Underestimating the dangers of peak oil and climate change

Many people dismiss the risks associated with oil depletion and climate change--even many who accept the two issues as problems. They judge those risks to be small or at least manageable. Since no one can know the future, we cannot be sure whether they are right or wrong. But even if they are right, should we be so sanguine? As we examine this question, keep in mind that we are talking about probabilities and the level of risk, not absolute knowledge which none of us can have about the future.

One reason that so many people discount the risks of oil depletion and climate change is that their experience tells them to do so. We've had high oil prices and tight oil supplies before, and always new supplies and declining prices followed. For many we are just in another market cycle, and there's nothing to be worried about. And, when it comes to climate change, well, we've had hot summers before and even if the climate is warming a bit, we'll adapt. 

Both these observations are subject to what's called the problem of induction. In a nutshell, we believe that because a certain event has reliably repeated itself in the past or because certain conditions have prevailed for a long time, we can always expect more of the same in the future. If that were true, there would come a point in our lives when we would never be surprised. But as it turns out, humans are continually surprised, which shows you that the problem of induction lives on.

The classic illustration is the statement: "All swans are white." The statement may be based on thousands, even millions of observations. But, this would not prove that it is true. This is because we cannot possibly observe all swans for eternity. And, it takes only one swan which is not white to prove the statement false. As it turns out, Europeans only realized that this statement was false when they landed in Australia and saw black swans.

So, just because high oil prices in the past have eventually led to low oil prices does not necessarily mean they will this time. Oil is a finite resource. At some point it will never be plentiful again. Has that point come? Is that even the question we should be asking? I'll elaborate below.

When it comes to climate, the globe's warming temperature is an indisputable fact, something that even reluctant oil industry CEOs now accept. So the question for them and for us is whether we can adapt or whether we should try to stop the rise in global temperatures.

Even last summer's intense drought in the United States, dryness in the growing regions of South America and Russia, and wildly wet weather in Great Britain still seem not to have made climate change a priority. Food prices may well exceed their all-time highs of 2008. Yet, we humans are like the man plunging from a 100-story building who, when asked how things are going as he passes a 50th-floor window, replies: "Fine, so far."

This oft-cited illustration shows in a humorous way that we humans are frequently oblivious to dangers that are right in front of us, but which for some reason we cannot immediately sense or comprehend. We base our assessment of risk on the past (in this case the 50 floors from the top traveled so far). The result is that we assign a probability of harm that is too low.

But even if the probability of severe peril from a future ongoing, permanent decline in oil supplies or from climate change is actually small, should we ignore that probability? Let me provide another illustration which may be familiar to many. Let's say that you are offered a free trip to your favorite vacation destination. You are told that the plane arrives safely 95 percent of the time. The other 5 percent of the time it crashes. Pretty good odds, right? Of course, not. You would never board such a plane. You would decline the flight and gladly pay your own way on another safer flight, that is, if you still wanted to go.

So, even a 5 percent chance that you will die on a routine plane flight is too big a risk to take. Yet, the world's political leaders and peoples have been given convincing evidence that the chance that unchecked climate change will imperil the very stability of modern civilization is far more likely than 5 percent. True, it's not certain that this will happen, but then every forecast is uncertain. The question is: How do we handle this uncertainty?

Let me provide another illustration. When it comes to home fires, every sensible person knows how to handle the risk: purchase insurance and take steps to reduce the chance of a fire. At yet, fires that warrant the filing of an insurance claim remain exceedingly rare. So, given the low probability of such an event, why do we insure against it? We do so, of course, because even this very low probability event can have catastrophic consequences should it occur.

And, this frames the proper understanding of risk. Risk is not just about probability; the proper measure of risk is probability times severity. Measured this way, small probability events that are expected to have severe impacts become worthy of preparation.

Oil production will certainly start to decline some day. We know this in advance because oil is a finite resource. There are warning signs, an emerging plateau in world production since 2005 and persistently high prices. These are not definitive, but they are worrisome. Given that a rapid, unexpected decline in oil availability has shocked us before, and given that oil continues to be the central commodity of our age--supplying a third of our energy, 80 percent of our transportation fuel, and the basis for innumerable chemicals essential to modern society--given all this, can we not conclude that a persistent decline in oil supplies might be civilization-wrecking if we are not prepared for it?

We know that climate is changing. The record lows in Arctic sea ice are probably the most telling and troubling result. This ongoing warming at the poles affects weather patterns that already have and will continue to threaten crop yields around the world. We are almost completely certain--nothing is absolutely certain in science--that human activity is the main cause of climate change. It is not a leap to conclude that continuing on our current course has a definite, but not precisely calculable risk of undermining the stability of our society.

Whether you believe that severe outcomes are certain, merely probable or very improbable if our behavior does not change, you are forced by a proper evaluation of risk to agree that at least something ought to be done; the possible outcomes include ones that are simply unacceptable.

We never make policy or even personal decisions based on absolute certainty. Instead, we do formal and informal assessments of the risks of any given path based on the information we have at the time. No one--not you, not me, not the pundits, not the oil industry, not the government, not the world's scientists--can have certain knowledge about future oil supplies. The same applies to the future of climate change. We can, nevertheless, describe the severity of possible outcomes. From a policy and preparedness point of view, benign outcomes need not concern us much. In the case of oil supplies and climate change, however, the possible outcomes include some which are truly alarming.

There are too many variables and unknowns to calculate precisely what the chances are for an irreversible decline in oil production starting, say, by 2020. There are too many variables and unknowns to calculate precisely the course and exact severity of climate change. But our understanding of the possible extreme outcomes should tell us that we need to do a lot to address both problems and soon.

Even if we could calculate that the chances were merely 5 percent that one or both problems might result in civilization-shaking outcomes, it would behoove us to take steps to head off possible disaster--just as we would step off a plane that we know has a 5 percent chance of crashing before it reaches its destination.