Recently I interviewed Gail Tverberg, “Gail the Actuary,” a co-editor of The Oil Drum, who is an invaluable source of analysis and articulation of how peak oil is manifesting itself in the world economy and its financial institutions. We began with a macroeconomic perspective and then considered then consequences for healthcare.
It is noteworthy, that while some pundits and many US government officials in 2007 and early 2008 repeatedly claimed that subprime defaults and other fiscal and economic setbacks were minor and contained because the US economy was “fundamentally sound,” Gail calmly explained why the world appeared headed for a credit unwind of unprecedented proportions. She argues that this unwind, which has come to pass with a vengeance, is intimately connected to peak oil.
In a series of articles these past several years she has detailed how peak oil could transform the economy, credit, banking, insurance, and kindred financial institutions. This includes, much to my interest, how it threatens the very viability of our medical system and health insurance companies, in essence replacing the need for “healthcare reform” with the realization that fundamental actions will be required to preserve our healthcare system.
I asked Gail to summarize her intellectual and experiential background that led her to articulate the ways in which natural resource constraints shape economic and financial institutions, and her particular insight into the healthcare industry. She cited three threads that came together in her life:
1. Growing up, “My father was doctor, a general practitioner in a small town … when the GP performed” a wide variety of medical services. This gave her tacit knowledge of the profession, both how it functioned “in the good old days” pretty much as a cottage industry, and, secondly, it provided a benchmark to assess today’s bureaucratized healthcare industry.
2. Professionally, “I of course did research, wrote reports, and so on in my actuarial [role]. But every time I’d go past a bookstore I’d go inside to see what books were out on new or interesting topics.” I commented, “You read widely out of pure curiousness,” and she said, “Yes, I’ve always been that way.” She read about chaos theory, the medical system “and, of course, when peak oil books began to appear I read them.”
3. In terms of education, “I have a Masters in math and took the actuarial exams … I made forecasts for companies relating to claim costs and investment income, and calculated required premiums. So I was also working not just in math but in the area of economics and finance –my [educational] foundation is math, not” business school, however. She reflects that while preparing these reports, “I could see how our various assumptions [built into forecasting models] affected the various future rates [we estimated].” And most importantly, “in 1974 I was associated with … two companies who were affected by the price spike in oil… One went bankrupt … and the other ended up being bought out… So I could see … at that point … that oil price shocks could have a huge affect on the economy.”
She went on, “In fact, my first articles about peak oil were from an insurance perspective and addressed how badly [peak oil] would affect insurance companies… The assumptions they have buried in their models are that things will keep getting better and better economically.” There is no accounting in their models, she said, for the possibility that oil scarcity could make things “worse and worse.”
We then discussed her April 2008 lecture on the future of healthcare made at a peak oil teach-in held at The Ohio State University’s college of public health. At this teach-in Gail said, “I expect that over the next 20-30 years healthcare services are likely to be drastically scaled back” largely as a consequence of peak oil’s far-reaching impacts on the economy. I then asked her to elaborate on and update this comment now, a year later. Gail replied:
As you know, in the past several decades “We’ve gone to a more and more complex medical system … more tests, more technology, more specialists. People have to drive farther and farther to see one of these specialists… We go to extraordinary lengths to prolong by a few months the life of a ninety year old person. I see that this system will have to go backwards in terms of complexity, but it’s not entirely clear if it’s a huge step backwards or … more of a gradual reduction.” That will depend, she added, at a minimum upon the severity of the economic crisis we’re now in and how it interplays with the post-peak rate of decline in oil extraction. Plus there is the increasing possibility of Black Swan events or, as I think of it, a Black Swan or two seems to be inevitable.
I asked her, “Do you see a race between the fiscal crisis and peak oil? Of course, they’re joined, but does it make sense to ask which one is going to reduce complexity faster?”
She said, “The fiscal crisis is THE expected outcome of peak oil… We’ve added more and more debt [through the years] so we need more and more growth to support it; but, in fact, with oil resources constrained, and water resources constrained –and you can think of other constrained resources … we really can’t grow that way anymore… Without growth people … businesses, government can’t pay back their debt; and so we’re running into this massive unwind of debt rippling through the world economy –and we’re not anywhere near through it.”
This is worth pondering since classical, neo-classical and Keynesian economists and financial analysts rarely note any connection between the run-up in the price of oil from 2004-2008 and the burgeoning economic crisis. They operate from a paradigm in which natural resources are assumed to be a constant of no predictive, or theoretical, significance. Therefore, they view peak oil as either irrelevant or in the distant future, an issue for the next generation but not this one.
Gail’s logic is that of a counter-paradigm, I think, whose illustrative metaphor is the limits to growth. Growth is the premise (or guiding metaphor) upon which every mainstream economist and financial analyst bases his or her case for solving the economic crisis now underway; disagreements are about tactics and motives, not about the goal. They assume a return to growth is the master solution for the crisis; it follows that they do not see its pursuit -through a combination of debt, credit buildup, resource depletion and environmental insults and degradation- as the ultimate source of the economic crisis.
Gail then offered an example of how this macroeconomic meltdown plays out in medicine by pointing out that the more complexity –say depending upon imported medical products and equipment, just-in-time delivery, specilization within medical fields, and overall more reliance on technology and energy- the higher the probability of a minor disruption in one part of the complexity chain spreading throughout the entire system. Additionally, a non-growth economy is wholly uncharted territory. Given this turbulence and unpredictably “you can have things change pretty quickly” in unforeseen ways. The wrenching economic fallout from reaching a four-year plateau in oil production underscores this. That is, we’ve yet to experience the fallout from the post-peak descent.
Remember that the overwhelming majority of health reform advocates assume health insurance companies are formidable or omnipotent overlords of the medical care system. Further, they think narrowly about how to co-opt or declaw the insurance (and pharmaceutical) industry. They operate from the growth paradigm and keep coming up with plans to provide more and better care to all of the populace while assuming –as is common in discussions of public policy in the US- that natural resource scarcity is not an issue. In sum, no thought is devoted to the consequences the depletion of oil or other natural resources will exert on the healthcare reform debate. To suggest that there are limits to the care we as a nation will be able to offer is, in my experience, often taken as a sign of a lack of compassion, delusion, defeatism, or a stealth argument to perpetuate the status quo.
In this context Gail observes, “The idea of scaling back is a real difficulty for these growth-based medical institutions… and how do you deal with a bigger and bigger uninsured population? How do you provide preventive care [and] some level of basic care” in a post-peak oil world?
These are, in my view, the kinds of questions reformers should be asking.
We ended our conversation by turning to the viability of health insurance companies. In fact, they are not nearly as powerful as reformers imagine because peak oil makes their future foreboding. Put differently, they are powerful under current –and now weakening- political-economic conditions.
Gail observed, “Health insurance is generally written through life insurance companies. Life insurance companies are now running into difficulties because of the guarantees they offer. There have been no failures to date, but companies are asking for changes in the rules, so that their capital will not be deemed to be inadequate. These problems may or may not escalate. If they do, some policyholders may not be able to collect on their health insurance, adding yet another problem to the problems of the healthcare system.”
Also, these insurance companies invest subscriber premiums to earn interest for their profit margins. It is not clear how much these companies may have lost in the economic contraction now underway. What is known is that they are not earning much if anything at present from these investments of subscriber fees. Again, the implications of a contracting economy will not leave healthcare unscathed –as they will not spare any institution in industrial society.
Gail then added other factors affecting how insurance companies determine “risk pools” to set their premium rates. These include the expectation of growing unemployment, a deepening government fiscal crisis due to an overall tax base shrinkage, and the retirement of the baby boomer generation (most medical care is allocated to older persons) that is losing a substantial amount of the retirement income it thought it had.
Where does this leave the insurance companies, the government and the medical establishment?
All those seeking to overhaul the healthcare industry should organize their efforts with Gail’s insights at the core of their planning. In my view, the limits to growth is likely to narrow our long-term options to 1) an elite medical system only the rich can afford or 2) a scaled back universal system that truly integrates public health and medicine.
