocino California. He is the author of the book entitled “Kicking The Gasoline & Petro-Diesel Habit: A Business Manager’s Blueprint For Action” (see www.kickingthegasoline.com).
February 21, 2011
Serious and sustained disruptions caused by peak oil — up to and including total systemic shutdown — face the food, water, transportation, and other complex systems found in modern industrialized societies. Yet the methods now used to perform risk assessments are too short-term, and too focused on traditionally encountered threats, and too single-organization-centric, to include peak oil as a legitimate threat worthy of serious consideration. This article briefly covers how the approaches used for risk assessment, now found in modern businesses and modern government agencies, must change to properly understand both the seriousness and the pervasiveness of the peak oil threats now facing us. Only after we sufficiently understand the nature of these threats can we have any sort of a grounded conversation about the necessary steps to: (1) shift these complex systems to alternative energy sources, (2) alter existing systems to be less energy consuming, and (3) avoid and/or mitigate the many adverse impacts of peak oil that now loom on the horizon.
Short-Term Perspective: A few days ago, this author attended a lecture delivered by a seasoned senior manager at a Fortune 500 company. This executive described the company’s risk management system, including the process that the company uses to determine which risks are worthy of top management attention and budgetary recognition. This process was considered “best of breed,” and from the audience the presenter received many positive comments during the question and answer session. Nonetheless, the process described had one serious flaw that prevents it from even considering peak oil as a threat: the time horizon for the threat evaluation process was one year. For each prospective threat, managers evaluate the likelihood, or probability if you prefer that word, that the threat would take place within one year. Peak oil is widely considered to be a concern far into the future, perhaps a decade, perhaps several decades, out into the future. And so it was no surprise that peak oil was not even mentioned as a threat to be examined.
Granted, some of this problem has to do with deficient awareness campaigns mounted by government and other sources considered to be authoritative. The effects of peak oil no doubt will be felt much sooner than most members of the public anticipate. Nonetheless, even if the general public shifted the expected arrival date when adverse impacts of peak oil were felt, to be a date much closer to the present, this date would still in most cases be outside the time horizon used by this risk assessment methodology. The widely encountered short-term management decision-making time horizon thus blocks us from taking prudent action in response to peak oil. This is especially worrisome because it took many decades for us to build our current petroleum-dependent systems, and it will probably take many decades for us to retrofit these systems to be reliant on other forms of energy.
This author’s 30+ years of consulting in technology risk management, and his consulting experience with over 125 different organizations, all point to this short-term thinking problem being pervasive, not the unique oversight of this highly respected company. A Ph.D. dissertation by James R. Young, entitled “An Evaluation Of The Readiness Of UK Companies For Disruptions In Energy Supply,” comes to similar conclusions. Specifically Young indicates that there are serious deficiencies in current risk assessment methods used by business, and that these deficiencies blind top managers to the very serious risks posed by peak oil.
Fixed Threat Lists: Another serious problem with most of the risk assessment methods now being used in government and business has to do with scripted lists of acknowledged threat types. Rather than thinking “outside the box” (in creative ways), many of the people performing risk assessments today are simply following scripted procedures, so as to meet contractual, regulatory, or legal requirements. The approach they use is driven largely by compliance concerns and auditor findings, rather than by overall risk management. As a result, the people performing risk assessment are often focused on proper execution of the process, preventing management liability, and other issues tangential to the truly important focus on which they should be riveted: deeply understanding and appropriately preparing for the full spectrum of risks that now face their organization.
Peak oil has never happened before, so the people who are performing risk assessments will not find it on the list of threats that should be examined when performing risk assessments. Ironically, threats which pose much less of a financial risk, such as pandemics, are routinely evaluated by these risk assessment approaches. It is additionally ironic that threats that are much less likely, such as a serious incident of workplace violence, are also routinely included in these risk assessment processes (peak oil is a certainty, the only chronological uncertainty is when it will happen and when its impacts will be felt). Organizations must rewrite the list of threats to be evaluated so as to incorporate peak oil. Some organizations are now including climate change on their list of threats, but peak oil is still almost always missing. This is further ironic in that most organizations will feel the impacts of peak oil much sooner, and much more painfully, than they will feel the impacts of climate change.
Single-Organization-Centric: A third problem with existing risk assessment methods involves a single-minded focus on the impact on the organization in question. Traditional risk analysis methods look at a range of scenarios, such as a major fire in an office building, and the impact of such an event on the organization in question. But the serious risks posed by peak oil do not come from any one specific event like a fire. They arrive over a long period of time, and they come from the interaction of many parties, not just the internal activities of a single organization. Likewise, these impacts are cumulative and multi-directional in their influence. For example, the peak oil event that happened last month to a supplier very well may affect what happens this month to the reader’s organization. Most current risk assessment methods do not embrace this multi-organizational complexity.
Peak oil is thus a systemic threat, and it needs to be modeled accordingly. Aside from the US Department of Defense, and a very few other sophisticated organizations, most have not taken the time or set aside the resources to look at the way that many different organizations will respond to peak oil, and how those responses will make problems better or worse. Such modeling efforts are badly needed in order to increase our understanding of peak oil, how to prepare for peak oil, and how to mitigate the adverse impacts of peak oil.
Sudden Changes: The traditional management approach to serious threats that we don’t know how to address has been to wait until a crisis takes place, and then undertake some intervention. The United States Congress provides a good contemporary example of this management approach. For example, consider the financial system liquidity crisis that began in 2007, which by the way is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s. This crisis was not proactively addressed by Congress, even though there were many warnings of serious problems. These ominous warning signs included rapidly rising default rates on sub-prime mortgages, a real estate price bubble, widespread predatory lending, and conflicts of interest on the part of those who rated mortgage-backed securities. In spite of these and other alarming and quite public red flags, Congress did nothing until a systemic failure was upon us.
In defense of the members of Congress, it is true that the world financial system has become incredibly complex, and many members of Congress probably did not fully appreciate the risks. Without markedly improved risk assessment approaches, we can expect that top management in business and government will act the same way when it comes to peak oil. And the public will probably let them get away with it because it will then be true that they did not truly appreciate the risks of peak oil.
Unfortunately, this evolutionary, crisis-management approach, where we try to pick-up-the-pieces after serious damage is already done, won’t work well for peak oil. As was the case with the recent financial crisis, we are now dealing with systemic risks found in many inter-dependent complex systems. The traditional ways of thinking about our complex Internet- and computer-enabled infrastructure will not work because this infrastructure has changed so much in the last few decades. If management tries to use traditional approaches that are incompatible with the new complex computerized and tightly knit systems, these efforts will be ineffective or will fail. Just as the US economic embargo of a country such as Cuba is increasingly ineffective in the modern interconnected world, so too will traditional tactical approaches be ill suited to deal with the problems of peak oil.
In addition, management in government and business is currently far removed from the daily activities of these system components. This distance means that that management does not understand how quickly or how easily a systemic collapse could take place. Likewise, this lack of understanding about the underlying processes means that management believes that we can go back to the way things were. But if we have significantly less resources with to build new systems, and if we have significantly less energy on which to run these new systems, we cannot simply go back to doing things the way they were done in the past.
Much Better Modeling: If business and government do not promptly invest in developing new and more sophisticated risk assessment models — that reveal the reality of our complex interconnected systems in the food, water, transportation and other areas, and how these will be affected by peak oil — we run an additional and largely unappreciated risk. Of course, without these improved risk assessment approaches we will suffer many adverse impacts of peak oil that could have been avoided or prevented if we had understood and proactively dealt with the risks. But we need to understand that, under pressure, and facing a widespread and painful crisis, management will be likely to make impulsive, ill-informed, and maladaptive decisions.
For example, in the midst of the oil embargo of 1973, the US government imposed price controls. Economists now generally agree that price controls further restrict the supply of a particular commodity like oil. And so the US government actually made the 1973 oil crisis worse thanks to price controls. Without much better risk assessment models, we can expect that similar decisions will be made in response to peak oil.
Charles Cresson Wood is an independent technology risk management consultant with Post-Petroleum Transportation in Mendocino, California. He is the author of “Kicking The Gasoline & Petro-Diesel Habit: A Business Manager’s Blueprint For Action” (see www.kickingthegasoline.com).
June 18, 2010
We’ve known about it for decades. It’s mentioned in the most prestigious of newspapers, such as the The Independent (UK) and The New York Times. It’s occasionally covered on the most heavily trafficked web news sites such as The Drudge Report and CNN.com. Prominent but retired figures like James Schlesinger, former US Secretary of Energy, have publicly expressed their concern about it. Even the most conservative of pro-business organizations, such as the International Energy Agency (IEA), have publicly expressed their alarm about what’s happening. Yet, not one prominent corporate leader or politician in America today has been willing to stand up publicly and take a stand about it. I am talking about “peak oil,” the fact that we have recently reached, or are very soon about to reach, peak world production of petroleum.
We’re now forced to go to very inhospitable environments to find more petroleum to feed the world’s voracious appetite. Perhaps the most salient of examples is the horrendous BP Gulf of Mexico oil spill, still gushing as I write this (June 2010). We, the people of industrialized countries, are so desperate to find more oil, that we now do things like go to the Artic, and risk severely damaging not just the Gulf of Mexico, but the pristine Artic National Wildlife Refuge as well. It’s peculiar that this doesn’t seem to strike most people as insane. That we are so dependent on petroleum that we would cause what may well be the most severe ecological disaster in America’s history in order to get more of it for our fix, that doesn’t seem to get many people talking about getting off the stuff. If they do talk about it, many people say things that only reinforce our existing dependency, words such as “drill baby drill.”
Meanwhile, those who would offer a fantasy, about how the peak oil conversation is a just a lot of hot air, they are given great prominence and a high pulpit from which to preach their fantasy. Perhaps most prominent of these are the economists who believe in a world without limits, where every resource has a readily-available substitute, and where every problem will be worked out by “the market.” They disparage conservation efforts with fancy theories like Jevons Paradox, which says that it doesn’t matter much if energy efficiency improves, because people will just use more of the fossil fuel involved. We will regret that we made them the high priests of American society. Meanwhile, the loyal and hard working geologists, environmentalists, and contingency planners that have been sounding the alarm about peak oil are largely ignored. For the most part, there’s not even an attempt to refute the statements of these Paul Revere types — they are simply ignored. So what’s really going on here?
We’re up against the power of denial. This stubbornness and unwillingness to deal with reality is actually quite dysfunctional. If you were a passenger driving in a car with a friend, who was under the influence of a few drinks, and he or she seemed to have fallen asleep at the wheel, would you try to wake them up before the car you were both in crashed into something hard and immobile? Or would you just sit there, remaining silent? The analogy is actually quite apt. We — the people in the developed world who are so very dependent on petroleum — are on a crash course with reality.
Unless we start dealing with this reality immediately, and do so quite intensely, we are going to bring on much more serious repercussions than would have been suffered had we told the truth and promptly dealt with the problem. Some of these severely negative effects are probably unavoidable, given that we have ignored the problem for decades. But we make them still worse, the longer we wait to get out of denial. These repercussions include massive unemployment, a crashing stock market, a crashing real estate market, and widespread bankruptcies. I’m talking about shortages and rationing of motor fuel, blackouts of the electrical grid, and the failure of government to do much of anything about it. I’m talking about still more environmental degradation, shortages of other natural resources, and a surging population whose basic needs are not being met. In some places, widespread hunger, and even starvation, is also likely to result. I’m not making this stuff up, just summarizing what we’re clearly headed for.
Many of us humans tend to deny what’s going on when we don’t like it. We fall into this place of being frozen and paralyzed by our fear. I’m not a psychologist, but I would guess it has something to do with the desire to avoid pain. But the pain of confronting the truth is going to be nothing compared to the pain of the collision just ahead on the road.
The task for us all starts with an end to our preoccupation with our self, with a going beyond our selfishness. We need to stop putting our own feelings (discomfort about what the future will bring, looking foolish, being wrong, whatever) ahead of what’s right, ahead of what needs to be done, ahead of what would be respectful of both nature and future generations. We need to start envisioning what life is going to be like for our children, and our children’s children, if we don’t quickly change the direction in which we are speedily traveling. This visioning process has an official name: scenario analysis. To help us with this effort, there is a large body of research and a large body of experience already available in the contingency planning community. But even those people who are not working in the contingency planning field can and should still prepare their own future scenarios.
It’s time that we started modeling a new type of human being, and here I’m talking about someone who is willing to put their petty selfish feelings aside, someone who is willing to roll up their sleeves and get down to work doing the work that must now be done. I’m talking about a new type of human being, a more evolved human being, someone who deeply gets that we are all in this together. This human being knows that what we do today (such as driving a SUV long distances to commute to a job) has a significant impact not only on themselves, but also on other human beings, on animals, and on nature.
This new human being will also need to admit that there are no shortcuts, that to create a certain result, such as a new economy that is no longer dependent on petroleum, a great deal of serious work must be done. Denial and stubborn refusal to grapple with the truth does not make it go away. Denial of the truth does not mean that the truth is an illusion, it only means that the individual adopting this strategy is ill-prepared and poorly-adapted to the reality of what’s happening. The part of us that thinks we can deal with something by denying it, that is the part that thinks that we can use shortcuts, thinks that we can get away with cutting-corners. That is magical childish thinking, and it’s time for all adults in the industrialized countries to start thinking like, and acting like, responsible adults.
Denial can be tricky, and it does this in an effort to try to maintain its position of prominence in the consciousness of those who have adopted this dysfunctional position. For example, that part of us that likes denial, also likes to color issues in black-or-white (dualistic) terms. For example, either peak oil is a non-issue that we shouldn’t even to talk about, or else we’re all going to die as a result. If today you believe that it’s a non-issue, then you rationalize that you might as well continue your denial. If instead today you believe that everybody is going to die as a result of peak oil, then you can figure “there’s nothing to be done, so why bother worrying about it?” And so you then are back to denial, with perhaps another mask put over the truth. It’s only in grappling with reality, which will be something in between these two extremes, that we can discover what for us would be a right response to peak oil.
It’s time that we all looked at our own personal process surrounding denial of the reality of peak oil, and for that matter, our denial of peak natural resources as well. What part in each one of us has been selfish and unwilling to broaden our perspective to include our impact on other beings and the planet? What part of us has been thinking that we could get away with shortcuts, when we know darn well that we can’t? What part of us has been engaging in mind games, like dualistic thinking, in order to be able to continue with our denial?
To the extent that we can move through these blocks to encountering the truth, in its full impact and implications, to that extent we can start to evolve into the new type of human being that we all potentially are. And by the way, I’m working on it too. For us all, this will require on-going effort to keep confronting the truth as it is revealed. I hope to see you all, the new human beings, after we get through these turbulent times.
Charles Cresson Wood, MBA, MSE, CISA, CISSP, CISM, is a technology risk management consultant with Post-Petroleum Transportation, in Mendocino, California. His most recent book is “Kicking The Gasoline & Petro-Diesel Habit: A Business Manager’s Blueprint For Action” (see www.kickingthegasoline.com).
June 2, 2010
By Charles Cresson Wood
In 2009, the Obama administration granted BP a special exemption from a legal requirement that the oil company perform an environmental impact study (EIS) exploring the results of drilling in the Gulf of Mexico with its platform called Deepwater Horizon. According to the Washington Post, the Department of the Interior’s Minerals Management Service (MMS) gave BP a “categorical exclusion” so that it might promptly commence drilling with Deepwater Horizon, even though MMS knew that an EIS had not been completed. The MMS report claims that the ecological consequences of an oil spill could be ignored because such an event was “unlikely,” and besides, “no additional mitigation measures” would be needed in the event of a spill.* We now know that this was a horrendous mistake. Here, as in many other cases, the questions people ask are instrumental in creating the future they manifest.
This cause and effect relationship — between the questions they ask, and future they create — applies to contingency planning in all domains, and on all levels of potential damage. Said differently, successful contingency planning is critically dependent on creating realistic scenarios about what the future might look like. The relationship that many businesses, non-profits, and government agencies have today with Peak Oil is much like the relationship that the MMS had last year with the possibility of a massive oil spill in the Gulf of Mexico. Many organizations are unquestionably aware of very serious oil related problems looming on the horizon, but they have not yet integrated realistic scenarios into their internal contingency planning efforts. As a result, they remain dangerously exposed to very serious losses — including going out of business.
These organizations are, by default, waiting to see what type of losses will ensue, waiting to see how painful and expensive these losses will become. Perhaps then they will be compelled to take action to do something about Peak Oil? As the massive oil spill in the Gulf of Mexico so clearly shows, this is a very dangerous and ill-advised strategy. Instead of waiting to see what will happen next, we should all be asking ourselves: “How horrendous, how destructive, and how ultimately-suicidal does the evidence have to be before we all agree that the age of cheap oil is over?”
It’s one thing to be preparing contingency plans for a future scenario that has a very remote possibility of happening, perhaps an airplane crashing into the headquarters building of an organization in question. It’s another thing entirely to plan for something big that we know definitively will happen, and will happen within the next five to ten years. Peak Oil is a certainty — the only open question from a probabilistic standpoint is: “When, over the next few years, will serious adverse impacts will be experienced?” Many organizations are driving completely blind because they haven’t seriously analyzed these things, so management at these organizations now has no idea how serious the adverse impacts will be. These organizations are in effect guaranteeing that the problems will be a whole lot worse than they need to be, because they haven’t yet gotten their act together to transition to other energy sources, to prepare contingency plans, and to take similar steps enabling them to weather the metaphorical storms ahead.
Likewise, it’s generally acceptable (from a standard of due care standpoint) if an organization doesn’t do contingency planning for relatively-low-negative-impact scenarios, such as an isolated incident of violence in the workplace. It’s an entirely different matter if an organization fails to do planning for a high-negative-impact scenario, such as a massive oil spill that threatens to decimate the economy in a major portion of the country, and that threatens to make thousands of animal species extinct. Similar to the massive oil spill in the Gulf of Mexico, Peak Oil involves many high-negative-impact scenarios that absolutely must be anticipated and planned for. These high-negative-impact scenarios include massive unemployment because the petroleum-dependent system on which we depend can no longer be maintained in the wake of petroleum wars, embargos, shortages, rationing, terrorism, and high prices. Other Peak Oil related scenarios include bankruptcy of critical suppliers and major customers, because they can no longer profitably participate in an energy infrastructure based on low-cost petroleum fuels. Airlines and long-distance trucking firms are now acting as canaries in the mine — their recent mergers and bankruptcies have been caused by the prominent position that petroleum-based fuels play in their cost structures.
In an age where so many decisions are dictated by the numbers, it is surprising that so many organizations still fail to do Peak Oil related contingency planning. In fact, it is illogical NOT to do this type of planning, and the numbers prove this position. Many organizations do contingency planning for low-negative-impact events like an isolated case of workplace violence. And many organizations do contingency planning for very-low-probability events like an airplane crashing into a building. But these same organizations are often at the same time failing to plan for the high-negative-impact, and virtually certain, impacts of Peak Oil. For the detailed mathematical calculations substantiating this analysis, see my blog post on this topic (http://kickingthegasoline.com/contingency-planning/the-irrationality-of-not-preparing-contingency-plans-for-peak-oil/).
The construction of future scenarios is dependent on asking the right questions. The questions we ask will inform the scenarios we construct, and the extent to which they are realistic or not. Many of us have been asking old-fashioned and ill-informed questions, and as a result, the contingency planning scenarios that we have created are most unlikely to come to pass. For example, asking the same questions about deep water oil drilling that one asks about shallow water drilling, that approach has been shown to be ill-advised, dangerous, and obsolete.
Among the old-fashioned and ill-informed questions that we have been asking is this favorite of politicians: “How can we sustain economic growth and expansion?” Efforts to sustain economic growth and expansion with fossil fuels will only create more hardship, more damage to the environment, and more straining to keep things going when we can no longer do that. Fossil fuel production, in fact production of the vast majority of non-renewable natural resources, is peaking if it is not already on the down-slope (its status depends on the resource you are talking about). This means that fossil fuels and non-renewable natural resources will be much more expensive in the future, that is if they are available at all. Efforts to keep our current petroleum-dependent economy going with these non-renewable resources will only cause more damage and pain. The horrendous spill of oil in the Gulf of Mexico is just one of many examples showing that we cannot keep going with this same approach. A much more empowering question is instead: “How can we meet basic human needs, and how can we continue our basic business activities, and how can we reduce our adverse impact on the environment (climate change for example), when there is much less energy available, and when the energy that is available will be commanding a much higher price?”
Another ill-informed and old-fashioned question that many people are still asking is: “In the wake of energy shortages and high prices, how can we maintain the globalized transportation and distribution system that we currently employ?” Continuing to ask this question will likewise only make life painful, exceedingly difficult, and ultimately impossible to sustain. The upcoming high energy prices, and intermittent shortages of energy, mean that the production, transportation and consumption of goods will be done, in the near future, on a much more localized basis. It will soon be neither economically viable, nor ecologically sustainable, to continue our current globalized transportation and distribution system. A much more empowering question to instead be asking is: “How can we produce essential goods and services locally so we don’t need to rely on the fossil-fuel-dependent globalized transportation and distribution systems?”
Yet another ill-informed and old-fashioned question many of us have been asking is: “How are we going to replace all the fossil fuel energy we currently use with renewable energy systems?” The fact is that fossil fuels, particularly petroleum, are incredibly dense and packed full of energy, and there is no good renewable energy system that we know of which can fully replace them. In other words, we can’t help but have our standard of living adversely impacted in a big way by declining energy availability and escalating energy prices. We must instead be talking about energy descent, or using much less energy than we have been using. A much more empowering and realistic question to be asking therefore is: “Given that we will have much less energy to consume in the years ahead, and given that what energy we do consume will probably be much more expensive, how can we retool local businesses so that they are ecologically sustainable, and resilient in the wake of the many changes that they will be going through?”
As it turns out, there are a significant number of old-fashioned and ill-advised questions that we have been asking, questions that are dangerously distorting our anticipated future scenarios. It is only through realistic questions that that we can create credible scenarios, and through these realistic scenarios, then go on to create truly responsive contingency plans. Businesses, non-profits, and government agencies need to seriously scrutinize the questions they have been asking, need to seriously question the validity of the assumptions they have been making, and need to deeply understand that the future will not be just more “business as usual.” With appreciation to Rob Hopkins, the founder of the Transition Towns movement, this author signs off with a request to all businesses, non-profits, and government agencies: please start asking the right questions.
Charles Cresson Wood is a technology risk management consultant with Post-Petroleum Transportation, in Mendocino, California. He is also the author of the book entitled Kicking The Gasoline & Petro-Diesel Habit: A Business Manager’s Blueprint For Action (see www.kickingthegasoline.com).
* For purposes of this discussion, let’s ignore reports that government regulators falsified safety inspection reports, were awarded bonuses for rushing oil-drilling permits, and approved the final permit for BP’s catastrophic drilling operation in fewer than 10 minutes.
October 30, 2009
By Charles Cresson Wood
The public has known about the threat of markedly diminished oil supplies since 1956. Over the last 50 years, the notion of more limited future supplies of oil has been fiercely debated in public forums, and now the data clearly shows which side was right. Now we see that there is no longer any dispute, now we see that we are on a plateau, where we are unable to increase world oil production, regardless of the price that this oil fetches in the marketplace. To verify the correctness of these statements, direct your browser to the web site of the conservative US Government agency called the Energy Information Administration. In spreadsheets of the world oil production numbers, you will see that world oil supply has been about 74 million barrels per day since 2005. Note that this production did not markedly change, even though the price spiked up to $147/barrel in July 2008. A variety of high-credibility scientifically researched reports discuss the seriousness of our current situation, our position at the peak of world oil production. For example, you might reference “Peaking Of World Oil Production: Impacts, Mitigation, & Risk Management” by Robert L. Hirsch et al, and “Global Oil Depletion — An Assessment of the Evidence For Near-Term Peak in Global Oil Production” by the UK’s Energy Research Centre.
With all the credible evidence that peak oil is real, not a “theory” as some would have us believe, why is it that organizations such as the Federal government have steadfastly refused to draw up contingency plans to deal with the impacts of peak oil? There is no doubt that, as a society, we have dragged our feet way too long, and because it takes years to change many elements of our energy infrastructure, many of the desirable transitions to alternative energy cannot now be achieved. So now we are forced to do the best we can, now we must deal with the repercussions of our extensive dependence on petroleum (fully 50% of America’s energy comes from petroleum). At the same time, that same vital substance will soon get very expensive, will get increasingly scarce, and the delivery systems for providing it will become increasingly unreliable. So at the very least, we should get real, and do a risk assessment and figure out how we will be affected, and then draw up situation-specific contingency plans. To refuse to undertake this important activity is illogical, as the numbers provided below clearly indicate.
Let’s compare the peak oil situation to three scenarios for which most large organizations have already prepared contingency plans: (1) a widespread flu pandemic, (2) a serious incident of workplace violence, and (3) a fire in a work related building. The calculations shown below are rough-and-ready, use a back-of-the-envelope style, and are intended only to make the point asserted in the title of this article. These calculations provide a numerical indication that our society’s commonly held perception about the risks related to peak oil is dangerously out of kilter with reality. To be more specific, these three planned-for threats are one to two orders of magnitude less likely than peak oil, and they will cause one to one hundred orders of magnitude less damage than peak oil.
According to Risk Management Solutions (RMS), a consulting firm specializing in catastrophe risks, when it comes to a H5N1 (avian flu) pandemic worse than the 1918 pandemic, occurring this year (2009), the probability is 20%. They estimate that the mortality rate in the 1918 influenza pandemic was 0.67 percent in the USA. While losing 1% of an organization’s staff would be inconvenient and difficult, cross-training and backup staffing, combined with procedural documentation, should allow other staff members to successfully get the work done. Of course, in such a scenario many people are sickened but don’t die, and their absence from the workplace could also cause an adverse effect. According to the Centers for Disease Control and Prevention, the 1918 pandemic involved some 20% of the population getting sick. While productivity in most organizations would definitely take a major hit, and many people would choose to work from home rather than risk exposure on public transportation or in other public places, an absence from work of a few weeks would in most cases not have any serious long-term impact on organizational profits, financial viability, or ability to serve a mission. So this threat, one that has not occurred over the last 90 years, has a relatively low probability of happening, but when it does occur, the impact will be significant, but short-term in nature, and most likely the impacts will be manageable.
In terms of a serious incident of workplace violence, let’s look at the statistics from the US Department of Labor Statistics. Let’s focus on the most serious of these incidents involving homicide of workers. According the 2003 Training Manual published by the International Foundation for Protection Officers, for even the most dangerous occupations such as taxicab drivers, the annual rate of workplace homicide is only 3.5 for every 100,000 workers. That’s roughly 0.0035 percent of the workers… pretty unlikely. Rates were significantly lower for other occupations such as retail clerks. Of course, nonfatal workplace violence can result in serious injury and psychological trauma. According to the Bureau of Justice Statistics, in the late 1990s (the most recent years for which data are available), some 1.8 million workdays per year were lost across the USA as a result of nonfatal acts of violence. According to the Teamster’s Union, this time away from work represents some $55 million per year of lost wages. That sounds like a large number, but maybe not when you consider that the actively working population of the USA in 1995 was 87.2 million people. You can calculate that these people worked roughly 50 weeks a year, five days a week, or a total of 21.8 billion days per year. So we’re talking roughly 0.0083 percent of workers losing any workdays due to any type of reported workplace violence. So this threat has a very low probability and when it does occur, the impact is restricted to a relatively small number of people. Certainly an incident of workplace violence is traumatic and upsetting for those directly involved, but for the vast majority of workers at the same firm where such an incident occurred, it’s relatively easy to get back to work after such an incident. The dollar impact of workplace violence is significant in its broader implications, and is estimated at $13.5 million in medical costs, according to Carmen A. Paludi writing in her book Understanding Workplace Violence. Yet this number pales in comparison to (and is less than 0.007 percent of) total employer contributions to medical insurance plans nationwide, which were estimated at $200 billion by the National Federation of Independent Businesses (NFIB).
Last on our list of exemplary threats is a fire in a work related building. According to data from the National Fire Protection Association (NFPA), most deaths are caused by smoke inhalation, not by burns. While many people fear death by fire, perhaps imagining death in a crowded theater, the deadliest fires are those that engulf whole forests or cities, or that take place in a confined areas like a steamship or an airplane, or in industrial settings such as a mine or chemical plant. NFPA says that four out of five fire-related deaths occur among civilians in the home. In 2007, US fire departments responded to 399,000 home structure fires, which means that there were about 100,000 fires in workplaces (ignoring other public places to be conservative). NFPA says that, in the USA, some 2,865 people died in home fires in 2007, and so by implication approximately 716 died in workplace fires in 2007 (using the same ratio between home and work). During the same year, some 13,600 injuries occurred due to home fires, and this means that, using the same ratio, there were roughly 3,400 injuries in work related fires. Property damage from the home fires in 2007 was estimated at $7.4 billion, so property damage from work related fires very roughly in the vicinity of $1.85 billion per year (approximately $544,000 per workplace fire). If we use the US Census Bureau estimate of the total US population in 2007, of about 301 million people, we see that an individual has a chance of dying in a work related fire of roughly 0.00023 percent, and a chance of being injured in a work related fire of 0.00112 percent. Thus the chances of individuals dieing or being injured in a work related fire are very low, but if a fire occurs, the damage to property can be quite significant. Since the working environment may also be damaged by fire, and normal work activities may thus be unable to proceed, it is prudent to have a contingency plan for this type of threat.
Now let us turn to the peak oil threat, about which we have no historical statistics, because something like this has never happened before (no doubt that’s a problem when it comes to people believing that it will happen, or that it has happened already). There is no doubt about it, peak oil is going to happen. So we are dealing with a 100% probability (maybe you are a hold-out and you still believe the issue is when). A report by Chris Nelder posted on the Energy Bulletin web site, archived 20 October 2009, summarizes various sessions at the Association For the Study of Peak Oil (ASPO-USA) conference held in Denver in 2009. He indicates that most experts now believe we have already reached peak world production, in 2005, as indicated earlier in this article. He goes on to indicate that depletion rates are now estimated to be between 5.0% and 5.5% per year. That’s right, total worldwide oil production is expected to decline 5.0-5.5% per year. This decline rate is expected to accelerate to 6.5% per year by 2014. These estimates are more or less in line with official estimates publicly acknowledged by the International Energy Agency (IEA). According to petroleum geologist Chris Skrebowski, to lose this much oil in a single year would be equivalent to the loss of 4 million barrels per day (mbpd), which is somewhat like the sum of all the biofuels, all the tar sands, and all the heavy oil now produced. Or, seen another way, it is like losing the entire North Sea’s oil in 14 months. It will be a huge challenge for the world to adapt to such rapidly declining fuel supplies. So from a probabilistic standpoint, there is no arguing with the actual oil production statistics, they show that it’s happening — it’s real and it’s happening now.
In terms of the impacts of peak oil, each and every organization is going to have to calculate these consequences themselves (they vary based on business model, products and services produced, types of technology deployed, etc.). A business impact analysis (BIA) is a standard and recommended approach to contingency planning where we look at “what if” scenarios. For example, if gasoline was $10/gallon, what would that do the ability of workers to commute by personal car or truck? Similarly, if petro-diesel fuel was $10/gallon, what would that do to the organization’s shipping costs, and how would that eat into profits if the firm was unable to increase prices? Through this type of an analysis, every organization is going to need to come to terms with the impacts of peak oil, which are going to be pervasive, and are going to be hitting us all very hard. There will, for instance, be short-term impacts, such as shortages of petroleum that cause manufacturing plants to shut down. And there will be long- term impacts, which result from feedback loops as the short-term impacts work their way through the economy. One example of the latter would be significant inflation for goods that are made with the aid of petroleum including food, clothing, building materials, and pharmaceuticals.
Just to get a rough sense for what we’re up against, consider the research of Steven Kopits, Managing Director of the UK based energy consulting firm Douglas-Westwood. His calculations indicate that whenever the price of oil exceeds 4% of the US Gross Domestic Product (GDP), and that currently is about $80/barrel, it triggers a recession. Recession followed the high oil prices experienced after the 1973-74 Arab oil embargo, the Iranian Revolution of 1978, the Iran-Iraq War of 1980, and the First Persian Gulf War of 1990. Recession also occurred after the oil price shock of July 2008. While there were certainly other influential causes of the recession of 2008, the research of University of California economics professor James D. Hamilton confirms that of Koptis, indicating that high oil prices are a greatly-under-appreciated cause of the most recent recession. If these calculations are even roughly on target, the so-called “green shoots” indicative of the growing economy will soon be trampled by rising oil prices. We will be locked into a cycle of higher oil prices causing recessions, which in turn will lower consumption, which will then lower oil prices, which will lead to less oil exploration, which then restrict the supply of oil, which then causes the price of oil to rise again, and around we go (until we get off of petroleum). So economically we are talking about the macroeconomic loss of billions, if not trillions of dollars, because we are locked into this petroleum-dependent spiraling down cycle.
At individual firms, using the change in corporate profits reported in the State of Texas as a rough indicator of corporate profits nationwide, we see that profits decreased 18% in the one-year period ending in July 2009. For a large business such as IBM, which reported pre-tax annual profits of $16.7 billion in fiscal 2008, a drop of 18% in profits amounts to $3.0 billion dollars. On a personal level, this reduction in business activity, occurring since the recession began in December 2007, according to the Bureau of Labor Statistics, has resulted in the loss of 7.2 million jobs nationwide. While some of this unemployment is probably due to problems with derivatives and mortgages, this number nonetheless provides an order of magnitude sense for the unemployment that peak oil can, and probably will, cause. So, relative to the minor and short-lived consequences of the three other threats described herein, peak oil is going to have a gigantic and long-lasting impact, not just for organizations, but also for families and individuals.
So, we see that three major risks cited here (flu pandemic, workplace violence, and workplace building fire) for which organizations spend a lot of money doing contingency planning are far less of a threat than peak oil is. This is true from both a probability standpoint and from a total dollar impact standpoint. Yet, surprisingly, most organizations are still not seriously engaged in peak oil contingency planning. Clearly we have a pressing need for people’s perceptions about the risk of peak oil to change. One way that the reader can do this with the managers at his or her place of employment is to make reference to the numbers. The author invites the reader to make use of the numbers contained herein as a starting point for these discussions.
Charles Cresson Wood, MBA, MSE, CISM, CISSP, CISA, is a technology risk management consultant with Post-Petroleum Transportation in Mendocino, California. He focuses on the strategic planning, risk assessment and contingency planning issues related to peak oil and climate change. His most recent book is entitled “Kicking The Gasoline & Petro-Diesel Habit: A Business Manager’s Blueprint For Action” (see www.kickingthegasoline.com). Working in the technology risk management field for 30 years, he is the author of over 330 articles and seven other books. His speaking and consulting work with 120+ organizations has taken him to 20 different countries around the world.
October 27, 2009
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.
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