Locked into a destructive relationship with oil, it's not the planet, but business' own capital that is now at risk, write Alison Kemper and Roger Martin
Alison Kemper and Roger Martin
Farmland Tapped For Oil In The Midwest
The sun sets behind an oil well sited in the middle of a soybean field in 2008 near New Haven, Illinois, USA. Photograph: Scott Olson/Getty Images
For many years, the most compelling issue driving sustainability efforts among businesses, consumers, governments and activists has been climate change. We are all becoming increasingly concerned with the impacts of rising temperatures and extreme weather events on our supply chains, cities, transportation networks, agricultural industries, and lives.
We have become increasingly alarmed about the results of burning too much coal, oil and gas; the consequences of excessive emissions resulting from some of the most useful substances humanity has ever harnessed. We have identified our most important struggle – to maintain economic growth while reducing carbon emissions.
Because our concern has been first and foremost the concentration of CO2 in the atmosphere, we have designed and sporadically implemented economic incentives to reduce carbon emissions. We issue carbon credits to companies that emit less carbon. We offer cash to countries who don't cut down their forests.
We have trusted that oil reserves would hold out long enough for a substitute to be developed, and focused on the impending catastrophe of climate change. Peak oil theories, so common a few years ago, were relegated to the back burner as gas and oil were discovered in US shale deposits, the Artic thawed, exposing the possibility of off-polar shore wells and much of northern Alberta was transformed into bitumen mines.
But it turns out we were wrong. The most recent issue of the Royal Society's Philosophical Transactions A focuses on the future of oil supply. You can read the introduction here, it's a thought provoking read. It's clear that we are moving toward more and more unconventional liquid fuels, produced at greater costs from less amenable sources. Our economies will be increasingly volatile as higher fuel prices drive out economic activity and subsequent recessions lower the demand for fuel.
For those looking for business insights, the articles suggest that there are enormous opportunities for those who can deliver efficiency solutions and substitute liquid fuels, for we are never going back to $50 or even $75 per barrel of oil. The last article in the issue explores the potential market for solutions that can close the gap between the road transportation we now use and the technologies we require in order to ship goods in the future.
This is not the only recent academic publication that explores the economics of peak oil. In early December 2013, Christian Kerschner, Christina Prell, Kuishuang Feng and Klaus Hubacek published "Economic vulnerability to peak oil" in Global Environmental Change (paywall). They analysed diverse industries' exposure to economic risk resulting from declining oil production. They began by offering substantial evidence that peak oil is imminent and decry "the paucity of research looking at the potential economic impacts of this phenomenon".
They looked at two measures: the impact of oil price increases on US industries and the importance of each industry in the broader economy. In other words, will the industry be viable if oil redoubles in price, and will the broader economy be adversely affected by the impact of the industry's response to increased oil prices? They concluded that metals, transport, and chemical and plastics were the industrial sectors at great risk as oil prices rise and their decline would in turn place the broader economy at greater risk.
In answering these questions, they have devised a tool for policy makers to identify the industries that are most affected and which have a central role in the broader economy. They point to specific industrial sectors where exposure to price shocks may trigger a cascade of economic decline.
In light of this new research, our understanding of sustainable business must change. We have long known that sustainability would require much more than cutting our utility bills and buying efficient trucks. For many years, we have tried to connect the efforts of companies with the massive global transition away from carbon.
In this research, we see the connections much more clearly. The risks identified in these papers are not only to the environment, to low lying countries, or to coastal cities. Businesses facing peak oil need to identify how they can sustain their own operations. Peak oil redraws the boundaries around sustainability and forces a new understanding of "going concerns".
For years, we have known that oil will be our downfall, and we still have not been able to drive public policy to assist businesses to retrofit homes, to install photovoltaics, to convert delivery fleets to electric vehicles, to create closed loop manufacturing processes. These papers point business leaders in a direction of thoughtful urgency. It is not the planet, it is now their own capital at risk.
Because it is a uniquely useful fuel, we have become locked into destructive relationships with oil. Many of us echo the words of Jack Twist, the protagonist of Brokeback Mountain, "I wish I knew how to quit you." New research on peak oil makes it apparent that oil will quit us. We must be ready.