The New PSM Normal (1) — Deflation

The New PSM Normal (1) — Deflation

The last few weeks have changed everything. How long the COVID-19 pandemic will last, how many people will fall ill and how many will die all remain a matter of speculation. Nor do we know the duration of this crisis, but it is probably going to be longer than most people expect. An article in The Atlantic magazine — Our Pandemic Summer — quotes Devi Sridhar, “Everyone wants to know when this will end. That’s not the right question. The right question is: How do we continue?”

We are equally uncertain as to what impact this disease is going to have on the world’s economies. It is possible that we will see a V-shaped recession followed by a return to prosperity, the “Old Normal” and vibrant economic activity. But I am dubious — too much has happened too quickly. Moreover, precedents from previous pandemics suggest that the second and third waves of an infectious disease can be the most deadly. So, even if we do open up the economy within the next few months, businesses and customers will remain reluctant to invest and spend because so much uncertainty remains. If this is the case then we face the possibility that we are not merely in a recession but at the start of a long-term depression.

In response to these health and economic crises I started a series of weekly posts at my New City of God site. The purpose of the series is to provide suggestions to people of faith as to how they can provide leadership in the new and rather scary world that we are entering. The first three posts are:

I am now starting a similar series of weekly posts here at the PSM Report to discuss how the process safety management (PSM) discipline may change in the coming months and years in response to the health and economic crises that are upon us.

Economic Background

The first step in the discussion is to consider how the overall economy is likely to change in coming years. Based on this evaluation we can then attempt to evaluate the impact on the energy and chemical process industries. Then we can consider how the PSM community can respond.

Anyone who has worked in the energy or process industries for more than a few years is all too familiar with ups and downs in business activity and employment prospects. So it is tempting to think that what is going on now is a repeat of what we have seen before. We just have to ride out this current downturn and wait for the good times to return. But I wonder if this is what will actually happen. There are two reasons for my concern. The first is that the current situation has merely exposed previously existing fault lines, particularly with regard to our use of debt. My second concern is to do with the massive and totally unprecedented spike in unemployment that has just taken place.

Debt

Our economies use debt to fuel growth. Or at least, that’s how it should be. But in recent years debt has not provided the growth that we had come to expect.

United States federal debt growth

The chart shows U.S. federal debt for the last 30 years. In 1990 it was $4 trillion. By 2019 it was up to $23 trillion. What it will be by the end of the year 2020 given all the stimulus programs that are being proposed is anyone’s guess. But it is bound to be a new record by a large margin. And it's not just governments that have run up huge financial obligations. Individuals have bought into the same mind set: credit card debt, student loans, mortgages on expensive homes — the list goes on.

Even before the current crisis we were seeing problems with the effectiveness of all this debt. True economic growth comes from the development of resources and the efficiency with which those resources are used. In recent years real growth has slowed or even stopped. Therefore, nations all over the world have responded by increasing debt levels. They are using future debt to pay off today’s debt.

In a November 2018 Forbes article A Worldwide Debt Default Is A Real Possibility, John Maudlin talks about the failure of ‘debt productivity’.

. . . debt is losing its ability to stimulate growth. In 2017, one dollar of non-financial debt generated only 40 cents of GDP in the US. It’s even less elsewhere. This is down from more than four dollars of growth for each dollar of debt 50 years ago.

This has seriously worsened over the last decade. China’s debt productivity dropped 42.9% between 2007 and 2017. That was the worst among major economies, but others lost ground, too. All the developed world is pushing on the same string and hoping for results.

Now, if you are used to using debt to stimulate growth, and debt loses its capacity to do so, what happens next? You guessed it: The brilliant powers-that-be add even more debt. This is classic addiction behavior. You have to keep raising the dose to get the same high.

His conclusion is that there will be what he calls a Great Reset.

. . . we will have to deal, one way or another, with the largest twin bubbles in the history of the world: global debt, especially government debt, and the even larger bubble of government promises. We are talking about debt and unfunded promises to the tune of multiple hundreds of trillions of dollars – vastly larger than global GDP.

Analyses such as these suggest that the savage economic downturn that we are currently enduring did not come out of the blue. In fact, all that the pandemic has done is merely speed up and highlight on-going trends.

Unemployment

The defining economic feature of the current pandemic is the startling and sudden increase in unemployment. The chart shows the data for the United States.  (In fact, due to delay in filing unemployment claims, the actual figures are probably much higher.) This situation is totally without precedent.

Unemployment in U.S.A. following COVID-19 pandemic

The economic impact of such high unemployment rates is to further slow down the economy. The unemployed no longer have a paycheck, so they do not purchase goods and services, so the providers of those goods and services have to cut back, which means that they have to release more of their workers, which means that even less is purchased, and so on and so on. It’s a vicious circle.

Deflation

As I have already stressed, no one knows what the future holds and it is possible that we will bounce back from a short, V-shaped recession. But such a response seems less and less likely as this crisis drags on. Instead we seem to be entering a time of deflation where the driving economic force will be the lack of spending due to lack of wages.  This slowdown leads, in turn, to reduced investment.

Even people who remain employed or who have savings will cut back because they are uncertain about the future, so they save their money for a “rainy day”. Optional purchases are deferred, particularly on large capital expenditures such as automobiles. Moreover, the fact that we are told not to mingle with other people (social distancing) put a further damper on consumer activity.

In a deflationary economy people and businesses become very cautious about taking on new debt, even though interest rates are very low. The reason for this caution is that the payments on the debt will certainly have to be made, but there is much less certainty to do with the income that pays that debt.

Another worrisome feature of a deflationary economy is that commodity prices fall, as we are seeing with the oil industry. If the industry cannot make a profit then it is forced to cut investment, and so even more people are laid off or furloughed. Some businesses will be forced to close their doors permanently.

If deflation continues for long enough the economy moves from recession to depression, the defining feature of which is that there is a surplus of goods and services because people cannot afford to buy them.

Industrial Safety

Those who work in the energy and process industries rightly believe that safety is the top priority — it comes before everything else. We can see this mind set in representative statements such as the following, “Safety is a core value at ExxonMobil”.

Few of us ask why we have adopted this value. It wasn’t always this way. The following picture is taken from A Day in the Life of an Engineer made in the 1950s.

railway workshop 1950s

This fascinating video shows the day in the life of a professional engineer who works in a factory that manufactures railway engines. The engineer is clearly a highly skilled professional, proud of the work that he is doing. Yet what most of us first notice in the picture is the complete absence of safety equipment and Personal Protective Equipment. What changed over the course of the last 50 or 60 years? What took us from that picture to picture below, which is taken from the ExxonMobil page?

PPE offshore worker

Most of us would say that safety is ultimately a moral issue; it is our responsibility as a society to ensure that workers are not killed or injured. And this response is absolutely correct — safety is a moral issue. The ExxonMobil statement just quoted does not need to be backed up by any justification or rationale — safety is a core value and that’s that. If people who work for that company are asked to justify this view they will come up with phrases such as, “It’s right that people should not be injured or killed while at work”. They simply use different words to make the same moral statement.

Yet the principles of morality and ethics have not changed in the last few decades — there seems to be another factor that has led to the increased emphasis on safety programs over the course of the last 50 years. In that time society has become much wealthier, hence we can now afford to implement better safety standards, such as the use of advanced PPE. Therefore, it could be that the reason for the change in safety standards is simply that we can now afford to do the right thing in a way that they could not in the 1950s. We have more money to meet the moral imperative.

Impact on Process Safety

The formal discipline of Process Safety Management (PSM) developed in the late 1980s. Many PSM activities, such as the writing of procedures, the management of change and execution of safety studies had been always been carried out. But about 40 years ago industry started to formalize these activities and to apply them universally, largely through the use of regulations from organizations such as OSHA and the UK HSE. PSM programs have, by and large, a built-in assumption that because something should be done, it can be done. For example, a Process Hazards Analysis team may recommend that a new instrument be installed or that additional training be provided to technicians. The team members have to justify their recommendation and it will have to compete with other project requests, many of which will themselves incorporate a safety ethic. Nevertheless, there is generally an assumption that safety recommendations will be implemented if the justification is strong enough.

If the economy is indeed entering a deflationary phase, possibly a long-term depression, then the energy and process industries will be confronted with reduced output and lower profits. Hence there will be less money to spend on all aspects of their businesses, including safety. There is always tension between safety and operations. We know that, over the long-haul, a safe operation is a profitable operation. But the short term reality is that safety is generally requires investments in items such as more reliable equipment, upgraded instrumentation or more training programs. Obtaining the necessary funding is likely to be a challenge in the coming months and years.

Conclusions

This post is somewhat downbeat, and I hope that my projections for the future of our industry are wrong. It would be great if we can return to the “Old Normal” after a quick V-shaped recession. But I am dubious. Moreover, if we have learned nothing else in the last few weeks, it is to be prepared for the worst (and hope for the best).

In future posts we will consider other aspects of the new economy, how the energy and process industries might be affected and how the PSM community can respond. It’s not all bad news. A time of crisis is also a time when we can adapt and learn.