Peak Oil Is A Serious Business Contingency Planning Issue

Many decision makers in business and government continue to erroneously believe that peak oil is a “theory” that will not substantially affect them or their organizations, at least not any time in the near future. Accordingly, they continue to drag their feet when it comes to adjusting to the new reality of declining petroleum supplies. This behavior is not only dangerous, it is likely to make the process of adjusting to the peak oil situation much more painful, expensive, and difficult than it needs to be.

Petroleum is America’s most important fossil fuel energy source. Fully 50% of the energy consumed in the United States comes from petroleum. Virtually every modern business process in America today is supported by petroleum. A short list of the products manufactured with petroleum include: pharmaceuticals, clothing like shoes and panty hose, fertilizer for food, foodstuffs like bubble gum, office supplies like elastic bands, cosmetics like lip stick, packaging like plastic bags, household items like wax paper, and sports equipment like golf balls. The most important products made from petroleum are gasoline and petro-diesel, and these are used to manufacture, distribute, service, recycle, and dispose of virtually all products. Of course these two fuels are also used by virtually 99% of people when they drive their cars and trucks to and from work. Most importantly, the peak oil problem is a problem involving declining supplies and increasing prices for liquid transportation fuels.

Peak oil will affect business and government in many ways: some will have an immediate impact, and some will bring impacts through longer-term feedback loops. In the short run, employees may not be able to get to work because gasoline or petro-diesel may simply not be available (older readers will remember the long lines at gas stations in 1970s, which is when we should have started the serious transition away from petroleum). Some employees, particularly those who make relatively low wages and commute from the remote suburbs, will simply quit their jobs because the high price of fuel will make it uneconomical to keep their current jobs. Shortages, rationing, as well as both foot-dragging and corruption in the government agencies that will oversee liquid fuel distribution, will also most likely lead to a break down of truck-based just-in-time inventory systems, on which so many businesses have come to rely.

In the longer term, to save fuel and thereby save money, many businesses will be supporting more employees as telecommuters rather than workers who show up in the office. Globalization as we know it, where products are shipped all over the world, will also be reversed. Many products will increasingly be made locally and shipped much smaller distances. Already we see evidence of this trend in the increasingly-popular local food movement. Air travel will be severely curtailed and soon become the exclusive privilege of the political ruling class, the military, and the super-rich. Longer-term impacts will also include increasing prices for inputs to most every process, and these increasing prices will have a ripple effect throughout the economy, reducing profit margins, and forcing high-cost organizations that have not yet adjusted to the new post-peak-oil reality out of business.

The question that business decision makers should be wrestling with is not: “Is peak oil a theory?” Instead, they should be asking: “When and how will peak oil affect my personal life, and when and how will it affect my organization?” The data from many credible sources is clear — peak oil is happening now. For example, the conservative Federal government agency called the Energy Information Administration publishes worldwide production statistics for conventional oil. Production has been on a plateau since 2005, at about 74 million barrels per day. The inability to increase production flies in the face of increasing demand from developing countries such as India and China. These statistics underscore the fact that new high-tech technology, such as computer models to locate underground petroleum deposits, is not going to take care of the peak oil problem.

In spite of a dramatic run up in prices in July 2008, up to $147/barrel, the high price of oil has not resulted in more oil coming to market. As the world economy picks up steam, we are now (October 2009) going through another run up in the price of oil — oil prices per barrel have roughly doubled in the last six months. This run up in prices will soon result in another recession, at least in the USA, because the American economic system cannot, the way it is currently configured, deal with very high costs for energy. This run-up-in-oil-prices-and-then-crash-in-recession cycle will continue until we actually move to other sources of energy.

Many people erroneously listen to the economists when they should be listening to the geologists. According to classical theoretical economics, if the price of a commodity increases, then more of it will be brought to market. But this did not happen in July 2008, and it will not happen in the years ahead. This is because oil is a limited resource, and the classical economic theory doesn’t take scarcity into consideration. Thus, the market is not going to take care of oil shortages on its own. The fantasy of a perfectly correcting market mechanism is not going to save us here.

Energy Bulletin