Business Partner Solvency Analysis
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.
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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.”
Cassandra’s Lament – Four Reasons Why Nobody Listens To Peak Oil Warnings
February 14, 2010
In ancient Greek mythology, Cassandra had such great beauty that Apollo granted her the gift of prophesy. After spending the night at Apollo’s temple, she later did not return his love. In retaliation, Apollo placed a curse on her, so that no one would ever believe her predictions. Many of us activists in the peak oil area frequently feel like Cassandras. We have overwhelming and unquestionably compelling evidence of very serious problems coming out of the peak oil situation. We even have public statements signaling big trouble ahead coming the most credible of sources, such as The Wall Street Journal (article on 11 Feb 2010). Yet we continue to be met with indifference, denial, and deafening silence from almost all of our political and business leaders. Why is that?
Yes of course there are very powerful entrenched business interests that wish to keep us addicted to petroleum as long as possible, so as to eke out the maximum profit they can. There are likewise other structural rigidities, organizational disfunctionalities, and bureaucratic perversions that block our leaders from properly responding to the threats that peak oil presents. I will not write of those here. These can all be handled on relatively short order, after we successfully deal with the problems in human nature that block us from responding as we should. If these structural problems are fixed but the problems in human nature remain, then we will see that still no action is taken. I don’t pretend to have the entire answer here — just four ideas about what keeps our leaders stuck — the same four ideas that keep us all from being effective leaders in this transition movement.
Humans are being called to evolve, being pushed to be much more than we have been in the past. We are for example being called to let go of our pre-occupation with ourselves, let go of our selfishness, let go of our focus on being consumers, get out of our illusion of each being an entity separate and apart. We are each being called to see ourselves as an integral part of a much larger system. We are being called to responsibly interact with and care for that much larger system (you could call this system “nature”). Capitalism has, though advertising, encouraged us to indulge our greed, our pride, our belief that we are better than others, and our belief in separation from others. Although it has successfully sold many products and services, this worldview is not in truth. Our technology has become so powerful, and the damage that we are doing with this technology has become so serious, that we must move into this more responsible worldview if we are to prevent ourselves from not only killing ourselves, but killing everything else on the planet.
Another aspect of human nature, that is blocking our leaders from taking appropriate action, is our desire to remain children. We all would like to be taken care of by a benign and powerful authority. We would love for the government to fix this peak oil problem for us. We have been told that government is going to fix so many of our problems, and as a result many of us have become hypnotized into believing that this will also happen with peak oil. In our desire to remain children, is an unwillingness to take the initiative, an unwillingness to be a responsible adult, an unwillingness to do the hard but necessary work ourselves. Instead, this child in us wants life to be easy, carefree, fun, but alas, this peak oil preparation, this conversion to alternative energy process, that looks to be none those things. It is also the child in all of us that is lazy, that is just waiting, waiting until a parent comes to take care of this problem. This childish attitude has to change soon if we are going to have even a modicum of success with our transition efforts away from petroleum.
Still another aspect of this problem involves our personal relationship to change. Nature and life is attempting to restore a balance in the world, and that is why for example the weather is changing in response to climate change. The peak oil crisis is a reflection of the fact that we have denied, ignored, procrastinated and resisted this transition away from oil for far too long. Because we did not make the change voluntarily when we should have (after the oil embargo in the 1970s), we are now going to be forced to make the transition, only this time it is going to be a whole lot more painful, expensive, and difficult that it needs to be. Our personal relationship with change must be modified so that we look for the truth, so that we honor the truth, so that we seek to handle problems expeditiously before they become full-blown crises. To wait until a crisis takes place, and then take action: that is no longer a viable way to do business (the Washington military-economic establishment often operates this way). This wait-until-a-crisis-takes-place approach is needlessly damaging to the environment, to the populace, to the economy, and to other aspects of our world. We must understand that life involves frequent change, that change is absolutely necessary in order to maintain health, balance and harmony. We must live with the fact that life, by its very nature, involves both movement and change.
One more aspect of human nature that has adversely contributed to the peak oil crisis is the fact that humans tend to ignore long-term trends, even if they are potentially catastrophic in nature. Instead, we pay attention to the short-term pain that is bothering us (such as the Greek government’s deficit spending, problems rolling over Greek government bonds, and the related threat to the Euro as a currency). In the grand scheme of things, it matters little if the Greek government goes bankrupt. Likewise, it matters little, in the grand scheme of things, if the centralized European government, and the Euro as a currency, both cease to exist. In contrast, it matters a great deal that we are on track for millions, perhaps billions, of people to die of starvation because the petroleum-dependent system that has for decades brought them their food is no longer functional. It matters a great deal that we are killing the planet due to our continued addiction to fossil fuels (pesticide toxics pollution, hormone disrupting plastics, climate change, etc.). We must reprioritize what our leaders pay attention to, and if they refuse, we must replace them with leaders who can in fact lead with a truthful and balanced set of priorities.
So the question is: How can we get our leaders to focus on what is important? More specifically, how can we get them to seriously get into action with the transition away from oil? To begin, I suggest that each of us must make the shift. Each of us must personally evolve ourselves, so that we can then be the kind of people we want our leaders to be. This is to say that we must get out of our selfishness and be responsible for our personal impact on the planet. We must be willing to roll up our sleeves and do the hard work, we must be willing to be responsible adults here; we must stop waiting for others to handle these problems for us. We must also alter our relationship with change, so that we take constructive action based on the information available to us, so that we no longer wait until a full-blown crisis is upon us. We must also look out into the future, beyond the short-term; we must see the long-term consequences of our actions, and then take these consequences seriously. As the indigenous peoples of America say, we must acknowledge our “responsibility to the seventh generation.”
When we change ourselves, then we are in a position to change our leaders, and then we are also in a position to positively influence those around us. As Mohandas Ghandi said: “Be the change that you want to see in the world.” In our understanding of the great personal development challenge that the peak oil transition presents, in that are the seeds of a more evolved human being. For us to step into this place, for us to make it real, we must not keep our new consciousness to ourselves. We must take it out into the world.
The polite, patient and reasonable approach has not worked. The world cannot wait any longer. It is clear that our leaders are hopelessly stuck in a quagmire. It is time for mass teach-ins, widespread letters to the editor, mass letter writing campaigns to politicians, new government-independent movement organizing web sites, gigantic public demonstrations, mass Internet signature collections, politician impeachment hearings, alternative political parties, product boycotts, strikes, lawsuits, and other legal (but in-your-face big-time attention getting) expressions of public opinion. These and other measures must clearly communicate to our leaders that they must reorient their priorities, they must express these new priorities publicly, they must take the necessary steps to transition away from petroleum, and they must do all these things right away.
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Charles Cresson Wood, MBA, MSE, 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 (www.kickingthegasoline.com).
Time To Revamp Business Models
November 17, 2009
By Charles Cresson Wood
Most articles appearing in business newspapers and magazines implicitly assume that economic growth will continue in the years ahead. This assumption is widely held by economists, but is based on a fundamental misconception about limited resources. This doctrine holds that the free market (whatever that is, because we do not have a truly free market anywhere in the world today) will find a way to resolve all problems, and will then efficiently allocate goods and services. This flawed doctrine assumes that resources are perfectly substitutable for one another. For example, if we run short on petroleum, then we’ll simply use coal-to-liquids instead.
As a technology risk management consultant who has for decades specialized in the ways that the market does not adequately resolve significant technical problems — such as personal privacy — I offer a few data points. Many people are already intuitively getting that the old-fashioned “growth forever” viewpoint is unsustainable. The new reality is grounded in the numbers not from economists and politicians, but from geologists, engineers, and scientists.
The pace of economic growth that we experienced over the last few decades will markedly slow and later decline because the production of 50 important non-renewable resources has already peaked in the US, and is now in decline. These resources include bauxite, copper, iron ore, tin, zinc, magnesium, phosphate rock, and potassium. They also critically include petroleum. Future economic growth is dependent on the abundant and relatively inexpensive energy to which we have been accustomed. According to the US Energy Information Administration, worldwide conventional petroleum production hit a plateau, around 74 million barrels per day, and has not markedly increased since 2005. Note that the price ran up to $147/barrel in July 2008. In spite of this much higher price, producers were unable to bring more oil to market. This contradicts a mantra of classical economists, who insist more petroleum will be brought to market if the price increases.
Yes, tar sands, oil shale, and other types of unconventional oil are ramping up their production, but the supply provided thereby will not be able to adequately compensate for the markedly declining supplies of petroleum. There are several reasons for this — most important is the fact that future oil production will be at a very much higher cost than production has been in the past. Thus the cost to produce one barrel of oil via tar sands, is much higher than it has been to produce one barrel via traditional drilled oil wells. Shell reports the energy required to produce one barrel of oil from tar sands requires one third of what is returned thereby. In other words, 1 Btu invested returns about 3 Btus in oil. Meanwhile, for each 1 Btu invested, many traditional oil wells are now returning 10 Btus. But even this is way down from the conventional oil equation in which 1 Btu invested got 100 Btus in return, a situation common half a century ago. So in the future there will be a natural tax on each barrel produced and this tax will increase over time. At some point, even though great volumes of oil may still remain in the ground, it just won’t make economic sense to extract that oil.
The rapid expansion of modern industrial economies has been enabled by relatively inexpensive energy, most notably petroleum. China isn’t striking a bunch of long-term deals with worldwide oil producers without reason. Petroleum now provides about 50% of America’s energy, so increasing scarcity and increasing prices are going to have a giant economy-wide impact. For example, the globalization trend will soon yield to a localization trend, in large part because transportation will be so much more expensive.
Meanwhile most business models don’t take these changing realities into consideration. The airline industry looks like it will be an early casualty of this trend. Air travel in the years ahead will be reserved, for the most part, for the very wealthy, the politicians and the military. Likewise, air freight will become increasingly expensive, and many current air freight shipments will instead go by boat and rail (the latter two having markedly lower costs per mile). It is no wonder that Warren Buffet has invested so much money to buy Burlington Northern Railroad! He seems to appreciate the trends and some of their implications. But does your business? It’s time for all business people to seriously question whether the business model their organization uses is viable in light of this new energy supply reality.
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Charles Cresson Wood is a 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.” He specializes in the strategic planning, risk assessment, and contingency planning related to both peak oil and climate change.
Don’t Fight The Powerful Trends Now Underway
June 23, 2009
By Charles Cresson Wood
The Obama Administration has been desperately trying to prop up and maintain the petroleum-dependent American personal car industry. Unfortunately these efforts are a lost cause, because this way of life (a transportation system primarily based on billions of personal automobiles) is no longer a viable option. It’s ridiculous for America to be spending billions to keep Chrysler and General Motors on life support, when these car companies are going to die soon anyway. These dinosaur companies have very high costs of production, have emphasized the production of the most inefficient vehicles (such as SUVs and the Hummer), and are dangerously out touch with the fact that the world is running out of inexpensive petroleum. If the Administration could only put short-term political considerations aside, if it could only look to the needs of the future, it would probably have spent all this car company bailout money in a very different way. The money would much more productively be spent supporting small new companies offering innovative transportation products that do not depend on petroleum. I’m talking about companies like Aptera, Miles Electric, Venturi, Universal Electric Vehicle Corp., and Zen Motor Company.
It’s time that decision makers admitted that putting band-aids on a dying patient is not going to prolong the life of the patient, or even significantly improve the patient’s painful transition experience. The petroleum-age is over, we are on the downside of peak oil, and it’s time that we admitted it and go on with the transition. It is time to switch to a new way of looking at transportation, time to adopt a new set of transportation models, time to adopt and evolve a new set of transportation technologies, and it is time to switch to a transportation system that is both ecologically and economically sustainable.
While the Obama Administration was swept to victory on last November’s election day based on a platform of change, it has recently been looking very much like a maintainer of the status quo. The Administration still has not come clean with the American public: it still has not told the truth about the real situation when it comes to peak oil. There is no chance that America will be able to make the transition to a post-petroleum economy in an orderly fashion if its leaders won’t even publicly admit the truth about what’s happening today. It gets worse than that. The Administration is in fact causing serious trouble with its efforts to keep the old-fashioned oil-dependent transportation system going.
The trouble comes from three major areas. The first of these involves wasting resources on unnecessary activities. The billions spent on GM and Chrysler need to instead have been spent on activities that create new transportation infrastructure, new transportation technology, and new ways of operating our transportation systems. For example, instead of trying to broker the sale of Chrysler to another company, the Administration should be supporting standardization efforts that facilitate the development of and adoption of new technology. A more specific example of this — and the author is by no means endorsing this approach — is provided by the company called Better Place. This company is pushing a standard for electric car batteries that are interchangeable. Thus an electric car could simply get a ten minute battery replacement, rather than having spend four to eight hours charging up its own battery. Long distance trips via electric vehicles would thereby become more practical and efficient, even though major new breakthroughs in battery technology have not yet arrived. In general, standardization facilitates research and development, and facilitates the introduction and adoption of new products. Standardization also facilitates buyer understanding of new technologies, which in turn accelerates the adoption of new technologies.
The second source of trouble created by the Administration is that by attempting to shore-up old transportation systems, the focus is placed on the maintenance of, and fixing of the old system, when the old system instead needs to be converted or abandoned. If we don’t admit what’s going on, if we don’t start having a public and open conversation about it, it’s exceedingly difficult to effect a transition to new technology. If we don’t create a new way of thinking about our world, that incorporates peak oil, and the peak resource constraints that we face (such as peak metals), then it’s highly unlikely that we are going to be able to responsibly manage the remains of these resources in a manner that successfully moves us in the direction of transition.
In the postponement of this important transition, in the continued focus on the old, we as a society may miss most of, if not all of, the window of opportunity to transition to a truly sustainable transportation system. With this focus on the old system, we are likely to simply keep going with the old system as long as we can, and then crash in a crisis because we cannot, at that point, go on any longer. It remains to be seen what, if any, residual assets we will have at that point in time in order to accomplish this gigantic transition to non-petroleum-based technology.
The third source of trouble is that this approach creates what the insurance industry calls a “moral hazard.” If the government gives money to dead and dying petroleum-dependent car companies, it encourages management at these rescued car companies, and other car companies for that matter as well, to act irresponsibly. By this I mean ignore the future, and fail to transition to new energy technologies. The government thereby gives managers the message that they will be bailed out if they fail to respond adequately to the peak oil crisis. The government thus allows these companies to somehow avoid the discipline of the marketplace, which would otherwise have dictated that GM and Chrysler go out of business.
So consider the recent developments in our economy as markers of the trends that are already set into motion. For example, perhaps the current worldwide recession is a harbinger of a new way of life where we are all required to have a much lower level of economic activity? A variety of economists are already taking positions that the recession was caused by the run up in oil prices occurring in 2008. It would be far more cost-effective, and far less painful, if we would simply downsize and reduce our level of economic activity, rather than attempting to build it back up to unsustainable heights that were only made possible by low-cost and abundant fossil fuels. So instead of resisting the current trends, instead of hoping to reestablish the old order of things, consider whether recent developments are the beginning of new trends. Then evaluate whether you want to fight against these trends, resist them, deny them, or the much easier and recommended alternative: go with them.
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Charles Cresson Wood, MBA, MSE, is a sustainability management consultant based in Mendocino, California. His book entitled Kicking The Gasoline & Petro-Diesel Habit: A Business Manager’s Blueprint For Action provides a step-by-step plan that organizations of all types can use to transition away from petroleum (more information at www.kickingthegasoline.com).
Risks Of Petroleum Dependency Are Not “Hidden”
November 19, 2008
by Charles Cresson Wood
The Wall Street Journal recently ran a front page article (Note 1) claiming that AIG management did not prepare computer models for all of the relevant risks related to credit default swaps. This oversight probably would have caused the gigantic insurer to go bankrupt, were it not for generous Federal government assistance. It is curious that, in this article, the Journal’s reporters claim that the risks related to credit default swaps were “hidden in the enormous market” for these contracts. Let’s be clear about this: AIG management chose not to look at all the risks, even though they had a gigantic amount of money involved. The risks were not “hidden” – AIG management simply chose to look the other way.
We see the same problem associated with the world’s production of oil reaching a peak in 2005. This is not speculation, it is a fact demonstrated by statistics from the US government’s Energy Information Administration (Note 2). From this point forward, businesses and governments are going to have to make do with considerably less petroleum. The International Energy Administration recently published a report called World Energy Outlook (Note 3), and this report indicates that oil production will decline 9.1% next year, unless extra investments are made to raise production. This means that output from the world’s oil fields is declining a whole lot faster than previously anticipated, and it will soon precipitate a wide variety of serious repercussions for the economy. These include very high prices, shortages, and rationing of both gasoline and petro-diesel fuels. And those are just the first order impacts. Second order impacts will include rapidly advancing inflation, very high food prices, high unemployment rates, and slow downs in business processes because certain oil-dependent products and services are unavailable.
Although the rapid rate of decline is news, the fact that petroleum is a limited resource, a resource that we must transition away from right now is certainly NOT news. For decades management has known that at some point we will be forced to get off of petroleum, and that time has now come. Will management at the reader’s organization continue to look the other way? Or will they embrace at least one of the twelve proven commercially available alternative fuels that can be used to conduct business and government operations? At some point in the future, after gigantic and unnecessary losses have been sustained, will they too apologetically attempt to claim that the risk of petroleum dependence was “hidden”?
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Charles Cresson Wood is an Alternative Fuels Management Consultant with Post-Petroleum Transportation, in Sausalito, California. He is the author of Kicking The Gasoline & Petro-Diesel Habit: A Business Manager’s Blueprint For Action.
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Note 1 – See “Behind AIG’s Fall, Risk Models Failed To Pass Real-World Test,” The Wall Street Journal, 3 November 2008, pp. A1 & A16.
Note 2 – Direct your browser to http://www.eia.doe.gov/emeu/international/oilproduction.html and choose the spreadsheet at the top of the web page related to All Countries, Most Recent Annual Estimates, 1980-2007
Note 3 – For more about this report, see the 29 October 2008 headline entitled “Global Oil Production Is Falling Faster Than Expected” at http://www.peakoil.net
Ringing The Alarm About The Petroleum Situation With Your CEO
October 15, 2008
By Charles Cresson Wood
Frost & Sullivan just completed their inaugural survey called Going Green. It examined senior manager’s perceptions about both current and future environmental/sustainability initiatives within their organizations. The good news is that some 67% of the respondents expect that the rate of green investment over the next year will increase, while 33% believe it will remain unchanged, and 0% believe it will decrease.
The bad news is that senior organizational leaders below the CEO level, such as vice presidents and directors, perceive that going green is more of a growth opportunity than CEO’s do. Some 34% of these senior organizational leaders other than CEOs think that going green is a growth opportunity, but only 23% of CEOs see things that way. Although the study did not provide numbers supporting it, my personal experience is that the rank-and-file in many organizations understands what’s really happening in the petroleum area, but CEOs do not. As the study indicated, the predominant objection that CEOs use to block the approval of green initiatives is, not surprisingly, cost.
CEOs are of course very busy, and most don’t have the time or the inclination to study environmental problems such as peak oil, global warming, and the country’s dependence on foreign fuels. As this survey implies, when it comes to these issues, many CEOs don’t know about these issues. At the same time, the survey indicated that by far most environmental and sustainability initiatives have CEOs as their champions. So we have a strange and dysfunctional situation, where these initiatives need to be spearheaded by CEOs, that is if they are going to get underway, but CEOs don’t really understand the issues.
So it is essential that managers other than CEOs, not to mention technical specialists such as strategic planners and risk managers, bring the petroleum situation to the attention of CEOs. If these non-CEO workers don’t initiate CEO-education efforts, there is very little chance that important environmental and sustainability initiatives, like getting off of gasoline and petro-diesel fuel, will be undertaken. People really need to get that before anything is going to happen, they need to educate their CEO about the very pressing nature of what’s happening.
This petroleum problem is not theory, this is not some academic exercise, this is reality, and it is substantiated by the facts. For example, the CEO of Shell Oil is now calling for a major effort, to move to renewable energy, an effort along the lines of the Manhattan Project, the famous rush-rush U.S. government-sponsored effort to develop the nuclear bomb during World War II. Your discussions with your CEO should have the same type of urgency that the Manhattan Project did. If the major problems associated with a continued dependency on petroleum are to be minimized, and it is now too late for them to be avoided, then the conversion to alternative fuels must be undertaken right away.
Into this urgent need to educate CEOs, and get them to support conversion projects, we have the day-to-day reality that I hear from managers in charge of transportation and logistics. I gave a “Thirty Serious Reasons Why We Must Get Off Of Petroleum Now” speech at a major conference in Salt Lake City in September 2008. I received the usual response from the audience including: “Great points, and I agree with your analysis, and yes we need to do something about this, but it’s not my job, and with all that’s going on right now, I’m afraid to even bring up the topic with senior managers.”
This fear about top management’s adverse reaction is a recipe for disaster. This conversion is never going to happen before we are suffering from a major crisis, if top management isn’t getting the information that they need to make informed decisions. It is everyone’s responsibility to start talking about this hitherto taboo topic, to broach the topic in what may seem like unsuitable or awkward situations (perhaps in an elevator, but definitely whenever you get some exposure to the CEO). There is precious little time to make the conversion, and delays are only going to lead to unnecessary and serious problems. All those Paul Reveres out there, now is your time — now is the time to ring the bell signaling the alarm that we must undertaken conversion efforts to minimize our continued serious dependence on petroleum.
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Charles Cresson Wood, MBA, MSE, is an alternative energy project manager 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.” Information about this book, his alternative fuels blog, and the ways to contact him can be found at www.kickingthegasoline.com.
Using The Right Numbers To Estimate Renewable System Payback
October 8, 2008
By Charles Cresson Wood and Bruce Erickson
When they receive a written proposal for a renewable energy system, many managers balk, saying it’s too expensive. This article explores why many of these managers may be using outdated and irrelevant numbers to come to such a conclusion. The article proposes some alternative numbers that make the shift to renewable energy technologies look a whole lot more attractive.
Many people go about making a decision for or against an alternative energy system with a payback calculation. If a solar system, for example, reduces a monthly electric utility bill, then that reduced expense will be extrapolated over the useful life of the system, in order to come up with the number of years it takes before the system pays for itself.
For example, let’s assume the owner of small business based in California is now paying a flat commercial rate of $0.1147 per Kwh for electricity, and that the owner pays a total of approximately $450/month for electricity for his business’ headquarters building (consuming 3930 Kwh per month). Let’s also assume that this business owner is considering investing in a solar system that would cost $60,000 to install (after the Federal renewable energy tax credit and California renewable energy rebate). The annual operating expense for this solar system would be for distilled water only (for the batteries), and to simplify our calculations, we will say that the water is essentially free.
The building owner wants to use solar technology to reduce his usage of grid electricity by about 50%. In the event of a grid failure, the owner has determined that he could run the business with only the essential machines and office appliances, and this would work out to about half of the current monthly usage. Thus the hypothetical solar system could be a 16 Kw system, which could produce roughly 1920 Kwh of electricity per month on average over a yearly cycle. We also assume that the owner has already installed the most efficient lighting, and made other conservation related changes in the electrical system.
Assuming a flat rate schedule applicable to commercial customers, and assuming the cost of electricity remains the same over the years ahead, the solar system is estimated to pay for itself in approximately 23 years. If that’s as far as the analysis goes, the customer would probably not purchase the solar system. But when we go deeper with this analysis, the payback gets markedly better.
Note that if this were a residential customer, a tiered rate schedule would probably be employed, making the calculations more difficult, but also significantly improving the payback because the grid energy consumed would be purchased at a lower rate per Kwh. In a similar way, this example does not take into consideration the possibility of a time-of-day meter, which involves different buy/sell rates at which the solar system is buying/selling energy from a local utility’s grid. Depending on the usage patterns, time-of-day meters can make a solar system still more attractive from a payback perspective. This is because a solar system is generating during peak electricity usage hours, when electricity is most needed on the grid, when a local utility pays the best rates to electricity generators. Likewise, with a time-of-day meter, electricity can be bought by a small business customer at night, to charge up batteries, when rates are lower. In a similar way, for simplicity’s sake, this example does not incorporate the reduction of electricity demand rates that a commercial user pays. Demand rates are based on the maximum base load energy demand, and a solar system will bring that maximum demand down considerably, especially if a battery bank is a part of the system. Reduced demand rates would therefore markedly improve the proposed system’s payback.
The complicating factors in the prior paragraph aside, let’s consider some alternative numbers to get a better idea of the true economics of the proposed solar system. We will challenge a number of the assumptions contained in the analysis above. Let’s start with the most unrealistic of these, the assumption that the cost of electricity will continue to be $0.1147 per Kwh in California some 23 years in the future. Examining the statistics from the US Energy Information Administration, we see that the national average commercial cost of electric power has gone from $0.0764 per Kwh in 1996 to $0.0957 cents per Kwh in 2008, an increase of slightly more than 25% over the last 12 years.
If we were to assume that this same increase in the price of electricity (1.023% per year) were to be experienced again over the next 23 year period, the payback for the proposed solar system would be improved. This means that the expected annual foregone electricity payment some 23 years in the future would be $4,358, much better than the $2,643 ($450/month) mentioned above. For the sake of easy calculations, assuming a steady year over year increase compounding at 1.023% per year, the solar project would now have a payback of about 18 years.
But this assumption about the cost of electricity is probably still way too optimistic. In 2008, Pacific Gas & Electric, one of the larger local California utilities, asked the California Public Utilities Commission for a 4.5% rate increase. PG&E cited the increasing cost of natural gas, which is the primary source of energy used to generate electricity in California, as well as declining supplies of hydroelectric power provided by the states of Oregon and Washington. The utility pointed out that natural gas prices have increased 30% in 2008 alone, and that it must now pass some of those increased costs along to its customers.
So if a 4.5% annual compounded increase in the price of electricity were used in these solar system calculations, the payback period for this installation moves down to 16 years. Things get really interesting if the rate of increase in the price of electricity follows what has been happening to the price of natural gas. If a 30% annual increase in the price of electricity were used in these calculations, then the payback becomes about 8 years. This should not be surprising to those of us who remember that Pacific Gas & Electric rates went up 46% in 2001. Perhaps those of us with some gray hair remember that in 1974, right after the oil embargo, PG&E increased its rates almost monthly.
Note that this analysis does not explicitly incorporate the rate of inflation. Although the August 2008 numbers indicate that inflation has been around 5% per year, let’s use the average rate over the last 10 years, which has been more like 3% (using the Consumer Price Index, which notably does not incorporate the price of energy or food). Whatever numbers for inflation you use, when buying a renewable energy system, it’s like getting a fixed rate mortgage because you lock in your future costs. Adding a 3% inflation rate to the 30% annual increase in electric rates brings the payoff down to 7 years.
Perhaps still more realistic is the assumption that the cost of electricity will, in the near term, in rough terms follow the cost of petroleum, which is the most widely used fuel in the world, and which has recently been driving up the prices for all other fuels. According to statistics from The Wall Street Journal, as of May 2008, the cost of oil, on a per barrel basis, went up 95% over the prior year. With a 95% compounded increase in the cost of electricity, and a 3% compounded annual inflation rate, the solar project now has a payback of just under 5 years.
Even the 95% compounded annual increase in the cost of electricity may be conservative, if one believes that peak oil will have a serious and adverse impact on electricity rates. Evidence of the “peak oil theory” can now be found all around us, if we care to look at it. According to the US government’s Energy Information Administration, worldwide statistics for oil production show that total production has been effectively flat at about 74 million barrels per day since 2005. This is surprising given that world demand has, in the recent past, been increasing at about 2% per year. This is doubly surprising given OPEC’s stated objective is to keep oil prices relatively low in order to have production be profitable to its member states, but at the same time not put a damper on the economic growth of consuming states. Meanwhile, the Saudis have not been able to substantially increase their crude oil production, in spite of the fact that the world has been looking to them to ramp up production in order to keep the price of oil relatively low. For more on the inability of the Saudis to step in and provide much more oil, see the book entitled Twilight In The Desert by Matthew Simmons.
The continued disparity between supply and demand in the oil market may cause the price for oil to shoot up even more than 95% per year in the next few years. This is because the demand for oil is what the economists call inelastic (consumption doesn’t go down much when the price increases). Until the infrastructure changes associated with using other sources of energy can be completed, many users of petroleum will be forced to pay escalating prices. For example, changing the energy-generating infrastructure in a natural gas electricity generating plant is a giant job, certainly something that takes a considerable amount of time. Reflecting this, in some cases, utilities abandon or mothball uneconomical generating plants, and then build entirely new ones.
Wars over oil (such as the Iraqi war), political problems (such as the 1973 oil embargo), terrorist attacks (such as 9/11), disruptions in the very complex and long distribution chain for oil, and many other unstable risk factors mean that the demand for oil is going to be increasingly unreliable in the years ahead. Perhaps the unavailability of power is the greatest reason to move ahead with an on-site renewable energy proposal, such as the one mentioned above. This way of looking at the decision makes the renewable system look more like an insurance policy rather than a cost reduction proposal, although no doubt both benefits can be obtained. If one were to go out and buy insurance against electrical grid failures, if such a type of insurance were to be available, what would a small business owner pay? Probably a great deal of money, maybe $10,000/year. Maintaining the 95% annual increase in the cost of electricity, plus 3% annual inflation, and adding in the cost of this annual insurance premium forgone, the payback for the solar project mentioned above is now just over 3 years.
So the numbers reflecting the cost of energy that many people are using for their calculations are seriously out of date. Entirely different decisions can be reached if people instead use numbers reflecting the current costs of energy. This rudimentary example illustrated that point, but did not incorporate two additional factors that may be important. The first factor is accelerated depreciation that is often available on systems such as these, and that can markedly bring the purchaser’s taxes down. The second factor is the increasing price of commodities such as steel and lead, commodities that are used in the production of renewable energy systems. As energy costs go up, so too will the costs to mine, smelt, fabricate, and transport these commodities. This means that certain types of renewable energy systems, such as the solar system mentioned above, will be considerably more expensive to purchase in the future than they are today. The demand for renewable energy systems will probably also escalate in the years ahead, and this increased demand may additionally drive up solar system prices. All these factors underscore how it is wise to invest now in a renewable energy system, rather than wait to see what the future will bring.
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Charles Cresson Wood is an alternative energy 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. Information about the book, information about his alternative fuel blog, and a way to contact him can be found at www.kickingthegasoline.com.
Bruce Erickson is the president of Mendocino Solar Service, a local provider of solar electricity and solar water pumping systems in northern California. He can be reached at 707-937-1701.
Radically Different Business Models Required In The Era Of Rapidly Depleting Fossil Fuels
September 17, 2008
By Charles Cresson Wood
The world has changed dramatically, and the traditional business models used by many firms in the United States are dangerously out-of-date. The world’s total production of oil is about to peak, is now peaking, or has very recently peaked. This means that petroleum-based fuels such as gasoline and petro-diesel will soon be markedly more expensive and much more scarce. This also means that the supply networks providing these fuels will become dramatically more unreliable. This article discusses a few business model implications of this new situation. While these implications are wide-ranging, we will restrict this discussion to: (1) minimizing internal operations to the core competencies of the organization, and (2) exploiting lower wage rates in foreign countries via offshoring. The position taken here is that these strategic business model objectives are now passé and need to be rethought in light of the new energy supply reality.
Management consultants for years have been urging clients to focus on core competencies. By this the consultants mean what a firm can do well, something that could provide a competitive advantage. Activities that are not seen as core competencies should, with this theory, be divested and outsourced to other firms, in order to free up resources that can then be invested in the improvement of core competencies.
While this approach made sense in an era where inexpensive energy (primarily petroleum) was readily available, it no longer makes sense. The core competency approach assumes that outside firms will be able to reliably deliver products and services. In an era of rapidly depleting fossil fuels, the continued viability of other businesses, particularly those that have not taken aggressive steps to accommodate the new energy reality, is in doubt. For example, the continued existence of many airlines is in great question now that fuel costs have risen so much. Thus businesses that continue to employ the core competency approach will take on unnecessary business risks, and jeopardize their own firm’s existence, when and if they rely on outside firms to provide critical activities.
Instead, organizations should be identifying the critical activities that absolutely must continue to be provided, along the lines of a classical business interruption contingency planning process. Activities that are critical should then be brought in-house so that management can directly supervise them, can reengineer them so that they will continue to be available in the future of uncertain petroleum supplies. By bringing an activity in-house, management can then convert such a critical activity (such as product delivery to customers) from a reliance on petroleum-based fuels, to a reliance on renewable energy technologies. For example, the diesel trucks owned by a delivery service could be replaced by electric trucks owned by the firm distributing these products. The electricity for these new trucks could then be generated by solar panels, wind turbines, geothermal stations, and other renewable in-house and on-site systems that are not dependent on outside organizations. If an activity is highly-critical, for example military defense of a country, then spare parts for these new energy systems, and in-house maintenance staff, can also be set-up to further lessen the dependence on outside organizations.
With the old-fashioned way of looking at things, the diversity of supply found in the free marketplace will help to ensure that a certain product or service is provided by those who have the most expertise, the lowest costs, or some other particular competitive advantage. This theory, in conjunction with plentiful and relatively low-cost petroleum, led to outsourcing of much of America’s manufacturing to foreign countries such as China (AKA offshoring). The cost of shipping raw materials to these countries, and the costs of shipping the finished products back to the United States, over the most recent decades been considerably less than the reduction in labor costs thereby achieved. But in the era of increasingly-high energy costs, distance now matters a whole lot more than it did in the recent past. Increasing wage rates in these foreign countries are also unfavorably altered the economics of offshoring.
As a result, firms with heavy or bulky products, like auto company Tesla Motors and furniture manufacturer Ikea, are repatriating their manufacturing activities due to high shipping costs. The trend toward the localization of various business activities is additionally found in the recent efforts of companies like General Electric, DuPont, Alcoa, and Proctor & Gamble. Not only does this localization reduce shipping costs, it revitalizes local economies, and also reduces carbon emissions.
Offshoring arrangements where there is considerable shipping to and from foreign countries will soon become prohibitively expensive. High petroleum-based fuel costs will tip the equation increasingly toward local provision of raw materials, local provision of labor, local manufacturing, and local distribution. Supply chains will get shorter, less complicated, and more personalized. Those firms that continue to rely on foreign business partners in these offshoring arrangements risk the sudden cut-off shipments due to fuel shortages, fuel rationing, and very high fuel prices. Future military conflicts over access to energy supplies, as well as terrorist incidents focused on the petroleum production and distribution infrastructure, both have the potential to seriously disrupt these offshoring arrangements.
Instead of exploiting the lower wage rates found in foreign countries, an increasing group of forward looking organizations will soon be placing greater priority on operational reliability, predictability, and control. By bringing these activities back to the home country, and for critical activities, bringing the activities entirely in-house, an organization will be able to engineer internal processes so that they will be buffered from the increasingly fragile petroleum-based fuel situation. For these firms, the traditional notion of a company town looks interesting as we enter the era where energy supplies will be in increasingly restricted. With this approach, local on-site workers could be provided with housing, food, clothing, entertainment, etc. so that they need never leave the company town. Energy to support the business activities taking place in this company town could be generated entirely locally, ideally entirely in-house, with technologies such as bio-methane (also called renewable natural gas). This fuel can be generated by the bacterial decomposition of organic industrial waste, organic agricultural waste, or organic municipal waste. This fuel could be used to generate electricity, to power motor vehicles, and to heat buildings.
There are many other aspects of traditional business models that must be rethought so that they will be viable in the era of declining supplies of petroleum. These include the notion of just-in-time (JIT) inventory management, where the on-hand supplies of inventory will be minimized to keep carrying costs low, but the chances of a stock-out condition will be set at an acceptably low level. With the increasingly unreliable supplies of petroleum-based fuels that we will encounter in the years ahead, shipping companies will find it much more difficult to consistently meet customer delivery schedules. Instead, progressive firms will be considering business interruption contingency plans that will allow them to successfully weather delivery firm failures, delivery system delays, in-transit product piracy, and related problems. These contingency plans will often include larger on-hand inventories than were found in the recent past.
Perhaps it is time to review the business plan at your organization to determine whether it will be cost-effective in the new energy reality? Perhaps it is time to determine whether this business plan is truly sustainable in an era that will most likely be characterized by high petroleum prices, petroleum shortages, and petroleum rationing? Perhaps it’s time to integrate renewable energy technology into this business plan so as to come to terms with these issues?
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Charles Cresson Wood, MBA, MSE, is an alternative fuels management consultant with Post-Petroleum Transportation, based in Sausalito, California. His most recent book is Kicking The Gasoline & Petro-Diesel Habit: A Business Manager’s Blueprint For Action. For more information about the book, as well as his alternative fuels blog, and a mechanism to contact him, go to www.kickingthegasoline.com.
High Costs Could Prompt A Premature End To Oil Production
August 29, 2008
Consider what’s now happening at the major mining companies as a harbinger of what we can expect to see with oil production companies. According to a recent article appearing in The Wall Street Journal*, a number of mining companies are curtailing certain of their operations, in some cases shutting them down completely. The explanation, which at first blush seems strange, especially given the run up in commodity prices over the last few years, has to do with operating and investment costs. The cost of energy to run mining trucks and other equipment has skyrocketed. In addition, certain materials needed to make mining buildings and related infrastructure, materials like steel, have also become considerably more expensive.
Mining nickel, lead, copper, and other metals from the ground actually has many similarities to pumping oil out of the ground. While the processes are technologically different, in both cases we are talking about discovering and extracting a commodity that is in limited supply. In both cases, the supply of these commodities is in the process of being exhausted, and as a result, these commodities are increasingly more difficult to find, and increasingly more expensive to extract from the earth. For example, no new giant oil fields are being discovered these days. Producers must now go into very inhospitable environments, such as the bottom of the sea, in order to find significant new deposits of oil.
In the future, firms that are mining minerals, and firms that are producing oil, will both be hit with the double whammy of higher energy prices combined with higher commodity prices. Higher energy prices mean that the cost per ton of ore produced, or the cost per barrel of oil produced, will be higher than it was in the past. Higher commodity prices will discourage investment in new and more efficient infrastructure, just as it will discourage efforts to develop additional deposits.
As was the case for carrier pigeons, bison, and many other animals, the extraction of these “resources” continues until it is no longer economical. Personally, I think it’s deplorable that organizations make these decisions primarily based on economics, but that’s the way the system is set up right now. So the production of minerals and petroleum from the ground will continue until it is no longer economical for the producers to engage in this activity. This point comes when the variable operating costs, and the fixed investment costs, both mentioned above, no longer look attractive relative to the revenues that can be obtained from further production activities.
Exactly when this point in time will come for oil or other commodities is hard to estimate. Many factors will affect this timing, including remaining supplies, prevailing demand levels, available technology, government subsidies and taxes, as well as the cost of capital. The important take-away point is that there will come a point when the producers stop producing, NOT because supplies have run out, and NOT because demand has dried up. At that point in time it won’t matter who you are, or how important your organization’s mission is, nobody is going to produce the commodity your organization may be dependent upon.
So the traditional bell-shaped depletion curve that is generally drawn by those who speak about peak oil is therefore a bit misleading. The smooth symmetrical bell shaped curve was relevant for the United States because the gap between United States’ production and United States’ consumption could be made up by imports from other countries. But when worldwide oil production peaks, if it has not done so already, and there is ample evidence to indicate that it has, then there will be no other country that can supply the missing oil. So the curve doesn’t neatly move down asymptotically approaching the horizontal axis of the diagram – at some point it just stops. That is the point when it is no longer economical to extract petroleum from the earth.
Confirming this reality, firms that produce oil are now dealing with heavy oil, oil produced from tar sands, oil high in sulfur, and otherwise undesirable grades of crude oil. It is much more expensive to extract and refine these types of oil than was the case with the light sweet crude that has been traditionally produced. So this day or reckoning, when oil will no longer be produced, is not all that far away.
From a managerial perspective, what does all this mean? First, it underscores the importance of reengineering your organization so that it is no longer dependent on a rapidly-depleting limited-supply commodity such as oil. It would be far better to transition to renewables, such as ethanol and butanol, fuels that can be distilled from biomass and other forms of renewable waste. Better yet would be sources of energy that do not depend on any potentially unreliable external input whatsoever. For example, electric cars can be powered by solar, wind, geothermal, wave, tidal, and other forms of energy that are predictable and do not deplete over time.
Secondly, this reality points to the need to get more specific about the economics of producing oil, so that we might get a better sense for the date when production will cease because it is no longer economical to engage in this activity. Just having a conversation about this date, and attempting to calculate when it could be, will also be important, because it underscores the increasing fragility of any operation that remains dependent on petroleum.
Thirdly, this reality points to the need for much greater diversity in our energy supply. Because petroleum now makes up about 60% of the world’s energy supply, if oil producers were to stop producing, there would be widespread and unprecedented adverse impacts. But if petroleum made up a much smaller part of the world’s energy supply, and if specific organizations used multiple sources of energy, the impact would be substantially reduced. Even if this day when oil is no longer produced is far away, it is in everyone’s best interest to more toward greater energy supply diversification.
Fourthly, knowledge of this day when petroleum will no longer be produced underscores how organizations are dependent on suppliers on the other side of the world, suppliers that they have no relationship with whatsoever, suppliers about whom they really know very little. Knowledge of this day of reckoning pushes management to consider making their own transportation fuels, and otherwise setting up in-house (or at least local) energy-generating systems. For example, it is now possible for organizations to manufacture their own bio-methane (also called renewable natural gas), to refine this gas, to store this gas for long periods, and to use this gas in their own transportation vehicles. The technology to do this is now sufficiently advanced that organizations can go out and buy a turnkey manufacturing system to capture and refine this gas.
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Charles Cresson Wood, MBA, MSE, is an alternative fuels management 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 learn more about the book, read his alternative fuels blog, and reach him at www.kickingthegasoline.com.
* See Barta, Patrick, “High Costs Dig Into Mine Profits,” The Wall Street Journal, 25 August 2008, pp. A1 & A9.
Note: A different version of this same article appeared at www.renwableenergyworld.com on 15 September 2008.
How Peaking World Oil Production Will Force Us To Evolve
August 13, 2008
By Charles Cresson Wood
At this point it is no longer a question whether world oil production will peak, although the exact date of this peak is certainly still in question. Recent books such as Twilight In The Desert by Matt Simmons authoritatively document that even the most reliable long-tern sources of petroleum, such as Saudi Arabia, will soon provide much diminished quantities of oil. From the standpoint of a futurist and strategic planner, one can of course see a wide variety of resulting implications, many of which should now be the serious concerns of governments, businesses, and non-profits. For example, if world supplies of petroleum will soon be significantly reduced, and if prices of this same petroleum will soon be much higher, organizations will need to rapidly transition to alternative transportation fuels. click here to read more
