the __earthinc

According to an article in the New York Times today, Shell’s top executive has resigned due to Shell’s overestimation of its oil and gas reserve worldwide. The result of Shell’s reassessment of its reserve was announced several weeks ago and it sent shockwave throughout relevant industries. According to New York Times further, considering the Shell’s conservative management style, it would be hard to accept the gross overestimation, 3.9 billion barrel lower than previously thought. That’s a 20% reduction.

At the same time, due to malpractice suspicion, the Securities and Exchange Commission has launched a probe against Shell on February 19.

The problem was further intensified in the days after the restatement when Shell announced that its net income has decreased by 19% in the fourth quarter earning. The company has also reduced its oil and gas production forecast.
Despite Shell’s restatement, no other major oil and gas firm has issued a restatement apart from El Paso. El Paso reduced its reserve estimate by a staggering 41%.

The current development is interesting since any move made by Shell, one of the once seven sisters will affect the world economy. This is true since the world market to a large degree depends on carbon-based fuel mined by giant transnational companies such as Exxon Mobil, BP and Shell. More importantly, if the current phenomenon in Shell is not exclusively a Shell’s problem, I would expect other firms with similar core business to re-estimate their reserve.

There has been a study that suggests oil and gas reserve will fall rapidly in the near future. In fact, according to another report by New York Times more than a week earlier, Saudi Arabian production is unsustainable and would fall soon. Even right now, Saudi Arabia is barely meeting its own production quota. In Malaysia, PricewaterhouseCoopers has reported that oil and gas reserve is dwindling and further exploration needs to be done if Malaysia wants to combat its rapidly falling reserve.

Also, it has been predicted that by 2050, oil and gas roles in the economy will be limited due to supply shortage. Once oil and gas reserve finally depleted, alternative energy will gain importance.

I’m convinced that the migration from fossil fuel to alternative fuel will happen no matter what; it’s more a matter of when than why or how. Being a green, I’m hoping that it will happen sooner than later because this will force companies such as Shell and the stubborn Exxon Mobil to shift from its traditional core business to alternative energy business.

Due to the imminent migration from fossil fuel to alternative energy business, research on various alternative fuels should be accelerated in order to compensate the spaces left behind by the coming departure of fossil fuel.

With the departure of fossil fuel, perhaps we could combat global warming more effectively since with the absence of fossil fuel, greenhouse gasses emission will be significantly reduced. And even if global warming is not true – of which I believe is impossible to say so – we could have a cleaner air to breath in.

Today in my financial economics class, conducted by a hilarious visiting professor from Vanderbilt University, for the first time there was a hint of politic in it.

It all started with the discussion of investment companies and from there, the topic gradually moved on to pension fund and all the way to social security system. Currently, the social security system is the largest pension fund in the whole world and it is sort similar to the Employees’ Pension Fund back in Malaysia. More precisely, the social security is a defined benefit plan, where the employer is responsibled to set aside part of its employees’ income into a pension fund and then hand out a stream of income for its employees after their retirement. In reality, a small part of the company assets is aside for the purpose, not part of the employees’ income. Therefore, the money that is supposed to be there to pay future retirees is not actually there but rather, will be paid through future wealth that will be put aside when the time to pay up comes.

Currently, the baby boom generation that came into being in the 70s is still in the workforce and the generation is slowly pushing themselves towards retirement. Right now, the social security works because there are more people in the workforce versus people that is out of them workforce due to retirement. And presently, in practice, the baby boomers are paying the income stream for current retirees.

The problem arises when the baby boomers retire. As Professor Rousseau put it in a serious but yet entertaining tone, “And guess who is going to pay for it?”

Well, guess who?

Hint, USD 500 000 000 000 budget deficit; for the mathematically deficient, that’s half a trillion dollar.

Answer, us. Well, actually us excluding me unless I continue to stay here after 2005.

There are a few solutions to this problem. One is to scrap the social security system. Interestingly, the professor said this may not be the solution due to moral hazard – we won’t allow our parents to live in the street. Well, would us?