“Whether it is natural disasters, economic instability, resource constraints or unpredictable and damaging climatic events, the need for local resilience is becoming increasingly evident today. We have moved from a relatively localised economy to a largely global economy. Supply chain disruptions and geopolitical events make this system interdependent and highly vulnerable.“
Resilience has become a buzzword, with civic organisations, think tanks, community groups, corporations and local business addressing potential risks. A system is said to be resilient if it has the capacity to defend against, adapt to and repair itself after disturbances. Resilience can also be defined as the, “ability of the system to evolve in order to accommodate environmental hazards or policy change and to expand the range of variability with which it can cope.” 1
Energy, economy and environment are all highly correlated, yet as a society we fail to understand how these are inextricably linked. Unfortunately much of our thinking is compartmentalised and the broader picture is not well understood. Before we can take positive action and make real change we must understand the challenges and the realities based on facts and evidence based research. Only by understanding the potential risks can we better manage and move toward a resilient future.
Prior to 1870, the world received nearly 100% of its energy from biomass predominantly in the form of wood and peat. In the late 1800’s coal became the dominate source of energy. The early 1900’s saw the rise of petroleum which began to occupy a significant portion of the energy mix. By the 1960’s a combination of natural gas, petroleum and coal supplied most of the global energy needs. This surplus energy allowed human populations to extract resources at an ever faster rate. The below graphic from the 2016 BP Statistical Review highlights the current energy mix. Despite the rapid growth in renewables since the early 2000’s it still only constitutes a relatively small portion of the overall mix.
Before we can make informed decisions about the future we must understand the influence and power of crude oil. Understanding the energy density of crude oil is the first step in understanding how to build resilience. Crude oil is the single biggest source of primary energy today. Our highly complex society and economy has benefited enormously from the benefits of crude oil. It has driven numerous technological innovations and is responsible for the rapid growth in economies and global populations.
Crude oil is the most versatile source of energy. Petroleum is used for a wide range of applications, most-notably powering internal combustion engines, aviation fuels, the feedstock for pharmaceuticals, fertilizers, bitumen, and the manufacture of plastics and synthetics to name a few.
1. Resources are Finite – Peak Oil
With transport fuels continuing to be dominated by oil (88% in 2035),1 it is crucial to understand the concept of Peak Oil. The term ‘Peak oil’ is used to describe the point at which the exploitation of oil resources reaches maximum production and then declines. Peak Oil, is NOT synonymous with “running out of oil,” it represents the half way point of oil extraction. The significance of this half-way mark is the remaining half is much harder and more expensive to extract than the first.
The International Energy Agency (IEA) outlined in 2006 that ‘conventional’ oil production peaked. The IEA conducted a field by field analysis of 800 of the world’s largest oil fields and suggests that depletion rates are very high (6.8% per annum). Decline rates on conventional oil fields are important because they account for more than 90 percent of global production.
A 2016 HSBC report into ‘Global Oil Supply’ suggested that 81% of the world’s total liquid fuels production is already in decline. HSBC the 6th largest bank globally, estimates the average decline rate on post-peak production is 5-7%PA, equivalent to around 3-4.5million barrels per day (mbd) of lost production every year.
‘Unconventional’ oil resources exploited by fracking, deep water and tar sands have helped offset the declines of more conventional resources over the last few years. These efforts are proving costly, rate constrained and economically unviable for many oil and gas producers. Once exploited the decline rates are significantly higher than ‘conventional’ operations, therefore continued capital investment is required to maintain and offset the high decline rates. Depletion rates for ‘unconventional’ resources vary from 45 percent per annum to 85 percent.
Source: EIA, Drilling Info, Statistics Canada and Labyrinth Consulting Services, Inc.
2. Net Energy is Declining
Energy Returned on Energy Invested (EROEI) is the ratio of the amount of usable energy delivered from a particular energy resource to the amount of energy used to obtain that energy resource. The higher the EROEI, the more things can be done within an economic and social system. An abundant source of energy with a high EROEI (100:1), gives us a surplus of energy, allowing us to engage in diverse activities and pursuits outside the realm of survival and maintenance of critical services.
Source: Charles A.S. Hall and John W. Day, American Scientist June 2009.
Understanding (EROEI) is crucial in our ability to fully comprehend how our economies and society at large function. Comprehending EROEI allows us to make informed decisions about the future and build resilience. Most current economic models do not factor in and account for energy and how it impacts society and economies.
The above graphic illustrates the returns each energy source receives back from the initial unit of energy invested. In simplistic terms, we are currently experiencing ‘diminishing returns’ of net energy. The net energy return in the 1930’s for oil was 100 to 1. This dropped to around 40 to 1 in the 1970’s, and today the EROEI for oil is around 14 to 1 and declining rapidly. It is getting harder and more expensive to extract resources, therefore the net benefit to society is declining. This is clearly highlighted by the tar sands which has an EROEI of less than 5.
3. Supply Constraints are Imminent
Increasingly more capital is required by oil and gas producers to extract oil from harder to explore places. 2015 highlighted this predicament with the discovery of new oil supplies reaching a 70-year low. Approximately 20 times more oil is currently being used every year than is being ‘replaced’ (through the discovery of new reserves). Many analysts suggest that the consequences of this lack of new discovery will be felt during the coming years.
Oil Discoveries Graph Illustrates the predicament oil producers, consumers and economies face. With most of the major conventional oil discoveries being made in the 1950’s, 1960’s and 1970’s it is only a matter of time until we will run up against sup-ply constraints. HSBC research sees global oil supply demand continuing to grow by 1 million barrels per day (mbd) every year, extending out until at least 2040. Declining discoveries combined with continued oil demand heightens the risk of a major global oil supply shock around 2018 which could “significantly affect oil prices.”
4. Economic Growth is Dependent upon Cheap Oil
The converging crises (environmental/climate), social and financial are inextricably linked. A research paper authored by a team of European government scientists, in October 2016, warns that the global economy has entered a new era of slow and declining growth. This is because the value of energy that can be produced from the world’s fossil fuel resource base is declining inexorably. Oil is the invisible hand which supports, facilitates and drives global growth and economies.
The study by European government scientists, suggests, from the data collected for the past 40 years that during economic recessions, the oil price tops $60 per barrel. But during economic growth it remains below $40 a barrel. This means that prices above $60 will inevitably induce recession. The study concludes that to avoid recession, “the oil price should not exceed a threshold located somewhat between $40/b [per barrel] and $50/b, or possibly even lower.” 3
5. Debt has Grown Exponentially
It is energy, not capital, that drives the global economy. As the cost in terms of extraction of resources has increased, so too has the growth in debt. As the ’low hanging’ easy to get resources have been exploited, the difficult harder to access resources have required increasing amounts of capital to extract resources. Money and debt merely facilitate the extraction process. The recent debt bubble has simply brought forward future production, hence why we are currently seeing an oversupply in the world oil markets. It is not a long term solution to the broader challenges ahead.
Stubbornly high oil prices leading up to the Global Financial Crisis (GFC) acted as a hand brake for the global economy. Many analysts suggest high oil prices helped trigger the GFC. In an effort to restart the global economy central banks embarked on numerous economic stimulus packages, bailouts, quantitative easing and cut interest rates to record lows. These measures could not compensate for these persistently high oil prices and already indebted economies and households. Since the financial crisis, instead of reducing indebtedness or deleveraging, global debt since 2007 has grown by $57 trillion, raising the global ratio of debt to GDP by 17 percentage points.
It is important to understand that money and debt does not create energy. Money and debt simply help facilitate the extraction process. Since 2007 no major economy has decreased its debt-to-GDP ratio. Currently 24 nations face significant economic headwinds or face a full-blown debt crisis. Global debt to GDP ratio is at a record high of 286 percent, or $200 trillion dollars. France, Spain, Belgium, the United States, United Kingdom, Lebanon, Singapore, Portugal, Italy, and Japan are some of the countries that have significantly high government debt to GDP and face fiscal challenges. 4
As production becomes increasingly expensive, the net benefit of cheap energy declines. This flows through to production cost of goods and services affecting many parts of the economy. With such large debt overhangs across the globe, it becomes increasingly difficult for individuals, governments and business to afford and invest in new technologies. Continued debt growth is the only way to offset diminishing returns and stimulate the overall economy.
6.Financial Markets are highly, Integrated, Complex and Leveraged
Since the Global Financial Crisis (GFC), Central banks have artificially supported equity markets with quantitative easing and other stimulus instruments. Many investors (both retail and institutional) have allocated capital into the equity markets, due to the low interest rate environment and lack of alternatives. Many high profile analysts and prominent investors suggest the markets are ‘expensive’ or in ‘bubble’ territory. Prominent veteran investor, (Chairman and CEO of Berkshire Hathaway) Warren Buffett is warning that the U.S. stock market is significantly ‘overvalued’. Other billionaire high-profile investors such as Jeff Gundlach (DoubleLine Capital LP) and Bill Gross (co-founder, Pacific Investment Management – PIMCO) have also been vocal in selling down equities and buying precious metals.
The globalised capital and financial markets are now more complex and interdependent than ever. Complex derivative and financial instruments are often highly leveraged. Financial contagion can easily spread if risks aren’t managed. Global financial risks are becoming increasingly complex and often unfold in unpredictable and unexpected ways. We have already witnessed significant economic and geopolitical challenges and instability over the last few years in countries such as, Greece, Brazil, Spain, Ireland, Portugal, Venezuela, Japan, Iraq, Syria, Afghanistan, Russia, Ukraine, Ecuador and Argentina. Hence, building local resilience is essential for stability in a volatile and highly leveraged global economy and capital markets.
7. Climate Change is here, NOW
The traditionally conservative International Energy Agency, claim we’re headed for an increase in temperature in excess of 5 degrees Celsius if we continue on the energy intensive path we are presently on. Ian Dunlop, formerly a senior international oil, gas and coal industry executive, now a vocal activist around the issues of climate change and peak oil, suggested at a 2016 ‘Engineers Australia’ conference, “We need a completely different risk framework to address climate change which is not in anybody’s lexicon right now. It needs to move to a different level. What we are really doing is waiting for catastrophe to happen, which is what risk management ought to be about.” 5
While few governments are taking significant legislative action, most are aware of the risks. Many climate projections estimate higher temperatures, rising sea levels, more frequent extreme weather events – such as droughts and floods, and changes in rainfall patterns. This was echoed by the ‘Director of the Central Intelligence Agency’ (CIA) of the United States John Brennan in late 2015 at the opening session of the Global Security Forum 2015.
While there is much debate and conflicting views around the severity of the impacts of a changing climate, it is certain the global climate system is changing. We are already seeing the consequences of prolonged droughts. Syria’s drought has destroyed crops, killed livestock and displaced as many as 1.5 million Syrian farmers. In the process, it touched off the social turmoil that burst into civil war, according to a study published in March in the Proceedings of the National Academy of Sciences USA. 6
Regardless of any increase in renewables, the majority of the global energy mix will be in the form of fossil fuels, with 80% of the world’s total energy supplies expected to be dominated by fossil fuels until 2035. 7 Despite the political rhetoric it is evident global emissions will continue to rise over the coming decades. Communities, environs and livelihoods are already being adversely impacted and increasingly prone to disaster risks as a consequence of climate change. It is crucial that communities and organisations prepare and plan for a very different world.
“On climate change, we often don’t fully appreciate that it is a problem. We think it is a problem waiting to happen.”
Human influence on the climate system is clear, recent anthropogenic emissions of greenhouse gases are the highest in history. 2016 has set a new record as the hottest year ever measured. The previous record was set in 2015; the one before in 2014. Fifteen of the 16 warmest years have occurred in the 21st century. Already global average temperatures are 1.3C above pre-industrial levels, rising faster and further than almost anyone predicted. 8 Habitat for all species as well as human’s is disappearing throughout the world at an alarming rate. While the mainstream media and conservative scientists minimise the climate dilemma, there are many in the scientific world that are less optimistic about the ability to stay under the 2 degree C target. While vested interests protect their patch and deny climate change the insurance industry is taking the matter seriously. (see below chart)
ClimateWise, a coalition of 29 insurers, including Allianz, Aon, Aviva, Lloyd’s, Prudential, Swiss Re and Zurich, commissioned a report into the impacts of climate change on the insurance industry. This global collaboration of leading insurers focused on reducing the risks of climate change found that more frequent extreme weather events are driving up uninsured losses and making some assets uninsurable. The report said that, since the 1950s, the frequency of weather-related catastrophes has increased sixfold. The report concluded that the industry must use more of its $30 trillion of investments to help fund increased resilience of society to floods, storms and heatwaves.9
The chairman of Lloyd’s of London has said that climate change is the “number one issue for that massive insurance group.” Europe’s largest insurer, Allianz, stated that climate change stands to increase insured losses from extreme events in an average year by 37 per cent within just a decade. Paul Fisher, former deputy head of the Bank of England, also articulated, “climate change is potentially a systemic risk” which “could be the trigger for the next financial crisis.”10
8.Climate Shifts are Already and Will Increasingly Impact Food Production
Food is the lifeblood of civilisation, without it, towns, communities and cities don’t exist. Food is fundamental to our wellbeing and also impacts the environment more than any other industry on earth. Over recent decades our food systems have become highly vulnerable. For the most part they are dominated by energy intensive ‘just in time’ long distance supply chains. Both resource scarcity and climate change pose significant risks to our food systems.
The price, quality and seasonality of food are increasingly being affected by climate change. Future food security is under threat. Food supply chains are highly exposed to disruption from increasing extreme weather events driven by climate change. Farmers are already struggling to cope with more frequent and intense droughts and changing weather patterns. In industrialised countries there is the typically less than 30 days supply of non-perishable food and less than five days supply of perishable food in the supply chain at any one time. Households generally hold only about a 3-5 day supply of food. Such low reserves are vulnerable to natural disasters and disruption to transport from extreme weather. 11
The inter-dependencies between energy and water are set to intensify in the coming years, as the water needs of the energy sector – and the energy needs of the water sector – both rise. Water is essential for all phases of energy production: the energy sector is responsible for 10% of global water withdrawals, mainly for power plant operation as well as for production of fossil fuels and biofuels. These requirements grow over the period to 2040, especially for water that is consumed (i.e. that is withdrawn but not returned to a source).12
Source: Wohttps://www.climatecouncil.org.au/foodsecurityreport2015 rldEnergyOut-look2016ExecutiveSummaryEnglish.pdf1.
9. Modern Agriculture is Dependent Upon Cheap Oil
“From farm to plate, the modern food system relies heavily on cheap oil. Threats to our oil supply are also threats to our food supply. As food undergoes more processing and travels further, the food system consumes ever more energy each year.”
Danielle Murray (Earth Policy Institute)
Modern agriculture is almost entirely dependent on reliable supplies of oil for cultivation and for pumping water, petroleum based pesticides and herbicides, crop storage, drying and for the transportation of farm inputs and outputs. For every calorie of energy used by agriculture itself, five more are used for processing, storage and distribution. Currently about 10 to 15 calories of fossil fuel energy are used to create 1 calorie of food. It is no surprise agriculture is the single largest consumer of petroleum products when compared to any other industry. This equates to 1,500 litres of oil equivalents to support the average western diet each year.13
The UN’s Food and Agriculture Organisation (FAO) reported a 45% increase in the world food price index during the 2008 food crisis. Wheat prices increased by 130% relative to 2007 levels, similarly, soy prices went up by 87%, rice prices by 74%, and maize prices by 31%. Short-term causes of these crises include weather shocks, increased oil prices, speculation, and growing demand for biofuels.
Indicative of most western countries, a 2007 study conducted by Melbourne’s Centre for Education and Research in Environmental Strategies, (CERES) found the average Australian basket of food has travelled over 70,000 kilometres from producer to consumer. The study analysed 29 different food items purchased at a typical supermarket, items included fruit, vegetables, meat, dairy and non-core food items such as chocolate. The food in the basket of goods had been transported by road within Australia and by ship from other countries.
Due to the constraints of the first and second laws of thermodynamics this highly energy intensive system of food production cannot be maintained in its current form. 14 This reliance on long distance, energy intensive supply chains, combined with use of fossil-based fertilisers and pesticides makes our current food systems highly vulnerable. The combined effects of unpredictable climate events, exacerbated by volatile and declining fuel supplies will place pressure on producers and communities over the coming decades.
10. Cognitive Biases are Limiting Action
The converging crisis, ecological, energetic, economic and social, are inextricably linked. Unfortunately our inability to see the complexity and interconnectedness of these may go unnoticed. Most events that catch us by surprise are both predictable and preventable, but we often miss (or ignore) the warning signs. ‘Black Swan’ theory is a metaphor which helps explain why certain events come as a complete surprise. These events usually have a major effect on systems, society or economies. The risks of certain events occurring are inappropriately rationalised. It is only after such events (in hindsight) it becomes obvious. The Global Financial Crisis was an example of a ‘black swan event’. In hindsight, it was obvious that unrestricted lending, complex leveraged derivative tools, all time high petrol prices and increasing property prices would have adverse consequences.
Today we are in a much worse situation than we were prior to 2008. Debt levels are significantly higher than those pre- GFC. Resource constraints have only been masked by a short term oversupply, increasing global emissions and the environmental crisis continue to dominate the narrative. The ability to plan and prepare adequate strategic outcomes is hindered by our biases and behavioural conditioning. These psychological biases make us collectively blind. Hence, we overlook and discount facts and information which impacts our ability to take preventative action. Work by Bent Flyvbjerg (Aalborg University, Denmark) explains ‘explanatory power of optimism bias’ and ‘strategic misrepresentation,’ respectively, in accounting for forecasting inaccuracy as a function of political and organisational pressure. (see graphic below)
Source: Political and Organisation Pressure Graphic, Bent Flyvbjerg, Aalborg University, Denmark and Delft University of Technology
Both Peak oil and climate change remain only vague threats to the general populous. These threats are very real and are already being felt locally and globally. It is wise to be proactive, as opposed to being forced to take emergency action. While it is easy to be optimistic or ignore the real issues, there is great power, freedom and benefit to being able to identify, plan and take positive action before any crisis occurs. Only by understanding our current circumstances can we move toward realistic solutions.
Before we can take positive steps towards a brighter more resilient future we must ask a number of questions and challenge our current assumptions. We must ask ourselves: What kind of future do we want? Are our assumptions about the future based on reality? Is there a systems thinking approach to what we do? What are the alternatives and what is possible? Our greatest ability as humans is to conceptualise and think. It is time to ‘rethink’ our future….
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Article by Andrew Martin, Andrew is author of Rethink…Your World, Your Future...he is also Director of Rethink Consulting. Rethink Consulting takes a whole systems approach to navigate the challenges ahead. They have developed tools and indexes to help ascertain the overall resilience of a community, organisation or local government body. Once risks, vulnerabilities and opportunities are identified action is taken to help minimise, mitigate or develop real world solutions to enact positive change.
Cover Image: Jason Tester Flickr
1 (Adger, 2006a, P. 270).
2. Kim Fustier, Gordon Gray, Christoffer Gundersen and Thomas Hilboldt, Global oil supply, Will mature field declines drive the next supply crunch?, HSBC Global Research, September 2016
3. Nafeez Ahmed, Brace for the oil, food and financial crash of 2018, Insurgeintelligence, 2016.
5. Ian Dunlop chaired the Australian Greenhouse Office Experts Group on Emissions Trading from 1998-2000 and was CEO of the Australian Institute of Company Directors from 1997-2001.
6. John Wendle, The Ominous Story of Syria’s Climate Refugees, Scientific American, December 2015.
7. ‘Fossil Fuels to Remain Dominant until 2035’, Oil and Gas Journal, October 2016.
8. George Monbiot, The Climate Crisis is Already Here, but no one is telling us, The Guardian, Aug 2016.
9. Matthew Heimer, This Chart Shows Why Insurers are Climate Believers, Fortune, August 2016.
10. Julien Vincent, Australian companies’ negligence on tackling climate change will cost us, Sydney Morning Herald, January 2017.