Langlois' Comment on Technology Revol...

Continuing on with our review of Professor Richard Langlois work. We pick up a "comment" that Langlois published sometime in 2008. His comment is in response to comments that were made by Professors' Dosi, Gambardella, Grazzi, Orsenigo and Lazonick on Langlois' 2003 "The Vanishing Hand" paper. There is a clarity in terms of how Langlois sees his vanishing hand theory evolving.

My 2003 paper and subsequent efforts (Langlois 2004, 2007) did not make the claim that Chandler’s visible hand has been fading away. Rather, I took this phenomenon as a widely agreed-upon starting point. The last few decades have witnessed a widespread “deverticalization” of production in the United States and other advanced economies. My objective was to explain the phenomenon, which I attempted to do not by rejecting Alfred Chandler’s original account of the rise of the large vertically integrated corporation in the late nineteenth century but rather by showing how Chandler’s account might be fitted into a larger framework that could admit of forces both for vertical integration and for disintegration. (I will say a bit more presently about the nature of this explanation.)

Langlois states the two issues he has with the points made by Dosi et al. For the purposes of this post we will ignore the first issue.

Thus there seem to be two issues: (1) what is the nature of the empirical evidence against the phenomenon of deverticalization? And (2) does the New Economy (however we understand that) imply less — or more — “organization” within the process of production? I will take these points in order.

I have consistently argued that oil and gas is in a transitional period in which substantial change will alter the makeup of the industry firms. The Draft Specification moves many of the operations within the industry to a greater market definition. In this post I want to describe my point of view regarding the survivability of the large oil and gas producer. Throughout corporate history firms evolve according to the changes in the marketplace. Our review of Chandler showed the one time that the hierarchy did fail was during the great depression. Professor Carlota Perez has also shown us that this is not a unique event, but one that has a consistent rhythm over the past 300 years. Professor Perez has defined these major transition periods as installment and deployment periods in which the transitional period in between them can lead to financial difficulties. We are experiencing those financial difficulties today which places us at a unique point in time in terms of economics. The changes currently taking place are 1) the financial crisis has not fully developed, and 2) we are at the very beginning of the deployment period, a time when the new technologies positively affect all industries.

The oil and gas firms that exist today are subject to the forces that are in play in the greater marketplace. People, Ideas & Objects is taking these forces and applying them to the industry in a manner that unleashes the full potential of Perez' deployment period. The oil and gas industry as represented by the large producers have chosen not to participate in People, Ideas & Objects and are therefore opting out of the deployment phase. I see this as a form or corporate self selection (suicide) by these large organizations. They have chosen not to participate and that is their decision. I believe they will be challenged by their inability to function, much like BP is in the Gulf of Mexico, and particularly when the full scope of the current debt crisis hits them. To summarize the challenges that I see them facing in the near future would include:

• Sourcing capital.
• Higher rates of interest on existing debt.
• Escalating cost structures.
• Stable commodity prices.
• Declining production.
• Greater scientific complexity.
• Negative political environments.

Langlois makes his argument.

Here again, I think the problem is one of conceptual imprecision. It is perfectly common, and often unobjectionable, to contrast a market and an organization, that is, to contrast the institution called a market and the institution called an organization (such as, notably, a firm). But the opposite of “organization” in the abstract sense is not “market” but disorganization. More helpfully, the opposite of conscious organization is unplanned or spontaneous coordination. In this sense the market-organization spectrum (and similar spectra one could imagine) are arguably orthogonal to the planned-spontaneous spectrum. One could well wonder, as I have (Langlois 1995), whether large organizations do not in fact grow far more as the unplanned consequence of many individual decisions than as the result of the conscious planning of any individual or small group of individuals. And it is certainly the case that, as Alfred Marshall understood, both firms and markets “are structures for promoting the growth of knowledge, and both require conscious organization” (Loasby 1990, p. 120).

For the large oil and gas firms to continue to ignore the difficulties in the industry will lead to further disorganization. The expectation that the market will spontaneously provide is an extension of the ways and means of managing the industry for the past 50 years. Muddling along, as I would refer to it, is the systemic culture of the current management. This culture needs to be broken by actively planning and organizing the market, as in People, Ideas & Objects Draft Specification, or face further disorganization by the firm.

People, Ideas & Objects software development identify and support the industry standard Joint Operating Committee (JOC). The legal, financial, operational decision making, cultural and communication frameworks of the oil and gas industry. The JOC is in essence a thing that is generated as a result of an agreement between multiple producers. The JOC is what is effectively used to conduct any and all types of field operations. Most of these field operations are conducted with third party suppliers. The contract is a natural extension of the oil and gas JOC and producer. Langlois notes;

Charles Sabel and his collaborators have begun looking into the nature of the relationships that characterize the New Economy (Gilson, Sabel and Scott 2008; Jennejohn 2007; Sabel and Zeitlin 2004). And what they find is not common ownership or hierarchy but rather a “form of contracting [that] supports iterative collaboration between firms by interweaving explicit and implicit terms that respond to the uncertainty inherent in the innovation process” (Gilson, Sabel and Scott 2008, p. 3). The New Economy may be highly organized. But it is fundamentally contractual, in a way that large Chandlerian multi-unit enterprises are not. These latter, properly understood, are indeed fading away in a world of extensive, capable, diversified markets.

It is difficult to see how the current administrations within the large firms could change their culture and begin the active planning and development of Industrial Districts. I don't happen to believe that its possible. Change of that scope can only be introduced through revolutionary organizational restructuring. Such as what we propose in People, Ideas & Objects by defining and supporting the industry standard Joint Operating Committee. And the destructive forces of both the current debt crisis and management's laissez faire attitude. On Friday Nouriel Roubini made the following comment,"...the recent global financial crisis is not over; it has, instead, reached a new and more dangerous stage." reflecting the time for action will soon be at hand.

I see this transition as inevitable and one that will be orchestrated by the shareholder / investors taking action to protect their interests. Whether these are formed as small or large firms is unknown at this time, the Information Technologies enable a proliferation of smaller firms to be organized, and that seems the most reasonable way that the industry will re-organize itself. We have appealed to the investor / shareholder to support these software developments as that is the necessary precursor to any future form of the oil and gas industry.

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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McKinsey on the economy.

Yesterday we saw the markets respond negatively to the debt situation in Europe. This has had an adverse effect on the global markets with many reflecting a flight to quality. It appears to me that the effects of the various government stimulus initiatives have enabled economies to avoid the crisis from becoming to great. However, there are  those unsustainable levels of debt that are carried by most countries. This situation appears to be ignored by many administrations, including the U.S., and the need to address them seems to be the priority being asserted by investors. Loaning money out at low interest rates may be at an end. Markets will continue to reflect these concerns until such time as Professor Carlota Perez “Deployment” period is fully installed.  

McKinsey have published their Global Survey results which clearly reflect the concern for debt is substantial.   

Executives in Europe and North America are haunted by the perception of crippling public debt levels: 54 and 61 percent, respectively, think that public-debt levels will have a “significant” or “severely negative” impact on GDP growth in their home markets. In contrast, 45 percent of respondents in China and 24 percent in India expect that the level of public debt will have a “positive” impact or “no impact” in their home markets.

Volatility remains high and this is reflected in yesterday’s U.S. stock exchange drop of 1,000 points, suggesting that buyers were few and far between. This volatility, unlike in 2008, will not lead to the types of economic impact that we have just recovered from. However, with large debts and the potential for higher interest rates, the long term flexibility of countries, companies and individuals is more constrained. Looking at oil and gas companies balance sheets, and understanding that these were mostly financed in short term markets, higher interest charges may constrain their capital expenditure programs. Issuing debt on longer terms will have this effect even if there is no change in market rates.

McKinsey note two positive trends that may be developing. For many decades, short term concerns drove the agenda of most companies.

Companies are shifting their strategic planning from crisis mode to a more balanced consideration of short-term profitability and long-term strategic issues: one-third now focus equally on the short and long terms, compared with one-fifth in 2009.

Information Technology being a key variable in increasing firms competitive advantage. This reflecting a timeliness of People, Ideas & Objects and associated communities. 

Technology will continue to materially reshape consumer awareness, choice, and interactivity models, and companies should be striving to tap the power of technology to improve their competitive advantage.

Let’s hope these trends continue. 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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Perez, Crisis and Innovation Part V

In this next installment of our review of Professor Carlota Perez' paper "The financial crisis and the future of innovation: A view of technical change with the aid of history". She paints a clear picture of where we're headed in terms of economic performance. And the financial situation as it stands at People, Ideas & Objects and associated communities. I recall that Milton Friedman once stated; "Only a crisis—actual or perceived—produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable."

People, Ideas & Objects have taken a good idea in using the Joint Operating Committee, developed it fully through application of academic research, and published a vision, the Draft Specification, of how the oil and gas industry could operate. When I look around for new ideas that might compete with People, Ideas & Objects I am unable to discover any. Since these are the only ideas that are being contemplated for the oil and gas industry I fully expect they will be taken-up by the industry. Otherwise, based on the financial crisis, our current debt crisis and the looming "capabilities crisis" in oil and gas, the industry will have to come up with its own ideas. The problem with doing so will be the time necessary to fully develop them and impart a vision in which people can rally around. This process took People, Ideas & Objects seven years to complete. We are at the point where the Draft Specification is almost two years old and the communities development has been undertaken since then. I don't believe the industry has the time to come up with its own ideas. They should therefore begin financially supporting People, Ideas & Objects and the Community of Independent Service Providers (CISP).

THE POLICY CHALLENGES: Taking the paradigm and the period transition into account

Professor Friedman's message is the same message that Professor Perez echos in this section of her paper. The presence of the beginning of the deployment phase is an opportunity that is available to anyone in oil and gas who wants to participate. Now is the time and People, Ideas & Objects is the opportunity.

Institutional restructuring is what would really unleash a healthy period of prosperity, fundamentally different from that of bubble times. Whether and how such a redesign is done on the national and supranational levels, the likelihood of a successful outcome is much greater if the debate is on the table from early on and if enough concrete and viable proposals and innovative solutions are there when the decision makers are ready to act. p. 25

The Joint Operating Committee is the industry standard means of operating in the global oil and gas industry. The geographical scope of the People, Ideas & Objects application modules will be determined by the CISP in their initial analysis. Producer firms representing specific geographical areas of interest should insure their participation in the CISP and People, Ideas & Objects is substantial enough to influence the scope decisions are made with those regions included. Waiting is unproductive.

Waiting is also unproductive for those people who want to participate in the CISP. Generating a service based offering at this time in many people's life is counter to the dreams of many. Retiring and living off of one's investments is clearly not going to happen to the majority of those working in the oil and gas industry today. It's here that Professor Perez picks up an interesting and valid point of what needs to happen in the deployment phase.

The motto of ‘don’t work for money, let money work for you’, so popular in recent time, needs to sound completely unrealistic in a world where economic policies, be they regulatory, fiscal, monetary or whatever, resolutely favour working for money –and making abundant profits– through innovation, investment and job creation in the real economy. p. 25

Things have changed, and that is represented in the volumes of debt that countries, companies and individuals are carrying. This debt was accumulated because the old ways were no longer working and carrying the weight of the economy. To keep the illusion rolling along therefore required that money needed to be borrowed. These are all symptoms of how these changes require us to look at the future differently.

The safest way to approach the financing of innovation in the deployment period is to assume that the instruments that worked in the installation period [1970 - 2000] may now be inadequate. p. 29

This discussion maps out a rather robust future. But we are not there yet. As our 2010 budget drive proved, the management in oil and gas will not fund these communities and software developments. These service based offerings are not going to form until there are the necessary resources to make these alternatives real. The investor / shareholder in oil and gas is being asked to fund the development of these communities and software developments. So that they, the investor / shareholder will have the infrastructure necessary to replace the current management and operate their assets in the most profitable manner.

The opportunities for innovation are manifold, both in existing companies and for new ones, if the potential installed in the territory (and in the minds) by ICTs and their organisational paradigm finds a favourable financial and regulatory atmosphere in which to flourish. p. 29

Of the things that we do know is that oil and gas is unique unto itself. No other industry is configured in the same fashion. To proceed with building the industries infrastructure requires that software be built to identify and support the Joint Operating Committee. This is a given in the advanced economies that we find ourselves in.

But innovating within a paradigm is much easier and less risky than doing so using the paradigm in another sector. This was learned by the venture capitalists in the 1990s when they tried to apply the same criteria and expectations to innovators in biotech as to those in ICT; both sides ended up frustrated and disappointed. pp. 29 - 30

Professor Perez introduced her SKIEs in our previous post. These accurately reflect the CISP in this discussion, and it is the CISP, as a subset of the SKIEs, that require the funding necessary to develop. If it is not the oil and gas investor or shareholder that supports these communities development, then whom. The bureaucracies have had the opportunity for the past seven years and have chosen to do nothing. Now these bureaucracies are beginning to fail, leaving the oil and gas shareholder / investor being the one who loses.

A large set of innovative opportunities is in the area of small knowledge intensive enterprises (SKIEs), where the intangible nature of the products and of the human capital involved presents complex issues for the traditional methods of the financial system. p. 30

The remainder of our review of this paper will focus on the development issues of the CISP and SKIEs. 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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Perez, Crisis and Innovation Part I

We begin our review of Professor Carlota Perez new paper "The Financial Crisis and Innovation: A view of technical change with the aid of history". I would find it difficult to choose whom has had a greater influence on People, Ideas & Objects, Professor Carlota Perez or Professor Richard Langlois. Professor Langlois has helped to define the Draft Specification with his research in Modularity, Boundaries of the Firm, Transaction Cost Economics and his "Vanishing Hand". Whereas Professor Perez has established the context of the economic times that we find ourselves in. Particularly what we can expect as a result of the Information & Communications Technology Revolution (ICTR). I am grateful for both of their work.

This February 2010 paper of Professor Perez' is quite probably the most important, critical and timely paper we could ever review. There are many new and valuable findings within the document and it is of particular value to what we at People, Ideas & Objects call our Community of Independent Service Providers. We will be reviewing this paper in detail in several parts, today being a fresh look at some of her past work.

Professor Perez begins with a summary that sets the tone for the document. Emphasis is mine.

This essay locates the current financial crisis and its consequences in a historical context. It briefly outlines the difference in patterns of innovation between the first two or three decades of each technological revolution –regularly ending in a major financial collapse– and the next two or three decades of diffusion, until maturity is reached. With this historical experience in mind, the essay discusses the opportunity space for innovation across the production spectrum taking into account the specificity of the Information and Communications Technology (ICT) paradigm and the increasing social and environmental pressures in the context of a global economy. Finally, there is a brief look at the sorts of institutional innovations that would be required to provide adequate finance to take full advantage of those opportunities. p. 2

There has been much we have reviewed of Professor Perez' work. This next quotation appears new to me, however, it is so obvious now that I think she needed to state it clearly for us to fully appreciate our situation.

Nevertheless, globalisation is a fact and the new emerging economies will change the shape of the world to come. p. 3

From an oil and gas perspective, our focus on demand is justified. The volume of supply of oil and gas will be a constraint to the global economy. The demand for innovation from the oil and gas producer will reach significant proportions. Operating within the global economy will also bring the full scope of the political, geographical, logistical and science based issues to the forefront of everyone in the industry. Organizing for this purpose is what we have been writing about, and preparing the communities for, at People, Ideas & Objects.

In the past I have shied away from the discussion of political points of view with respect to Professor Perez' work. I am a free market kind of guy and her views on the role of government in solving the economic problems have caused me difficulty. I think however, that I have been incorrect in not attributing the role of government to moving away from the casino atmosphere of financial capital, and the need for production capital to take the lead. This paper clearly states her values and the need for this transition to be aided by the role of government. The partisan nature of the discussion in the U.S. however, I think needs to adopt more of the attitudes and thinking of Professor Perez.

The other consequence of the bust, which could in some sense be defined as ‘positive’, is that by revealing all the crooked ways of the financial world during the boom, it has broken the myth of an ideal ‘free market’ and brought back the State into an active role in the economy. Such a come back is not limited to restraining the abuses of finance but extends to favouring the expansion of production and job creating activities over speculation and to spreading the benefits of growth more widely across society. p. 3

I highly recommend that everyone download this paper and print it out in hard copy. It is something that will be valuable as a frequent reference over the next number of years. Professor Perez' work has substantial value to anyone and everyone that will live in this globalized economy, this paper summarizes her work in a very substantial way.

To highlight the review of her theories and terminology I include the following definitions that frame our economic times. [Time frame]

This is the Installation period, [approximately 1971 - 2000] which begins in the midst of a mature economy in decline and ends with a frenzied prosperity characterised by the triumph of the new paradigm, the emergence of new giants and the development and collapse of a major financial bubble. p. 6

The second period brings to fruition all the potential opened up by the new technologies. It is the Deployment period [current to 2040?] when the new production giants serve as engines of growth. It is a time of ‘creative construction’ involving the expansion of both the new and the rejuvenated sectors and usually spreading the benefits of growth much more widely than during Installation. Production capital is then at the helm of investment decisions and finance adapts (or is induced to adapt) to serve those longer-term objectives and benefits from them. p. 6

The years between the bust and the unleashing of Deployment (from two years to as much as thirteen, as was the case in the 1930s) [2000 to current] constitute the Turning Point, referring to the shift in conditions and leading role from one period to the other. p. 7

In a previous post I quoted Professor Ralph Raico who stated the following about Professor Ludwig von Mises.

Back in the early 1700's there were slums, people were poor, people died, every possible plague. Mises says you cannot understand the industrial revolution without understanding the western world was undergoing an un-precedented population explosion. For example, England in 1750 had a population of about 6 million; by 1850 the population was 24 million. The question was how would these new tens and tens of millions of people survive? Mises said the industrial revolution was the answer to the population explosion. That's how they survived, by society becoming immensely more productive.

The industrial revolution was the solution to the population explosion and issues of the day. We now stand at a point in time where the benefits of the Information & Communication Technology Revolution are available to solve the problems that we face today. With the research of Professor Perez we can see clearly that now is the beginning of this trend, and the only thing that is stopping us is ourselves. From her paper.

In 2009 the world is going through the Turning Point and deciding the global and national context for the full Deployment of the ICT surge. Understanding the nature and direction of the changes required is a crucial input for designing institutional and policy innovation and increases the probability of taking best advantage of the new wealth creating potential of the new paradigm. p. 7

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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270 Billion Man Days per Day

That is the number of "man days of labor per day" that are offset by the consumption of 120 million barrels of oil and gas. 270 Billion man days per day.

Here are my calculations. How far can a fully loaded semi-trailer travel at 60 MPH on one barrel of oil? (42 gallons x 6 mpg = 252 miles) How much effort would it take to move that product (80,000 lbs) that distance without the benefit of energy. Lets suggest a man walking with 100 lbs of product @ 3 mph, it would take 800 such men 84 hours to move that weight that distance. That is total of 800 x 84 = 67,200 hours of energy equivalent labor. The world produces approximately 120 million barrels of oil and gas per day. 120 million x 67,200 = 8.064 trillion man hours and 1.008 trillion man days of physical labor offset each day. [Please note I am using the 18,000 (or 270 billion man days) man hours in these calculations as all energy use may not be as efficient as the semi-trailer example noted.] Kind of makes systemic risk and the potential of global warming, 50 years from now, look irrelevant.

Here is what we know. Prices for oil and gas have increased substantially in the past decade. These have fueled record activity, yet we still have an ability to produce only 85 million barrels of oil each day. I suggest we are organizationally constrained and are unable to achieve greater volumes of energy production. The bureaucracy can only run so fast.

We're fooling ourselves if we think we can get along without petroleum based energy or even a small decrease to what we use today. With China, India, Brazil and other countries joining the middle class, the future demand for energy will be significant. We need to solve this problem and that is what People, Ideas & Objects is focused on providing. Moving the organizational construct of the industry to the Joint Operating Committee. The legal, financial, operational decision making, cultural and communication frameworks of the global oil and gas industry.

Management are correct to have recognized this is not their problem. I say this with the greatest volume of sarcasm possible. Who's responsibility is it? To sit and do nothing about the scope of this issue shows a complete failure by those that are responsible. It won't take too much to get out of line in order for the collapse of society as we know and understand it today. If demand begins to develop, or supply becomes more challenged, rationing could precipitate the decline of our standard of living and force us to make choices that we should not have to make. All because the management didn't see that their product became so valuable to society. Maybe they are blind. We should start taking the names of the people that are willing to forgo their use of energy and hold them to it. Any rationing of energy is as logical and costly.

What is the future of this industry? Will it be the bureaucracies that are in power for another 100 years? Do we just let the world figure this one out on their own? Is there money to be made in this environment? It's time we began to take this opportunity and start providing the world with the potential for 2 trillion man days of effort, offset every day. What is our potential? And should we limit it so willingly?

People, Ideas & Objects proposes we build the systems to support the Joint Operating Committee. The design of these systems are detailed in this blog, the Preliminary Research Report, and Draft Specification. A design that moves the compliance and governance of the hierarchy to be in alignment with the five frameworks of the Joint Operating Committee. A design that enables innovation in the earth science and engineering disciplines to accelerate and meet the market demand for energy.

By saying things of this nature I risk alienating the status-quo. I say let them cut my budget. And it's no longer just me talking about this problem. In a blog post today, Professor James Hamilton is noting similar warnings. March 31, 2010 is the deadline for raising our 2010 operating budget. After which a variety of consequences, such as financial penalties and a loss of one years time will occur. Our appeal should be based on the 26 compelling reasons of how better the oil and gas industry and its operations could be handled. They may not 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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Why would producers pay?

It is argued that oil and gas producers do not have the requisite motivation to fund the budget of People, Ideas & Objects. My concern in pushing this budget cycle is that the motivation to make the necessary changes has receded from the mindset of people in the industry. When the financial crisis was at its height, all seemed to be in desperate need of bringing about change. Now that the pressure brought on by the crisis doesn't exist, the sense of urgency to address these problems has passed. We have survived to live another day. To approach the manner in which business is conducted is off the radar of the majority of people within the industry.

It is far better that this has happened now then having it happen in the middle of our developments. I don't expect that "all is well" will be the call even as early as later this year. We have solved none of the problems that brought the system close to collapse. Stuffing the economy with up to $17 trillion in stimulus and cash has had a strong effect. The performance of the bureaucracy remains questionable and the opportunity for them to continue on, I'll agree, is well entrenched. What this imputes is that the only time something like People, Ideas & Objects can be developed is during a complete collapse of the industry.

So here is to living happily ever after. This last ditch attempt to acquire some funding to keep moving forward looks less probable each day. We'll certainly continue on until March 31, 2010 and see what might come about, after that we will have to evaluate everything in light of the funding failure.

In answer to the question that is being asked, why would the producers pay? The People, Ideas & Objects value proposition shares the one-time software development costs across the production profile of the industry. Simply the producer, like the user, will attain greater value by contributing then it's costs. As evidenced in yesterday's example of the start-up oil and gas producer. The engineer does not have to incur the overhead necessary to maintain compliance with the various regulatory agencies.

The People, Ideas & Objects software and the Community of Independent Service Providers (CISP) is a critical aspect of how the producers compliance is achieved. The tacit knowledge of the industry is held by the people that work in the business. The software can not capture this knowledge, but what can happen with People, Ideas & Objects is the CISP define, build and use the software tools needed to do their jobs.

Where we'll stand on March 31, 2010 in terms of our future is quite exhilarating. Nothing focuses the mind quite like this type of situation. What we need to be doing is getting to the business of the business of oil and gas. We face a questionable future, and the complexity and difficulty is only accelerating.

On a related note, I find the "elite" economists oddly sharing my frustration at the pace of these changes. Simon Johnson and this Reason Magazine piece are good examples of opportunities potentially being lost.

Needless to say we still have not received any expression of support, commitments or funding. [Maybe I should be the one to get the message.] If your an enlightened producer, an oil and gas 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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Perez The Role of Government Part II

In this second part of answering Professor Carlota Perez' question "What role does the Government play in this?" we discuss the more general nature of the economy. In the first part we noted the expanded role that software plays in ensuring compliance to regulations. And how the software vendor has ultimately had to bear these software development costs alone with no financial support from the government agency issuing the regulations. In this second part I want to expand on the concept of this expanded role of software in our daily economic lives.

Lets assume that we have an engineer that recently saw the opportunity of a lifetime pass in front of her eyes. To realize this opportunity she needs to establish herself as an oil and gas producer and acquire land within a certain geographic location. The land and the money to purchase it are available, as are the drilling and other service industry technologies necessary to exploit the idea. The one problem this engineer has is that she has no access to systems that are capable of meeting the necessary compliance requirements of the jurisdictions she operates in. And no ability to interface with the various economic actors necessary to make the idea real.

Suddenly, she realizes that she is eliminated from pursuing this opportunity due to the fact that she has no software in which to operate this firm on an ongoing basis. Is the Governor of Texas willing to accept that the barriers to entry into the oil and gas industry becomes access to the necessary administrative software? Certainly the ability to build this capability exists, at approximately $2 million / year in additional administrative overhead.

The question is what is the governments role in the new economy. A new economy that is driven by the Information & Communication Technology Revolution. Where the access and ability to function in the marketplace assumes the ability to be in compliance with 400 pounds of paper regulations. An economy where engineers pursue new ideas or an economy of accountants and lawyers.

And how is it that People, Ideas & Objects is able to offer this engineer with a good idea with no costs associated with using the software? That is to say until she has established production, her costs for 2010 have been set at $1.00 / barrel of oil per day per year. Certainly there will be representatives from the Community of Independent Service Providers (CISP) assisting her in these compliance requirements. But the question of whether to "hire people or run software to be compliant" has been solved through People, Ideas & Objects. This overhead associated with the CISP is on an as needed basis and is a small fraction of the $2 million otherwise needed.

Many within the governments got ahead of this discussion by establishing the rules and regulations are self assessing. Self-assessing systems include most royalty regulations and of course many tax systems. If you make a mistake in filing your returns, you go to jail. It is necessary that negligence is not an excuse for mistakes. And I see no reason to abandon the self assessing style of system, if the software exists in the marketplace to ensure compliance. Governments have a fiduciary responsibility to their tax payers to ensure that equality and fairness are achieved, and that all revenues are collected. One side note is that Royalties are not taxes, but for the purposes of discussing self assessing systems, there are minimal differences.

Back to the question of the governments role in the new economy. Is it to facilitate high levels of access to all who want to compete in the oil and gas industry? Economic access or the lack of it has become a barrier to entry for all but those who have adequate size to maintain the administrative overhead. Will the engineer in this scenario, knowing that she could go to jail for not filing the right form, really be bothered to pursue that opportunity? And lets be clear, Bernie Madoff had no aversion to filing any forms.

Today I received notice from the Alberta Government that they do not share in the concerns that I expressed in Part I of this discussion. I indicated that our policies were to not build any software to meet Alberta's royalty requirements. And they indicated that Mr. Peter Watson, Deputy Minister of the Energy department has received that message. This point was probably moot as I do not see the user community including any Canadian jurisdiction in the Preliminary Specifications scope. Regrettable, but true.

Join me here and lets work together in finding the right answers. If your an enlightened producer, an oil and gas 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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McKinsey on De-leveraging

McKinsey on De-leveraging

Rarely are we provided with research that is applicable both professionally and personally. McKinsey Global Institute (MGI) have just published a comprehensive document entitled "Debt and De-leveraging: The Global Credit Bubble and Its Economic Consequences". A country by country breakdown of debt levels and the situations that both individuals and organizations will face in the coming years. The document can be downloaded from here. (Registration required.)

Although there is no breakdown by industry. Oil and gas is not in the situation where they are highly leveraged, in comparison to other industries. The high prices of the last few years did fuel heightened levels of activity, but those were with cash flow generated from production. As I have indicated many times, producers are being rewarded for their innovativeness. Borrowing money and raising capital are no longer the critical determinants of success in oil and gas.

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Changing deck chairs on the Titanic

I should thank SAP for this post. They have published a YouTube video of their use of Google Wave, and its all that I thought that Google Wave could be used for. Here's the Video.

What the video doesn't show is the level of security being used and the location of the individuals. It is more then reasonable to assume these individuals are located at various different places and could theoretically be anywhere, and through a standard browser. It is also possible to provide the highest levels of security that are technically possible to those users, wherever they may be. And these attributes are well reflected in the video, but I have to argue the damage that a tool such as this would bring to any oil and gas company.

What is it that SAP is missing in terms of providing this solution? What we learned in the Preliminary Research Report was that change needed to be introduced in the proper fashion. Specifically the cognitive and motivational paradox are key issues that are not being addressed in SAP's use of Google Wave. The cognitive paradox identifies that people perceive the new with an understanding from the old. Taking the old and superimposing their understanding on the new is a danger in SAP's use of Google Wave. The motivational paradox recognizes that people are concerned more with production, or getting their job done, then learning the new methods or tools. These two paradox have been critical in the need to understand how change is introduced in the Draft Specification. Simply there has to be a clearly defined break from the old. A significant break in which the new can be approached in the manner that is somewhat a blank slate.

Change for the sake of change, is wrong. Particularly with SAP's use of a new technical tool. Technically driven change is a disaster in the making. That is why People, Ideas & Objects is basing these changes in the strong economic forces in today's depression. Orchestrating this level of change is not possible unless there is the type of economic reforms that people like Professor Carlota Perez speak of. The old dinosaur bureaucracies are failing, actively destroying shareholder value, and are leading to the renewal for new and innovative ideas and organizations. This opportunity is ours to take.

I see serious problems in allowing this type of powerful technology (The Google Wave application, not the SAP application) introduced without any support for the changes made. And more importantly without the full consent of the management or ownership of the firm. In this video they introduce a number of people who collaborate on a new process that does not have the requisite authority or responsibility to make any changes. Designing things because they can collaborate does not make it a valid process. In oil and gas I could take Google Wave and quickly write a new process that would involve the collaborations of any number of producers involved in a Joint Operating Committee. This would be dangerous and irresponsible, that SAP misses this point is of concern to me. This is also why the Draft Specification developed the Military Command & Control Metaphor.

Particularly for a publicly traded company, decisions and actions have to have a document-able audit trail, compliance and governance implemented and operational. When we think of a JOC we have multiple organizations legal, financial, operational decision making, cultural and communication frameworks. It is my opinion that allowing this type of application, of which many examples have been written about here, is irresponsible for the management to allow. I also have an opinion that management are not that interested in working that hard to stop this type of activity. Just as they do not go out of their way to be more proactive with respect to compliance or governance. As I said it is just irresponsible of management to "allow" this to happen, but chaos may be the better choice for them to make.

In oil and gas management's sole concern is the compliance and governance of the company. It is People, Ideas & Objects "design" to have the compliance and governance moved from the bureaucracy to align them with the legal, financial, operational decision making, communication and cultural frameworks of the Joint Operating Committee. As one learns in most MBA programs the separation of operational decision making and compliance leads to no accountability. This is managements to exploit in the current market. There motivation is to ensure they are not eliminated by having compliance and governance more accurately managed within the software.

We have also learned that the division of labor is the primary means of enabling economic growth. The video shows the influence of many different people involved in the process, however, it is more a matter of convenience that these people are motivated and the scope is based on expedience. When we consider the interactions of people through a JOC we have interactions that, if left to an ad-hoc development, would not provide the value that the appropriate analysis would bring. As I have frequently mentioned, the current oil and gas industry is populated with potentially thousands of different jobs as a result of the growth of the industry. Allowing poorly implemented technologies such as SAP is doing in the video can lead to a destruction of that division of labor for something that is not efficient. Leading to the chaos mentioned and presenting to all the kings horses and all the kings men, the never ending story of Humpty Dumpty.

We are entering a world where the tools are very sophisticated and capable of significant benefit to society, if used properly. We are also viewing the world from a high level of sophistication in terms of its economic order or division of labor. These are being altered without an appreciation or understanding of how fatal even a small decline might cause the company. Management should be concerned at what might happen when falling from these lofty heights. Making undocumented changes and not implementing the appropriate levels of compliance and governance is irresponsible, bordering on criminal. Managements have been able to disassociate themselves from the shareholders and investors by entrenching themselves in a rigid compliance framework. This is also why no one has ever been fired for recommending SAP.

Ah the things you can say when you've been ostracized for your ideas, truly liberating.

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What about those prices.

Two conversations that are taking place are the relatively high oil, and the low natural gas prices. The opposite directions of oil and gas prices seems to be a result of the North American natural gas markets being satisfied by shale gas developments. What is the future of these prices.

It would seem to me that the economic developments and stimulus have done nothing to stem the depression we find ourselves in. The U.S. dollar is under attack and they seem not to be able to, or want to do anything to stop the decline. Those individuals that are holding U.S. bonds will soon realize the pain that was delivered to mortgage holders last year. As big as the mortgage market is, the size of the U.S. bond market will have as big and if not bigger dent's in the world economy. Hang on to your hats.

So the demand for energy may fall further, this is almost a guarantee as I see it. The two economic phenomenon that I have been banking on this past decade. The transition between the old to the new economy. And, the increasing difficulty for the bureaucracy to produce and explore for oil & gas. That I never put these two theories together, and predict that the prices would collapse shows how real life is always surprising.

So there we have it. The next step down in the economy is baked in the cake and the shock will hit the commodity markets, and the oil and gas prices will decline. The decline in prices will be sharp enough to bring great difficulty to the producers. We have moved to a high production cost environment. The management have hung their hats on the phenomenal earnings they made last year based on those higher prices. I wonder if they will take the blame as much as they took the credit for those spectacular results. Lets hope they do and are summarily fired as they should be.

What's driving these price declines. The inability of producers to be able to shut in production is causing the prices to collapse for the short to mid-term. Some producers have been able to shut in their 100% owned properties. Properties that have multiple owners are able to shut in production through the operational decision making framework of the Joint Operating Committee. The problem is that the ability to do so, in a material way, is constrained by the sheer numbers of JOC's and the contractual commitments of the producers. The conflict within the participants of the JOC is unable to be resolved because in essence, no one clearly identifies the JOC as the key organizational construct of the energy producer.

Why would the industry continue to produce at the volumes they are when these volumes are killing the prices. Shutting down of any future activity has been the very dull tool the industry has used to weather the storms. Not spending money on drilling more wells and facilities has been taking place now for almost two years. Earnings are in significant decline with not many companies showing a strong balance sheet or reserves. The traditional price-taker mentality is in full effect with no one seriously considering the necessary mechanisms to reduce the amount of product being brought on the market.

Continuous production of product in the face of such a dire forecast shows the need to have the systems and organizational structures of the industry rebuilt. Specifically around the JOC and with the systems I have described as the Draft Specification. I sought to resolve this problem by putting into place the necessary mechanisms for the Joint Operating Committee to determine at which price levels would trigger a 10% decrease, and if future declines needed another 10% decline in production, at what price level that would occur. Giving an automated means for the JOC to predetermine what is best for the property.

These conflicts and contradictions in oil and gas are are no longer able to meet the needs of the industry. Time has now come for the producers to act and support this software's development. Or, they can continue to watch the prices decline further and further and hope no one fires their buts. It has been well known for a very long period of time the energy price elasticity. Meaning that large price changes are brought about by small changes in production. Management I'm sure are hoping that these economic principles don't apply to them, and will wait it out to see if that is the case.

Continuing to muddle along as a corporate strategy is now putting the industry in serious jeopardy. Without the appropriate tools to manage the business, the management are damaging their shareholders investment and the industry capability. Leaving it in their hands is irresponsible in my mind, we should be building the software and community that will support the innovative oil and gas producer for the future.

Let me make it absolutely clear so that there will be no confusion. I have received no support and no funds from the industry for this project. Zero! In September 2003 I was ostracized and kicked to the curb when I first proposed these ideas to management. And laughed at by those perfect management teams since. It is not recommended that anyone should expect that operational code be written and waiting for companies to start using. What I have done since 2003 is complete the Preliminary Research Report. Researched the viability of a system based on the JOC. Based these ideas on an economic and academic foundation that total's over 700,000 words on this blog. And detailed a vision of what the systems would look like when the industry is using the JOC as the key organizational construct. The software development of that vision is what is needed to be done, and from scratch for lack of a better word. I have done everything humanly possible to make this vision real. It is not my fault that people will be disappointed with the progress of this project. Please join me here.

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Nouriel Roubini on the carry trade.

A big part of this software development project is a lesson in how change is adopted in business. For People, Ideas & Objects to succeed requires the status-quo be replaced by the new. People need to realize the way things are done are no longer working. Our current economy provides the understanding that the current bureaucratic firms are consistently being faced with difficult situations. It appears to me that the efforts in trying to keep these dinosaurs operational is far in excess of what is needed to start over.

Our economic problems seem more and more to be a product of not accepting that the status-quo should be replaced. In the past ten years it seem we have lost the capital discipline necessary to carry out the further development of the economy. Housing is not an investment. Investments provide returns, not happy family moments. Climate change and alternative energy do not provide returns. They are man made cost centers that will be funded by taxes or the consumer.

Investments need a return and are productive in nature. They should not rely on luck but skill, and they should be based on cold and unbiased financial criteria. I don't want to come off preaching but these lessons seem to have been lost, particularly in the U.S. Professor Nouriel Roubini is well known for his precise calling of the economic crisis that started last fall. Today in the Financial Times he is calling for the "Mother of all carry trades faces an inevitable bust."

To suggest the economies have recovered is a bit of stretch for me. Stuffing $12 trillion into the global economy, keeping interest rates as low as possible, only shows how bad things are. At some point these factors will change and I suspect the U.S. will be no longer permitted to abuse their number one asset, the U.S. dollar as reserve currency. It is easy to forget the stimulus that has been injected provides a strong cushion to the effects of the economic damage. It is clear there is damage and that damage will need to be repaired by time, policies and capital discipline.

Arnold Kling states

In spite of all the sophisticated rhetoric about "quantitative easing" and "new tools for monetary policy," the only way that I can understand what the Fed was doing is to say that the goal was to stimulate bank profits, not the economy. If your goal were to stimulate the economy, you would inject enough reserves to do that and not pay interest on reserves. That might require buying some long-term bonds or mortgage securities, but not the hundreds of billions that the Fed actually bought.

Everything the Fed has been doing over the past fifteen months makes sense if you think of their goal as transferring wealth from taxpayers to banks. If you try to explain it as an attempt to implement an expansionary monetary policy, you won't even get past my high school students.

Reading Nouriel's article in the Financial Times makes it clear speculators are using the U.S. dollar as the funding currency in the carry trade. Enabling them to speculate on any type of asset they can access with the excessive liquidity in the market. This isn't gambling, it's gambling with the game fixed in their favor.

The point of this blog post is that the hard work we face is necessary. These efforts to support the economy will fail and take the status-quo management with them. Someone has to pick up the pieces, and for oil and gas, that is People, Ideas & Objects. Please join me here.

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Paul Romer on BBC

We have covered former Stanford Professor Paul Romer in this blog before. In fact People, Ideas & Objects is the name that I derived from Romer's new growth theory. New growth theory suggests that future economic growth will be developed from People, Ideas & Things. I simply changed "Things" for "Objects" as we are object based software developers.

Romer is on the short list for a Nobel prize because of his new growth theory. In a related BBC commentary, an excellent summary of his thinking of what "Ideas" are about.

Physical objects are often scarce; economic growth is often limited by that scarcity. Conventional economics is the so-called dismal science, dominated by the law of diminishing returns where businesses compete with each other into their ultimate extinction, capitalism making the rope to hang itself.

Paul Romer disagrees, profoundly. Ideas are what makes the difference, and turn economics into the optimistic science. And in the networked world, in software, in new research-heavy disciplines such as biotechnology, ideas are shared across frontiers at lightening speed and then breed much faster than rabbits.

Needless to say Romer is blogging and providing more substance to his ideas here. His recent post on how certain countries were able to deal with the housing of its citizens is fascinating. Are we destined to learn these same lessons from the beginning again? We would be foolish not to review what works, and where it works, based on the experiences we have to date. That is what Charter Cities is about and I think the lesson is directly applicable to the work we are doing in People, Ideas & Objects software developments for oil and gas.

"There’s a little corner of economics where there still exists a sense of wonder about what is possible."

Please join me here.

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And there's more.

The energy industry does have a problem that is reflected well in today's $81 oil price. The purpose of this blog is to organize and develop the software modules in the Draft Specification. Why we are doing this is that the bureaucracy is constrained and is unable to meet the demands of the consumers in the 21st century. Without abundant energy the world economy will be in jeopardy, as will our way of life.

John B. Hess is the CEO of Hess Corporation, a second generation exploration and production oil and gas company. With a market value of $20 billion they have become one of the U.S.' great independent producers. It's reasonable then to assume that Hess knows what he is talking about. And he does.

In a major statement entitled "Oil and the Future", Hess has released a paper that discusses the energy industries looming supply side crisis. The problem is well defined in this paper. What we need to do is organize ourselves to face this challenge. Without the software that supports and defines the Joint Operating Committee (JOC) we will not be able to rise to this challenge.

Hess goes on to provide sound advice to deal with this problem. His recommendations are the three C's Communication, Courage and Collaboration. The following quotations capture the scope of the problem.

My remarks today will cover “Oil and the Future.” Today, our industry is at a crossroads. Oil has moved to a demand-led market where supply is struggling to keep pace. The financial crisis of the past year has reduced demand by 2 million barrels per day, creating excess inventories and lower prices. While this setback has brought us some welcome breathing room, I believe that it is only temporary. Once economic growth recovers, it is likely we will return to the market conditions of one year ago. The price of $140 per barrel oil was not an aberration; it was a warning.

A warning, indicating that there is time remaining. Our approach should be to get organized first. And for innovative oil and gas producers in the 21st century, getting organized means building the software to define and support the Joint Operating Committee.

Over the past several years, many people in our business have expressed confidence that we were up to meeting the challenges ahead. From the producer perspective, it has been suggested that the remaining global endowment of up to 3 trillion barrels of recoverable oil meant that we should not be concerned with a prospect of shortages. Higher prices, advancing technology and sound government policies would enable supply to keep up with demand. Consuming nations viewed these issues quite differently, criticizing producers for rising prices, blaming oil for climate change and implementing policies to develop alternatives to hydrocarbons. I would suggest there is a major disconnect between consumers and producers.

In this next quotation, Hess defines a break between what the producers see and what they act upon. It's a break that I find interesting in dealing with this problem. Each producer firm is only concerned with their production and do not necessarily see the broader picture. Looking at the horizon they see that such and such heavy oil project and these offshore resources will offset any declines experienced by any of the other producers. In other words the horizon is muddled by too much information.

The approaches of both consumers and producers are based on hope, but what we need is a sober reality. The reality is that an oil crisis is coming that could prove devastating to future economic growth. Given the long lead times of 5-to-10 years from oil discovery to production, we need to act now to avert this outcome. I would like to suggest a framework of three “C’s” to address this threat: communication, courage and collaboration.

All is not lost. Over the course of my career in the oil and gas industry, I have been shocked in terms of its performance. When called upon the industry has been able to deliver, and I would expect the same from this current call. Hess' message is to communicate the facts and eliminate the confusion around this issue.

Given these facts, we need to communicate the following message:

1. Hydrocarbons are here to stay.
2. Oil demand growth will be unrelenting, increasing 1 million barrels per day each year.
3. We are not running out of oil but growth of production capacity over the next several years will fall short of the incremental 5 million barrels per day each year that we will need to meet demand.
4. We will ultimately be at risk of supply rationing demand through skyrocketing prices that will threaten economic stability and prosperity. If we do not act now, we will have a devastating oil crisis in the next 5-to-10 years.

In reading the paper I came to the realization that this is an all interested persons must rise to this challenge. Consumers, International Oil Companies, National Oil Companies, Independent producers, OPEC, and consuming nations.

The stakes have never been higher. We must build a balanced and comprehensive approach to energy security and protection of the environment to ensure sustainable development. We must unite and work together as an industry, communicating one message, having the courage to act and collaborating for the global good. In this world, there will be a bright future, not only for oil, but for many generations to come.

We are a fair distance from resolving this. I have suggested that the ability to conduct appropriate exploration has been lost since the hey day's of the 1960's. Hess is quoted in this paper as stating "Resource additions from exploration last replaced annual production in 1987". We have a job to do, please join me here.

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