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.
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.