In November, Simon Snowden spoke at our Future Proof your Business seminar on the Oil Vulnerability Audit, a toolkit and methodology on how to assess a business for its exposure to peak oil. After the seminar we conducted a short interview with Simon, the key points of which are transcribed below.
Q: Can you explain Peak Oil?
A: Technically, as far as I understand it, it is the point at which we reach the maximum rate of production that is possible of oil, i.e. how fast we can get it out of the ground. Once we have reached that point, the peak in production, it will then slowly go into decline, and, year on year, month on month, we will be getting less and less oil out of the ground. But I think that each person has their own take on peak and in some ways for me what is most critical when I think about business is understanding the dislocation between demand and supply. That’s the peak moment for me, when the demand for oil outstrips the potential to supply that oil and the impact it has on price, the impact it has on the economy and the impact it has on individual businesses.
Q: For businesses you mentioned that it is not so much the high price of oil, not so much the low price of oil, but it is the vulnerability in the oil price that is the real difficulty for businesses.
A: It is something that I have noticed time and time again with people discussing peak oil, that one of the consequences is sustained high oil prices. It is clear that when you get a dislocation between the fundamentals of any kind of raw material or product then there is a tendency to push prices up but oil has an interesting dynamic linked to the economy. If you wish to grow your economy by 1% then typically you need to grow your consumption of oil by 1% and that link between the economy and oil means that you don’t simply get sustained high oil prices. It means that as the price of oil goes up and up and up, the inflationary pressures that that generates within the economy begin to bite on the pocket of the individual. Cutbacks in discretionary spending undermine all kinds of economic activity, and, as the economy goes into recession the actual pressure on the price of oil, because of a drop in demand, is released so the price of oil can come down very rapidly as we have seen over the recent period. That volatility is actually much more destructive and much more of a problem than sustained high oil prices. If the price of oil is low it tends not to matter how we deal with it and if the price of oil is high and remains high then we can begin to plan. If the price is going up and down like a yo-yo then it is much more difficult to make investment plans and not just within the oil industry itself but within all kinds of alternative technologies as well.
Q: How can the oil vulnerability audit help businesses ride out this volatility?
A: It is not so much just riding out volatility as beginning to plan and understand how the price of oil will impact on your organisation, to try and understand not just that general prices and costs within your organisation will rise but to understand in detail where these costs will impact your organisation, the particular processes, the particular activities and the level of vulnerability in there. Once you have that understanding you can begin to tackle targeted intervention. A hotelier approached me a year or so ago by saying: “it is all well and good a person telling me to change to low energy light bulbs, but I’ve got thousands. At £3-£5 a pop that’s a lot of money and a big chunk of cash flow – so which ones do I change first?”.
Beginning to break down in detail the understanding of how oil impacts on an organisation and being able to then develop different scenarios alongside business as usual enables a business to make much more intelligent changes to their organisation.
Q: Our food systems are incredibly vulnerable to oil shortages. Have you worked with any businesses in the food industry?
A: We looked at a single dairy farm and, without generalising too much, some of the initial findings were shocking. When we did our first analysis we looked at 5 particular elements connected to oil price; fuels, energy, petrochemicals, man-made materials and components. When we did the initial analysis of the farm we found that around 17% of the costs related to the price of oil. But the beauty of the audit is the way in which it breaks down an analysis of the component activities and processes. So when we began to look at the cultivation of the plants to feed the 200 herd cattle we found that 80% of the costs of cultivation related to the price of oil. This was petrochemicals such as herbicides, pesticides, insecticides and fertiliser, not really a petrochemical but hugely dependant on hydrocarbons. Once we understood that we shot from 17% oil vulnerable up to 70% oil vulnerable. 17% is bad enough but 70% is shocking.
Q: How did you become aware of peak oil? What was your peak moment?
A: Whilst I was doing some research for a lecture series I came across the idea of peak oil. My gut reaction was, Oh no – something else to be scared about. But the problem with peak oil is there are a lot of nice figures there and they slowly cogitate around your head. Everybody at some point goes through his or her peak oil moment. I had mine on the way back from a skiing trip in the Alps reading Jeremy Leggett’s book. At that point I said no, this is too critical, this is too important and I changed the whole of my research in this direction. And here I am today!
The full interview is below, our first foray into video recording…