New Bottom Line Volume 15.1 – Houston: 'We've got a problem'

Sunday, January 8, 2006

You’d expect a cover story about “peak oil” from WorldWatch magazine — but Barrons?!

Titled “Twilight for Oil?” in the Jan 2 print edition, and An Unapologetic Alarmist online (needs subscription), Sandra Ward interviews Matthew Simmons, head of energy investment banking firm Simmons & Co. The headline on Barrons‘ cover — “Preparing for (gulp!) $200 oil” — about sums it up.

But oil supply isn’t going to grow. As we move into the brutal brunt of the winter, we could easily have 45-to-60 days where demand is basically two-to-four million barrles a day higher than supply. Then we will test how robust our inventories are, because we’ve never experienced that kind of stock draw before. In the United States, in some areas we must be down to hours of spare inventory on a days-use basis, particularly in diesel fuel. When 85% of the things we buy in WalMart come from China, the implications for trucks on the highway system is profound. Those trucks are chugging along at three-to-six miles per gallon, which is why we are setting an all time record in the use of diesel fuel.

When asked “what do we do?” Simmons sounds more like a raving enviro — or like me! — than like a Houston investment banker:

Let’s actually assume there is a reasonable chance this awful peak oil and peak natural gas is real and do something about it, so if it turns out to be real it isn’t a show stopper and if we did something and it turns out it wasn’t real, we’ve bought ourselves an insurance policy.

He goes on to call for “the intensity of the way we tackled the Marshall plan when we rebuilt Japan and Europe after Word War II,” cutting oil use in half by 2020…. [making] a major shift in the way we distribute goods over long distance.” CAFE standards. Telecommuting. Yipes – the guy’s actually a locavore! “To have food taste great it has to be grown locally.”

But seriously, folks: It’s important, and notable, that serious players from the world of big oil are starting to pay heed, recalibrate how they view the landscape of risk and opportunity, and get those contingency plans into gear.

I’d be the last to claim I could predict exactly how energy futures are going to unfold. (Just have a look at the lively discussion generated by a shorter version of this article, posted at Simmons is called an alarmist, and is defended as highly respected. There’s plenty of oil, or there’s not. Nuclear is more realistic future energy source than solar, or vice versa. Etc.) But I can say this, with certainty: the world in which we will spend the rest of our lives will be an uncertain and unpredictable place, perhaps moreso than any time in living memory — and that’s saying something!

Energy — whether the concern is supply or price — is just one variable. Add to the mix: discontinuous political and technological change; rapid population and economic growth in China, India, Brazil and elsewhere; demographic shifts that yield younger populations in the developing world and aging populations in the advanced economies; potential political instability in critical regions, like, say, the middle east; climate change — or “climate weirding” as Rabbi Arthur Waskow calls it — and the potential disruption of the Gulf Stream; the list goes on.

The point of the list is not to scare the pants off you — though well it might — but rather to suggest that prudent leadership in the face of uncertainty demands a flexible mind and a quiver-full of diverse strategies. Since you can’t predict the future, you need to be ready for whatever future shows up on your doorstep. The advantage in this world will go to the companies — and countries — that deploy the strategies that are most adaptive to any array of potential futures, and that can shift gears quickly as circumstances change. In the face of the potential for $200 (or even merely $100) oil, prudent leadership will reduce future energy costs through increased efficiency, and will reduce reliance on energy imports through efficiency and energy independence strategies.

I can think of only two reasons not to do so: 1) you believe energy efficiency is too expensive to be a good investment in the short term — in which case, you’re doing it wrong; 2) your economic self-interest is too tied to the status quo to be able to see straight. Wait, there’s a possible third: you’re absolutely certain prices will drop and stay down (and I don’t know about you, but I sure wouldn’t bet my retirement portfolio on anyone cocksure about anything.)

By the way, if you’re not up on just how quickly this energy shift is happening — notwithstanding the macro trends heading us right into big trouble — be sure to track CLEANWATCH, the monthly newsletter on “clean technology” from Clean Edge. (Disclosure: co-founder Ron Pernick is on Natural Logic‘s advisory board; co-founder Joel Makower is a collaborator in the S/BAR sustainable business rating system and other endeavors.) CLEANWATCH is chock full of stories about growth in renewable energy markets, advances in solar cell technology and, this week, California’s proposal for the Nation’s Biggest Solar Program: 3,000 MW by 2016.

(c) 2006 Gil Friend. All rights reserved.

New Bottom Line is published periodically by Natural Logic, offering decision support software and strategic consulting that help companies and communities prosper by embedding the laws of nature at the heart of enterprise.

Gil Friend, systems ecologist and business strategist, is President and CEO of Natural Logic, Inc.

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