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.
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.