Beetles and Bacteria Revisited

Not too long ago a respected biologist posed an interesting question: Is it better to be smart or stupid? For example, beetles and bacteria are much more successful as survivors than humans. Since the average life expectancy of a species is only 100,000 years, humans may be coming to the end of their time on earth. As we have evolved we have become extremely proficient at destroying ourselves both through our attacks on the environment and our cruel attacks on each other.

The Bush administration appears to be ignoring the serious environmental problems world-wide. But one governmental agency is taking the problem seriously. And who might it be? Believe it or not, the Pentagon. In direct refutation to the right-wingers in this administration, the Pentagon has issued a report declaring that climate changes, i.e. global warming, is a serious security threat to the U.S. It is most urgent, the Pentagon declares, and it requires immediate attention. Climate change can occur much sooner than originally thought and very quickly. For example, it could occur over a period as short as 3-5 years causing droughts and starvation. Incredibly it could cause another Ice Age. Europe could freeze over, our mid-west could become another dust-bowl and Southern California would be without water. Even the World Bank is debating a possible recommendation to stop financing oil and coal development both emissions of which can cause climate change. Investors in the fossil-fuel and auto industries aren’t going to like these conclusions but can they continue to ignore them? A special review commission involving third world governments and “indigenous people” has recommended that the World Bank stop all coal loans now and all oil loans by 2008. It also suggested that the bank increase renewal energy (wind and solar) loans by 20% per year. As it stands now the World Bank is lending 94% of its funds for fossil-fuel and only 6% for renewables. So far the bank has refused to change because fossil energy is the cheapest energy to pull third world countries out of poverty. But what good is it if the world is headed for weather changes that will cause chaos and starvation?

Individuals in the Bush administration and their conservative think tank cohorts, viz. the American Enterprise Institute and the Heritage Foundation, who may still believe the earth is flat and that evolution is not a fact but only a theory, are re-writing science. They are blacklisting scientists whose work threatens the profits of mega-corporations and who are major supporters of the Bush administration. In addition any scientist or engineer who disputes the anti environmental beliefs of the neo-conservatives is immediately suspect and viciously attacked. So extreme has this been that, according to Robert Kennedy , Jr., who works as an environmental lawyer, approximately 60 scientists, many who are Nobel Laureates have accused the Bush gang of distorting scientific facts “for partisan political ends.”

Let’s take, for example, the air quality in downtown New York City after the 9/11 tragedy. The EPA released nine press releases between September and December stating that the air was safe to breathe. We have since learned the EPA’s data was being doctored by the White House in order to re-open Wall St. as quickly as possible. So once again our government was lying to the public. Also shortly after 9/11 the E PA maintained that the asbestos level was very low in that area and perfectly safe to breathe. An independent study done by UC Davis at the time indicated that the levels of asbestos particulates were the highest ever seen world-wide. Another study showed that 78% of rescue workers had lung ailments and 88% had ear, nose and throat problems for months, sometimes a year, following the disaster.

Another extremely dangerous problem that the Bush administration is ignoring is global warming. The Bushites have consistently altered the facts regarding the serious case of global warming. Since the beginning of this administration there have been at least a dozen government studies on global warming that the White House has suppressed or discredited as a favor to the mega-corporations whose industrial emissions are a major contributing factor to the problem of global warming. The National Research Council, the National Academy of Sciences and NASA have all presented studies on the effect of fossil fuel emissions on global warming to the administration and are ignored.

Halliburton, VP Cheney’s former company, has given millions to the Republican Party to protect itself from interference by government in a process that the company employs to extract oil and gas. Benzene is injected into the ground to aid in the process. The EPA discovered that the process could contaminate drinking water beyond the usual acceptable drinking water standards. Shortly after this was reported to a Congressional Committee, the EPA backed off saying that the benzene did not exceed government standards. EPA finally admitted that industry pressure had forced them to change their position.

The coal industry introduces large amounts of mercury into the environment. The EPA delayed for nine months a report on the tragic effect of mercury on the health of children. One in 12 women are carrying mercury in their blood stream to cause neurological damage and a lower IQ in their unborn children.

Or let’s take the case of Atrazine, a commonly used weed killer in America. Back in 1980 it was identified as a carcinogen that could cause prostate cancer. Tests by government scientists found large concentrations of Atrazine in the drinking water across middle America, primarily in the corn belt. UC Berkeley found that this chemical at “one thirtieth the government’s ‘safe’ 3 parts per billion” causes major deformities in frogs. Recently the University of Missouri found that male semen counts in farm communities were 50% below normal. What did the Bush administration do about this? It did not ban the chemical as was done in Europe but rather turned control and monitoring over to the manufacturer. With a perfectly straight face the spokesman for the manufacturer said, “This is one way we can ensure it’s not presenting any risk to the environment.”

Before going any further with the anti-environmental agenda of the Republican administration, let’s take another look at the Pentagon report on global warming and the resulting green house effect. The climate changes that are sure to occur if the use of fossil fuel continues would cause the Arctic ice to melt and since it is “less dense” than salt water would then flow into the Atlantic. This in a very short period would shut down the warm Gulf Stream. As a result, Western Europe and Eastern North America would become very much colder and Europe’s climate would become similar to Siberia. Now the reason the Pentagon is so concerned is the effect it would have on agricultural harvests. Thus, widespread starvation becomes a reality. Wars would then change in character and become struggles over natural resources rather than over ideology. Any changes in the causes of war would affect the way in which wars are fought. And that, of course, interests the Pentagon. Therefore, we need to look at some of the problems caused by the use of fossil fuels and what, if any, are the solutions?

So let’s start with the preeminent but problematic fossil fuel of our day—oil. Whenever I drive my compact car into the parking lot of the local supermarket, I invariably windup between a huge sport utility vehicle (SUV) on one side and an oversized pickup truck with huge tires and an exposed chassis on the other. I feel as though I have been dropped into the maintenance bay of a Greyhound Bus terminal. My visibility is totally obstructed and backing out requires a great deal of courage. The other day I was on foot and a “Grandma Moses” type approached me, believe it or not, in a Hummer and impatiently waved me out of the way so she could park this tank in a “Disabled Parking” space. Now these vehicles were originally designed for off the road use for people who need to use truck for that purpose. But studies indicate that only 1 in 20 owners take the vehicle off the road and only 1 in 10 carry anything in the back of the pickup. So these people are using the “gas guzzlers” (as low as 5 miles to the gallon and as high as 18 or any number in between) to carry a couple bags of groceries or to take the kids to the soccer field or a Little League baseball game. If they think they will be any safer in these tanks, safety studies show that the SUV in a crash is more likely to kill the occupants of the other car and it is also a danger to its occupants because it tends to roll over. Incidentally, the new Volkswagon bug introduced a few years ago actually has proved in tests that it is the safest car on the road and gets the best mileage.

So what is the American public seeking when it buys these huge vehicles. It appears to be a combination of conspicuous consumption, the desire of urbanites to appear macho and tough and for some just plain stupidity. The average fuel economy of all vehicles has dropped to less than 21 mpg, the lowest level since 1988, the peak year for fuel efficiency. The increased use of these vehicles has caused oil consumption to grow in the US from “17 million barrels per day in 1990 to 20 million today”. This could rise to 32 million in the year 2020.

The use of oil in the world by 2035 will leap to almost twice what it is today. Today we use 80 million barrels per day and that will increase to over 140 million barrels. Natural gas usage will increase over 120 % and coal by 60%. In countries like China and India, which are in the process of emerging industrially, consumption will grow exponentially. In a recent auto show in China it was reported that the crowds were elbow to elbow. No one had ever seen such a turn out. China is fast becoming “the hottest car market in the world.” The Chinese purchase of autos alone will raise the use of oil by 2 million barrels per day.

So are we going to run out of oil? And how soon? Let’s check out the Saudi oil fields where ¼ of the world’s oil is produced. Unquestionably modern civilization owes its development to the fossil fuel industry, i.e. oil, gas and coal. But what most people who live this comfortable life and take the energy for granted don’t realize is that the most popular energy, oil, has its limits. Some of the biggest oil deposits in the world, e.g. Saudi Arabia and the Baku deposits of the former Soviet Empire have already peaked. Once that happens production slows and eventually produces nothing. It’s at that point that a new oil deposit must be found. When the ground is broken and the new deposit is released the natural pressure is so intense that the oil shoots out similar to a geyser. But then after decades of use the pressure subsides so that in order to get the oil out of the ground water is injected to force the oil out. The oldest and largest oil field in Saudi Arabia first dug in 1953 originally produced 6 million barrels per day. Today that well requires water injection that produces oil with a “water cut” of 30%. A new well will produce almost pure oil with natural gas and only a trace of water. Eventually the well that requires water injection and produces as much as 30% water will in time produce nothing but pure water and the well has to be abandoned.

The world today requires more and more energy and there appears to be no end to our requirements. So oil production world wide is peaking. Take, for example, the oil wells on the Caspian Sea. 20 years ago the oil wells 2 miles into the Sea were gushing seemingly endlessly until they peaked and then depleted. Now there is nothing but rusted pipe lines and empty buildings. However, new wells were sunk but production is nowhere near the peak production of 1986. Given a few more years and all oil from that region will be gone permanently. There will be nothing left of the old Soviet Oil Empire. The same problem exists in Texas, Pennsylvania and Borneo. Self pressurized oil wells producing millions of barrels per day gradually deplete and new wells are dug elsewhere to replace the oil already used.

The problem is that it is getting harder to find oil deposits world-wide that are easy to produce. The oil that exists in the ground is in most cases today located in very difficult environments, i.e. under Arctic ice, Siberia and unstable African countries. As demand continues to rise, the cost of production also rises and so does the price of gasoline.

So what does “peaking” mean? It means that when half the oil in the ground has been pumped, we have peaked. Once half the oil is gone world-wide we cannot produce the same number of barrels required per day and we are faced with falling production. If we continue to use increased amounts of oil at the rate of 2% a year, we will reach our peak in 2030 if the estimates of oil in the ground are accurate. However, the numbers are suspect. The oil companies tend to conceal impending peaks in their current wells. And they do this for political or economic advantage. Therefore, most of the time their estimates for reserves are bogus. In reality, since 1995, the world has used much more oil than it has found in new deposits. (24 billion barrels annually vs. 9.6 billion barrels per year.) One study indicates that the energy industry is finding less than 40% of the new oil needed to support the known reserves. Thus depletion continues because there is less and less oil to be found despite improved technology. Oil producers continue to pump more oil than they can replace. And most of the world’s oil is still in the Middle East controlled by OPEC, a not very friendly cartel that controls production and prices.


References:

The Nation. 3/1/04. Mark Hertsgaard. A New Ice Age.
The Nation. 3/8/03. Robert Kennedy, Jr. Bush’s Jungle Science.
The New York Review. 6/10/04. Bill McKibben. The Real Climate Crisis.
Roberts, Paul. The End of Oil. Mariner Books. 2005.

Corporate Conspiracy

Four years later it is still difficult for many people to understand how huge companies like Enron and WorldCom with billions of dollars in revenue and stock prices close to the ceiling could in a matter of weeks declare bankruptcy. And the people who should have been able to predict the fall, i.e. the investment bankers, the rating agencies, the analysts and the most prestigious accounting firm in the country did not appear to have a clue. Most shareholders upon receiving the beautiful annual report assume that the company is in fine financial shape since one of the largest and most respected accounting firms in the country has signed off on the report. Now accountants are just people including the lead partners who actually supervise the audits. But they are as corruptible as anyone because in order for fraud to occur, as one financial observer commented, there has to be “complicity”.

So now the question arises, how can a “company manipulate its earnings?” For example, during the annual audit one of the young outside accountants assigned to the company discovers that the company’s internal accountants have been “booking something incorrectly”. It doesn’t “conform to generally accepted accounting procedures”. It may not appear on the surface to be a major problem but it is significant enough to put downward pressure on the earnings per share if it is corrected. The company, therefore, will not look as good to the Wall St. community and the share price will drop. This inevitably happens when the street analysts publicly downgrade the stock. The smallest decrease in earnings per share (EPS) can cause a rush to sell and the stock price drops like a stone.

Now the Chief Financial Officer (CFO) and the Chief Executive Officer (CEO) are concerned for another important reason. They own millions of dollars in options and since the stock price has been going straight up, these options are worth millions more. But if the EPS drops, the options will drop also and could possibly end up worthless. The executives have probably made financial commitments based on the future value of the options and now they are faced with losing it all and having to deal with the financial embarrassment that follows. When the lead partner of the accounting firm informs the CFO of the problem, the CFO is in shock. He had been relying on his internal accountants who in turn were relying on the outside accounting firm who told them that what they were doing was O.K. The lead partner is now saying they were wrong. Oh, my! It is at this point that the CFO involves the lead partner by telling him that the Board of Directors had been considering switching accounting firms and that the CFO had talked them out of it. The CFO had told the Board that he and the lead partner had a very good working relationship and didn’t advise changing. Now the lead partner was on the spot. A client of this size represented millions of dollars in fees and to lose it would mean personal financial loss for him. Furthermore, any reduction in the EPS could mean the loss of the CFO’s job. In that case the lead partner would lose his support and the client would go to another accounting firm to say nothing of the possibility of the lead partner being degraded. So he tells the CFO that he won’t press the issue this time but let’s not do it again.

So what happens the following year? Is it fixed? Of course, not. A young accountant points out the “inconsistency” once again but this time the lead partner tells him to keep his mouth shut. The lead partner is now inextricably involved in the company fraud. And the EPS would drop even more if the books are corrected. Now the young accountant is caught in the trap because he has financial commitments also that he cannot jeopardize. Nothing more is said about the discrepancy. The books are bogus and the shareholders are fleeced. The executives, on the other hand, are making a pile. It is outright fraud. When the annual report is published once again the following year no one says a word and the stock continues to rise. Everybody involved gets a bonus.

Now specifically how does the company continue to support the rising EPS figure? The simple answer is to “book fraudulent revenues.” You claim you made more sales than you really did. How does the company get away with this? Well, large corporations normally book income when they ship the product not when they get the cash. Many corporations wait 90 days or more for their cash. So any fraudulent sales reported goes immediately into the income statement, the net income increases and therefore the EPS increases. Then a bogus receivable is recorded on the balance sheet. But payment is never received because the sale was never made. It is difficult for any outsider to determine that some receivables are bad since the bad are included with the good. The ordinary investor looking at the financial statements at the end of the year could not possibly detect the fraud. And bogus receivables will be on the balance sheet every year in increased amounts because in some years business is bad, but the EPS has to go up. The catch is that eventually all the receivables are bad and there is no cash. Somebody knowledgeable eventually snoops around and discovers the fraud, discloses it publicly and the banks begin demanding payment on their loans. Even worse they refuse to make any further loans to carry the company over. The house of cards collapses. Enron, for example, was selling 30 year energy contracts and booking the total sale on day one. The income came in slower than the expense outgo. In addition huge Enron revenues were being drawn down to support “lousy” business deals organized into limited partnerships with the CFO, Andrew Fastow, acting as general partner. This in itself was a conflict of interest ignored by Fastow. However, he also was collecting huge management fees as the general partner and Enron was footing the bill. Enron was being milked by Fastow and this contributed to the astronomic Enron debt. Much of this money was going to members of his family and friends. Actually it was Fastow’s responsibility to keep an accounting of the debt and when asked at one point what the extent of the indebtedness was, he was unable to say. He did not know.

Another serious problem that disturbed some of the smarter people in Enron was the fact that Enron itself was often borrowing billions of dollars for short periods of time, i.e. weekly or monthly and then using the cash for long term projects. These had to be repaid long before the project produced any revenue. This could cause a liquidity crisis if a loss occurred at which time the banks might refuse any further short term loans. Enron could not stay in business without these loans. This eventually, of course, happened. It is interesting to note that the savings and loan industry toppled in the 1980’s for the very reason that it was using short term loans for long term investments. It was considered a “classic financial blunder.” And so with Enron.

Enron was able to function in the way that it did because the stock market “bubble” that produced high stock prices made it possible to use “aggressive accounting” (fraud) to push the stock prices even higher. This is done by inventing “phantom profits” which make the company grow even more and the bottom line to look even more outrageously profitable. Enron, WorldCom , Adelphia and Tyco to name just a few were in reality gigantic Ponzi pyramid schemes. They used slightly different accounting methods but in essence they were using money from new investors to pay off old investors. This was the way Fastow operated his limited partnerships. As the price of the stock rises, more investors are attracted and the capital gains to the initial investors increases hugely. Thus more investors are attracted and so on. Until eventually the seemingly successful business implodes because you’ve “run out of suckers” and cash. Enron, for example, invited their banks to invest in “the shell companies they used to hide debt and siphon off money.”

The Enron scandal did not emerge suddenly for it was building for a decade. Enron started out as a natural gas pipeline company but when deregulation came on the scene much through the efforts of Ken Lay, the CEO of Enron and a personal friend and supporter of the Bush family, the company became one that “dealt in contracts.” It became more like a Wall St. investment house and was the market maker for the deregulated natural gas industry. From there it began making markets in electricity and selling long term contracts. This, of course, lead to the California catastrophe caused by energy company market manipulation to drive prices up. One dirty trick was to pull energy companies offline to create shortages and prices went through the ceiling. Much to the anger and consternation of Californians. There are actually Enron memos that show that Enron was without question “rigging the markets” to harm the state of California. In addition there was a division in Enron that produced fraudulent profits in order to puff up its stock price. And it also devised bogus energy transactions to again puff up Enron’s profits “at the expense of the state of California”.

So what we have here was a method of operation that completely ignored ethical standards. It was an environment of callous greed and criminal behavior but also startling incompetence and shocking arrogance. The executives were inadequate and blinded by avarice. The bankers, accountants and lawyers were more interested in their huge fees than investigating the company’s questionable policies. Brokers and investors did not have a clue as to what was going on and were interested only in making huge profits. The CFO and his cronies supported by the CEO and the Board of Directors indulged in bad business practices and spent much of Enron’s huge revenues supporting them.

The end result to those involved was devastating. Arthur Anderson, the prestigious accounting firm that was signing off on fraud, went up in smoke. Thousands of innocent employees who had nothing to do with Enron lost their jobs. Andrew Fastow, the Machevellian mind behind much of the bogus business deals, has pleaded guilty to all counts and will serve 10 years in prison. His wife has already completed a year sentence. Still to be tried and sentenced are Ken Lay, the founder and CEO and Jeffrey Skilling, the replacement CEO when Lay moved on. Incidentally, shortly after Skilling appeared on the cover of BusinessWeek as the new brilliant CEO, he resigned ostensibly for “personal reasons”. Some time later he admitted that he left because the company stock had dropped 50% but denied that anything was amiss in the company. Not too long after, the company declared bankruptcy.


References:


Eichenwald, Kurt. Conspiracy of Fools. Random House. 2005.
Frey, Stephen. Shadow Account. Ballantine Books. 2004.
Krugman, Paul. The Great Unraveling. Norton. 2003.