Consider This... Hayek on Prices Part II

Part II of Consider This... Price Maker Strategy and Hayek 

Industries Current Practice

Analysis of this graph (@soberlook) from the perspective of producer firms suggests that total costs across the major shale basins range from approximately $48 to $54 per barrel of oil produced. Within that total, operating expenses and royalties account for roughly $28 to $37 per barrel, while capital costs are estimated at $18 to $23 per barrel. 

The capital cost component warrants closer examination because it reflects one of the industry’s most significant misconceptions. The figure shown on the graph is not the commercial cost of recovering invested capital within a competitive timeframe. Instead, it is an accounting allocation that distributes total capital investment across every barrel expected to be produced over the property’s entire productive life. In shale developments, that period may extend for decades and, for certain natural gas properties, potentially generations.

People, Ideas & Objects contend that this accounting convention no longer reflects the realities of modern capital markets. Investors do not commit capital with the expectation that it will remain tied to a producing property for several decades before being recovered. Capital carries an opportunity cost. Every dollar committed to one project is unavailable for new drilling opportunities, debt reduction, shareholder distributions, acquisitions, or alternative investments. Conventional oil & gas accounting largely ignores this economic reality.

Within Synallagi, we therefore propose a fundamentally different treatment of capital recovery. Capital invested in a property should be substantially recovered during approximately the first thirty months of production, corresponding to the period in which most shale wells generate the majority of their productive capacity before expensive decline management and re-fracturing programs become necessary. Recovering invested capital within this period allows producers to continually recycle capital into new opportunities, strengthen their balance sheets, reduce debt, reward shareholders, and finance future development without repeated dependence on external financing.

This approach fundamentally changes the criteria governing production decisions. Production should occur only when commodity prices exceed the property’s full economic cost, including operating expenses, royalties, and the competitive recovery of invested capital. Profitability—not merely positive operating cash flow—becomes the governing principle. The distinction is fundamental.

The graph identifies what the industry commonly describes as “break-even” and “shut-in” prices. In practice, these definitions generally assume production should continue whenever commodity prices exceed operating expenses. Any contribution toward capital recovery, however small, is considered sufficient justification for continued production. Production is expected to cease only when prices fail to cover operating costs.

This is not genuine economic break-even. It is merely an operating cash flow threshold.

Under this approach, producers acknowledge that invested capital is not being recovered competitively, yet continue producing because cash continues to enter the business. Positive operating cash flow is mistaken for profitability. It is not.

Failure to recover capital within a commercially competitive period indicates that shareholder wealth is being consumed rather than created. Although production generates immediate cash receipts, it simultaneously exhausts the underlying investment. Ultimately, the reserves are depleted while much of the invested capital remains unrecovered. Under the Synallagi framework, such production is economically unprofitable for the entire reserve base, regardless of whether operating cash flow remains positive.

Synallagi therefore adopts a different production discipline.

Assuming the cost estimates presented in the graph are broadly representative, production should cease once commodity prices fall below the property’s true economic break-even point. Continuing production below that level reduces corporate profitability, delays capital recovery, and accelerates the destruction of shareholder value.

The consequences extend well beyond the individual producer.

Oil & gas commodities are better understood as price-making markets than price-taking markets. Every producer that continues producing below economic break-even contributes additional supply to an already oversupplied market. That incremental production depresses commodity prices, reducing profitability not only for the individual producer but for every producer participating in the market.

When this behavior persists across an industry for decades, the cumulative effect becomes systemic wealth destruction. The collapse of North American natural gas pricing—from the historic energy-equivalent relationship of approximately 6:1 relative to oil to more than 50:1 during 2024—illustrates the long-term consequences of sustained overproduction without adequate production discipline.

The issue is therefore not one of accounting terminology. It is the absence of production discipline founded upon profitability.

Most industries recognize that unprofitable production cannot continue indefinitely. Temporary losses may be accepted during short-term market disruptions, but businesses eventually reduce production or suspend operations before cumulative losses threaten the enterprise itself. North American oil & gas has largely abandoned this discipline.

Instead, conventional accounting methods defer capital recovery over extraordinarily long production lives, substantially understating the property’s true economic cost of production. A property appearing to break even at approximately $50 per barrel under conventional accounting may require commodity prices approaching three times that amount before invested capital is recovered within a commercially competitive period.

The consequence is predictable. Investors are presented with financial statements suggesting properties are profitable when, economically, they continue consuming shareholder capital. This misunderstanding has encouraged chronic overproduction, suppressed commodity prices, weakened returns on investment, and contributed to the destruction of industry value for more than four decades.

Synallagi replaces this framework with one founded on genuine profitability. By measuring both operating costs and the competitive recovery of invested capital, producers gain an objective basis for determining whether production creates shareholder value or merely consumes it. Production discipline is therefore governed by profitability rather than operating cash flow alone.

Conclusion

So concludes what I consider to be the first successful paper in our Consider This… series. Unlike the broader 21st Century Marketplace Vision publications, these papers focus on a single issue related to Synallagi, our user community, and their service provider organizations. Their purpose is not to present the entire architecture, but to examine one idea in sufficient depth that its broader implications become apparent.

This paper compared our price maker strategy with Professor Friedrich Hayek’s September 1945 essay, The Use of Knowledge in Society. What is most striking is not simply the elegance of Hayek’s theory, but how closely the behaviors he described eighty years ago resemble those observed throughout the oil & gas industry today. The central question remains unchanged: can decentralized decision-makers, guided by accurate information communicated through markets, consistently outperform centralized administrative control?

Hayek understood that accepting this proposition required a considerable degree of faith. It demanded confidence that no individual or central authority could ever possess sufficient knowledge to allocate resources more effectively than the collective intelligence expressed through market prices. Throughout his career, that proposition remained controversial. Political and economic thought has repeatedly oscillated between confidence in markets and confidence in centralized planning. President George H. W. Bush’s famous characterization of “voodoo economics” during the 1980 Republican presidential campaign illustrates that skepticism. Yet the remarkable economic performance of decentralized markets over subsequent decades has steadily reinforced Hayek’s central thesis.

Our own price maker strategy has encountered much the same resistance. When first introduced, it was criticized as collusive. Our response has remained unchanged. Independent producers, acting through the Joint Operating Committee and making decisions at the individual property level using objective, factual financial information, are not coordinating with one another. They are responding independently to the same market signals. The market itself becomes the coordinating mechanism. Like Hayek’s original proposition, acceptance ultimately depends upon confidence that prices communicate more information than any centralized management structure ever could.

This observation reaches beyond pricing strategy. It extends directly into the Organizational Constructs that underpin Synallagi. Markets are not simply places where transactions occur; they are an Organizational Construct that coordinates specialized knowledge across an industry. Likewise, the Joint Operating Committee serves as an Organizational Construct for exploration, production, governance, and operational decision-making. These structures are complementary rather than competing. The Joint Operating Committee governs the efficient operation of individual properties, while Markets coordinate information, specialization, innovation, and capital allocation across the broader industry. Together they create an organizational architecture capable of responding continuously to changing conditions.

This perspective also changes how we think about the producer firm itself. The traditional assumption has been that organizations and markets exist in opposition to one another. Increasingly, the literature on organizational economics suggests a different interpretation. Firms, markets, and other institutional arrangements are alternative mechanisms for organizing economic activity. The objective is not to replace organizations with markets, but to determine which organizational structure is best suited to a particular function.

Whether North American oil & gas requires the degree of reconstruction proposed by People, Ideas & Objects is, in many respects, beside the point. If markets represent the superior means of coordinating dispersed knowledge, innovation, specialization, and capital, then every aspect of the industry should seek to employ them wherever they create greater efficiency. Producer firms should concentrate on their distinct competitive advantages: ownership of their land & asset base together with their engineering & geological capacities & capabilities. Functions beyond those advantages should increasingly be obtained through competitive markets and the specialized organizations that serve them.

During preparation of this paper I encountered an interesting statement:

“The opposite of organization is not the market; it is disorganization.”

Although I was unable to verify this as a direct quotation, the underlying idea appears consistently throughout the organizational economics literature. Ronald Coase demonstrated that firms and markets are alternative mechanisms for coordinating economic activity. Oliver Williamson expanded this into competing governance structures. Richard Langlois and Nicolai Foss further developed the concept by emphasizing that firms, markets, and capabilities represent complementary forms of economic organization rather than opposing ones.

That conclusion reinforces one of the central themes of Synallagi. Markets should not be viewed as existing outside organizational theory. They are themselves an Organizational Construct. They coordinate information, encourage specialization, stimulate innovation, and allocate resources across an industry in ways that centralized organizations cannot readily duplicate.

Perhaps that is the most enduring lesson from Hayek’s work. Markets are not merely mechanisms for discovering prices. They are mechanisms for organizing knowledge itself. Eight decades after The Use of Knowledge in Society was published, that insight appears more relevant than ever. Artificial Intelligence, digital marketplaces, and Synallagi eleven Organizational Constructs do not replace Hayek’s vision—they extend it into the twenty-first century.

Consider This... Hayek on Prices Part I

 Introducing our new series of papers entitled "Consider This..."

The intellectual collision between the Keynesian framework and Hayekian thought remains a compelling chapter of the late 20th century. Following 1945, the consensus leaned toward the former, yet Hayek's perspective on spontaneous order eventually found its footing. This resurgence was most visible during the 1980s, when leaders like Ronald Reagan and Margaret Thatcher utilized his principles to achieve noted economic outcomes. Nevertheless, the allure of fiscal expansion often leads modern administrations, such as the one under President Biden, to return to significant budgetary and monetary expansion. Hayek’s receipt of the 1974 Nobel Memorial Prize in Economic Sciences also helped restore his academic profile.

Of note, historical accounts place both economists at Cambridge University throughout the Second World War.

Friedrich Hayek was in Cambridge during the Second World War because the London School of Economics had been evacuated there. During the Blitz, Hayek and John Maynard Keynes reportedly shared fire-watch duty on the rooftops of King’s College, watching for incendiary bombs. This episode is well documented in Hayek biographies and Cambridge histories. 

One nuance is worth emphasizing. It is an oversimplification to say that “Keynes said government was the answer.” Keynes advocated government intervention when aggregate demand was insufficient, but he did not advocate comprehensive state planning of production. Likewise, Hayek did not argue for the absence of government; he accepted important roles for the rule of law, monetary stability, competition policy, and a social safety net. The enduring debate between the two traditions is less about government versus markets than about where each works best and where each reaches its limits.

What Keynes and Hayek advocated for may not have been consistent with what ambitious politicians implemented. We’ve seen a strong move towards the left in the past 50 to 60 years. What Hayek said about the two prominent systems of government was appropriate. “Socialism is simple and seductive, capitalism is complex and subtle.” 

The Price System: Market prices act as an incredibly subtle communication system. Prices signal scarcity or abundance and utility without requiring central coordination. 

Counter-Intuitive Order: It seems absurd to the "naive mind" that decentralization generates better order than a deliberate plan.

Energy producers must now look to the price system as the mechanism for navigating the fundamental transition from scarcity to abundance brought about by shale. People, Ideas & Objects price maker strategy in Synallagi provides the necessary framework for this production discipline. If it’s profitable it produces, providing an application of the most fair, equitable and reasonable production discipline available. 

The purpose of this Consider This… paper is to examine Professor Friedrich Hayek’s seminal September 1945 paper, The Use of Knowledge in Society, through the perspective of People, Ideas & Objects Synallagi price maker strategy. Although written more than eighty years ago, Hayek’s observations remain remarkably relevant to the challenges confronting North American oil & gas in 2026.

Hayek writes:

We must look at the price system as such a mechanism for communicating information if we want to understand its real function—a function which, of course, fulfills less perfectly as prices grow more rigid. (Even when quoted prices have become quite rigid, however, the forces which would operate through changes in price still operate to a considerable extent through changes in the other terms of the contract.) The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on, and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement. pp. 526 - 527.

An obvious question follows from Hayek’s discussion of the price system. What would have happened had North American oil & gas producers adopted our Synallagi price maker strategy over the past several decades?

Surprisingly, the impact on consumers would likely have been relatively modest. The greatest difference would have been experienced by producers, their investors, the service industry, and the broader economy.

People, Ideas & Objects have documented more than $5.0 trillion in lost natural gas revenues during the 21st century. These losses represent value that was never realized by North American producers because commodity prices failed to reflect the full economic value of the resource. This value destruction is measurable and well documented, yet it has produced remarkably little structural change. Rather than addressing the underlying market mechanisms responsible for these losses, the industry has largely continued operating under the same assumptions that created them.

This observation is consistent with Friedrich Hayek’s explanation of the price system. Hayek argued that prices communicate dispersed knowledge throughout an economy. No individual needs to understand every variable affecting supply and demand because the price itself communicates the information necessary for rational decision-making.

The Synallagi price maker strategy extends this principle. A profitable commodity price becomes the signal that communicates everything the producer needs to know. It reflects operating costs, capital recovery, transportation constraints, consumer demand, global supply, infrastructure limitations, investment requirements, and competitive conditions. Rather than attempting to manage each of these variables independently, producers need only respond to the information embodied in a profitable market price.

Profitability therefore becomes the coordinating mechanism that transforms dispersed knowledge into disciplined economic behaviour. This discipline extends beyond the producer.

Oil and gas is a primary industry, but its capabilities depend almost entirely upon its secondary and tertiary industries. Drilling contractors, engineering firms, equipment manufacturers, construction companies, software providers, and countless specialized service organizations collectively provide the industry’s productive capacity. Without this service industry, there would be no practical oil & gas industry.

For more than six decades, however, producers have relied upon what has become known as capital discipline. During periods of depressed commodity prices, capital expenditures are reduced in an effort to preserve corporate cash. While understandable from the perspective of an individual producer, the broader consequences are substantial.

Capital discipline is a blunt instrument. It often requires years before meaningful adjustments occur. More importantly, it systematically reduces the productive capacity and technical capabilities of the industry itself. And the burden of the downturn is transferred directly to the service industry.

When producers cancel capital programs, demand for drilling, completions, engineering, construction, and field services contracts immediately. The service industry experience dramatic declines in revenue, often compounded by demands for significant price concessions in order to retain work. Equipment is retired, experienced personnel leave the industry, innovation slows, and specialized capabilities are lost. The bust portion of the industry’s boom-and-bust cycle is effectively transferred from producers to the service sector.

The documented loss of more than $5.0 trillion in natural gas revenues illustrates an even broader economic principle. Somewhere between the point of production and the final consumer, someone will recognize the full market value of the commodity. Someone will recover the costs, earn a profit, and supply consumers at a price they are willing to pay.

If producers fail to capture that value, others inevitably will.

The value may be realized by downstream processors, exporters, marketers, utilities, industrial consumers, or other participants further along the value chain. Alternatively, consumers themselves may benefit through commodity prices that remain below their long-term economic value. Regardless of who ultimately captures the benefit, the value does not disappear. It simply leaves the upstream producer and the industries that depend upon it to be captured by others.

People, Ideas & Objects attribute much of this value destruction to the industry’s failure to transition from a business model based upon resource scarcity to one capable of managing the abundance created by shale. Abundance requires a fundamentally different production strategy. Rather than maximizing production volumes, producers must maximize the profitable value realized from each unit of production. Synallagi provides the accounting, operational, and marketplace framework necessary to support that transition and long term management.

Had producers consistently accounted for the full economic cost of production and limited production to profitable production, substantially more of this value would have remained within the industry. Investors would have realized stronger returns. The service industry would have maintained their technical capacities and capabilities. Innovation would have been continuously funded. Productive capacity would have been preserved instead of repeatedly dismantled and rebuilt during successive downturns.

The central lesson is straightforward. Commodity prices should communicate profitability, and profitability should govern production. When prices fail to support profitable production, the appropriate response is not to increase production in the hope that markets will eventually rebalance. The appropriate response is to preserve the resource, preserve capital, and produce only when production creates genuine economic value.

Only profitable production should be produced—everywhere and always. Synallagi lists the benefits to a producer firm of our price maker strategy as follows.

■ Maximized Profitability: Producers maximize profits when losses from unprofitable wells or properties no longer dilute the gains from profitable ones. It’s common sense to limit one's losses.

■ Strategic Reserve Management: Holding reserves until they can be produced profitably means avoiding the incremental costs associated with losses from unprofitable production. Reserves are not obligations to produce at any price. They are assets to be managed prudently.

■ Cost Reduction: Keeping oil & gas as reserves reduces production, transportation, processing, storage and administrative costs tied to excess, unprofitable output.

■ Variable Overhead Costs: Overhead costs are fully covered when profitably produced. That cash incurred is therefore returned within 60 days to the producers. Any shut-in production will not incur overhead as all Joint Operating Committee costs are turned variable in Synallagi. 

■ Synnefa.ai Our Cloud Administration & Accounting for Oil & Gas: Shared administrative and accounting infrastructure costs of software and services based on the Cloud distribution model are tangibly lower.

■ Market Stability: Removing unprofitable production allows commodity markets to find the marginal cost, establishing fair prices for all production. Eliminating industries' boom / bust cycle. Markets provide one thing, and only one thing, a price.

■ Reserves Valuations: Market prices accurately reflect the value of producers petroleum reserves. Higher commodity prices expand the volumes of proven recoverable reserves and fulfill officers and directors fiduciary duty to safeguard assets.

■ Innovation Opportunities: While unprofitable properties are shut in, producers can innovatively explore ways to increase production volumes, reduce costs, or expand reserves. To return the well or property to profitable production.

■ Replacement Value: The realized market price of oil & gas must reflect the current market’s costs of exploration and development. That is the cost of a replacement volume of energy produced today. 

■ Production Discipline: Using profitability as the criterion for production decisions is the only fair and reasonable method of instilling production discipline. Producers that continue to produce unprofitably will continue to incur losses and have difficulty competing in North American capital markets.

■ Alleged Capital Discipline: Producers claim by cutting spending on drilling and completions is their method of resolving low prices. Capital discipline is at best a dull, blunt instrument. As we see today, it is the willing destruction of productive capacity. What it also does is shift the bust of the boom / bust cycle to the service industry to suffer exclusively. 

■ Innovation as a Foundation: Higher commodity prices finance greater innovative activity.

■ Effectively Eliminating the Boom / Bust Cycle: Dynamic changes to the producers production profile ensure they remain profitable and are aware when industry overbuilding has begun.

■ Commodity Values Realization: Each barrel of oil equivalent (boe) delivers the equivalent of 10,000 to 25,000 man-hours of labor to the consumer. This represents an irreplaceable value proposition, priced in January 2026 as high as $0.006 per labor hour, yet sourced from a finite supply. It is our responsibility to future generations to ensure this vital resource is not squandered. We must demonstrate that all production was profitable and that we passed on a robust, prosperous, profitable and viable industry to future generations. Price makers only bring on new production when it is profitable. 

■ Consumers will use the Products Price to Make Decisions: Consumer decisions based on profitable prices will stabilize the demand side of the market.

■ Independent Decisions: Our price maker strategy is built on making independent business decisions, using actual, factual financial information at the property level. This is sound business practice, not collusion, which renders any such allegations moot.

■ Profitable Operations: Conceptually, profitable operations would provide a producer with all the financial resources they need to conduct their business. Providing leadership with the independence to set their own direction. End the systemic dilution of their shareholders interests to fund capital expenditures and build value.

■ Achieves North American Swing Producer Status: Oil & gas are now both global commodities subject to the supply / demand dynamics of these markets. Shale and heavy oil are unquestionably the most costly produced anywhere in the world. The role of swing producer is to add or remove production as required to stabilize prices adequate for its markets to provide for profitable operations.

Artificial Intelligence creates an opportunity to rethink long-held assumptions about how industries organize, compete, and innovate. It encourages us to move beyond established patterns of thinking and to reconsider whether existing organizational structures continue to serve their intended purpose.

North American oil & gas has long embraced a collegial culture. Cooperation, consensus, and professional relationships are viewed as virtues, reflecting an industry that seeks to distinguish itself from the crude notion of individuals competing over scarce resources. This philosophy has shaped not only oil & gas but many North American institutions.

The question, however, is whether this collegiality has gradually evolved into something less constructive. Has it become a closed culture in which opportunities are implicitly reserved for a select few? Has competition itself become viewed with suspicion? More importantly, has the pursuit of competitive advantage through superior knowledge become socially discouraged rather than celebrated?

Friedrich Hayek raised precisely this concern in The Use of Knowledge in Society (1945):

It is a curious fact that this sort of knowledge should today be generally regarded with a kind of contempt, and that anyone who by such knowledge gains an advantage over somebody better equipped with theoretical or technical knowledge is thought to have acted almost disreputably. To gain an advantage from better knowledge of facilities of communication or transport is sometimes regarded as almost dishonest, although it is quite as important that society make use of the best opportunities in this respect as in using the latest scientific discoveries. This prejudice has in a considerable measure affected the attitude toward commerce in general compared with that toward production. Even economists who regard themselves as definitely above the crude materialist fallacies of the past constantly commit the same mistake where activities directed toward the acquisition of such practical knowledge are concerned—apparently because in their scheme of things all such knowledge is supposed to be ‘given.’ The common idea now seems to be that all such knowledge should as a matter of course be readily at the command of everybody, and the reproach of irrationality leveled against the existing economic order is frequently based on the fact that it is not so available. This view disregards the fact that the method by which such knowledge can be made as widely available as possible is precisely the problem to which we have to find an answer. (p. 522)

Hayek’s observation remains remarkably relevant. The competitive advantage of an organization is rarely determined solely by superior scientific or technical knowledge. More often, it arises from possessing better operational, commercial, organizational, and financial knowledge—and, more importantly, from organizing that knowledge so it can be acted upon quickly and effectively.

Artificial Intelligence substantially expands that opportunity. Rather than replacing human expertise, it enables organizations to discover relationships, identify opportunities, and coordinate information at a scale previously unattainable. The challenge is no longer acquiring knowledge alone. The challenge is constructing organizations capable of making that knowledge available to the people responsible for making decisions.

That challenge in terms of delivery of the financial knowledge lies at the heart of Synallagi. And knowledge is provided through the price system. 

Vision without action is merely a dream. Action without vision just passes the time. Vision with action can change the world.

Joel A. Barker

From Friedrich Hayek’s The Use of Knowledge in Society (1945): 

It is, perhaps, worth stressing that economic problems arise always and only as a consequence of change. So long as things continue as before, or at least as they were expected to, there arise no new problems requiring a decision, no need to form a new plan. The belief that changes, or at least day-to-day adjustments, have become less important in modern times implies the contention that economic problems also have become less important. This belief in the decreasing importance of change is, for that reason, usually held by the same people who argue that the importance of economic considerations has been driven into the background by the growing importance of technological knowledge.

Is it true that, with the elaborate apparatus of modern production, economic decisions are required only at long intervals, as when a new factory is to be erected or a new process to be introduced? Is it true that, once a plant has been built, the rest is all more or less mechanical, determined by the character of the plant, and leaving little to be changed in adapting to the ever-changing circumstances of the moment? 

Hayek’s central concern was not simply the existence of knowledge, but how dispersed, practical knowledge could be organized, communicated, and made useful for economic decision-making. That challenge remains largely unresolved within North American oil & gas. Engineers and geologists possess extraordinary scientific and technical expertise, yet they are rarely supported by actual, factual, standardized, and objective accounting information that enables them to evaluate the financial consequences of their operational decisions.

Synallagi addresses this deficiency by integrating standardized financial information directly into operational decision-making. Engineers and geologists would have immediate access to consistent financial statements prepared according to industry-wide standards, enabling them to analyze the economic performance of their properties from both scientific and business perspectives. Rather than relying upon fragmented information distributed across multiple organizational silos, they would possess a unified operational and financial view of every property under their responsibility.

Supported by our user community and their service provider organizations, they would be able to investigate cost structures, evaluate alternatives, optimize operational performance, and continually improve resource preservation, performance, and profitability. Synallagi Business Operations Management module provides the operational framework for these decisions, while the Marketplace Interface enables participants to engage the broader marketplace, deploying both organizational and market capabilities to achieve profitable outcomes.

Viewed from this perspective, Synallagi is not merely an Enterprise Resource Planning system. It is an organizational architecture for making Hayek’s dispersed knowledge actionable. It transforms information into coordinated decision-making by placing objective accounting information alongside engineering and geological expertise, thereby allowing both forms of knowledge to contribute simultaneously to operational success. Organizational knowledge and speed will be two of the primary elements of an oil & gas investments success. 

A Debate # 39 - Consider This... Hayek and Synallagi Price Maker Strategy

 Today's podcast introduces a different format from our previous Synallagi discussions. It reflects the launch of our new Consider This... series, a collection of concise, focused papers intended to engage more directly with our user community and the broader North American oil & gas industry.

Our objective is straightforward. Each paper examines a single topic central to Synallagi, our user community, or their service provider organizations, and compares that perspective with established thinking. By grounding these discussions in both academic research and practical industry experience, we hope to stimulate constructive debate rather than simply present conclusions. More importantly, these papers are intended to contribute to what we describe as Synallagi — A New Discipline. They are not merely discussions about software; they are discussions about how North American oil & gas should be organized, governed, and managed throughout the remainder of the twenty-first century.

The accompanying podcast serves that purpose well. It presents the competing viewpoints fairly, allowing listeners to evaluate both the strengths and weaknesses of each position. In my opinion, the discussion effectively illustrates that meaningful progress begins by questioning assumptions that have remained largely unchallenged for decades.

The Consider This... series will therefore continue as a permanent part of our publications. We believe it provides an effective forum for exploring individual ideas without the complexity of our broader 21st Century Marketplace Vision papers. It also allows us to focus attention on one of the industry's greatest obstacles: organizational latency. North American oil & gas possesses extraordinary technical knowledge and expertise, yet repeatedly struggles to translate that knowledge into timely business decisions. Reducing organizational latency—shortening the time between recognizing an opportunity and acting upon it—is becoming one of the defining competitive advantages of the twenty-first century. That challenge extends well beyond technology. It is fundamentally an organizational issue.

One unexpected challenge with producing these podcasts has been pronunciation. Our two product names, Synallagi and Synnefa, continue to present difficulties for automated narration systems. Several excellent podcast segments ultimately had to be discarded because repeated mispronunciations distracted from the discussion itself. Interestingly, however, I discovered that Synallagi naturally follows the same pronunciation pattern as the words philosophy and technology, which may help listeners become more comfortable with the name over time.

If I had participated directly in this debate, there are several additional observations I would have raised.

First, consumers may not ultimately experience any increase in the cost of energy. It is entirely possible that today's retail prices already contain sufficient economic value. The issue is not necessarily what consumers pay; it is how that value is distributed throughout the industry. Producers have largely concentrated on ensuring their own financial well-being while the secondary and tertiary industries upon which they depend have operated for decades without the financial resources necessary to sustain their capabilities and capacities. This has become a culturally accepted pattern within North American oil & gas. Meanwhile, organizations outside the industry that better understand markets have increasingly captured economic value that could and should have strengthened the service industry supporting producers.

To illustrate, assume oil sells for $80 per barrel and includes approximately $10 of producer profit. The important question is not simply who receives that profit, but who actually created it. Producers certainly contribute, but so do engineers, geologists, drilling contractors, service companies, technology providers, and many others. The consumer may ultimately pay the equivalent of $120 per barrel after downstream processing and distribution, yet that additional value demonstrates that economic opportunities existed throughout the value chain that producers failed to recognize. Under Synallagi, a greater proportion of that value would remain within upstream oil & gas, strengthening both producers and the service organizations essential to their long-term competitiveness.

Second, our proposal to recover capital investment over approximately thirty months is driven by the expectations of North American capital markets rather than by accounting convention. Producers compete with companies such as Apple, NVIDIA, Tesla, and many others for investment capital. They cannot expect investors to finance decades-long capital recovery while accepting a culture of "muddling through." The thirty-month period therefore represents a pricing and investment discipline rather than a regulatory requirement. Securities and Exchange Commission reporting establishes the maximum period over which property, plant, and equipment may be depreciated; it does not require producers to maximize that period. A highly profitable producer could legitimately report substantially lower property, plant, and equipment balances if its performance justified doing so.

Third, arguments suggesting that shutting in production damages oil and gas reservoirs no longer withstand scrutiny. Prior to 2020 this concern was frequently cited as justification for continuous production regardless of market conditions. The global response to the COVID-19 pandemic provided an unprecedented real-world experiment when approximately one-quarter of worldwide oil production was temporarily shut in. Production subsequently resumed without widespread evidence of permanent formation damage. The argument therefore no longer provides a compelling reason to continue producing unprofitable volumes.

Finally, I have enabled comments on this blog for readers wishing to continue the discussion. That is, after all, the purpose of the Consider This... series. Progress begins with thoughtful discussion, constructive disagreement, and the willingness to challenge assumptions that have become accepted simply because they have existed for a long time.

Please note that all comments should be submitted with the understanding that they constitute derivative works of Synallagi's Intellectual Property and are licensed solely for participation in this discussion. Where comments materially extend or enhance these concepts, they will be considered Intellectual Property of People, Ideas & Objects.

Consider This...

People, Ideas & Objects are pleased to announce a new series of publications entitled "Consider This..."

These papers complement our "21st Century Marketplace Vision" series by taking a different approach. Rather than presenting broad architectural concepts, each "Consider This..." paper examines a single topic in detail. Their purpose is to encourage discussion, challenge long-held assumptions, and explore the principles that underpin Synallagi, our user community, and their service provider organizations.

The series asks straightforward but fundamental questions. For example, how can the critical financial information describing a property's performance be delivered to the engineers, geologists, and others responsible for making operational decisions? How should Markets function within the organizational architecture of North American oil & gas? Which long-standing assumptions deserve to be reconsidered?

Our first publication in the series is:

"Consider This...
Markets as an Organizational Construct
Hayek's "The Use of Knowledge in Society"
and the Synallagi Price Maker Strategy"

In this paper, we revisit Professor Friedrich Hayek's landmark 1945 essay, "The Use of Knowledge in Society," and examine its relevance to the challenges facing North American oil & gas today. We explore how decentralized decision-making, informed by objective financial information and coordinated through Markets, can reshape operational performance and profitability.

We hope this new series stimulates thoughtful discussion and contributes to the development of "Synallagi — A New Discipline."