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The debate, if you can call it that, in the US over health care system reform is a truly bizarre spectacle, and one that is an abject lesson in how to distract an argument away from the core subject being discussed.

The indisputable fact is that approximately 40,000,000 people in the US cannot afford access to basic health care services. By “basic” I refer not to agonising decision over whether to have nipple enhancement or not while you’re in to get your breasts done. No…by ‘basic’ I mean services like non cosmetic dental care, A&E care, blood pressure and cholesterol diagnosis and treatment, diabetes diagnosis and treatment, natal care, and services to repair all the wear and tear experienced during the average first 18 years of life. The bottom line here is that the current system, the status quo, is structured such that 40 million mothers, fathers, grandparents, sons and daughters have zero ability to pay for services to fix health problems that are chronically painful and perhaps life threatening. With no “health care net” available either “no ability to pay” translates into “zero access”.

To reiterate what is an important and fundamental point. The current population of the UK is approximately 60 million people. If 40 million people in the UK were similarly effectively blocked from access to health care then two thirds of the population could not go to the dentist or doctor ever. The current population of Australia is 21 million - so if you deported all the doctors, nurses and dentists from Australia and closed all the hospitals and clinics you’d still only be halfway to denying 40 million people basic health care services.

Meanwhile, for the other 260 million or so Americans who do have access to health care, services and treatments are eye poppingly expensive. However, be careful your eye doesn’t pop too far out as it may not covered by the health insurance scheme provided by your employer - which is shelling out an estimated US$12,000 per employee per annum to pay for that insurance (providing insurance for the employee and up to 3 dependants). That’s US$12,000 more that could be paid directly to the employee as wages if the employer did not structurally have to cover the health insurance costs. If you think twelve thousand bucks is chicken feed, it is worth remembering that that figure is the about the US minimum wage - though it is also worth remembering that if you were an employee actually on minimum wages, it is unlikely that your employer would also be providing health insurance making you perhaps one of those 40 million people unfamiliar with the inside of a doctor’s waiting room.

This author speaks from experience with regards to the platinum coated pricing schemes of US health care as we had a son born in New York state during the family’s four year tenure in the USA. It is worth providing a short summary of those costs to provide perspective:
- total time mother/son spent in a hospital: 12 hours (the minimum time before you’re allowed to check out after giving birth)
- total time doctor spent in room: 60 seconds (to sign a form)
- nursing staff: 1 “in and out” with the majority of nursing provided by self funded midwife
- drugs and other interventions: zero (yes you read that right; no drugs, no interventions)
- use of “machines that bleep”: zero
- use of ambulance or similar: zero

In short - you would struggle to describe a birth experience that required less support from neo-natal services other than a home birth.

Total cost: just shy of US$8000; with the employer provided insurance paying for 90% and leaving us with a 10% or US$800 deductible. Just what was worth eight thousand dollars of medical treatment remains a mystery to this day.

Meanwhile the US is ranked by the WHO in almost all indicators, except for cancer survival rates, far below Oman, Morroco and Colombia, as well as the UK, France, Germany (just keep listing other major European and Scandinavian countries here), and Australia. The USA ranks 37th.

To summarise: the US has a health care system today that under-delivers against important key performance indicators (infant mortality, average life span etc), is eye wateringly expensive for those treatments it does provide, and leaves 40,000,000 people with zero health care. Oh, and by the way the status quo is projected to bankrupt the country entirely as it will fail to scale further as the populations increases and ages.

The debate therefore ought to be a simple one - does the US maintain this status quo, or does it seek to reform health care in such a way as to drastically improve the USA’s WHO rankings , provide basic services universally, and reduce the overall costs to prevent budgetary collapse.

However that isn’t the debate that is taking place. The debate that is taking place is over whether the provision of universal health care is “socialist” (translation: pinko subversise communist), and whether fantastical death panels will rule over the worth of Grandma’s life (Sarah Palin says she can see the Death Panels from her medicine cabinet). Take these two distracting and emotive topics, add a little dash of Glenn Beck to the aforementioned Salt of Palin and you’ve just hijacked what was a needed and sensible debate, and you’ve turned it instead into a roiling mess of argument that churns onward and achieves nothing. Or more accurately, it achieves the maintenance of the status quo.

Which brings us naturally to the topic of peak oil (this as my old friend George Watt would say, is a “neat little seque”). The connection here is twofold and less tenuous than you might think. Firstly, oil provides the energy that enables modern health care. Secondly, and more directly relevant to the main point here is that the debate over the timing of peak oil has been allowed to overshadow the necessary debate over the future of (petroleum based) energy prices.

The truth of the matter is that we will only definitively know when global oil supplies have peaked once we’re well down the slope of decline. Far enough down perhaps to have put behind us a few (more) instances of supply having insufficient scope of growth to meet real demand. There is much evidence to suggest that we’re already basically at the peak point, or just beyond. However arguing this point tends to just around in circles. It is very easy for peak-deniers to point to the status quo and argue that “Providers report significant reserves as they have in the past. They didn’t stop pumping last year. So they won’t stop pumping this year. And anyway, we can just drill a few more holes in the Alaskan tundra if we need more.” Such drill-baby-drill responses are the peak-oil equivalent of the pinko-communist-death-panel responses in the US healthcare debate. The main purpose, intentional or otherwise, is to maintain the direction and rate of the status quo and delay or prevent structural change and improvement.

The real discussion that needs to be taking place concerning oil is whether cheap oil will continue to be available. “Cheap” is of course a relative term. Ignoring for a moment that (not insignificant) fact of the infamous US$147 p/bl price peak, by “cheap” means “the median price of oil over the period during which it has fuelled the development and growth of the current economic model.” Furthermore, given that the maintenance of the social/economic/world-balance-of-power status quo relies on the oil price remaining somewhat near that median price, what are the implications for the economic decisions that are made countless times every day, that are based on the price of oil?

The outlook is such that it is almost certain, on balance, that anything but the status quo will result. For example, OPEC has for some time now called for a price range of between US$70 and US$80 p/bl as being the minimum that can support the necessary infrastructure and exploration investments required to maintain supply levels. Shell CEO Jeroen van der Veer stated in June of this year that “(All this) points to new price spikes and volatility further down the road.” The same Kuala Lumpur hosted Asian Oil and Gas conference heard BP CEO Tony Hayward state that a target price of US$60 to $80 p/bl is also in BP’s sights in order to pay for required investments.

A per barrel target price of between US$70 and $80 p/bl is a very interesting one for a number of reasons.

For a start, it represents the upward slope of prices for petroleum and oil-derived products (fertilizer and plastics feed stocks) that are felt downstream by consumers and industry. The Wall Street Journal reports that petroleum prices as a percentage of disposable income more than doubled between 1981 and 2008. This is enough to change consumer behaviour, and certainly enough to alter the balance of cost calculations for heavily oil dependent industries.

Secondly, it is worth looking at the 2006 study performed by the US Department of Commerce titled “Macroeconomic and Industrial Effects Of Higher Oil and Natural Gas Prices”. The D.O.C. study was designed to predict the effects on the US economy (and by extrapolation all other developed economies) of an oil price that is maintained in the range of US$70.00 to $80 p/bl for two years or more. Not surprisingly, the study found depressive effects on GDP, industrial output, consumer disposable income levels and more. All other things being equal such a price would also result in an additional 500,000 people becoming unemployed due to cross sector job losses, compared to an oil price range in the US$50 to $60 p/bl range.

Those resulting changes occur for a very simple reason: as oil prices increase (and therefore the prices of products derived directly and indirectly from oil increase) the decisions made by individuals whether acting as individual consumers or in their capacity as business decision makers changes too. Spend less, invest elsewhere, carry less employees, locate and manufacture elsewhere. Scaling upwards to the strategic and structural as oil prices continue to go upward from US70+ we eventually reach a point where airlines downsize and go out of business en masse, and where commuters desert their SUVs and catch a train or a bus instead. Jeff Rubin, former Chief Economist of CIBC Worldmarkets is quoted as saying “I think we’ll see a return to triple digit prices (per barrel oil prices) very early into an economic recovery”. His book titled “Why Your World is About to Get a Whole Lot Smaller: What the Price of Oil Means for the Way We Live” is worth a read as a basic outline of his thinking.

This therefore is the discussion we ought to be having - how do we achieve a soft landing for society as oil prices increase, and the associated economic decisions are reworked? Sure, there are clearly some, like Mr. Rubin who are sounding the drum. However the majority of individual and corporate decision makers continue with the assumption that energy prices will remain roughly in line with those enjoyed during the past 50 years, and that therefore the same structural economic system will continue. All the rest have either not noticed at all, or have been distracted by the circular debate regarding peak oil.

All of which is a segue if I ever seen one. And a sick one at that.

At school, I was taught that “mankind consumes two types of resources; renewable resources and non renewable resources”. Vague memories come to me of that being a core aspect of the early stages of either the economics curriculum or that of what was fuzzily called “Social Sciences”. The latter subject embraced everything from geography to politics to society, and if memory serves me was led for a while by one of the more interesting teachers to have chalked the blackboards during my formative years. I seem to recall that a number of prepubescent young ladies found the subject of renewable anything utterly engrossing as long as it was explained by a certain foppishly haired Social Science teacher.

Anywhere, there you have it, we have a group of important people (mankind, one presumes the woman were off doing things like cooking the latest Margaret Fulton pavlova recipe) doing the important things they are destined to do (consume stuff) while the world sits there doing exactly what it ought to do (provide resources for the consuming of). Furthermore, the world either provided all those resources as a one-off (gold, diamonds, hit singles by The Vapors), or in the form of an almost magical cut-and-come-again manner (trees, water, foodstuffs, The Magic Pudding. Thus enlightened a classroom full of eager eyed students were that little bit readier to be sent out to play their parts in the great circle of consumption and commerce that is modern life.

Except for one little oddity: oil.

Oil, which logic dictates ought to be classified as a non-renewable resource has thus far been treated as a renewable. Oil supplies have truly been treated as though they are the Magic Pudding energy supply. However, given that the source of oil is what you get when you compost prehistoric algal blooms for a really long time, under conditions of heat and pressure it stands to reason that oil must be a non-renewable resource. Finite algae = finite algal bloom derived product. QED.

Meanwhile, oil literally powers the engines of commerce, while being the feedstock for diverse products from fertilisers to plastics. The history of the 20th century, and the conflicts and problems of the 21st could not more intimately connected with the history and realities of oil production then they are. We are literally living in an oil based society.

Oil’s status as a non-renewable resource, combined with its unique role as the foundation for society’s structure and everyday actions means that we must ensure that we have a plan for the eventual decline of supply. Now if that eventual decline was a long time off, say 100+ years from now, then we would still have enough breathing space to engineer a switch away from using this resource the way we do today (notwithstanding the fact of oil’s role as principle AGHG pollutant - but climate change is a whole other issue). But if a material decline in supply levels were to be only a short time away, say between 10 and 30 years, then good governance would dictate that humanity ought to be applying some of that unique ability to forward plan that is said to differentiate Homo Sapiens from the rest of the animal kingdom. In short, the urgency with which we take action to seek alternatives to oil ought to dictated by how long it is until oil supplies materially decline.

Back in the 1950’s the “science” of calculating just when an individual oil producing field’s production rate will begin to decline was formulated by M. King Hubbert. Hubbert’s seminal work resulted in the concept of what has come to known as “Hubbert’s Peak” - referring to the point at which an oil field’s production peaks and then begins to decline. I’ve written at length on the science and history of Hubbert’s peak here, and here (latter link opens a PDF which provides an introduction to the concept of peak oil). However the fact that we might be approaching the decline in worldwide production capacity in the near term rather than the long term has continued to be treated as a fringe theory by much of the mainstream, and certainly by the markets.

However the Chairman of the International Energy Agency Dr Fatih Birol is an individual one would hardly label as “fringe” or as being an individual prone to conspiracy theories. Therefore his statements as published in UK newspaper The Indepedent are of the “sit up a little straighter and pay attention” variety.

Dr. Birol is quoted as saying “One day we will run out of oil, it is not today or tomorrow, but one day we will run out of oil and we have to leave oil before oil leaves us, and we have to prepare ourselves for that day. The earlier we start, the better, because all of our economic and social system is based on oil, so to change from that will take a lot of time and a lot of money and we should take this issue very seriously,”

How seriously?

The IEA Chairman’s statements come on the back of the agency updating its calculations regarding the health of known oil fields, their remaining capacity, and the potential for there to be significant reserves yet to be found. The IEA recently updated its estimate of the rate of decline for production from 3.7% per year to 6.7% decline per year. That means two things; firstly that the rate of decline is increasing, which would tend to indicate that we are at or near the peak point already (maybe just before, maybe just after the peak). And secondly it means that for oil production capacity to remain steady, we need to find new supplies equal to the capacity being removed from the system through the very natural phenomena of individual oil field decline - at a rate of 6.7% per year. Meanwhile, the global demand for oil holds steady and is forecast to grow as emerging economies such as India and China ramp up their needs.

Business as usual just doesn’t seem to make a lot of sense in such circumstances.

Which is why it is both refreshing to see Dr. Birol’s statements being made in the mainstream press. It is also very concerning that 24 hours later it was all as if nothing ever happened. Which perhaps just goes to show that Homo Sapiens might not be that good at forward planning after all. I am betting that there is not a single organisation I will speak to in the coming 12 months that will have flagged this issue as being one that is fundamental to the question of its business strategy, looking forward to the decades ahead. I await the pleasant surprise of a contrary experience. Meanwhile, its back to the fringes of conspiracy theory. At least while there I will have the good company of Dr. Birol, Jeremy Legget, Matthew Simmons and a whole host more.

A recent tweet by tebbo recommended a short article on a proposed in-wheel electric motor that can be retrofitted to existing petrol vehicles…. “RT @Vibroseis Retrofit hybrid kit for your car using electric wheel motors http://bit.ly/8gLox <<< Nice one Mr ex-IBMer”

Its an interesting idea. The technology proposal is for a set of electric motors to be installed between the wheel and the brake mechanisms, and powered by a battery array in the trunk. The motors will take up some or all of the load with the petrol engine therefore needing to work less, perhaps including down to only an idle speed. The petrol engine wouldn’t be able to be turned off completely when in motion as it will be required to power the vehicles existing essential systems - steering, brakes, aircon, digital-integrated-multi-media-web-browsing-GPS console, and heated 48oz coffee mug holders.

The practical challenges to making such a system work have to be: electric engine power limits; battery technology constraints,; integration with existing controls especially braking (incl. ABS) and acceleration - such systems may be fly by wire or cable/hydraulic; networking of motor units in order to synchronise output across the two/four wheels; the need to support multiple wheel size, stud pattern, rim offset configurations.

Wheel sizes and configurations are standardised more than you might think. A quick check of the webiverse finds that there are probably about 20 combinations of wheel size and stud pattern that are used across a high proportion of vehicle manufacturers and models. The practical consideration of deliverable motive power from the electric motors versus vehicle weight might reduce the range of cars the technology is practical for anyway, so the most common 20 size/stud patterns might well fit 75% of the addressable market. If the electric engine drive assembly is designed to allow for it then additional stud patterns can be bolted on easily. The published design schematic (see figure) seems to indicate that this is catered for.

The other caveat is that of bureaucracy. As the electric motor system is a change to the motive power source of the vehicle, and on paper adds horsepower over and above the existing petrol engine I would imagine that every vehicle in which it is installed will need to pass some sort of re-registration and roadworthiness inspection. There will no doubt be insurance implications as well.

There is another important design consideration - style. There is a trend toward Brake Bling. The designers will do to remember to cater for those who wish to greenvertise their new electric wheels.

The concept of “peak oil” remains a touch too uncomfortable for most. Too close to being “big conspiracy”, too far from the everyday, and the implications too far reaching for the idea to sit comfortably in the repertoire of the polite dinner party conversationalist. Religion, politics, and peak oil to be avoided at all costs - best to stick to something safe and controversial like whether its OK or not to build a duck house at the taxpayer’s expense.

Only there are some interesting indicators pointing to the fact that in many ways, we’re already beyond the peak point. Here’s a list of indicators, which can be handily printed off, kept to hand, and ticked off the list as each occurs:

- the price of oil increases by a significant margin in a short period of time. Say, doubles within the space of 6 months. Its important that such price increases are not aberrations related to factors such as short term political instability in a producing country, or a war, extreme weather event, buy-side price manipulation and so on.
- the target price talked up by the various oil ministers of the major producers is even higher still, with the justification being that such a relatively high price is required “in order to fund the required infrastructural investments necessary to maintain supply”.
- the target price that OPEC et al aim for is within the range deemed by the USA’s Department of Commerce to be dampening (all other things being equal) on the US economy. Indeed, in this 2006 study the Department predicted significant downward GDP pressures, unemployment, and a slowdown in manufacturing sector output resulting from oil prices in the $70 to $80 range.
- vehicle manufacturers that have ignored fuel efficiency in their ranges struggle to sell their models as consumers become more sensitive to oil price.
- major oil consuming businesses like airlines post significantly poor results citing high oil prices as a major catalyst for their poor trading results.

So lets compare that to today’s reality:
- oil price has doubled so far in 2009 and is currently in the high $60 pbl range (hitting a $66 high Friday last)
- the target price is in the $70 to $80 range. OPEC Secretary-General Abdullah al-Badri has called for oil to hit that range by the end of 2009. Other OPEC ministers, including Ali al-Naimi of Saudi Arabia saying “the world was ready to cope with oil at $75-$80 and that it could reach that level before the end of the year.”
- GM has shed $50B of shareholder value in the last decade and will roll into Chapter 11 bankruptcy faster and more predictably than a Chevy Tahoe drinks Texas Tea.
- British Airways as one example posted a “worst ever loss” of £401M after being hit with a fuel bill just shy of£3B. The weak pound and the drop in passenger numbers as a result of trimmed travel budgets (itself a result of the recession) didn’t help at all. In the lead up to the loss it was reported that “Costs far outstripped revenues of just under £9bn due to high fuel prices”

So this is what it looks like - we’ll know where at the point of peak oil not when the unaudited reserves of Ghawar are finally shown to be a sham, but rather when the economic indicators “downstream” of the depletion point exhibit the market behaviours associated with sensitivity to the resulting high oil prices. Because at that point the level of actual reserves is somewhat academic, and we’re dealing with the reality of the actual price point.

Interestingly, the Department of Commerce itself states that “Over the long-run it is possible for the economy to adjust to the higher prices of energy imports by improving its energy efficiency, finding alternative sources of energy, or searching out additional supplies of energy. ”

So the bright lining is that investment in alternative energy sources, and also in fuel consumption efficiency ought to be accelerating.

Fog high above London. Boardroom type table Orbited by a dozen or so suited individuals to which any of the following might apply, but all would be modestly denied…clever, thoughtful, experienced, connected, influential, knowledgeable,passionate, engaged. And I got to be there too. The scene is important I think as a form of context for understanding the fascinating nature of the conversation around the table.

Suited business professionals and members of the industry analyst community (some whom scrub up OK too) engaging in a passionate and informed discussion regarding the need to consider the re-engineering of the long established and pervasive capitalist system. Specifically, to examine how we can recognise and reward the value associated with a steady state economic (and business) model, as opposed to only rewarding a constant growth model as we have for the last 500 years or so.

The serious proposal being that the current systemic economic crisis and associated recessions are an opportunity to start on a new direction, especially given the nexus of the economy, climate change and looming petroleum supply shortages.The conversations themselves are fascinating to listen to, and a privilege to have the opportunity to engage with. What is truly interesting however is the type of people having them, and what that signals as far as the debate on climate change has come.

Valuing a mature sustained state economic model will highlight the value of efficiencies in the service delivery production chain. Currently efficiiencies are only lightly rewarded, at best second to margin growth derived through territory expansion. The correct valuation of efficiency gains would be enabled to no small degree by including the currently externalised economic, social and ecological costs associated with an activity into the financial balance sheet where it all belongs.

Those still debating whether climate change exists, or pointing to sunspots as the cause have unfortunately been left behind in the debate. It is critical to remember that that group is large in size (arguably the majority) , and non optional as far as the need to include them as we further engage, educate and encourage appropriate action around climate change.

Who said what around the table shall remain unattributed for now, but it was all good and thank you everyone.

Thank you and kudos to BT for organising the event, inviting us all along, and having the maturity to encourage unbridled discussion.

More.

Please.

What a slippery and exciting ride its been during 2008 for oil prices. Just a few months ago the world was feeling dizzy from the heady fumes of $147 a barrel oil and petrol sniffing was becoming so expensive a habit it almost had the necessary exclusivity to become widespread among the rich and well heeled. Even the most loyal of Chelsea Tractor drivers began to be dazzled by the hypnotically spinning numbers at the petrol bowser as they filled their tank. “Peak oil” made it from the vocabulary of the conspiracy theorists to the business pages of the broadsheets and dire predictions were made regarding the availability and cost of fuel supplies. But just in time for Santa to refuel the sleigh, New York Crude has fallen to below $34 a barrel, lower than any time in the last four years.

The gleeful exclamations of those who continue to wish for a world awash in cheap and plentiful petroleum fuel sources can be heard even over the roar of the newly restarted four barrel Holly V8s. Not for them a future of restrained oil supply, just “business as usual”. Now if only Chrysler and GM weren’t under Congressional and Executive pressure to build girly electric cars, we could all go back to the nirvana that is a multi-tonne SUV’d future.

But is it fair to point to the current crashing of oil prices and assume that we are in fact back to the days of cheap energy? Firstly it is appropriate to recognise that OPEC is committed to a price well above the thirties, albeit they recognise that North of $140 might be good for the hip pocket in the short term, but it is globally economically unsustainable in the long term. The fundamental factors behind oil pricing are the same as any other commodity - the balance of supply and demand. Above $100 a barrel oil prices began to contribute to the economic drag that was already beginning spreading from other factors. Though OPEC made substantial noises that they would increase supply to stabilise the price the reality is that relatively little extra capacity was able to brought online, not helped by the fact that not all members of the cartel wanted to play the game as they were in it for the short term gains.

More influential were the speculators, whose trading created an additional detachment effect that further dulled OPEC’s ability to control prices through altering supply.

What of the future? OPEC’s inability to much increase supply flow actually lends support to the views of industry insiders such as Matthew Simmonds who cast doubts on the accuracy and truthfulness of the claimed remaining reserves of the Saudi (and other major worldwide) fields. The IEA continues to cast doubts on the ability for us to find further significant fields, and despite the “Drill, baby drill” bluster expressed during this year’s US election campaign, the reality is that exploration of new fields offshore of the US or in ANWR make little real difference to global supply levels.

Oil price is also a bit like a piece of elastic. Once stretched, it will never return to the same size again. Now that OPEC has seen that the world will go as far as $140+ before choking, they will not settle for a long term price of less than $50. Even they hear the warning bells ringing from the calls to decouple Western (read: USA) economic growth from Middle Eastern oil. Such efforts will take a decade or more before they are successful, but in the long term OPEC must realise that the days of taking trillions from Western pockets are drawing to a close. Best to suck out as much money while the wallet remains at all open.

OPEC is now attempting to again stabilise the price, this time upward. At an OPEC meeting this month, Saudi Arabian oil minister Ali al-Nuaimi again indicated he thought US$75 per barrel would be “fair and reasonable,” adding that anything lower could lead to more, not less, instability. Ali al-Nuaimi reportedly saying “When oil is priced lower, such as it is now, there will be less investment and less future supply”. We should need no clearer indication that OPEC will cut supply to keep prices high, and furthermore are signalling that any existing field capacity will require difficult, innovative, and increasingly marginally effective (translation: expensive) extraction methods.

Conclusion: The strategic approach is to recognise that the future does indeed require us to migrate off petroleum based energy sources as soon as possible.