McKinsey Mobilizing Minds

During the writing of the Research & Capabilities and Knowledge & Learning modules I have stumbled across a McKinsey document that I should have reviewed back in 2006. Clearly this document has had significant influence over my thinking during the time I set out to define the draft specifications. The article is titled "The 21st Century Organization" and they have recently expanded the article into an excellent book called "Mobilizing Minds: Creating Wealth from Talent in the 21st Century". The information that I am looking at in this post is from Chapter 1 of the book. I have also reviewed the document in the Research & Capabilities and Knowledge & Learning module specifications.

One of the reasons that I am so confident in this project is, first of all, the need as reflected by the oil and gas prices. Secondly the effect that Information Technology is having on releasing the constraints within companies and industries. We are in a period of time where anything can be accomplished, and if done properly, with the People leading the way, we can solve these problems.

It was Professor Ludwig von Mises who noted that the industrial revolution was the solution to the problems of the day. I believe the Information Technology revolution is the solution to the problems of today. This book, which originated from the McKinsey article, speaks clearly to the time and place we find ourselves in.

Ask any mid-level professional or manager at almost any large company - even a successful one - and he or she will tell you that the growing complexity of work is becoming a greater and greater problem.

Starting off with a clear statement of how congested and constrained our traditional organizations have become.

One survey by the research firm Net Future Institute (NFI) showed that nearly 75 percent of senior managers consider the workload of people in their department to be too heavy. Another survey by the same firm found that most people do their best business thinking not while at work but while commuting to work or in their home. Why? Because that's when they finally get some time to think.

The problem in oil and gas is that the organization that brought us to this point in time can not deal with the complexity of the current business. The best term I have heard is that the easy or cheap energy era has ended. The firms as they stand have provided commercial volumes of energy to the markets for many years. When oil was valued at $9.00 to $22.00 a generations worth of time had past. The constraints of change and the complexity of the business are catching up to a generation of neglect in building the business. What brought us to this point is inadequate for our needs. The traditional Schumpeterian creative destruction has been delayed in this industry because of the current earnings of the producers. But if you listen closely, they are claiming their costs are inching towards the point where the bureaucracy will not be able to earn anything from their production.

The People who have worked in this industry are the ones that need to lead the changes in these organizations. These companies will never exercise the level of change that is necessary to bridge this new energy era. Are we to wait for this industry to turn to ashes before we are motivated to make the necessary changes?

The increasing frustration of the workforce is symptomatic of an even more fundamental issue: the organization of most companies today - and how it limits the ability of talented people to perform and take full advantage of the opportunities of the 21st century. The modern, "thinking" company should be a fluid and fast moving creature, in which its workers discover knowledge and exchange it with their peers collaborating with others to create value.

In many ways the industry is not just dealing with the difficulties of the business they are in, they also are faced with a "better way" to do their work as offered by IT.

The problem, however, is that most of today's large companies fall well short of creating conditions that maximize the productivity of their thinking, problem-solving, self-directed people. Too bad this thinking machine isn't working nearly as well as it should be.

And here is the paradox that most people face. The technology provides the opportunity to move to a "thinking, problem-solving, self-directed people" but also locks them into the traditional ways of the organization. As I have mentioned many times before "SAP is the bureaucracy".

Much of the communication is worthless noise: In a 2005 survey conducted by the McKinsey Quarterly, of senior and top executives, 60 percent said their company's size and complexity have made it somewhat difficult, or much more difficult, to capture opportunities than it was just five years ago. Little wonder, then, that ineffective bureaucracies develop within large companies, that the head office seems remote from the field, and that the "left hand doesn't know what the right hand is doing."

As Nobel laureate Herbert Simon stated. "What information consumes is rather obvious. It consumes the attention of its recipients. Hence a wealth of information creates a poverty of attention."

A symptom of the problem companies face today is simply the amount of energy they waste. In the cities the problem is congestion. In companies, the problem is unproductive complexity.

It is opportune at this time to ask what happens next. In oil and gas we see the past leadership holding to the notion that they do not understand why the prices are so high. The fact is the market is allocating the financial resources to these firms to deal with the increased complexity involving the earth science and engineering disciplines. Information Technologies are enabling people within these organizations to do so much more, however, they have no authority to exercise any change. Is this situation to remain in the oil and gas industry for another five years? Or is there an alternative, such as this software development project?

The organization of most companies today bears limited resemblance to the original intended design. While there are plenty of well managed companies that are exceptions, most are struggling: Their hierarchical relationships have become so confused that the power of hierarchy to drive performance is compromised. This dysfunction is usually felt most severely at the front line, where the brainpower and the energy of front-line workers are significantly consumed in the struggle against the internal complexity of their organizations.

This is a software development project that has researched the problems in oil and gas and arrived at a solution to these problems. The five years that I have spent on this research is time that would have needed to be expended, and therefore, I am able to offer the industry the ability to turn back the clock on the past five years and establish this development as a priority.

The fact is that even the most self-directed, brilliant people can't create wealth by working alone. They need help mobilizing the talents of other thinking intensive people and securing crucial capital and labor. They need to be able to convert their thinking into moneymaking activities.

In order to proceed from here requires the People who are doing the work in these organizations to put their heads together and make this application capable of doing their jobs. This mass collaboration could start at anytime and the longer we wait, the longer the problems will fester. The involvement of the People is not something that can be replicated in any other manner. The industry needs to fund these developments and I can not do the work of thousands so time is now being lost.

A new problem

In this book McKinsey articulate further problems that are inherent in the bureaucracy. One that reflects that the lack of motivation to resolve these issues is rewarded by the price driven increases in profits of the producers.

Much of the underlying problem is the use of internal financial reports that do not reflect the underlying economic relationship of intangibles to profit making. Managers can look good on reported results, even as they take actions that hurt the enterprise. These issues are compounded by performance measurement approaches that reward selfish, divisive behavior at the expense of collaborative behaviors for the common good.

Mobilizing Mind Power

What would be the effect of having this software operational in an oil and gas concern? Would using the JOC revolutionize the performance of the science based oil and gas producer?

If your organization can harness this mind power -- if you can boost the profits from each thinking employee -- then your organization will be on the path to great success and competitive advantage in the 21st century world.

and

Most companies are tapping into only a small fraction of the potential to create wealth from the mind power of all the managers and professionals they employ. During the 20th century, the costs of coordinating work across large companies were so large that mind power was trapped in small pockets of people scattered throughout each company. But nowadays this is no longer true. As a result, today there is an opportunity to earn large "rents" (that is, profits disproportionate to the amount of labor and / or capital that are invested.)

Where the Money is

Obviously it is my belief that the changes in organizing the oil and gas industry will provide value to producers, individuals, and society. Alternatively we face a future led by the bureaucracy and its continued failure. Does anyone see how these organizations will survive until 2020?

It would be reason enough to develop better organizing approaches if all that was accomplished was to make the jobs of talented employees more rewarding. All business leaders know how important talent is to their current success. Furthermore, it could be argued, actions taken that will enable companies to attract, develop, and reward talent bring their own reward. Still, we believe developing a better organizing model is more that that. In the 21st century, its where the money is.

What I think is a critical component of this development is a refocus on the competitive advantages of the oil and gas producer. The land base and physical assets are the producers' competitive advantages. As I indicated in the Research & Capability module the intellectual property of how things get done is transferred away from the producers to the vendors, suppliers and People working within the industry. That is their competitive advantage and hence their motivation to develop the most advanced drill bits, rigs, etc. The producer does not have the scale and scope necessary to fully develop the idea, or the application to make the idea commercial. So lets stop playing the game of no one earns any intellectual property because the industry holds all the money. The producers have to actively spend the resources necessary to fully develop the support industries that will make the energy producer the most innovative and profitable. We won't get there if the intellectual property is passed around to the vendors competition by the producer firm. And that also applies to this software development project.

Because of the development of globalization and advances in technology, scale and scope effects have increased across the board -- particularly in those effects related to intangibles. By "intangibles" we mean such assets as the brands, intellectual property, and proprietary networks that are unique to individual firms.

If we don't allow the ideas that are a critical part of an innovative science based industry to be developed where and when they are needed, we will be stuck with the problems of the 20th century. The clock is now ticking.

The opportunity is to bring the entire firms [industries] mind power and the related intangibles to every job, to increase the value of every person's work, every day.

and

We are arguing that companies need to view investing in designing and building strategic organizational capabilities as means to capturing rents from everything they do. Companies are being constrained, unnecessarily, by the unproductive complexity of working in their organizations. We believe that investing in capabilities to relax these constraints, thus enabling a company to mobilize not just labor and capital but also the company's unique mind power, is the key to creating wealth in the 21st century.

and

Furthermore, we truly believe that companies have only begun to tap the opportunities to create wealth in the 21st century. Why? Because they are still using an organizing model designed for the industrial age rather than for the digital age. to create greater wealth in the future, we believe that all companies should make organizational design the centerpiece of their corporate strategies.

Please, join me here.

Technorati Tags: People's, McKinsey, Energy, IP, Organization, User,

Two More Draft Specifications

I am pleased to submit to the community the Knowledge & Learning and, Research & Capability Draft Specifications. (Please note these modules are very similar and therefore each file contains both specifications). These are the eighth and ninth Draft - Specifications and I will complete the last two Performance Evaluation and Analytics & Statistics Modules before the end of July 2008.

• Security & Access Control
• Petroleum Lease Marketplace
• Partnership Accounting
• Accounting Voucher
• Resource Marketplace
• Financial Marketplace
• Compliance & Governance
• Research & Capabilities
• Knowledge & Learning

Technorati Tags: People's, Specification, Research, Knowledge, Learning, Capabilities,

Why the companies.

In my last post I pointed the accusatory finger for this energy problem, at the oil and gas companies, particularly the majors. The first aspect of the accusation is that they knew, as I had pointed out, that their organizational constraints would limit their level of activity far below the market demands. This may seem a rather harsh point of view, which they should be given the benefit of the doubt about their knowing or not knowing. It was clear to many that this situation was inevitable, I was providing a solution, not identifying the problem.

The management of the companies knowing the situation would become as difficult as it is, undertook to do nothing. They were making money and would continue to do so when the prices went up. This lack of motivation to do anything was the choice of these managers. Show me a major producer that has earned any increase in their profits other then from higher prices.

Educating the public. Even today companies and their industry representatives claim to have no idea why prices are so high. What business are they in, do they mis-understand their markets so fundamentally? What could have been done in the past five years to mitigate the problems we face today? If consumers were given the real facts, would they have gone out to purchase the SUV they feel they are now stuck with? The duck and run from the truth policies of these organizations have allowed John Q. Public to walk blindly into the biggest issue ever facing mankind. The motivation to dip into the trough is strong with these managers.

In September 2003 I published a proposal to the industry to conduct the research of determining if the JOC was the key organizational construct. Given the opportunity to deal with this constructively, the industry represented by Petro-Canada, Encana, CNRL, Talisman and many others, chose to hire Cambridge Energy Research Associates (CERA) to research the idea that I proposed! Shows you the scope of what these people are capable of. And I was not dealing with some low level manager; I was speaking with CEO's of these firms. Luckily for me I was able to complete the research ahead of CERA. In publishing the May 2004 report the only question that was asked was who paid for the research? Well I did, and now I own it lock, stock and barrel.

It's been this last point that really bothers the companies. They have no desire to ever let anyone derive any value from Intellectual Property. It is since this time I have been forced to find employment in other industries. So here the industry was presented with a workable idea that made more sense then anything they had read before. (My words). And they hush it up and try to kill it. Each of these companies struggles with the inability of SAP to do any after sales service, why would they refuse any new idea? And that is the last point that these organizations are culpable for, their efforts to kill this opportunity to solve this problem before it affected the consumers.

These companies are more or less suffering from a grid-lock organization that long ago failed. Recall in 2007 even Exxon lost 10% of their production base after spending an additional $25 + billion in capital. These dinosaurs will never be able to keep up with the decline in their production base and are therefore slowly rapidly dying. So who else, other then the consumers are suffering as a result of the manager’s lack of accountability and motivation? Clearly the shareholders are at a sizable risk as they watch the managers slowly run the company into the ground.

I am calling on those investors to fund the developments of this software development project. A means for which the shareholders could be provided with the alternate organizational systems enabling them to manage their assets. The current oil company managers know that in today's business environment you must have the electronic systems in place first, or you will be relegated to manual systems to run your operation. The managers have their investors over a barrel.

How much longer will these managers be left in control will be determined by the investor class. An investor class that happens to be comprised mostly of John and Jane Q. Public, the people that are now facing the energy problem. What is needed is for them to act as I see no other alternative.

Technorati Tags: People's, Call-to-action, Organization, Research, Failure,

Very bad news.

I believe that the solution to the current energy difficulties is to eliminate the bureaucracy and replace it through the more natural form of organization, the Joint Operating Committee. Supporting that organization with these future software developments, will enable the markets to form and begin the process of eliminating the detrimental effects these bureaucracies have brought to our door.

I have fought with everything I have to make this situation as painless as possible. With $135.00 oil being a reflection of how I have failed to convince these bureaucracies to move to this alternative vision. Let me make it absolutely clear, these bureaucracies fully understood and agreed to the underlying hypothesis in my thesis. I originally floated this idea in September 2003 and published the full report in May 2004. What they have done since that point in time proves that they are incapable of acting in a responsible manner towards the energy demands of consumers.

The bad news that I feel is that the time has come where the real pain will soon begin. If the Saudi people have, as they announced this weekend, increased their production by a half million barrels, they have proven to me that they have done everything that they could or can. When the accusatory finger is pointed as to who's fault this is, I can assure everyone no one in the Middle East is to blame, the companies are.

The Saudi increase only shows their concern for the market. And I would have to state their concern is as genuine as mine. The system of how energy delivery in what we call the western world has reached a critical point where there is nothing left to give. A slight panic by drivers in North America will probably lead to excessive demand of the system that can not be addressed by the refiners, their inventories or the level of world oil production. This is a critical breaking point where the fallout will be permanent, and all the kings horses, and all the kings men, will never be able to put it back together again.

There is some difficulty ahead. If we are smart we would implement a consumer oriented rationing of gasoline. The primary priority should be to keep the transportation system operational at full capacity. I think a rationing is more then possible and will mitigate the disaster this may well become. The other task is the need for this software development, and the People who work in oil and gas today, get behind the re-organization of the energy industry to enable the production volumes that these economies need to function.

I believe that given the situation we have today, the resolve of the People in the next 5 - 10 years can restore the energy production our economies need and we can look back at this failure of the bureaucracies as one of the darkest periods of our civilization.

Today's problems will not be solved by today's thinking. Please, join me here, and pray for peace.

Technorati Tags: People's, Call-to-action, Change, Peak-Oil, Failure,

Management of IP (Intellectual Property) in oil and gas

I have a few thoughts on how IP is developed and used in oil and gas and why it needs to change, quickly. First, as I have documented in the Resource Marketplace™ Module. The competitive advantage that a producer has is contained within their land and production base. The application of the earth sciences and engineering knowledge, understanding, and capability to their land and production base are the means in which to build value. The IP (intellectual property) is how the market provides the commercial means of building the producers value.

And IP is the markets way of building value and key competitive advantages. The holding of IP within a producer company is redundant, of no value and an impediment to innovation. The market uses the tools of IP to prepare the state of art research and knowledge for its own monetary gain and competitive offerings. In the hands of a producer IP is useless.

What would holding a number of patents on drill bits provide a producer such as Exxon Mobil? Or in this case, the IP of using the JOC as the key organizational construct? Again in the hands of a single producer it makes the ideas unavailable and unusable. In the hands of an entrepreneur it can build value for the entire industry. Neither of these two examples provide the producer with any strategic competitive advantage. Nor does the producer have the economics of scale to make the innovation or research worthwhile. They are not in the drill bit or software businesses.

Until the producers realize the IP is not their competitive advantage, and accept the markets holding of these ideas, the market will not respond to the needs of the producers. If the markets efforts are in vein and the producer just hands over one vendors IP to the next, nothing will develop that is different from today's $138 / bbl marketplace.

Not recognizing the IP of others as a practice will need to change before the producers can begin to approach the market demand for energy. For the past number of years the management of IP by the industry has been catastrophic. Other then the large suppliers such as Schlumberger, BJ and Halliburton's ability to file for patents. Most of the IP has been ignored by the producers so that they do not have to grant the monopoly rights to the technology developer. Since the energy industry is a primary business and 100% of the resource value is received by them, does not mean they can strip, cherry pick, abuse or otherwise attempt to steal the IP of the market.

Over the past 5 years my personal experience in this area has given me first hand knowledge of the depths of stupidity the companies taken the concept of IP ownership. This must stop for the betterment of society. If we continue in the fashion that we have, we will never be able to meet the markets demand for energy.

Central planning is dead, long live the market.

Technorati Tags: People's, IP, Market, Research,

Draft Specification - Compliance & Governance™ Module

Compliance & Governance™ provides the methods that the firm deals with the investment community and its associated regulators. (SEC, Tax and Royalty). The unique attribute of how the People, Ideas & Objects™ application provides the compliance, is by using the advanced technologies available to automate as much of the processes as possible. Technologies that the industry inherits in this software development capability and the regulators embrace of technology through their published API's (Application Programming Interface) and Frameworks. The best example of which is the SEC's XBRL initiative.

In this module we are ensuring that the policies and procedures of the People, Ideas & Objects™ application and its users are in compliance with the various regulations and requirements of an organization. In essence, through building this application we are moving the compliance and governance framework of the firm to be in alignment with the four other frameworks of the Joint Operating Committee. Maintenance of the producer in compliance to the frameworks of the SEC, tax and royalty regimes is this applications compliance goals. The governance aspect of the application assigns the role and responsibilities of the People to their tasks based on the Military Command & Control Metaphor.

A key to the resolution of the industries ability to find and produce the energy the market demands is through the efficient application of capital. This point has been dealt with in the Financial Marketplace™ module and other modules in this specification. Raising money requires access to public funds. The size of the innovative oil and gas producer should not be an impediment or constraint of access to the markets of oil and gas activity, and, capital access. If a firm is a small partner in a few projects, their ability to raise capital will be dependent upon their level of compliance capability.

Copies of the specification with the other six module drafts can be downloaded from the old wiki .

• Compliance & Governance™
• Security & Access Control™
• Petroleum Lease Marketplace™
• Partnership Accounting™
• Accounting Voucher™
• Resource Marketplace™
• Financial Marketplace™

Technorati Tags: People's, Specification, User, Development,

Robert Metcalfe on MIT Video

As I've mentioned in this blog before, Robert Metcalfe is someone that I find to be great interest to this energy problem. The introduction of Metcalfe in the Video provides a good summary of his background, and I would note that even despite his accomplishments his attitude remains fresh, and challenging to the status quo. The energy industry needs to be shaken and Metcalfe does a bit of shaking in this video.

Another aspect that Metcalfe was involved in was in participating in the MIT's founding of the Massachusetts Enertech Cluster. I held out high hopes that this was the necessary direction of the academic community, only to find soon after its forming it was hi-jacked by the climate and alternative fuels red herrings. I expressed my disappointment of this in this blog post here. Metcalfe is single handedly criticizing the Massachusetts Enertech Cluster in this one hour talk and returning the hope that I expressed of the MEC. Early on in the presentation @ approximately 9 minutes he states a few interesting points:

"Here are these trillion dollar markets (energy) that are poorly served."
"The people who have been doing energy investing for 50 years are annoyed with people like me, Internet people, invading the energy space." Stating, "look you guys have had your chance, and haven't solved it, move aside, here come the Internet people." (Here, here)

"In energy there are some particularly nasty people out there that are not going to welcome your technological developments."

Stating the goal should be that we pursue "clean" and "cheap" energy, Metcalfe summarily attacks the founding premises and objectives of the Massachusetts Enertech Cluster (MEC). Stating that;

• Climate change is a "motivational bubble" that may be solved quickly.
• Conservation should not be an objective of this project (MEC), we need abundant energy not conservation. Our economies need to grow, not be stifled by energy conservation.
• No Nukes (MEC), which meets the clean and cheap energy objective. Technology can and will mitigate the effects of nuclear energy production.
• Corn ethanol is a fraud.
• The government needs to adopt a Manhattan styled project for energy. The government will have no solutions outside of taxes.
• Only scale projects are needed, which of course is very foolhardy. Innovation will come from everywhere.
• And lastly there are no silver bullets. Metcalfe suggests we spend more time finding the silver bullets instead of opposing their development.

Which leads me to this project. How is it that the energy industry can ignore the People, Ideas & Objects application as a solution?

Technorati Tags: People's, Massachusetts-Enertech-Cluster, Energy, Metcalfe, Science,

Constrained Organizations

In a follow up post to the "Unconstrained Prices", I thought it might be a good time to reiterate the reasons that I see for the ever escalating oil and gas prices. Energy production is driven by the earth science and engineering disciplines. As one would expect, over a given period of time the science and engineering will be subject to new discoveries and findings, leading to further enhancements of the underlying sciences. Innovation plays a key role here in that the new sciences bring about new innovative uses, and in turn, lead to new science. This is the key area of long term value add in the oil and gas industry. A producer that is able to apply the science and ideas to the problem at hand will, over time, increase their production and reserves. I'd like to call this the "Capabilities Approach" to the oil and gas industry.

If we reduce the competitive nature of the industry down to this Capabilities Approach. We see the interactions and understanding of the industry as it developed over the past 100 years. Someone figures out how to drill deeper, then the subsequent wells expose more oil bearing formations and hence more opportunities for increased oil or gas production. As time has passed the more lucrative and "big" ideas have been applied in broader areas, and for longer periods of time.

As we have learned from Stanford Professor Paul Romer's new growth theory, "more" ideas are needed to progress forward from the current base of understanding. The supply / demand for these ideas is not linear, but logarithmic, and occur at a much faster pace through their life cycle. Enter the classic bureaucracy and realize its efficiencies are based on expansion of the underlying activity (growth) and continuous process improvement. Change, and particularly scientific and engineering change, are the hierarchy's deficiency. What we need is a new form of organizational structure that will support and enable the industry to compete in this dynamically changing and high demand marketplace. Until such time as we can change the performance dynamics of the organizational form for the oil and gas industry, prices of commodities will continue to rise.

It is these comments and ideas that I have asserted in this blog for the past few years. They are a direct result of my thesis that provides evidence that the Joint Operating Committee is the method of organization of the innovative energy producer. We need to start building the software that I have specified in the 11 module People, Ideas & Objects application and unleash the potential of the sciences for the betterment of society. I find these ideas are consistent with many of the industries leadership. The International Energy Agency recently made some comments that reflect these concerns.

The IEA states that by 2015 there will be a shortfall of 12.5 million boe / day.

"Future crude supplies could be far tighter than previously thought."

"Reflects an increasing fear within the IEA and elsewhere that oil producing regions aren't on track to meet future needs."

"The oil investments required may be much much higher than what people assume."

My personal favorite;

"This is a dangerous situation."

"We are optimistic in terms of resource availability, but wary about whether the investments get made in the right places and at a pace that will bring on supply to meet demand."

Yet nothing is done by these bureaucracies. They know what the problem is, there is just no motivation for them to make the necessary changes. Record profits at Exxon Mobil mask the 10% production declines. We need to consider who's responsibility this problem is, as the companies are unwilling to do so. After all it is not they who will be suffering with energy shortages but society in general.

On the other hand, and what I truly do not understand is that the $135 prices are rewarding those that find and produce the energy. This is an entirely new dynamic for the industry, when will we see the companies that are able to outperform the current crop of producers? The answer to that question unfortunately is not soon. Until this software is built to organize the efforts of the industry, our choices are limited to the status quo or manual systems. Join me here.

Technorati Tags: People's, Call-to-Action, Energy, Engineering, Science,

Draft Specification - Financial Marketplace Module

I am pleased to submit to the community the draft specification of the Financial Marketplace Module. This is the sixth of eleven modules, and last of the three marketplace modules in the specification.

What may not be obvious at first glance of this specification is the Marketplace makeup of the module. Financial resources are critical to the energy industry because of the intense capital nature of the business. This marketplace therefore provides a number of means for the innovative producer to manage the cash resources of the firm and apply the budget discipline at a finer level of focus, the Joint Operating Committee.

One thing that is very obvious about this module is the radical nature of how the nuance of committing capital amoungst the partnership is handled. Offering a multitude of options for the innovative oil and gas producer and eliminating many of the issues associated with raising money.

I have purposely provided a very light sketch of the Financial Marketplace Module. This is not my area of expertise, and many of the users in this community will better understand the open opportunity the module provides. I think the seventh module to be published will be the Compliance & Governance Module.

• Security & Access Control Module
• Petroleum Lease Marketplace Module
• Partnership Accounting Module
• Accounting Voucher Module
• Resource Marketplace Module
• Financial Marketplace Module

Technorati Tags: People's, Specification, Market, Change,

Unconstrained prices.

We have seen the price of energy increase by rather large amounts over the past 6 years. One would have to think that the upper limit of what is reasonable has to be near.

Oil and gas is unique in that it is the only resource that has a finite value. There are only so many volumes of oil and gas that ever existed. Like wood, wheat or rice it is not renewable, and like gold, silver and platinum not reusable. Once oil and gas is used its irretrievably lost. These attributes are what make them unique to other commodities.

The other aspect is that they are expensive, but more importantly difficult to find and develop. Conceptually the energy industry is the most difficult from a science and engineering point of view. As we have progressed through the cheap energy era, we now find ourselves in the era of difficult energy.

The pace at which the consuming public has learned the dynamics involved in the industry and its pricing has increased. The point that I want to make in this entry is that oil and gas prices are no longer constrained by the idea that there are easier to produce alternatives. The market has always generally believed that corn, wind and solar would replace the "dirty" oil used to power the SUV. That the future of the world's energy sources would now suddenly be clean, cheap and environmentally friendly.

The lesson that has been difficult to learn is that we can't use our food for fuel. Rice, wheat and corn are being disrupted and it is the food supplies of developing nations that suffer. Secondly the volumes of energy consumed in the alternative energy manufacturing process are higher then what is produced. And finally solar and wind, as they stand today, are prepared to take on less then 1% of the total supply of energy

So where may we see the price of energy go? If my suspicions are correct, we may ultimately see the price of oil reach $650.00. Within the next three months we may see $175.00 / bbl and we should consider that cheap. Cheap because it will only lead to temporary shortages.

Technorati Tags: People's, Peak-Oil, Energy, Market,