Losses are Completely Unncessary

Those unnecessary losses of course being those that have been incurred in the past five years in the natural gas side of the business. And the losses that we anticipate will be incurred on a go forward basis on both the oil and gas sides of the business. What everyone knows inherently about the oil and gas business is that the commodities are highly inelastic in terms of the supply and demand curve. I know we all learned this economic principle in university so I won't go into too much detail. But the long and short of it is. Removing a small portion of the current oil or gas production from the marketplace, in an inelastic supply and demand situation, leads to large impacts in the prices of oil and gas. The reverse, or what we are experiencing today, where a small volume of excess production hits the market has significant downward pressure on the prices. Its good to see we all agree on these fundamental economic principles. Excuse my condescending tone, however there is a purpose.

As we indicated the other day, the bureaucrats who have been educated in the economic principles of specialization and the division of labor, have refused to deal with the issues of low natural gas prices for the past five years. This is with knowledge of the Preliminary Specification and decentralized production models availability in the marketplace. We know they know about our product because of their antics regarding our Intellectual Property. We also know that they know the principles of inelasticity. So why has nothing been done? I'm at a loss to understand how the custodians of an industry could have brought it to the brink of total destruction knowing what we know they knew.

What is currently being discussed in the industry regarding low oil and gas prices? I don't hear anything. Why is that? The bureaucrats have nothing to lose therefore what is there specifically to discuss? If everything fell apart tomorrow they would be faced with the fact that the cottages gardening could be expanded substantially to take up most of their time and energy. What exactly is the issue? Certainly there will be difficulty keeping occupied in the winter but that is why they moved the cottage to Costa Rica! If there is a need to keep working there are other industries outside of oil and gas. Clearly the perception of an issue being at hand is that which is held by a small group of concerned, self interested loonies.

And I have been called worse by our friends the bureaucrats for many years. There strategy of waiting this out and having the oil and gas prices eventually recover is valid. The trouble is that with natural gas reserves being as they are today, they will never recover without the ability to implement some form of production discipline in the marketplace. This is because of the new element of shale reserves in the marketplace. Show me a producer who doesn't have a trillion cubic feet of gas and I'll show you a start up. And as obvious as that is on the natural gas side of the business, it is the complete opposite on the oil side. Natural gas reserves from shale could last 50 to 60 years. On oil they may last 10 at current production volumes. And at the rate they are developing them they could have them exhausted far earlier. Under either scenario, its the prolific nature of the flush production that dictates the price destroying characteristics in the marketplace. Its not that these producers are playing with matches, they’re playing with dynamite. And they need a method of production discipline to ensure that they don't destroy the marketplace every time they drill a well. The decentralized production model provides production discipline and the “price maker” strategy in the Preliminary Specification but that requires the bureaucrats will need to first work to build the software and then be forced into retirement by the software’s existence.

I’d rather be a loon than someone who consistently detonates their business interests. And so unnecessarily. I’d like to think there is some intelligence in the oil and gas business. An expectation that provides proof once again that I am a loonie.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative and profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

General Comment on the "Shaky" Economy

From time to time I have made my views known on the state of the general economy. This is an important issue to People, Ideas & Objects, the user community and the service providers as the economic trend that began in 2008 works its way through the economy. I recently posted that I saw things beginning to look a bit “shaky” again. I think we can now put some definite facts on that “shaky” hypothesis. If you select the Perez label from this blog you will find the posts that discuss Professor Carlota Perez’ theories on Information Technology based change. She has been one of the leading researchers in the area of economic change as a result of innovations. Her analysis shows the phases that economies progress through in order to implement the type of changes necessary to accept a new technology. For the oil and gas industry to accept People, Ideas & Objects, the user community and the service providers a higher level of general economic pain would be necessary in her model. Once this occurs we can reach the highly productive, highly rewarding new economy that awaits us. Much like the industrial revolution which her theories are based upon.

In my last post regarding the general economy I suggested that the best description that I have heard about why the great depression occurred was that it was the failure of governments. Since 2008 we have seen the heightened role of governments in the general economy of all countries. Possibly Japan is the best example of this as they have been in a poor economic situation since 1992. And it was in 1992 that they had a remarkably high level of government involvement of 30% of GDP in their economy. And today that is at an unbelievably high level of 40%. Whether its Japan, Europe, the U.S., or China it seems that the news regarding the economy is usually directed by the government. The reliance on markets is something that got us into the difficulties of 2008, is the thinking. And markets is what needs to be regulated out of the system. We are so far from being a capitalist or free system that it is frightening to think how far we have come. Canada should be held out as the last good hope.

Of course the ability to deal with the problem is not being addressed by these governments. Addressing the debt of these countries is the issue. In a zero interest rate environment no one has reduced their debt or balanced their budget. Each country continues on in an unsustainable manner borrowing, or now printing, their way out of the difficulties they face. European debt commands less of a discount rate than the U.S. This is only evidence that its a confidence game. Are you really going to buy that European paper? Japan has now fallen into a recession. The U.S. dollar is surging as there is probably an ongoing flight to quality.

However, one of the most effective economic indexes in these trying times has become the Baltic Dry Index. The cost to move freight collapsed in 2008 as there became an overcapacity of container ships. You can’t idle containerships. Their hull’s will become infested with mussels and can become unusable due to the high fuel costs needed to propel them. Therefore they are deployed for just the fuel costs. Hence the Baltic Dry Index will drop in times of low economic activity. The Baltic Dry Index collapsed in 2008 and hasn't really recovered. It is once again under stress. Governments can’t control the microeconomic levels of supply and demand of individuals and businesses. And therefore we could be heading into another downturn.

What tools are at the government's disposal to fight another downturn? In a word, nothing. All the bullets have been fired that can be. At some point the market will do what it thinks is in its best interests. If that involves an individual cashing in that bond then that is what it will do and the government, if it still exists, will pay the owner what its worth, or what it can.

This will go down as the next big example of the failure of centralization. The movement to markets will be the solution and decentralized decision making within those markets the answer. Centralization and bureaucracies are both failures. Why we have to turn to them is something that we just seem to do. Once they fail however we seem to make the right choice and turn to the marketplace as the solution. The Preliminary Specification has three marketplaces, the decentralized production model, and provides the oil and gas producer with the most dynamic, innovative and profitable means of oil and gas operations.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative and profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

A Comment on the Economy

It seems every year around this time I feel compelled to discuss the general economy. Last year it seemed to be looking fairly promising with the ability to crawl out of this malaise being a distinct possibility. A malaise that we have found ourselves in since 2008  We've had a good year, but that possibility of breaking out of the doldrums seems like we'll have to wait a while longer. I don’t know about you but I've turned pessimistic about the general economy over the past couple of months. I’ve lost that optimism that we were moving upward and onward. I’m feeling more like its pre 2008 and everyone is partying, thinking it will never end. There are a few that are saying that we should be careful this time and are preparing for some rough times. But I'm thinking of some real rough times. The central banks are out of bullets. And as much analysis and rewriting of history that has gone lately about the great depression. The best description that I can find of what did happen is that it was caused by a failure of governments. If the central banks have fired their ammo, and we head into some difficulty, then the failure of government could be upon us once again.

Turning to brighter news. The bureaucracy have sought and found all the cover that they could have ever wanted in the past decade in corporate America. Don't rock the boat, steady the ship and live to fight another day have been good strategies to make it through these years. And look at the performance of our organizations in general. Never in the history of corporate America has the economy performed consistently so poorly. With interest rates being at zero for so many years investment decisions have been lacking the appropriate discipline in the corporate world. If you make a mistake no one will notice as the consequences are not realized when there is no competition for the investment dollar. Therefore the bureaucrats have become more obese and even lazier than before. Leading to the poor performance in the economy.

At the same time the Information Technologies have matured to the level where it is possible for anyone to do anything with them. The limits of ones imagination are the constraints that we are now living with. And at the same time we are provided with FaceBook and Instagram, Pinterest and Snapchat. I guess these types of experiments are useful in ways but as businesses with large valuations I thought we dispatched these useless experiments in the late 1990’s. We are however beginning to see the revolutionary business model driven technology companies begin. Companies like AirBnB, Uber and Lyft are revolutionary. They are changing the accomodation and car ownership models. Other applications of this mature Information Technology are just around the corner.

It is these types of technologies that eliminate the bureaucracies and the power of the Taxi commissions across the globe. Applications that are developing today. These are where the economy needs to move too as soon as possible. The ability and capabilities of these technologies are dependent on societies capacity to change. Currently we are still hunkering down in our jobs, clinging to that paycheck that sustains us and constrains us. I think that, in a very short time, people will begin to see others embracing the technologies and moving to the new environments. Environments like People, Ideas & Objects where the individual matters more in the outcome of the oil and gas industries performance.

It is this transition to the mature Information Technologies that have been temporarily disrupted by the entrenched bureaucracies. In all industries in North America not just oil and gas. The sooner we take the opportunities to remove them from the scene the better off the economy will be and we can resume the normal course of economic development that we had once become accustomed to.

The Preliminary Specification and user community provides the oil and gas producer with the most dynamic, innovative and profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy. And don't forget to join our network on Twitter @piobiz anyone can contact me at 403-200-2302 or email here. 

A New Hypothesis

Throughout our writings and particularly in the Preliminary Specification there is the understanding that organizational change will only occur after the software has enabled the changes first. That we are dependent on software in our organizations and as defined in Professor Anthony Giddens Structuration theory, we are enabled and constrained by these structures. Our hypothesis takes this understanding and extends it across the economic horizon. And concludes that as a result of the inability, or lack of capability, to amend the ERP software in organizations today, economic growth has stalled. We are, or should be, wholly dependent on a deliberate and purposeful pursuit of specialization and the division of labor. That the concept of spontaneous order, which is necessary for specialization and the division of labor, is eliminated through the use ERP software systems.

It was in the Preliminary Research Report that we first discovered Professor Anthony Giddens Structuration theory and Professor Wanda Orlikowski model of Structuration. In terms of its definition we have this quote from Olga Volkoff

From the perspective of structuration theory, adaptation is the joint effect of the actions of individuals and the institutional structures which those actions take place. Structures such as business strategies, organizational culture, reward and control systems, patterns of communication, and professional norms both enable and constrain the daily activities of people, but do not wholly determine them. 

ERP systems, particularly those installed in the larger organizations, are the modern equivalent of pouring concrete into your organization. The ability to make even a small change in a process requires the dedication and sacrifice of several peoples careers. The importance of this is possibly lost on the following two quotations. First is Fredrich Hayek on spontaneous order.

It is the other way round: man has been able to develop that division of labor on which our civilization is based because he happened to stumble upon a method which made it possible. Had he not done so, he might still have developed some other, altogether different, type of civilization, something like the "state" of the termite ants, or some other altogether unimaginable type.

And this next quotation is from Professor Richard Langlois. It describes how specialization and the division of labor are expanded.

Let’s take a closer look at the nature of the “gaps” involved. Adam Smith tells us in the first sentence of The Wealth of Nations that what accounts for “the greatest improvement in the productive power of labour” is the continual subdivision of that labor (Smith 1976, I.i.1). Growth in the extent of the market makes it economical to specialize labor to tasks and tools, which increases productivity – and productivity is the real wealth of nations. As the benefits of the resulting increases in per capita output find their way into the pockets of consumers, the extent of the market expands further, leading to additional division of labor – and so on in a self-reinforcing process of organizational change and learning (Richardson 1975; Young 1928). p. 7

People, Ideas & Objects provide a software development capability to the innovative and profitable oil and gas producer. Our revenue model is structured to support change. To avoid the difficulties that are evident in the economy today. To provide solutions to the issues that occur in the oil and gas industry. Solutions in both the administrative and in the operational domain. Operational issues such as our decentralized production model which provides the oil and gas producer with 2012 opportunity costs in the area of $94 billion. The decentralized production model can not be achieved in any manner other than by programming the industry through software. It is that simple, and that matter of fact, that we rely to this extent on software today. It is the same situation in other industries.

Within several modules of the Preliminary Specification there is the “Gap Filling Interface.” It enables users of the software, from the service and oil & gas industries, to publish areas where they sees gaps in the offerings being provided. This will open up communication and collaboration on the types of services and products that can be developed that are needed to fulfill those gaps. In addition with the software development capabilities of People, Ideas & Objects the software can be amended to deal with any change in the process to accommodate the gap filling process.

Spontaneous order brought us to this point. Unfortunately software systems have put a roadblock in its way. We now have to consciously workaround this roadblock and work to expand our economies deliberately and purposely. Our hypothesis suggests that today’s slow growth economy is severely constrained by the software and systems that are in use today. We need to fight to overcome these constraints. We also need to fight the bureaucracies who find comfort that their franchise is unchallenged by simply keeping the software intact.

The Preliminary Specification provides the oil and gas producer with the most profitable means of oil and gas operations. People, Ideas & Objects Revenue Model specifies the means in which investors can participate in these user defined software developments. Users are welcome to join me here. Together we can begin to meet the future demands for energy.

The Preliminary Specification Part VII (PLM Part II)

Yesterday we discussed the Petroleum Lease Marketplaces virtual representation of the physical oil and gas marketplace. And the “User Vision”, or graphical user interface that could be used in the Preliminary Specification. In today’s post I want to discuss the general classifications of the people that will work in the Petroleum Lease Marketplace (PLM) and some of the activities they’ll be involved in.

When we look at the types of work that is carried out in the PLM we see a large group of administrators working within different areas within a producer firm. Whether it be the Land or Legal department, Production or Exploration Operations staff or Accounting people; all of these groups have an interest in the information, people, assets, documents, processes and functionality contained within the PLM.

The primary concern of the people in these groups is the information and data contained within the module. It’s accuracy, access, and use by those within their firm, but also within the Joint Operating Committee’s that their firm has an interest in. Some of this data will be similar to the data that is held by their firms partners, and much of the data has been generated in a cooperative and collaborative manner by those partnerships.

For example AFE’s, Mail Ballots, agreements, are generated through interactions by each of the participants in the Joint Operating Committee. How much of this data and information could therefore be held by the Joint Operating Committee with an interface to the firm, is a question that should be answered with significant research during the Preliminary Specification. To answer that question would also answer; for whom do those people we mentioned, work for. The implications would be significant.

One of the greatest opportunities that we have in developing this system is to address the division of labor and specialization. To take these people’s work and to reorganize it across the industry, so that it was focused on the Joint Operating Committee but very specialized in terms of the tasks that they conduct. And apply those skills across the entire industry, or a geographical region, or some other classification. Is something that could provide significant increases in oil and gas industry productivity and overall cost savings. That is to say that an individual would work for a process that is billed to 1,000 Joint Operating Committees that might represent 200 Companies.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification. Email me here if you need an invite.

McKinsey, Measuring the Nets Growth Dividend

It’s the weekend which means its time to review some of our McKinsey backlog. Today we have the executive summary of “Internet Matters: The Net’s Sweeping Impact On Growth, Jobs and Prosperity” from the McKinsey Global Institute.

I want to highlight three quotes from the executive summary as they pertain specifically to the work that we are doing here at People, Ideas & Objects. The first quote states what should be obvious to most people by now;

Our research shows that more than 75% of the value added created by the Internet is in traditional industries. The businesses that have seen the greatest value creation have benefits from innovation leading to higher productivity triggered by the Internet. 

Applying technology to the oil and gas industry is to benefit those that work within the industry and the industry itself. To a large extent, what the Draft Specification provides is necessary functionality and process management for the industry to innovate and meet the markets demands for energy. Its not a nice to have but a necessity.

A few days ago we discussed Professor Paul Romer’s New Growth Theory and the three themes of People, Ideas & Things. In this next quotation McKinsey Global Institute discusses endogenous economic growth’s impact on per capita GDP.

The maturity of the Internet correlates with rising living standards.

Leveraging endogenous economic growth theory, we have been able to show that Internet maturity correlates with growth in per capita GDP. Using the results of the correlation, a simulation shows that an increase in Internet maturity similar to the one experienced in mature  countries over the past 15 years creates an increase in real GDP per capita of $500 on average during this period. It took the Industrial Revolution of the 19th century 50 years to achieve the same results. This shows both the magnitude of the positive impact of the Web at all levels of society and the speed at which it delivers benefits.  

If we are currently seeing these dramatic effects on per capita GDP, then the Information Revolution is well entrenched and the benefits to society are beginning to develop. As time passes these benefits will multiply and the values realized will grow. Now is the time to become active in these areas and start at what can only be described as the beginning of the commercialization of the Information Revolution.

This last quotation from McKinsey’s report advises where business leaders should put the Internet in terms of their strategic agenda. The Information and Communication Technologies are too powerful to leave outside of the tool kit of any CEO or business leader. Not only are they are powerful ways in which to lever competitive advantages, they leave areas of weakness exposed to competitors who exploit these technologies.

All business leaders, not just e-CEO’s, should put the Internet at the top of their strategic agenda.

Business leaders must optimize the benefits gleaned from the Internet through innovation and change. It is no longer a choice, given that many businesses face competitors who capitalize on the power of the Internet to Innovate business models. Business leaders should play a significant role in the spread of the Internet and systemically review how the Internet allows them to innovate more aggressively and even reinvent their business models to boost growth, performance, and productivity. 

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification. Email me here if you need an invite.

What's In a Name...

One of the fundamental underlying beliefs of People, Ideas & Objects is that for the oil and gas industry to increase its output requires that we re-organize. Adam Smith wrote in his book, The Wealth of Nations, that all economic growth was a result of the division of labor and specialization. Applying these principles have been the primary means for all economic growth since Smith wrote his book in 1776. That is to say that all economic growth has been the result of the reorganization of labor around enhanced divisions of labor and further specialization.

Professor Paul Romer of Stanford University and New York University is a proponent of what has come to be known as New Growth Theory. We have written about Romer on this blog many times before. In this Reason Magazine interview Romer talks about his People, Ideas and Things as the three underlying themes of new growth theory. I have taken these themes as the basis of our name People, Ideas & Objects and only transferred Objects for Things as we are Object based software developers.

(From Reason)

As one of the chief architects of "New Growth Theory," Paul Romer has had a massive and profound impact on modern economic thinking and policymaking. New Growth Theory shows that economic growth doesn't arise just from adding more labor to more capital, but from new and better ideas expressed as technological progress. Along the way, it transforms economics from a "dismal science" that describes a world of scarcity and diminishing returns into a discipline that reveals a path toward constant improvement and unlimited potential. Ideas, in Romer's formulation, really do have consequences. Big ones.

So what does all this mean. Simply new growth theory, and the reason it resonates here at People, Ideas & Objects is that these underlying concepts can multiply the output of industries.

(From Romer’s Paper Economic Growth)

Every generation has perceived the limits to growth that finite resources and undesirable side effects would pose if no new recipes or ideas were discovered. And every generation has underestimated the potential for finding new recipes and ideas. We consistently fail to grasp how many ideas remain to be discovered. The difficulty is the same one we have with compounding: possibilities do not merely add up; they multiply.

People, Ideas & Objects provides the oil and gas industry with a means to have people, their ideas and things to be used in new and innovative ways. By having the software, and most importantly a software development capability available to accommodate the changes made from any new ideas, the industry can realize its full potential. This is what Professor Romer is talking about in New Growth Theory and what is enabled here by the software and particularly the software development capability proposed by People, Ideas & Objects.

For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

Please note what Google+ provides us is the opportunity to prove that People, Ideas & Objects are committed to developing this community. That this is user developed software, not change that is driven from the top down. Join me on the People, Ideas & Objects Google+ Circle and begin building the community for the development of the Preliminary Specification. Email me here if you need an invite.

Free Riders and the Participation Bonus.

Free riders have been defined in wikipedia as

In economics, collective bargaining, psychology, and political science, "free riders" are those who consume more than their fair share of a public resource, or shoulder less than a fair share of the costs of its production. Free riding is usually considered to be an economic "problem" only when it leads to the non-production or under-production of a public good (and thus to Pareto inefficiency), or when it leads to the excessive use of a common property resource. The free rider problem is the question of how to limit free riding (or its negative effects) in these situations.

For the purpose of People, Ideas & Objects “free riders” is a serious problem that we have chosen to deal with in our Revenue Model. Simply our free rider problem is that many producer firms would feel their best approach to supporting People, Ideas & Objects would be to abstain from actively participating, particularly financially, and leave the burden to other producers to carry the weight of building the application without their direct participation. Applications such as People, Ideas & Objects can not be built with that method of participation.

The manner in which we solve this free rider problem is by assessing a late fee of 300% on top of our annual subscription fee. The annual subscription fees are due and payable on January 1 of the current year and need to be paid in full prior to the participation in the communities or prospective use of any software. Late fees are assessed on any outstanding annual subscription fees as of March 31, of the calendar year in which the fees were assessed. 2010 subscription fees were assessed at $1.00. 2011 subscription fees will also be assessed at $1.00. All fees, subscription and late, for all years, 2010 forward are to be paid before participation in communities can commence or prospectively use any software. Fees are assessed on the producers annual barrel of oil per equivalent production. (Eg. a producer currently producing 1 million boe / day would owe $1 million 2010 subscription fees and $3 million late fees, and $1 million 2011 subscription fees.)

The participation bonus is related to the late fee in that as firms that may have chosen to wait or hold back their participation in developing People, Ideas & Objects applications. That may have subsequently decide to join the development or begin using the application. Are then required to pay the subscription and late fees back to 2010 to the current date. As these lump sum payments are received by People, Ideas & Objects they offset the current years budgetary revenue requirements of the firm, therefore reducing the current years budget subscription fee value and therefore reducing those subscribing producers annual subscription fees for the subsequent subscription year. That’s the participation bonus.

It’s necessary that a project such as this deals with the free rider problem and at the same time reward those producers that participate early. For the industry to successfully provide for the consumers energy demands, it’s necessary to build the systems that identify and support the Joint Operating Committee. Building the Preliminary Specification is the focus of People, Ideas & Objects. Producers are encouraged to contact me in order to support our Revenue Model and begin their participation in these communities. Those individuals that are interested in joining People, Ideas & Objects can join me here and begin building the software necessary for the successful and innovative oil and gas industry.

McKinsey, Global Forces Shaping Business and Society

Once again McKinsey have impressed with a thorough summary of the situation in the global economy. This video presentation is very high level and only touches on individual points. However provides an overall summary and captures a spirit of the global economy and its future direction. To me these McKinsey partners are discussing the future economy and the ways and means of how and what of how people will earn there way in the world.

A fascinating and well presented discussion I highly recommend bookmarking the video.

The China Syndrome

In a recent post we highlighted the EIA’s revised energy supply forecast. The chart from that post shows a 1 million barrel per day reduction in current production volumes. Econbrowser is now publishing anlysis of the EIA’s energy demand forecast, focusing on the impact that China will have in the marketplace. 

Providing the market with adequate energy supplies would be a difficult issue on its own. Adding the unprecedented demand expected from China, provides a real opportunity for the innovative oil and gas producer. The author of the econbrowser article, Stephen Kopits notes an interesting characteristic of energy demand.

Oil demand does not grow linearly with GDP. Rather, the bulk of oil demand growth occurs in the two decades during which societies typically acquire motor vehicles, after which per capita oil demand flattens. For example, per capita oil consumption in the United States is today lower than it was in 1979, even though per capita income has increased substantially since.

That is not to say that the U.S. demand for energy has dropped. The focus on motor vehicles alone, which is what Kopits reviews, would therefore limit the potential demand from China to just that form of consumption. If we are to gain an understanding of the volume of potential demand from China, motor vehicles will be a portion of that demand, but not the sole source of the demand increase. Now the scary part of the analysis. Comparing the per capita increases in energy use of Japan (1960 - 1973) and Korea (1976 - 1996) and using either of those trajectories in China’s situation shows...

In any event, without delving deeper, we might expect China's steady state demand for oil could prove not less than that of more advanced Asian nations. Based on the experience of Korea and Japan, China's current population would be expected to consume approximately 55 mbpd at steady state (when per capita consumption plateaus), or nearly 2/3 of current global oil production, were the supply available.

One might argue that this is an unreasonable amount of energy consumption. It imputes systemic gridlock throughout China, and therefore would define the upper limit of what is possible. Nonetheless the volume of energy demand will be substantial. In this next quotation Kopits argues that the EIA’s forecast demand is similarly too low.

By contrast, the EIA sees China's oil consumption at only 10 mbpd for 2015, a growth rate of approximately 2.7% from current levels, and at only 16 mbpd by 2030. Is this consistent with a country whose vehicle sales are up 56% in the first five months of the year? Where sales of Audi's are up 77% and those of BMW have doubled compared to the first five months of last year? Is China truly going to be satisfied, as the EIA would have it, with less than 1/5th of the per capita oil consumption of Korea in 2030, even though they should be similar by that time?

and

The differences in views about China's oil demand outlook have enormous policy implications. If the EIA is right, and China will forget how to grow, then pressures on the oil supply will be modest. On the other hand, if China is to develop like other countries in Asia, the pressure on the oil supply will be crushing, with oil shocks, recessions, and war all conceivable outcomes. The energy--as well as the economic and security--policy differences between the two scenarios are like night and day.

I don’t think it has to be that way. Call me an optimist but I think that whatever China, the U.S. and all others need in terms of energy, it is possible to supply them at prices that reflect that demand. The costs associated with the exploration and production will be substantially higher then what they are today. The easy stuff is gone, that is something that we can all agree on. The prices and volumes of production are unknown at this time, with demand growth from China, the oil and gas business has moved into a different era of operations. We know that a commodity like oil or gas is affected by the demand from China no matter where the source of production is. 


Today’s oil and gas firms, particularly the large Independents and International Oil Companies are having difficulty generating value. The cost structures have caught up to the commodities prices and the performance of these bureaucratic firms is diminishing rapidly. If we look forward to 2030 we can assume that the way these firms are managed today will be history. No one would establish a firm today to operate in the fashion of the bureaucracy in 2030. 


What we do know about 2030 is that the industry will be using advanced systems to manage their operations. It is also reasonable to assume that the Joint Operating Committee (JOC) will be the key organizational construct of the innovative producer. The use of both the technology and the JOC will be decided upon today. Approaching issues that are as broad in scope as the supply and demand of energy, that present this level of opportunity, can not be approached in the same old bureaucratic fashion. We need to pursue a definitive course of action, by developing the Draft Specification of People, Ideas & Objects. 


Society is put in peril when world oil production declines. There is evidence that the world's oil production has declined. Therefore the world needs to have the energy industry expand its production. To do so requires that we reorganize to enhance the division of labor and specialization within the industry. As has been proven, this reorganization could achieve far greater oil and gas production. Management of the industry is conflicted in expanding the output of the industry. The less they do, the higher the oil and gas prices and the better they appear to perform. This managerial conflict must be addressed and the performance of the industry unleashed. To do so requires the current management of the industry to fund People, Ideas & Objects and build the systems as defined in the Draft Specification. Please join me here.

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Economics as Astrology

Richard Fernandez is right. Talking about economics in his Belmont Club blog, Fernandez raises many valid points in this recent post. A frequent contributor to Pajamas Media, he is responding to Paul Krugman’s comment that now is the beginning of a Third Depression. Fernandez equates Krugman’s comments to astrologist Madame La Zonga, he has a valid point. When Nobel Prize economists suggest that more spending of borrowed money will save us, it is economic voodoo.

The fact that experts cannot settle on the proper prediction suggests the model they use can give rise to multiple or even contradictory predictions, like a compass needle that spins with alacrity of the second hand of an analog watch. The physicist Frank Tipler says that with a compass like that you should start worrying. He argued that since Nobel Prize economists could manifestly rise only to the level of predictive competence of astrology, they should exhibit the same modesty as Madame La Zonga.

People, Ideas & Objects could be accused of falling for, or prescribing the same economic voodoo. We have relied heavily on the analysis of Professor Carlota Perez in predicting the economic environment that we now find ourselves in. A key difference between Krugman and Perez’ commentary is that Perez is looking at the historical record and suggesting patterns that have occurred before, and that are systemic over time. She is not suggesting a formula for how the future will unfold, only that in certain situations, history shows these events occur with predictable regularity. Krugman on the other hand, believes his prescription is the only valid remedy.  



Up until June 1, 2010 we have focused on the academic aspects of this project. Now, in phase two, we are focused on commercializing the research that has been undertaken. In our defense I would assert that we are actively providing a solution to what we see as happening in oil and gas. We have suggested that the oil and gas firm may be economically challenged unless they changed their key organizational construct to the Joint Operating Committee (JOC). If we look at the example of Shell, who recently completed a comprehensive restructuring of their organization, yet, based on today’s energy prices, are unable to earn a profit on their overall operations. This same scenario is, and will be played out across the industry. An industry that I have accused of muddling through as opposed to actively invoking the changes prescribed by adopting the Draft Specification. Fernandez notes.

Leaving economic policy to common sense might actually be the safer course. Wikipedia described an experiment in the 1980s which suggested that because macroeconomic models performed so poorly, the best course was often to leave well enough alone and muddle through rather than relying on ‘activist’ or ‘visionary’ prescriptions.

People, Ideas & Objects is based on the vision as described in the Draft Specification. Taking the situation at Shell, a prescribed course of further muddling-through might resolve their lack of profitability. On the other hand, using People, Ideas & Objects vision of using the Joint Operating Committee provides an alternative designed to solve exactly that lack of profitability. What was once an economic prescription, that being People, Ideas & Objects vision, was “speculation” on one of many of the possible outcomes of the industry. That speculation has now become the solution to what the industry is ailing from. Some would call this prescient, I call it lucky.



There are those areas (macroeconomics) of the economics profession that equate well with the astrological practices of Madame La Zonga. There are however, other areas (microeconomics) of the economics profession that are fact based, such as specialization and the division of labor, these are the areas that People, Ideas & Objects have focused on providing value.  Our prescribed solution may yet prove to be voodoo, however, I wonder what Shell thinks.



Society is put in peril when world oil production declines. There is evidence that the world's oil production has declined. Therefore the world needs to have the energy industry expand its production. To do so requires that we reorganize to enhance the division of labor and specialization within the industry. As has been proven, this reorganization could achieve far greater oil and gas production. Management of the industry is conflicted in expanding the output of the industry. The less they do, the higher the oil and gas prices and the better they appear to perform. This managerial conflict must be addressed and the performance of the industry unleashed. To do so requires the current management of the industry to fund People, Ideas & Objects and build the systems as defined in the Draft Specification. Please join me here.

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McKinsey on Global Rebalancing

McKinsey have published an article that I think provides a good understanding of how our economy will be functioning in the near term. Entitled “Globalizations Critical Imbalances” it talks about the necessary adjustments in world trade and their implications. Coming from the point of view of the energy industry, I think this document shows the demand for energy will continue to increase substantially in the near term. Prices will be the means of allocating these finite energy resources and therefore the rewards to the innovative oil and gas producer will be substantial. McKinsey notes.

To some extent, the rebalancing of global economic activity from developed to emerging markets simply reflects economic laws of gravity. In a world where ideas can flow freely and countries are at different stages in adopting modern modes of production, communication, and distribution, less developed nations should grow more rapidly than their counterparts in the West as they catch up.

China, India, Brazil and others are providing substantial increases in the quality of life for their citizens. This naturally imputes greater volumes of energy will be consumed by these countries. Competition for energy resources will be extreme. How much of an increase in consumption and energy pricing is reflected in this next quotation.

The structural issue facing developed-world nations is that the amount of high-quality, high-productivity labor that will be mobilized over the next decade in Brazil, China, and India (not to mention Mexico, the Philippines, and Thailand) is likely to be measured in the hundreds of millions of people. By comparison, the entire US labor force comprises 150 million people. This is a wonderful trend for humankind and would be a boon for everyone in the world if emerging-market employment were directed largely toward production for domestic consumption. The challenge for developed-world governments and citizens seeking jobs, however, is that a significant fraction of this emerging-world labor displaces jobs that would otherwise be created in Europe, Japan, and the United States. This may be the underlying reason why unemployment in Europe, Japan, and the United States is becoming more structural rather than cyclical and may get worse over time no matter how much public stimulus is provided. Certainly, the job losses of the Great Recession look quite different from those of past recessions.

We are clearly not out of the woods in terms of the Great Recession. One of the best indicators of the world economies health has been the Baltic Dry Index. The costs to ship dry goods has fluctuated wildly during the last few years. Although the index has stabilized over the past few quarters, it remains substantially below the highs recorded prior to the beginning of the recession. (Note the recent decline in the index has been substantial.) McKinsey notes the difficult situation these global imbalances will cause various governments.

It is very difficult to say how these issues will play out. The global rebalancing that is needed is obvious: developed-world countries need to save more, consume less, become more fiscally disciplined, and run current-account surpluses (or at least be neutral). Emerging-world countries need to let their currencies rise until PPP rates are closer to financial-exchange rates. They need to consume more, save less, run current-account deficits (or at least be neutral), and continue investing, with some of the capital provided by outsiders. If major national governments work proactively together to rebalance and coordinate their fiscal, monetary, trade, and foreign-exchange policies, the adjustment process could be gradual.

The implications of this “rebalancing” may appear dire to those in the developed economies. I think the opportunities will be substantial and the challenges significant. Those that are able to innovate, and particularly the oil and gas producers, will realize many benefits. Realization that we are no longer in the “low cost” era of the energy industries past. Changing from this past mindset to one that can profit from these types of economic forces requires the changes that are contemplated in the Draft Specification.

The underlying global economic processes under way are very powerful, and the profit opportunities will be enormous as four billion people in emerging markets triple or quadruple their incomes and wealth over the next 20 years.

McKinsey are specific on how companies should position themselves for these changes. Oil and gas firms need to adopt these and other recommendations. It is foolhardy to think that these economic challenges and opportunities can be handled by the existing bureaucracies. Innovative oil and gas producers need to begin the process of addressing these opportunities by acquiring the software development capability of People, Ideas & Objects and begin the development of these software applications.

These suggestions represent specific applications of the more dynamic management approach I have urged companies to adopt in the past. The hallmarks of that approach—heightened awareness, greater resilience, more flexibility, and the timely alignment of leadership around needed adjustments—will be invaluable for companies as they navigate the choppy waters of global economic rebalancing. This process will continue and perhaps even accelerate in the years ahead, not despite, but because of the structural adjustments that are needed to put the global economy on a more sustainable trajectory.

Society is put in peril when world oil production declines. There is evidence that the world's oil production has declined. Therefore the world needs to have the energy industry expand its production. To do so requires that we reorganize to enhance the division of labor and specialization within the industry. As has been proven, this reorganization could achieve far greater oil and gas production. Management of the industry is conflicted in expanding the output of the industry. The less they do, the higher the oil and gas prices and the better they appear to perform. This managerial conflict must be addressed and the performance of the industry unleashed. To do so requires the current management of the industry to fund People, Ideas & Objects and build the systems as defined in the Draft Specification. Please join me here.

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McKinsey on Valuing Value

Today we have a short article from McKinsey on valuing value. Entitled "Why value value? -- defending against crisis: Companies, investors and governments must relearn the guiding principles of value creation if they are to defend against future economic crisis." The crisis in the economy is now called a debt crisis and no longer the financial crisis. The financial crisis was a liquidity driven issue and our current debt crisis is a solvency issue. Liquidity can be resolved relatively easily by governments providing cash to the markets, debt crisis' can only be solved with difficult choices and significant hardship one way or another.

An interesting perspective on the current economic situation is provided in this weeks EconTalk podcast by Professor Russ Roberts. Here Professor Roberts breaks down how things became unhinged from an investment point of view. I find the discussion around housing as an investment, Collateral Debt Obligations (CDO's), Synthetics and most of what Wall Street has been involved in as gambling. Nothing is generated out of all these machinations. No new products or services, nothing tangible or worthwhile. It seems to me that Wall Street management have provided leadership to the energy industries management. Leadership in terms of losing sight of what is real.

Discussion of the current economic situation is of importance to the development of People, Ideas & Objects. We can only institute the levels of cultural change within the oil and gas industry through an economic transition that causes the existing bureaucracies to atrophy, and the alternative, as represented in the Draft Specification, is built and grows to replace it. The debt crisis is this mechanism, and we are focused on building value throughout the oil and gas industry.

What I expect will continue to happen is the existing bureaucratic firms will have difficulty in earning "real" income from their operations. Commodity prices are high, and the expectation that they will stay high is supported through the increase in global energy demand and the difficulties in increasing reserves and production. Costs of operations will continue to escalate due to the inability of the bureaucratic culture to build the necessary scientific and engineering capabilities in the time they are required. Throwing more money at the problem will continue to be the only solution that management can provide. The point of making the changes as suggested in People, Ideas & Objects Draft Specification, is to enable the oil and gas producer to focus on generating value. It is the point of generating value that is discussed in this McKinsey paper.

In response to the economic crisis that began in 2007, several serious thinkers have argued that our ideas about market economies must change fundamentally if we are to avoid similar crises in the future. Questioning previously accepted financial theory, they promote a new model, with more explicit regulation governing what companies and investors do, as well as new economic theories. p. 1

One continuous theme that we are finding in our review of Professor Richard Langlois' papers is that markets need "market-supporting" institutions. Leaving the future to unfold as it "should" is consistent with the Lassiez Fairre form of capitalism that brought us here. Now, as represented in the Gulf of Mexico, it could be argued that the inability of BP to shut in the well is a market failure. I would argue that it is a failure of establishing the appropriate market-supporting institutions. I have also argued that software plays a key role in establishing these market-supporting institutions. Software is an enabler or inhibitor to innovation. The current bureaucracies use of SAP has cemented the hierarchies ways and means permanently.

In this next quotation the author intimates that crisis' are created as a result of a miss allocation of capital. This is accurate in the sense that the low costs of money over the past few years has created a lack of discipline in making the right investments. Do we save for the future or buy a bigger house? These types of decisions have been made by consumers and businesses and have led to the situation where everyone is now carrying large debts supported by poorly performing assets. What is the investment capital discipline in the oil and gas industry?

My view, however, is that neither regulation nor new theories will prevent future bubbles or crises. This is because past ones have occurred largely when companies, investors, and governments have forgotten how investments create value, how to measure value properly, or both. The result has been a misunderstanding about which investments are creating real value—a misunderstanding that persists until value-destroying investments have triggered a crisis. p. 1

and

The guiding principle of value creation is that companies create value by using capital they raise from investors to generate future cash flows at rates of return exceeding the cost of capital (the rate investors require as payment). The faster companies can increase their revenues and deploy more capital at attractive rates of return, the more value they create. p. 1

Oil and gas firms have been profitable, many have had record profits. And that would denote they have generated value. However, what about the long term. These record profits have been generated as a result of increased multiples of the commodity prices. These profits have not been effectively invested in expanding reserves or productive capacity. Now that costs are escalating systemically and culturally, as I argue in the review of Professor Langlois, how much longer will value as defined by McKinsey continue to build?

In the Draft Specification, strategy is set by the producer at the Joint Operating Committee level. The producers competitive advantages are structured around their unique asset base and the scientific and engineering capabilities that are made available to them. With these tools the producer firm is able to focus on increasing their reserves and deliverability. Determining the best manufacturing methods to build drill bits do not provide value, and I have suggested that their involvement in owning and operating field level innovations be limited to defining and funding these types of industry capabilities.

Companies can sustain strong growth and high returns on invested capital only if they have a well-defined competitive advantage. This is how competitive advantage, the core concept of business strategy, links to the guiding principle of value creation. p. 2

The oil and gas industry stands at a unique time and place. We recently learned through our review of Professor Alfred D. Chandler that bureaucracies essentially failed during the great depression. We see hierarchies in the global banking system have also failed. Do we need to wait until it is evident to everyone that the energy industries management are failing? High commodity prices have made these companies look like they are functioning properly. However, the excess cash flow has not increased their reserves or production? Knowing what we know about the duration of the commodity price spike, and the logarithmic decline curve, what is the future deliverability of these companies. Understanding the role that energy plays in our lives we need to act before the failures become too obvious.

These principles have stood the test of time. Economist Alfred Marshall spoke about the return on capital relative to the cost of capital in 1890. When managers, boards of directors, and investors have forgotten these simple truths, the consequences have been disastrous. The rise and fall of business conglomerates in the 1970s, hostile takeovers in the United States during the 1980s, the collapse of Japan’s bubble economy in the 1990s, the Southeast Asian crisis in 1998, the dot-com bubble in the early 2000s, and the economic crisis starting in 2007 can all, to some extent, be traced to a misunderstanding or misapplication of these principles. Using them to create value requires an understanding of both the economics of value creation (for instance, how competitive advantage enables some companies to earn higher ROIC than others) and the process of measuring value (for example, how to calculate ROIC from a company’s accounting statements). p. 2

Our appeal should be based on these eight "Focused on" priorities and values of how better the oil and gas industry and its operations could be handled. They may not initially be the right way to go, but we are committed to working with the various communities to discover and ensure the right ones are. If your an enlightened producer, an oil and gas director, investor or shareholder, who would be interested in funding these software developments and communities, please follow our Funding Policies & Procedures, and our Hardware Policies & Procedures. If your a government that collects royalties from oil and gas producers, and are concerned about the accuracy of your royalty income, please review our Royalty Policies & Procedures and email me. And if your a potential user of this software, and possibly as a member of the Community of Independent Service Providers, please join us here.

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