Prosperity Without Growth

Keywords: smart growth, sustainable growth, sustainable business, Edward D. Hess, Strategy+Business

In the latest issue of Strategy and Business, David K. Hurst reviews Smart Growth by Edward D. Hess. The review is below. For more on growth and sustainability see:

Nobel Laureate Joseph Stiglitz on Sustainability and Growth

Prosperity without Growth: A review of Smart Growth by Edward D. Hess

Edward D. Hess, professor of business administration and Batten Executive-in-Residence at the University of Virginia’s Darden School of Business, has a heretical thought: Growth may not be good. In Smart Growth, he questions the four major assumptions behind the conventional wisdom of corporate success, which he calls the “growth mental model” (GMM): that businesses must grow or die, that growth is unequivocally good, that growth should be smooth and continuous, and that quarterly earnings are the primary measure of success. In addition, he supplies a series of trenchant questions for managers to ask themselves about how, why, and even whether their firms should grow.

In nine crisp chapters, Hess demonstrates that the GMM is neither possible in practice nor feasible in theory, and that attempts to meet its demands can create insurmountable obstacles to corporate sustainability. His arguments are supported by a series of case studies showing that growth is usually uneven and episodic — impossible to sustain for more than relatively short periods of time. Thus, attempts to “implement” the GMM result either in profitless growth, especially through acquisitions, or in ersatz earnings produced via a wide variety of financial manipulations. To test whether the concept of the GMM is supported by theoretical perspectives on growth, Hess turns to economics, organizational strategy and design, and biology. He finds that neoclassical economics is the framework that is most sympathetic to the GMM, but its assumptions do not hold up in the real world; that the strategic and design perspective offers little support for the GMM; and that biological theories are notable for the stress they put on the limits to growth. So there is little support for the conventional wisdom in theory.

Hess’s conclusion is that corporations should aim for sustainable or “smart” growth by asking some key questions, especially regarding the resources most needed to support such growth. Following economist Edith Penrose’s resource-based theory of the firm, he contends that the true limit to growth is usually defined by the capabilities of the firm’s managers — supporting this argument with the well-documented case of Starbucks’s overreach, in which the rapid expansion in the number of stores caused liabilities to rise precipitously and diluted the value of the brand.

All this makes good sense. The only shortcoming may be the author’s failure to examine why the GMM is so robust in the face of all the evidence against it. Is it because there are large constituencies in the economy that generate revenue by pushing the GMM and thriving on the turmoil it creates? If so, is there a need for public policy addressing it? And what risks do firms run if they eschew the flawed GMM in favor of smart growth?

Author Profile:

David K. Hurst is a contributing editor of strategy+business. His writing has also appeared in the Harvard Business Review, the Financial Times, and other leading business publications. Hurst is the author of Crisis & Renewal: Meeting the Challenge of Organizational Change (Harvard Business School Press, 2002).

Reprinted with permission from the strategy+business website. Copyright 2010 by Booz & Company. All rights reserved. www.strategy-business.com

More on Smart Growth at Amazon.com

Extreme Rain

Keywords: extreme rain, mudslide, climate change, extreme weather, flood, Maierato, Calabria, Italy, Lloyds of London, Emerging Risks Team, Climate Change Risk Management

As climate change progresses, weather extremes increase. New records are increasingly set for heat, cold, draught, and rain. Climate models predict an increase in the frequency and severity of extreme rainfall events.

The video below shows an example of the results of extreme rain. A mudslide in Maierato, Calabria, Italy results as the soil becomes saturated with rain. Liquefaction of the land occurs – the earth, rock and soil flow like a river, carrying trees, homes, anything on the surface down hill. The video is visually astonishing.

Lloyds of London Emerging Risks Team and the Climate Change Risk Management consultancy have published a whitepaper on Extreme Rainfall. Lloyd’s researchers found rainy days exceeding 25mm have become more frequent, increasing 33%, since 1960. However, the change is most significant for days of extreme rainfall over 40mm, which recorded a 900% increase.

Interestingly, the trends in this paper would be missed under analysis of annual or monthly records. The change in extremes in the daily record is entirely hidden from annual, seasonal and monthly records. This highlights the importance of collecting data and modelling at an appropriate level of granularity.

The study examined daily rainfall levels in East London from 1915 to 2006 and found only one day prior to 1960 of recorded rainfall exceeding 40mm, compared with ten days between 1960 and 2006. Over the entire period analysed, over half of the days with rainfall over 40mm were in September.

Lloyd’s team analyzed data over two separate periods (1915-1960 and 1961-2006), providing two 46 year periods. They found that daily rainfall exceeding 25mm occurred on 107 occasions in the 92 year period, with more in the post-1960 period (61) than in the pre-1960 period (46), (Figure 2).

lloyds extreme rainfall figure 2

Figure 3 shows the percentage of increase of various daily rainfall levels between the two time periods. For example, the number of days exceeding 40mm has increased from once between 1915-1960, to 10 occurrences, a 900% increase, between 1961-2006.

lloyds extreme rainfall figure 3

From the Introduction of Lloyd’s Whitepaper

There is a scientific consensus (Oreskes 2004) that the mean surface temperature of the Earth has warmed in recent decades, and that the warming amounts to around 0.8°C since the beginning of the 20th Century (IPCC 2007). From this, Goddard Institute of Space Studies (GISS) estimate that 2005 tied with 2007 as the warmest year since reliable instrumental measurements became available, and the first six months of 2010 appear to have exceeded these. Detection and attribution studies show that there is a high probability (at least 90%) that this warming is largely the result of man-made emissions of greenhouse gases (mainly CO2) in the troposphere and that the amount and rate of warming are outside of the range of natural variation identified during the latter part of the last 11,000 years.

Continued warming is expected to have important consequences for a range of Earth systems (including the atmosphere, cryosphere, oceans, hydrological systems and the biosphere) and there are compelling reasons to expect increases in the magnitude and frequency of some natural hazards such as floods (Huntington 2006), droughts (Mason and Goddard 2001) and landslides (e.g. Fischer et al. 2006). There are also concerns about the stability of several of the large ice sheets on Earth (e.g. Overpeck et al. 2006), as these have the ability to impact upon global sea levels and regulate ocean currents. (See Lloyd’s 360 Risk Insight Report “Rapid Climate Change” – www.lloyds.com/360.)

The pattern and extent of future warming has enormously important policy implications for governments and business. The only way in which such predictions can be made is through the use of Global Climate Models (GCMs) and through risk-based analyses.

It is clear that climate change presents a risk to the facilities and infrastructure of national and local authorities. An assessment and analysis of these risks is required to develop a robust risk assessment, mitigation and adaptation programme at regional and national levels.

The objectives of the preliminary analysis presented in this report were to:

  • Describe the patterns of daily rainfall in London and compare the early 20th Century record with that of the late 20th / early 21st Centuries.
  • Catalogue the occurrence of rainfall events that have resulted in major downpours in the last century.
  • Analyse and interpret changes in daily rainfall patterns.
  • Analyse trends in annual, seasonal and monthly rainfall patterns.

The whitepaper can be downloaded here.

Recommend Reading

California’s Other Storm of the Century by Jay Kimball

Atlantic Hotter Than Before Katrina, Boosting Storm Forecasts by Jay Kimball

State of the Climate: Hottest Decade on Record by Jay Kimball

Jeremy Grantham: Everything You Need to Know About Global Warming in 5 Minutes by Jay Kimball

Top Business Leaders Deliver Clean Energy Plan

Keywords: clean energy, business leaders, climate change, american energy innovation council

What do Americans spend more money on – potato chips, or energy research and development? See video below for the answer.

Seven business leaders, founders of American Energy Innovation Council, delivered a Business Plan For America’s Energy Future. The leaders are:

  • Norm Augustine, former chairman and CEO of Lockheed Martin
  • Ursula Burns, CEO of Xerox
  • John Doerr, partner at Kleiner Perkins Caufield & Byers
  • Bill Gates, chairman and former CEO of Microsoft
  • Chad Holliday, chairman of Bank of America and former chairman and CEO of DuPont
  • Jeff Immelt, chairman and CEO of GE
  • Tim Solso, chairman and CEO of Cummins Inc.

The US is the largest consumer of energy in the world. The American Energy Innovation Council makes the case that there is a pressing need for energy innovation, and we need to invest in that innovation.
Energy R&D Spending as a Share of Sales

Though energy is a key strategic component of any countries wellbeing, US energy R&D spending has been in decline.

Energy R&D Spending

Though the US is the worlds largest energy consumer, it spends less on energy R&D than China, France, Japan and Korea.

Energy as a Share of GDP
The council’s recommendations:

  • Create an independent national energy strategy board
  • Invest $16 billion per year in clean energy innovation
  • Create Centers of Excellence with strong domain expertise
  • Fund ARPA-E at $1 billion per year
  • Establish and fund a New Energy Challenge Program to build large-scale pilot projects

The full report can be viewed here, and for more on Bill Gates call for Zero Carbon emissions, see Bill Gates on Climate Change and Renewable Energy.

German Military Study Warns of Potential Energy Crisis

Keywords: peak oil, Der Spiegel, German military study, energy crisis

Though governments have for decades pondered the looming peak in oil production, we rarely get a glimpse into their uncut analysis.

A study by a German military think tank has analyzed how “peak oil” might change the global economy. The internal draft document — leaked on the Internet — shows for the first time how carefully the German government has considered a potential energy crisis.

German newspaper Der Spiegel reports on the study. Highlights are below, along with a translation of the document by The Oil Drum.

Peak oil is the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline. As oil supply declines, in the presence of rising global demand, price will rise rapidly. Estimates vary on when we hit peak. Some say we are at peak now, some studies suggest 2014, 2020 and beyond. More on this in a future post.

Though the global recession has slowed growth and taken the pressure off the rate of growth of oil consumption, as growth returns, so will increased consumption of oil. There is an opportunity – now – to invest in renewables, and flatten what was a rising demand for oil. And in so doing, reduce the amount of CO2 we emit, reduce our dependency on imported oil, and add jobs in the emerging cleantech renewables industries.

Peak Oil

Highlights of Der Spiegel article Military Study Warns of a Potentially Drastic Oil Crisis

The term “peak oil” is used by energy experts to refer to a point in time when global oil reserves pass their zenith and production gradually begins to decline. This would result in a permanent supply crisis — and fear of it can trigger turbulence in commodity markets and on stock exchanges.

The issue is so politically explosive that it’s remarkable when an institution like the Bundeswehr, the German military, uses the term “peak oil” at all. But a military study currently circulating on the German blogosphere goes even further.

The study is a product of the Future Analysis department of the Bundeswehr Transformation Center, a think tank tasked with fixing a direction for the German military. The team of authors, led by Lieutenant Colonel Thomas Will, uses sometimes-dramatic language to depict the consequences of an irreversible depletion of raw materials. It warns of shifts in the global balance of power, of the formation of new relationships based on interdependency, of a decline in importance of the western industrial nations, of the “total collapse of the markets” and of serious political and economic crises.

The study, whose authenticity was confirmed to SPIEGEL ONLINE by sources in government circles, was not meant for publication. The document is said to be in draft stage and to consist solely of scientific opinion, which has not yet been edited by the Defense Ministry and other government bodies.

The lead author, Will, has declined to comment on the study. It remains doubtful that either the Bundeswehr or the German government would have consented to publish the document in its current form. But the study does show how intensively the German government has engaged with the question of peak oil.

Parallels to activities in the UK

The leak has parallels with recent reports from the UK. Only last week the Guardian newspaper reported that the British Department of Energy and Climate Change (DECC) is keeping documents secret which show the UK government is far more concerned about an impending supply crisis than it cares to admit.

According to the Guardian, the DECC, the Bank of England and the British Ministry of Defence are working alongside industry representatives to develop a crisis plan to deal with possible shortfalls in energy supply. Inquiries made by Britain’s so-called peak oil workshops to energy experts have been seen by SPIEGEL ONLINE. A DECC spokeswoman sought to play down the process, telling the Guardian the enquiries were “routine” and had no political implications.

The Bundeswehr study may not have immediate political consequences, either, but it shows that the German government fears shortages could quickly arise.

A Litany of Market Failures

According to the German report, there is “some probability that peak oil will occur around the year 2010 and that the impact on security is expected to be felt 15 to 30 years later.” The Bundeswehr prediction is consistent with those of well-known scientists who assume global oil production has either already passed its peak or will do so this year.

Market Failures and International Chain Reactions

The political and economic impacts of peak oil on Germany have now been studied for the first time in depth. The crude oil expert Steffen Bukold has evaluated and summarized the findings of the Bundeswehr study. Here is an overview of the central points:

  • Oil will determine power: The Bundeswehr Transformation Center writes that oil will become one decisive factor in determining the new landscape of international relations: “The relative importance of the oil-producing nations in the international system is growing. These nations are using the advantages resulting from this to expand the scope of their domestic and foreign policies and establish themselves as a new or resurgent regional, or in some cases even global leading powers.”
  • Increasing importance of oil exporters: For importers of oil more competition for resources will mean an increase in the number of nations competing for favor with oil-producing nations. For the latter this opens up a window of opportunity which can be used to implement political, economic or ideological aims. As this window of time will only be open for a limited period, “this could result in a more aggressive assertion of national interests on the part of the oil-producing nations.”
  • Politics in place of the market: The Bundeswehr Transformation Center expects that a supply crisis would roll back the liberalization of the energy market. “The proportion of oil traded on the global, freely accessible oil market will diminish as more oil is traded through bi-national contracts,” the study states. In the long run, the study goes on, the global oil market, will only be able to follow the laws of the free market in a restricted way. “Bilateral, conditioned supply agreements and privileged partnerships, such as those seen prior to the oil crises of the 1970s, will once again come to the fore.”
  • Market failures: The authors paint a bleak picture of the consequences resulting from a shortage of petroleum. As the transportation of goods depends on crude oil, international trade could be subject to colossal tax hikes. “Shortages in the supply of vital goods could arise” as a result, for example in food supplies. Oil is used directly or indirectly in the production of 95 percent of all industrial goods. Price shocks could therefore be seen in almost any industry and throughout all stages of the industrial supply chain. “In the medium term the global economic system and every market-oriented national economy would collapse.”
  • Relapse into planned economy: Since virtually all economic sectors rely heavily on oil, peak oil could lead to a “partial or complete failure of markets,” says the study. “A conceivable alternative would be government rationing and the allocation of important goods or the setting of production schedules and other short-term coercive measures to replace market-based mechanisms in times of crisis.”
  • Global chain reaction: “A restructuring of oil supplies will not be equally possible in all regions before the onset of peak oil,” says the study. “It is likely that a large number of states will not be in a position to make the necessary investments in time,” or with “sufficient magnitude.” If there were economic crashes in some regions of the world, Germany could be affected. Germany would not escape the crises of other countries, because it’s so tightly integrated into the global economy.
  • Crisis of political legitimacy: The Bundeswehr study also raises fears for the survival of democracy itself. Parts of the population could perceive the upheaval triggered by peak oil “as a general systemic crisis.” This would create “room for ideological and extremist alternatives to existing forms of government.” Fragmentation of the affected population is likely and could “in extreme cases lead to open conflict.”

The scenarios outlined by the Bundeswehr Transformation Center are drastic. Even more explosive politically are recommendations to the government that the energy experts have put forward based on these scenarios. They argue that “states dependent on oil imports” will be forced to “show more pragmatism toward oil-producing states in their foreign policy.” Political priorities will have to be somewhat subordinated, they claim, to the overriding concern of securing energy supplies.

For example: Germany would have to be more flexible in relation toward Russia’s foreign policy objectives. It would also have to show more restraint in its foreign policy toward Israel, to avoid alienating Arab oil-producing nations. Unconditional support for Israel and its right to exist is currently a cornerstone of German foreign policy.

The relationship with Russia, in particular, is of fundamental importance for German access to oil and gas, the study says. “For Germany, this involves a balancing act between stable and privileged relations with Russia and the sensitivities of (Germany’s) eastern neighbors.” In other words, Germany, if it wants to guarantee its own energy security, should be accommodating in relation to Moscow’s foreign policy objectives, even if it means risking damage to its relations with Poland and other Eastern European states.

Peak oil would also have profound consequences for Berlin’s posture toward the Middle East, according to the study. “A readjustment of Germany’s Middle East policy … in favor of more intensive relations with producer countries such as Iran and Saudi Arabia, which have the largest conventional oil reserves in the region, might put a strain on German-Israeli relations, depending on the intensity of the policy change,” the authors write.

When contacted by SPIEGEL ONLINE, the Defense Ministry declined to comment on the study.

Oil Drum Translation of Leaked Document

Peak Oil

Implications Of Resource Scarcity On (National) Security

Center for German Army Transformation, Group for “Future Studies”

July 2010

1. Introduction

The focus of the document is on the topic of finite resources, using Peak Oil as an example. The report is part of a series of publications focused on the long term (30 years) with the intent to enable the Ministry of Defense to take action early.

In the past, resources have always triggered conflicts, mostly of regional nature. For the future, the authors expect this to become a global problem, as scarcity (mainly of crude oil) will affect everybody.

The authors confirm multiple views on Peak Oil timing and concede that there will be Peak Oil eventually. The study isn’t about positioning the problem on a timeline, but instead about the consequences of a peak. They expect major consequences with a delay of 15-30 years after the peak has hit.

The report refers to the uncertainty of reserve statements mainly in OPEC countries based on the quota allocation method within OPEC but also refers to the possibility of better extraction technologies.

They suggest that it has become urgent to understand those consequences of an eventual peak now in order to have enough time to adapt.

2. The Importance of Oil

2.1 Oil as a driver of globalization

95% of all industrial outputs is dependent on oil as a fuel and/or as a chemical base for polymer production etc. Oil has become a key driver of modern lifestyle and globalization.

Substantial oil price increases poses a systemic risk, not just for obvious things like transportation, but equally for other subsystems.

Thus, internationally, but equally nationally, there is a vital interest in securing access to oil, which is currently possible on world spot markets, with OPEC being cooperative due to a mutual dependency between key actors (and a massive presence of the U.S military in the Gulf region).

Yet, on the other hand, regional conflicts can always at least partially be attributed to resources, such as in the Caucasus region, the Middle East or in Nigeria. They may also fuel conflicts due to the wealth they create (such as in Africa).

The report sees – within a timeframe until the year 2040 – a changed international security layout based on new risks (including transport risks for fuels) and new roles of actors in a possible conflict around the distribution of increasingly scarce resources.

2.2 German energy security

The term is defined narrowly as “reliable energy supply”, and then extended to include environmental objectives, technology transformation of societies, planning for energy demand and the long-term planning of a national strategy, tied in with international organizations.

This expansion of the view is seen as required based on the globalization of energy markets. However, the report then narrows in scope again to the possible risk from a supply shock, focusing on the key suppliers of oil: Russia, Norway and the U.K. It is noted that both European partners are already past their peak and that Germany is increasingly dependent on Russia, which currently is reliable but not necessarily so in the long term. Given the expected decline in German energy consumption, the Russian share will likely be 40% by 2025, with the Middle East, Africa and sources around the Caspian Sea making up for the increasing gap from declining European production.

3. Possible Scenarios After Global Peak Oil

This chapter looks at gradual changes (3.1.) and the risk of disruptive changes (3.2) past a certain tipping point.

3.1 General interdependencies driven by Peak Oil

3.1.1 Oil as a deciding factor in international relationships

With increasing scarcity, producers are increasingly in an advantageous position, both from high revenues and access to cheaper oil when compared to spot market prices. This partly reverses the trend to free oil markets which took place after the ’70s shocks, and gives those countries more control over the supply chain, with a risk of monopolies and nationalizations, and of “political pricing.”

Further, oil producers use increasing amounts of their production internally at lower prices, which increases domestic consumption and inefficiencies, accelerating the problem. [The authors miss out on the fact that high oil prices also bring more wealth to the country which AGAIN increases resource consumption].

The report then looks at increasing “strategic” moves by key actors including the Chinese CNPC (China National Petroleum Corporation), which tries to grab the sources that are still available (particularly in Asia and Africa), but often at relatively unattractive conditions.

Overall, the authors expect a reduction of “free market” mechanisms in oil trade, and a rise in more protectionism, exchange deals, and political alliances between suppliers and customers, which could lead to significant geopolitical shifts. Equally, the authors expect this interdependency to shape foreign affairs of oil importers, making them more tolerant towards rogue behavior of suppliers out of sheer need.

Overall, higher volatility and loss of trust are seen as possible outcomes in a world where oil supplies are limited, increasing the need for “oil related diplomacy” and thus increasing the risk of moral hazard among all actors, which in turn decreases overall global supply security.

The report then refers to already existing actions of the German government to tie close economic relationships with energy suppliers, and to the tendency of consuming countries to reduce oil dependency, trying to steer clear of risks of future supply shocks.

The Middle East is identified as a very dangerous region with high external involvement from many players and thus a very unstable overall situation.

Overall, the report expects a reduction of the importance of “Western values” related to democracy, and human rights in the context of politically motivated alliances, which increasingly are driven by emerging economies such as China – likely leading to double standards. Emerging economies are equally expected to receive higher recognition in international organizations, particularly those with strength in resources (such as Russia).

3.1.2 New security risks based on additional/alternative energy resources

New conflicts are potentially arising from oil exploration in international or disputed ocean waters, where multiple issues arise, particularly around the Arctic Circle, with further geopolitical risks for conflict.

Also, the shift to natural gas is reviewed as an extension of the “oil age”, because it might be able to replace crude oil as a bridging source until new solutions are found. The risks for problems from transporting gas (pipelines) and the related issues (as seen between Russia and its neighbors during the past years) are highlighted.

Equally, nuclear power as a potential source is highlighted – emphasizing the risk for safety and the proliferation of nuclear technology. This would also require an increasing shift towards electricity.

Equally, the competition between biofuel and food production is highlighted, showing the limits of biofuel outputs to compensate for reductions in oil availability, and also showing risks for water supply and soil degradation from excessive use.

Overall, the authors see a trend to increase the energy autonomy of entire regions from external supplies, both in the ability to generate alternative fuels (from biofuels and coal), but particularly in electricity generation.

3.1.3 A shift in roles between private and public actors

Based on the increasing importance of oil, governments are becoming more relevant in securing the benefits of oil, both on the supply and on the demand side. This puts a higher emphasis on political negotiations and deals, and increases the risks for nationalizations of resources and key exploration activities.

Exploration licenses are seen as a key area where bidding wars (including non-financial commitments) might emerge. Equally, increasing pressure to renegotiate or revoke already existing licenses might emerge. Ultimately, each country will try to secure sufficient oil to maintain its standard of living.

On the other hand, private enterprises are seen on the rise in protecting infrastructure and ensuring production and transportation security in less developed regions, particularly if weaker countries become unable to keep their own services up.

The dependency on oil-related infrastructure (pipelines, refineries, harbors, key pathways on oceans) will increase, and thus the risk. Damaging infrastructure through hostile acts (sabotage, war) might become an attractive target for groups or countries with a tendency to use violence. The same is expected for electricity and natural gas-related infrastructure – they all might require higher protection.

Generally, the focus of risks is expected in the region which the authors consider the “strategic ellipse” (a term used for the region East of Europe reaching from Saudi Arabia in the South to Russia and former Soviet Union countries in the North), because a majority of oil reserves are located in this area.

3.1.4 Economic and political crises as a consequence of the transition to “post-fossil” societies

A number of risks of higher oil prices are seen for modern economies, particularly in transportation. Security risks are seen in resulting systemic crises.

A first direct consequence of higher oil prices and lower availability of fossil fuels is a possible reduction in transportation capacity, equally in individual transportation and in freight forwarding. This might lead to another “mobility crisis” for societies that heavily depend on cars and trucks.

Higher cost in commercial transportation markets might severely affect current supply chains, and no alternatives are in sight (electric trucks don’t exist yet). Food particularly might become a critical issue for countries that are a) highly dependent on imports and b) are susceptible to price-increases of food products, particularly affecting Africa, parts of Asia and Latin America, and the Middle East.

High oil prices would further affect almost all aspects of society, as it will also influence the cost of chemicals and all products derived from them, which might substantially alter the nature of value chains and make certain things uneconomical – ultimately leading to higher unemployment during a transformational phase away from an oil based economy. This might particularly affect the German car industry.

Limits in availability might also strengthen regulatory efforts, encourage the allocation of energy (oil) by rationing schemes and possible other actions limiting free markets.

Additionally, the changes and likely reduction in standard of living might render societies less stable and make them more attracted to extremist political positions and even trigger changes in government systems, as trust into key actors in politics will diminish. This might be a particular risk for the relatively young democratic countries in Eastern Europe.

3.1.5 More selective intervention – key actors overwhelmed

Overall, more expensive transportation and increasing problems “at home” might reduce the ability of larger countries to intervene internationally (politically and/or with military action), and also lower the readiness to provide help to poorer countries. The focus will be more on a country’s (energy) interest for itself and not so much on an ideal of transferring Western values. The gap will likely not be filled by NGOs, as they will be affected by similar limits.

Overall, international institutions will be weakened, as they will have less resources to provide help and support, and it becomes equally possible that help will be attached to direct (energy) needs of the donors.

3.2 Systemic risks after reaching a “tipping point”

In addition to the gradual risks, there might be risks of non-linear events, where a reduction of economic output based on Peak Oil might affect market-driven economies in a way that they stop functioning altogether, leaving the possibility of a relatively steady downward trajectory.

Such a scenario could develop through an initially slow decline of trade and economic activity, combined with higher stress on government budgets from lower tax income, higher social cost and growing investment into alternative technologies.

Investment will decline and debt service will be challenged, leading to a crash in financial markets, accompanied by a loss of trust in currencies and a break-up of value and supply chains – because trade is no longer possible. This would in turn lead to the collapse of economies, mass unemployment, government defaults and infrastructure breakdowns, ultimately followed by famines and total system collapse.

4. Challenges for Germany

4.1 Risk of new dependencies for Germany

Oil as a new factor of global power would create significant dependencies for Germany, and in order to avoid supply issues, strong ties with suppliers are a must, but equally a diversification of supply relationships, taking into account that a supplier might intentionally reduce capacity to accomplish political objectives.

Among the key supplier countries is Russia (supplying 35% of German oil imports), where reliability risks are prevalent, given past experience. Natural gas, as a possible temporary substitute, bears the same risk (37% comes from Russia). Thus, a diversification becomes essential.

4.2 Focus of politics on supply relationships

Germany needs strong and reliable ties to Russia and other Caspian Sea countries. This might create some challenges in international relations, particularly with smaller Eastern European countries [like Poland]. Thus, intensifying relationships to the Middle East might be equally relevant. However, all those relationships have an inherent risk of being instruments in conflicts, which puts a certain limit on treating all foreign partners the same.

4.3 More pragmatic foreign policy

The need to mitigate supply risks might require some compromises on foreign affairs topics (such as human rights). Equally, more active diplomatic efforts will be required with a focus of energy security in mind. This is more difficult given Germany’s reluctance to engage in political power play due to its history, but needs to be tackled in order to deal with the challenges ahead. The authors don’t want to encourage military solutions, but suggest a strong preventive development of political and diplomatic initiatives to tackle the problem.

4.4 Importance and freedom of industrial nations reduced

All industrial nations that depend on energy imports will become more dependent on new partners, both in emerging economies and supplier countries. This requires a new focus in foreign affairs, sometimes giving up standards in negotiations with countries that have different cultures and political systems.

4.5 Help in stabilizing supplier countries at risk

Some supplier countries (and surrounding regions) might be destabilized by the force of higher resource prices. This is an area where Germany needs to help by providing support for nation building and conflict resolution on the national and international level. This is in conflict with the lower economic power likely to result from Peak Oil, which might make interventions less likely and requires new approaches of “stabilization with lower effort.”

4.6 Growing conflict potential concerning the Arctic Circle

Germany might have to take positions in case of an upcoming conflict regarding resources in the Arctic Circle, where multiple countries (including Russia) have open claims for accessing oil and gas fields. This requires further research.

4.7 Nuclear technology proliferation

The risk for nuclear technology proliferation and thus more countries with the potential for nuclear weapons (and the risk for terrorists having access to nuclear material) is growing due to the proliferation of nuclear technology for energy generation. Equally, risks for terrorist attacks and accidents on German soil are rising. Both scenarios require more surveillance, intelligence and preventive action.

4.8 Higher conflict potential regarding critical infrastructure

Energy delivery infrastructure for all sources including electricity will have a higher importance in an oil constrained world, thus, securing its reliability, security and availability becomes mission-critical. International cooperation is needed to secure large international supply paths (pipelines, sea routes).

4.9 Larger “energy regions” change international alliances

The expectation of stronger connections between suppliers and consumers across continents creates different settings for current international alliances and security risks. DESERTEC (a large power production system in Northern Africa based on CSP) would require different settings even for military strategies.

4.10 Peak Oil for armed forces

Armed forces would also be significantly affected by fossil fuel limits, as they are very dependent on oil products. Significant investments in alternative energy procurement technologies (biofuels, coal-to-liquids – Fischer-Tropsch) and applications (electric and hybrid vehicles) would be required, with long transition times. Further, local energy-independence of stationary troop infrastructure (like military bases) using more renewable sources would be beneficial. The long term objective would be to fully convert Germany’s armed forces to only use renewable energy sources by 2100.

4.11 Crude Oil as a systemic risk

For scenarios which end with a complete destabilization of societies, Germany is at a significant risk given its strong participation in a globalized economy. Being still able to act requires a number of basic infrastructures to keep functioning, both for the country and its armed forces. Work is required to look into redundancy, high-resilience of infrastructure and local self-organization approaches.

5. Summary

The report sees significant risks arising from an unavoidable peak in oil production, which go beyond gradual shifts in energy systems and economies. This will likely lead to economic change and new geopolitical risks that affect much more than just what we can anticipate. The overall ability to describe exact outcomes is very limited, as many scenarios are possible, and further research is required.

Overall, more emphasis needs to be put on understanding and shaping international relationships with respect to energy security, anticipating and integrating the ongoing shift to different players in a resource-constrained world.

In any case, Germany has to identify and implement alternatives to the current transportation technologies that require oil, and put a similar emphasis on avoiding other dependencies, for example concerning rare earths.

For armed forces, Peak Oil creates significant risks, both from a mobility standpoint as well as from dependencies on other societal services. Understanding those risks requires further analysis and likely a very different approach in the future.

In general, more preparation is required for society and the army to make sure that problems are recognized and solutions are actively implemented.

Farming Wind Versus Farming Corn for Energy

keywords: wind power, wind turbines, corn ethanol, ERoEI

corn field with wind turbines
Farmers can plant crops right to the base of wind turbines (photo: Warren Gretzl, NREL)

If a farmer has 1,000 acres of land, and he/she planted it with corn for making ethanol and erected wind turbines for generating electricity, how much energy will the farmer produce and what are the economics?

Wind Power

A typical wind farm will have about 15 wind turbines per 1,00o acres. Each wind turbine will generate about 500 kW of power (assuming 33% capacity factor). Electricity retails at about 12¢ per kW hour. So 1,000 acres will produce 15 x 500 x .12 = $900 of electricity per hour, which equates to about $8,000,000 per year, representing about 224 trillion BTUs of energy.

Corn Ethanol Power

A typical 1,000 acre corn farm will produce about 7,500 pounds of corn, yielding about 340,000 gallons of ethanol. Ethanol retails at about $1.80 per gallon. So 1,000 acres will produce 340,000 x 1.8 = $612,000 per year, representing about 26 billion BTUs of energy.

Energy Returned on Energy Invested

It takes energy to produce energy. The Energy Returned on Energy Invested (ERoEI) for wind turbines is an impressive, state of the art wind turbines are providing ERoEI of over 50:1.

It takes a lot of energy to produce corn ethanol, which yields a far lower ERoEI of between .8 and 1.65 (see Ethanol’s Energy Return on Investment: A Survey of the Literature 1990-Present by Roel Hammerschlag).

ERoEI

Side-effects of Wind Power and Corn Ethanol Production

Wind turbines are often perceived as an eyesore, marring the land with imposing manmade structures. Flying creatures such as hawks and bats are often killed as they pass through the turbine blades. Wind turbines are noisy, and are best located in rural areas, or at sea. Wind power needs to be located near power transmission resources, it that infrastructure will need to be built.

Corn ethanol yields just a bit more energy than it takes to produce it. It takes about 1,700 gallons of water to produce each gallon of corn ethanol. Corn used for ethanol production is corn not used for food production. As food corn supply is reduced, corn-based food prices rise.

Summary

Given 1,000 acres of land, planted with corn and a typical density of wind turbines, the table below summarizes the annual economic and energy value of corn ethanol fuel and wind turbine electricity.

Wind Power Corn Ethanol
Retail Value $8,000,000 $612,000
Energy Yield 224 trillion BTUs 26 billion BTUs
ERoEI 50:1 1.5:1

Warmer Temperatures in China to Reduce Crop Yields

Shilong Piao of the Center of Climate Research at Beijing University has published a paper in Nature, reported on by Reuters:

With the climate set to get warmer from greenhouse gases, Chinese scientists predicted on Thursday that freshwater for agriculture will shrink further in China, reducing crop yields in the years ahead.

This story illustrates the typical cause and effect unfolding round the world as the world grows warmer. Food production will be challenged by water scarcity, warmer climate fostering crop pests, and reduced protein in plants. For related posts see:

Climate Change May Reduce Protein in Crops

Climate Change, Food, and Wildfires

Highlights of the article Warmer temperatures in China to reduce crop yields

In a paper published in Nature, they said the temperature in China had gone up by 1.2 degrees Celsius since 1960 and will increase by another 1 to 5 degrees Celsius by 2100.

“Such a pronounced summer warming would inevitably enhance evapo-transpiration, increasing the risk of water shortage for agriculture,” wrote the researchers, led by Shilong Piao of the Center of Climate Research at Beijing University.

“Climate change may induce a net yield reduction of 13 percent by 2050.”

They forecast that rice yields would decrease by 4 to 14 percent, wheat by 2 to 20 percent and maize by zero to 23 percent by the middle of the 21st century.

China only has 7 percent of the world’s arable land, but needs to feed 22 percent of the world’s population. Although its total water resource is huge in absolute terms, it is only 25 percent of the per capita world average.

Its climate has also become drier in the north, which holds 18 percent of the total water resource and 65 percent of total arable land, they added.

Apart from shrinking already scarce water supplies, higher temperatures have also led to the spread of pests, they said.

“Countrywide, a 4.5 percent reduction in wheat yields is attributed to rising temperatures over the period 1979-2000,” the researchers wrote.

China’s agriculture minister said in July that China faced a formidable task in meeting demand for grains such as rice, wheat and corn in the next 10 years.

China last year harvested a record 530.82 million tonnes of grain, but will need to increase annual supply by at least 4 million tonnes for the next decde to feed a population expected to hit 1.39 billion in 2015 from 1.32 billion at the end of 2008.