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”?
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.
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