The Irrationality Of Not Preparing Contingency Plans For Peak Oil
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.
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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.
Peak Oil Is A Serious Business Contingency Planning Issue
October 27, 2009
We Are Ignoring Serious Systemic Risk
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.
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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.
Oh, Never Mind — Peak Oil Must Have Been A False Alarm
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.
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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
Practical Tools To Speed Up the Transition Away from Petroleum
August 13, 2008
By Charles Cresson Wood
It is human nature to resist change when such a change involves anything else but known and desired results. We see evidence of this all around us, even in the U.S. Congress. When it comes to getting off of petroleum-based fuels, Congress has dragged its feet for decades. While special interest money no doubt also encouraged this foot dragging, we have now reached a point where the world is in an undeniable oil crisis. click here to read more
Don’t Expect The Market To Resolve The Petroleum Crisis
August 13, 2008
By Charles Cresson Wood
In one of America’s most famous business newspapers, a recent article explored the causes of the run-up in food prices (1). One economist was alarmed because some countries — such as Vietnam and India — are now restricting exports of food, and/or increasing tariffs on exported food, in an effort to ensure that their populations are adequately fed. This economist is quoted as saying “Countries should, in general, rely on trade for food security.” In the eyes of this and many other economists, the free market should instead be used to most efficiently allocate food among the world’s population. click here to read more
Avoiding Inflationary Pressures By Kicking The Petroleum Habit
July 30, 2008
By Charles Cresson Wood
A recent front page story in the Wall Street Journal* reported how Dow Chemical had raised prices on a wide variety of its products, some as much as 20%. Dow blames its soaring costs for energy, noting its oil and gas costs grew by 42% in a single year. Dow blasted Washington for policies that have led to higher energy costs. But the blame does not rest solely on the shoulders of government. Businesses and individuals have also been dragging their feet when it comes to transitioning to petroleum substitutes. With increasing demand and decreasing supply, the market price of petroleum is now signaling that it’s important that all these parties rapidly transition to alternatives. click here to read more
