Professor Clayton Christensen on MIT video

To be honest I am not a fan of Clayton Christensen's. I find he is standing on the shoulders of giants and not adding much more then a clear message. Lets call him the Oprah Winfrey of innovation. Nonetheless, this video provides some very interesting insights in the topic of innovation and where we find ourselves in the oil and gas industry at this time.

Professor Christensen has written many books all evolving around the theme of disruptive innovation. He sites three ingredients that are needed to develop a disruptive innovation.

Technological Enabler

As I mentioned here a while ago, the real innovation of this software development project is the virtualization of each and every worker in the oil and gas industry. It is impractical and inefficient for individuals who may work for a variety of JOC's and the companies that are represented there, to move from job to job during their day. Although most of the head office staff only have to go a block or two, people in the field would have farther to travel. Impractical by any measure. In order for people to physical meet and discuss the business of the JOC, the industry would be reduced to a standstill while people reconciled their calendars. The virtualization of the working environment and the introduction of Asynchronous Process Management (APM) (a cornerstone of the People, Ideas & Objects technical vision) deals with these two problems.

Business Model

It's not known if Christensen is talking about the People, Ideas & Objects business model or one of the companies in the oil and gas industry today. In terms of this projects business model, in comparison to the big SAP and Oracle applications, we provide a comprehensive vision of how we see the oil and gas industry operating. The Draft Specification captures this vision and provides an understanding of how an oil and gas producers business could operate. Oracle and SAP have made the sales to the oil and gas business, therefore they doubt anyone else would buy it, and that, other then they are not welcomed by the producers, is why they don't show up on the radar screen.

People, Ideas & Objects are making this application on a development cost plus basis. This application is not sold as an application but as a service. The costs of which are allocated throughout the global oil and gas industry. What was a major cost and effort to host and install Oracle or SAP are tasks borne of the bygone (bureaucratic) era. In addition to the software as a service, the community that is involved in building the software application provide the services to the industry in running and managing the oil and gas producers enterprises, or should I say JOC's.

The costs associated with these activities will be billed by the community members service based organization, and an assessment of a fee for the use of the software. The software will be billed on an assessment basis of x dollars per barrel of oil equivalent per year. At $10 / boe / day a firm with 200,000 boe / day would therefore pay $2 million for their use of this system. This is based on the development requirements as determined by the community.

The oil and gas industries growth strategy and / or business model for the past 30 years has been to muddle along. Great when the oil and gas was easy to find and produce. Muddling along doesn't provide a business model that can compete when the sciences and engineering are the key differentiating competitive advantages. The focus needs to be on the science in order to achieve profitable operations. Science and an ERP application like People, Ideas & Objects.

Someone tell me how a generation of oil and gas companies, reared on muddling along, are going to change their strategy to one based on the sciences in the time that the market needs more oil and gas? They haven't in five years that I have been trying, and Ill bet the ever decreasing size of the producers production will eventually trigger their own Wall Street type of collapse. As Nelson and Winter noted recently, industries evolve, companies come and go.

Commercial System

See Business Model discussion about how this community works.

Christensen goes on to note companies will either reject or co-opt a new technology. I can assure you the oil and gas industry has rejected this technology. I think I have also provided a strong case as to why their demise should be accelerated. This is the task I am calling for the shareholders of oil and gas companies, to withdraw their support of the bureaucracy and fund these software developments to ensure their best interests are managed properly. Otherwise face an uncertain future that may be as tumultuous as what Wall Street is feeling.

"Facilitated User Networks" is the third type of disruptive business model that Christensen notes. Stating they are lower in costs and more effective in terms of performance. I think this software development project meets that definition and criteria, and the oil and gas industry sure needs lower costs and higher performance. Design of the Draft Specification is clear, clean, crisp and concise. Anyone with 5 - 10 years of oil and gas experience can see the way in which the industry will operate and how their role fits within this community and the larger oil and gas environment.

The investors that have traditionally invested in oil and gas are of course the people who know and understand the business. There are others who have attained larger holdings and may have had some influence on the management in the past. These are the shareholders and investors that I think would have an interest in funding this project. If you know of any, and can send them the URL to this weblog, it would be appreciated. This project is now at a stand still until such time as funding is provided. I have established a modest budget to keep the "doors open" but up to this point I have received no indications of any funding. Please join me here.

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Where we're at in 624 words.

The following is a summary of where all the time went. September 2003 - May 2004. The beginnings of the People, Ideas & Objects software development project were based on my Master's Thesis. My hypothesis asked if the oil and gas bureaucracy had become redundant and if so; would the Joint Operating Committee, augmented with today's Information Technologies, provide for a more innovative footing of the oil and gas industry?

The findings of this research confirmed the hypothesis. If a producer was to move the compliance and governance of the bureaucracy to the legal, financial, cultural and operational decision making frameworks of the JOC, a greater alignment of these frameworks would provide for far greater levels of innovation. Additionally it was determined that systems define the organization. In today's business, any change in the organization must firstly be planned and software systems developed to identify and support the organization. Otherwise the organization will be relegated to manual systems.

May 2004 - December 2007 Comprehensive research was undertaken to determine; if the JOC was adopted as the key organizational construct of the oil and gas producer, what would an ERP styled system look like.

January 2008 to July 2008 a "Draft Specification" was published providing an overall vision of the systems modules. The system currently has eleven modules defined in the "Draft Specification" as follows:

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

One of the main reasons the People, Ideas & Objects software application can work is that when embedded in a transaction based collaborative environment, there is no need for the people to physically move from JOC to JOC. Bridging the physical distance between the participants in the JOC is enabled in the virtual transaction based environment of the application, which in turn enables the re-organization.

Since July 2008 I have attempted to make the case that the current bureaucracies are indeed failing and are only operating in managements own best interests to better themselves. Showing that declining reserves and production are leading to lower profits and even losses. Costs are escalating incrementally as project targets slip. Systemically using derivatives on the commodities they produce to prove they have no idea or understanding of what business they are in. During all this time, management have been rewarding themselves for this performance with multi-billion dollar stock option compensation.

August 2008 saw the commencement of the discovery process on how the funding of this project can proceed. Sourcing revenue for this project from the disenchanted oil and gas investor is the most likely candidate for starting the revenue. Unlike management's fleecing of Bear Stearn, Fannie, Freddie and Lehman shareholders, the People, Ideas & Objects software development project provides the oil and gas shareholder with options.

The purpose of this project is to build an environment where the oil and gas investor can produce their oil and gas in the most profitable manner. This is about enabling the industry to evolve at the speed of the underlying sciences. Based on this body of intellectual property, where the software is hosted in the "cloud," and the community of users provide the services to the producers in their own service based offerings.

This software development project needs Users (Oil and Gas workers of all professions), Developers, Project Managers and Oil and Gas Investors. The oil and gas investor has a vested interest in sponsoring this project and providing the funds necessary to build the system. This system provides the investor with an alternative organizational structure to have their oil and gas assets managed by this community. Managed in the most profitable manner where they are able to effectively control their assets in their best interest.

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Shareholder beware.

This current financial meltdown is not an under regulation problem, but an over regulation problem. Although I have issue with the expectation that markets will fix everything, and this may be a symptom of that expectation, the real culprit is the separation of ownership and control within a business environment.

I pulled this reference from the www.adamsmith.org website.

...negligence and profusion resulting from
the separation of ownership and control in a business enterprise.

The author of the article that made that quote brings up an interesting point in the subsequent debate. And that is, the reference to the separation of ownership and control being the Federal Reserve and Treasury Departments recent actions to companies on Wall Street. The Fed and Treasury are certainly not accountable to the shareholders. He makes the following point as well.

There’s a pattern here. The biggest shocks to the financial system have all come from stock market companies. By contrast, hedge funds, which many expected to cause trouble, have been innocent bystanders. These are, generally, owned as private partnerships. So one form of ownership has caused a crisis, and another hasn’t.

To add insult to injury, the Fed and Treasury are trying to stop this immovable, and natural force. This is a Republican administration that is based in the Reagan doctrine. Recall that he stated the nine scariest words in the English language are;

We are from the government, we're here to help.

In Saturday's Wall Street Journal, Amity Shlaes says we are following the same failed steps that were taken in the lead up to the great depression. Her article matches the players and their roles between 1929 and today with frightening similarities. Do we really believe that the government is going to be able to solve these business problems?

Within the oil and gas industry we have a different type of problem. The shareholders are being fleeced by the management. Why, because the rules and regulations that are designed to protect the shareholders limit their actions to a few minutes each year. That also assumes that the investor can rally the other shareholders to fight the management. A proxy scenario that is played out in only the most extreme cases.

I have written many times about Professor Carlota Perez. Her analysis shows the results of seven severe global changes in economics. These have occurred over the past three hundred years with the last one being 1929's. She has identified the many stages that an economy progresses, and describes in historical detail the scope and scale of the changes. In a nutshell she has detailed the process of how the old industries die off and the new industries take over as the key in the economy. Her prescription is very accurately being played out on the today's newspaper headlines .

In each case Professor Perez details the important role that financial capital fills in these transitions. Overbuilding of the infrastructure of the next great surge is something that has systemically happened. Whether it was roads, canals, shipping or in today's instance the Information and Communication Technologies. (ICT)

This is a healthy period and one that should be embraced. What the old economy will be doing is falling flat on its face. The scope of the failure according to Perez has to be significant enough "that people know the old ways no longer work". That is the only motivation that people will have to move to the new economy. Financial capital then assumes a much less significant role in the economy. This eventually leads to the crashes and other "meltdowns" that are also systemic with her data and analysis. Product capital, something that barely exists in my opinion, rises from the ashes of the financial capital.

It is my opinion that we have another problem on top of the ones that are being discussed here. That is the management of organizations, companies and governments are invincible. That is to mean they are employed in the act of solving problems for the most part. Lets call this the new oxymoron, the art of management. It may be up to half the people in the U.S. economy are employed in a role of overseer. They can't help themselves but to manage their way out of a crisis. I don't think this was necessarily the case in 1929 and prior economic collapses. At some point, however, they will realize the fact that no one can stop these forces and they are not necessarily bad, and get on with the prosperous future that is in front of the us. Schumpeter calls it creative destruction for a reason. 

Charlie Rose hosted an interview with AIG's former head Hank Greenberg. As a significant shareholder in AIG he feels he should have a seat at the table when discussing any future firm plans. In the video, Greenberg is completely in the dark in terms of how the company is going to be affected, and no one has returned his calls. Amazing. This is not capitalism. The problem here is that we are talking about Hank Greenberg. If he can't get anyone to call him, why would any one call the smaller investors?

The attitude of the Fed and Treasury may have assumed that the time for Hank Greenberg to act was long ago. That he didn't act in a timely manner was his problem, and he should bear the consequences of his inaction. I think that the love affair that Hank had with Elliott Spitzer was probably what distracted him from fulfilling his rightful duties. Imagine that an individual run out of their business for innuendo and rumors from a dirty government official.

Lets be honest here, western society has believed the shareholder was passive. That management were best able to manage the company. These statements, from both perspectives, are now seen as folly. The investor can not sit idly by uninvolved. We all know it doesn't work that way. And more regulations on the management only entrench their useless activities deeper within their untouchable domain. Has anyone heard a single complaint about Sarbane's Oxley lately?

To my point in this web log. The oil and gas investor can see clearly how they are being treated, and their prospects of future treatment in this environment. They are also the leaders in this capital intensive industry. The money has to go first to make things happen.

Here is what I recommend for the oil and gas investor to do in the next five years.

• Start funding this project.

Our budget for this year is only $180,000 and that can be shared amongst many investors.

• Get out of the oil and gas companies that you own now.

Oil and gas has to transition from the old era to this new era. Picking the winners and losers is impossible. People, Ideas & Objects is the new era of how an investor can manage their investments. Actively, much like a hedge fund that was discussed earlier.

• Start picking off some of the properties in oil and gas that will be offered for sale.

The investors lack of investment in these oil and gas firms will cause the financial's to deteriorate. Particularly with the credit tightening that is now ongoing. The energy companies are going to have shortages of cash and the properties will need to be sold to maintain operations.

• Get involved in actively managing these assets by getting involved in the People, Ideas & Objects ERP system and community.
  

Don't let what is happening to Hank Greenberg happen to you. At the very least you should hedge your bets, join me here.

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Google Search Appliance

Google recently did a presentation about their current version of the Google Search Appliance. As with my recent post of how documents work in Google Docs and how I see similar behavior in the proposed People, Ideas & Objects Draft Specification. I will be adding the key points of Google Search Appliance into the Draft Specification.

Some of the key technologies in Google Search Appliance put it in the must have category of any firm. For this project that would include project managers, users, developers, producers and Joint Operating Committees (JOC's). It solves the key concern that I have about enterprise search, that being the right access to the right data.

I recommend that all readers view the entire presentation. It highlights far too many things that are of significant value to this software development project. A few of those highlights are listed here;

• Kerboras based User queries - makes queries recognize the scope of the users authority.
• Single Sign On (SSO) - enables the user to maintain high level security without having to constantly log in.
• Customized authority and authentication - able to build off the Security & Access control module of the People, Ideas & Objects application.
  
• Domain Specific Queries - enables the user to request data from People, Ideas & Objects and only the information within their domain will show in the search results.
• Document level security.
• Key match search provides authority attributes.
  
• Databases (MySQL) - can include data elements from the database as well.
• Related Web Search - search results can include web based results.
• Collections are indexes from Google and are unlimited technically, but overuse has a performance hit. Provides the ability to focus search in specific areas of interest.
• Customizable "front-end" or search page.

With this search capability users will be able to access their data from anywhere and at anytime. Yet provide the JOC and producer companies the user works for with a trusted source of search technologies.

Keeping on the topic of Google and their technologies. The addition of multiple languages to this application presents a very difficult technological issue. I have set up two projects in the private wiki; the first project will address the scope of the language related technical issue. The other project is to determine if Google's Language API can provide the translation from English to the other languages that may be used by users in the People, Ideas & Objects application.

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How will Oracle and SAP approach the oil and gas market.

Oracle and SAP have their systems installed in many of the top oil and gas producers. Encana for example uses a variety of Oracle products, which I believe include J.D. Edwards and PeopleSoft. Makes you wonder why are they're hiring developers to build their OilCo and GasCo consolidation software?

One of the critical competitive advantages that we currently have in People, Ideas & Objects is that we are not constrained by the existence of operational software code, and customers operating from that code base. Moving in the direction that the users want and need have no consequences in terms of time, money or effort. Change is dynamic at the beginning of the project and therefore, it is important to consider as much as possible for inclusion into the preliminary through to final specifications.

SAP and Oracle have to look at the oil and gas marketplace with the idea that they have successfully sold the application in the marketplace. What is their upside in terms of new revenue sources? What type of application can be sold into the market, and specifically how would it compete with this People, Ideas & Objects user driven initiative? What mode of organizational structure would be used to model the innovative oil and gas producer? I can only think of the bureaucracy and the Joint Operating Committee. Since this project holds the intellectual property of using the JOC, they are precluded from competing on that basis. SAP as I have said many times before, is the bureaucracy. And therefore any justification to replace Oracle or SAP's current software applications would need to address how it's not a waste of time, money and effort.

Please note this decision to replace the application is at the discretion of the users of this project. If they decide tomorrow to scrap the project and start anew that is fine with People, Ideas & Objects. We are not selling a software application over and over again. Our revenue is based on our Intellectual Property, the cost of developing the application and a percentage for maintaining and profiting from our development capabilities. The costs of this development is therefor substantially lower then the aggregate revenue streams of our competition. 

Which I guess that leaves two options for a producer that wants to shed their bureaucratic ways. Either pool the industries financial resources in the People, Ideas & Objects application, or hire a few hundred developers each to do some custom in-house work. The latter probably makes the least sense when we consider the current bureaucracies are faced with declining reserves and production, increasing debt loads, quarterly losses and retirements of the brain-trust. But then I am rather biased about that.

This project has to find new sources of money and leadership to fill-in the many voids of the overall vision. If you know of someone who could help to financially support this project please do what you can to bring their attention to this. Ninety-five percent of the ownership of the oil and gas industry is held by individuals. Individuals who are the investors, users and developers of the People, Ideas & Object application. Join me here and lets build this software.

The PayPal button on this website will gladly take donations that can further us along in the road we are headed. Even if you can only contribute $10.00 we will be that much further ahead. Join me here.

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McKinsey 2008 Web 2.0 Survey

Article 39 of relevant McKinsey articles sees the publication of their annual survey of "Web 2.0" technologies in business. What is clearly evident in this survey, is an enhanced level of interaction between suppliers, vendors and producers in the oil and gas industry, is enabled by Web 2.0 technologies.

A fundamental component of the Draft Specification is the redefinition of the boundaries between the firm and market. One of the objectives is that oil and gas producers must rely more heavily on the markets to better anticipate their needs. This is an extension of the logic that a producer researching and developing their own drill bits is wrong headed, and would be a comprehensively uncompetitive behavior. The competitive advantages of an oil and gas producer resides in their land base; and knowing what earth science and engineering capabilities exist within their organization, and joint interest partners organizations.

Building redundant duplications of capabilities in each silo'd company presents the industry with a critical shortage of these key human resources. If, based on the Joint Operating Committee's (JOC's) established partnerships, the producers pooled their resources, the unnecessary duplication of capabilities within each firm is eliminated. Releasing these resources to address the growing science and engineering demanded within each barrel of oil. This pooling also addresses the potential issues raised around the retirement of the industry brain trust.

Companies report that they are using Web 2.0 both within and outside their walls -- to forge tighter links with customers and suppliers and to engage employees more successfully. p. 1

How the Web 2.0 technologies enable the JOC and the producers that represent them is not so much of a technology issue as it is an organizational issue. The unique characteristics of the energy producer have always been addressed through the JOC; whereas the compliance and governance of the hierarchy has monopolized the attention of software vendors. This no longer needs to be the requirement.

I much prefer the term Enterprise 2.0, Web Services or Service Oriented Architectures (SOA) then Web 2.0. The intent is the same. However, I feel Web 2.0 addresses the consumer more then business. Call it what you will, according to McKinsey's survey companies are beginning to respond to the potential competitive benefits.

However, fundamental changes are beginning to take place among the satisfied companies as a result of their ambitious use of Web 2.0. These companies are not only using more technologies but also leveraging them to change management practices and organizational structures. p. 2

This is reflected in the attitudes towards Web 2.0 technologies. Writing a blog was perceived as a waste of time, now blogging is becoming more main stream as a form of idea communication. According to McKinsey's survey these technologies will begin to involve transactions. This may seem far fetched today, however, there really is no technical difference in a web enabled ERP system such as People, Ideas & Objects Draft Specification and one that Oracle or SAP sell. The differences are not IT related in nature, but our choice of which organization we define and support.

Following last year's pattern, Web Services (software that makes it easier to exchange information and conduct transactions) remains the technology with the highest level of use among respondents across all regions. Respondents also rate Web services as the most important tool. p. 4

The next step will be the innovative application of these technologies in the various primary industries. This is the primary focus of the People, Ideas & Objects application modules. Modules that enable innovation and solve the problems the industry faces today.

Innovation. Successful companies already use Web 2.0 for business applications such as communicating with customers and suppliers; soon they may use it to drive innovation. p. 10

I wish to appeal to those that have an interest in making this software development project real. If you know of a producing company, or an oil and gas investor that is interested in sponsoring this project, please email the URL of the web log to them and join me here.

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JavaScript and Java Applets.

I have expressed my concerns about exposing this applications client side to any JavaScript. JavaScript is unable to carry the freight in such an application as this software development project will demand. JavaScript has traditionally been buggy, non-standard and too functional for its own good. I have changed my mind about potentially using JavaScript on the client. The reason for this change is that I know we may not get there from here. Where there is, is accurately captured in this video.

This video discusses the effect of using small amounts of JavaScript in a browser window, or in our case a Java Web Start application. The upgrade is primarily to do with Java and its Applets, not JavaScript. These changes in Java will be what sets off an entire new revolution of client-side computing. With the applications architecture being Java and JavaFX the users of this application will be provided with an elaborate interface that will establish new paradigm's and methods of user interaction. I think this is just the beginning. Many different directions can be taken on the client side as a result of these technologies and we will see robust, stable and secure client side processing that befits the users of this application. It is therefore time to adjust our thinking regarding JavaScript.

Up until now we had incorporated Google's Widget Toolkit (GWT) to render the necessary JavaScript code from Java. No actual JavaScript was to be hand written and that provides an acceptable level of JavaScript associated risk in the People, Ideas & Objects application. Does leaving the coding of this functionality through GWT still provide us with the types of technologies that are demonstrated in the video? I don't know, as the video was using some technologies that are not generally available today, but the presenter was talking throughout about a Java to JavaScript bridge. Possibly Sun has incorporated many of the same technologies as Google's GWT. Either way these new ideas are employing JavaScript in a very small role that has very limited actual work. (Messaging)

I feel reasonably safe with these technologies such that I am not willing to give up on any of the upside of the associated benefits.

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Coase, the Nature of the Firm, 1937

Professor Ronald H. Coase, a Nobel Laureate in Economics has been referenced in many of the papers that Professor Richard Langlois has written. Since Professor Langlois' work has provided the bulk of the thinking that went into the Draft Specification, I thought it would be worthwhile to go back and look at some of the papers that Professor Langlois has cited as influences in his papers.

The paper that we are reviewing is the Nature of the Firm which Coase wrote in 1937 and captures much of the thinking that won him the Nobel Prize. There is a follow on article to this entitled New Institution Economics written in 1998. I acquired both papers through JSTOR and they are available there to those with access.

Langlois' key attributes in the Draft Specification were the defining of the boundaries of the firm and market, and transaction cost economics, particularly "dynamic transaction costs" which he defines as;

The need to bring otherwise decentralized knowledge together & co-ordinate it especially in circumstances involving learning and the generation of new productive knowledge. Langlois

A Joint Operating Committee (JOC) is represented by many different producers. If we are to eliminate the excess demand for human resources that exists in the marketplace today, and is projected to become much worse with the pending retirement of the brain trust. Then we need to eliminate the redundant duplication that exists from each producer aspiring to conduct all the operations that are necessary within their organization themselves. Specifically what resources are available if we pool the resources of the working interest partners in the JOC.

Implementing the Military Command & Control metaphor that assigns the roles and responsibilities across the organizations in much the same manner that NATO does; the JOC adopts a governance structure that is workable. This is particularly important as the expected volume of engineering and earth science applied to each barrel of oil is increasing each year and is the reason the bureaucracies costs are escalating and their reserves are declining. Based on Langlois dynamic transaction costs, there will be additional costs associated with these activities.

This post being a follow on post of our review of Professor Sidney Winters. In which the definitions of what is necessary for a firm to approach both the short and long term horizons of the business environment. A clear separation of the types of work being conducted on either side of that dividing line or boundary between the firm and market. Coase notes the following with regard to the topic at hand;

Our task is to attempt to discover why a firm emerges at all in a specialized exchange economy. p. 390

I wish to highlight an area of conflict that currently exists in the industry. That is the capital and operating cost escalation in oil and gas is attributable to the "greed" of field suppliers and contractors that want to earn their due when the sun is shining. This may be the case, however, I would suggest that the companies inability to work with the suppliers and treat them as extensions of their organization is the root cause of this cost escalation. The people in the field should be extensions of the producers organizations, they are how the firms can acquire the necessary "local knowledge", by using the market.

The main reason why it is probable to establish a firm would seem to be that there is a cost with using the price mechanism. The most obvious cost of "organizing" production through the price mechanism is that of discovering what the relevant prices are. The costs of negotiating and concluding a separate contract for each exchange transaction which takes place on a market must also be taken into account. pp. 390 - 391

Lets take a look at the business of the metaphorical widget factory. Most of the widgets are manufactured or assembled in-house with staff that are applied efficiently on the basis of their specialization. Their domain of operation is essentially contained within their four walls and they are able to see and realize the obvious and not so obvious. This is somewhat of a static situation throughout the term of the life of the firm. Oil and gas operations are scattered. They are short term operations based on some form of geological theory that is being applied, tested, and some of the time, rehabilitated. The daily production of oil or gas is a 24 hour operation that provides strong cash flow and earnings with little if any human supervision during the production period.

The oil and gas business would seem based on this description to employ the resources of the market on a contract basis using the full extent and value of the price system. To do otherwise is beyond the scope and scale of the producer company. These costs are inherent in the business and as such we should optimize the energy firm in the use and processing of transaction costs. These elements of the Draft Specification are detailed in the Accounting Voucher module.

Adam Smith explained that the productivity of the economic system depends on specialization (he says the division of labor), but specialization is only possible if there is exchange-and the lower the costs of exchange (transaction costs if you will), the more specialization there will be and the greater the productivity of the system. p. 73

All economic growth is achieved through greater levels of specialization. That is a known fact. For oil and gas producers their enhanced productivity will arise as a result of the effectiveness of implementing this higher level specialization. A tall order when the activity levels and scope of the sciences being applied to producing properties are so high. This is the point that I am trying to make. If an enhanced level of productivity is to be achieved in the industry, the field operations will need to implement and host a greater division of labor. That also applies to the JOC, where the pooling of resources from the participant firms will increase the division of labor at that level.

I now want to focus on the group of individuals that make up the long term view of the operations group contained within an oil and gas firm. These people are actively looking for better ways in which to conduct their operation. Focused on the sciences, they innovate and develop the means and methods for enhanced oil and gas exploration and production. Using the market to implement these, the firm needs to be actively involved in the business development of that market. Such that a speed and innovativeness is attained based on the understanding of the underlying sciences.

How the Draft Specification deals with this particular issue is through the publication of generic data of the producers planned capital expenditures. This interface of the Petroleum Lease Marketplace provides the market with an understanding of what and where the industry will need to be doing in order to achieve their goals. Suppliers are then able to better read what it is that they are expected on a long term basis. Producers on the other hand are able to see through the Research & Capabilities module those ideas of interest. And then engage the marketplace to develop and build those capabilities.

The alternative is to continue along in the muddling sort of way that has brought us to this point. The companies today telling the market place that it is greedy is only making the situation worse. The companies expect the market to read their mind and build the capabilities for the future. To continue to have this being done on speculation is going to further retard the growth of the industry. Holding 100% of the industries revenues and doling them out as dog bones provides a lot of power to the industry. With that power comes the responsibility to effectively ensure that the markets they use are operating correctly. It is my opinion they are not.

It is commonly said, and it may be true, that the new institutional economics started with my article, "The Nature of the Firm" (1937) with its explicit introduction of transaction costs into economic analysis. p. 72

How this of course is implemented is through detailed software applications built specifically for this purpose. This is one of the many opportunities available to the industry from this software development project. Some may say that I am reaching here in terms of the ambition of this module, I believe Coase supports these with the following comments.

In effect it is the institutions that govern the performance of an economy, and it is this that gives the "new institutional economics" its importance for economists. p. 73

and

Economists often take pride in the fact that Charles Darwin came to his theory of evolution as a result of reading Thomas Malthus and Adam Smith. But contrast the developments in biology since Darwin with what has happened in economics since Adam Smith. Biology has been transformed. Biologists now have a detailed understanding of the complicated structures that govern the functioning of living organisms. I believe that one day we will have similar triumphs in economics. But it will not be easy. Even if we start with the relatively simple analysis of "The Nature of the Firm," discovering the factors that determine the relative costs of coordination by management within the firm or by transactions on the market is no simple task. p. 73

Information & Communication Technologies (ICT) are not the solution as much as the means in which new organizational structures are able to resolve and provide these features.

This is what I said in a lecture published in Lives of the Laureates (Coase, 1995 p. 245): "The costs of coordination within a firm and the level of transaction costs that it faces are affected by its ability to purchase inputs from other firms, and their ability to supply these inputs depends in part on their costs of coordination and the level of transaction costs that they face which are similarly affected by what these are in still other firms. What we are dealing with is a complex interrelated structure." Add to this the influence of the laws, of the social system, and of the culture, as well as the effects of technological changes such as the digital revolution with its dramatic fall in information costs (a major component of transaction costs), and you have a complicated set of interrelationships the nature of which will take much dedicated work over a long period to discover. But when this is done, all of economics will have become what we now call "the new institutional economics." p. 73

The alternative is to continue doing the same things with the same organizations with the same results.

This change will not come about, in my view, as a result of a frontal assault on mainstream economics. It will come as a result of economists in branches of economics adopting a different approach, as indeed is already happening. When the majority of economists have changed, mainstream economists will acknowledge the importance of examining the economic systems in this way and will claim that they knew it all along. pp. 73 - 74

Please join me here for this difficult but worthwhile task.

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Edith Penrose on the development of oil and gas.

I am reviewing a paper that was written by Professor Edith Penrose. The title of the paper is "Limits to the Growth and Size of Firms." This paper was published in The American Economic Review in May of 1955. Her papers are available through the various Journals that published the articles. Unlike most of the current research these papers are accessible only through paid services. In this case I was able to download them from JSTOR.

While I was at JSTOR, I ran across two very interesting Penrose papers regarding the oil and gas industry. I highly recommend that you pull down a copy and read them both. They reflect the dynamics of oil and gas pricing on a global basis.

The two documents are entitled:

Middle East Oil: The International Distribution of Profits and Income Taxes. Published in Economica, New Series, August 1960

and

Importance in the World Oil Industry. Published in International Affairs January 1979

Anyone suggesting that our current high energy prices are a result of speculation should put these two papers on their must read list. The depth of analysis, the lucid and objective discussion of how energy prices were established during the industries "easy era" is impressive.

One of the key conclusions she makes is that OPEC was a necessary mechanism for the market to function correctly. It is difficult to recall the days when the abundance of energy conspired to ruin the business at any moment. Articles like the 1999 Economist cover story "Drowning in oil" when commodities were in surplus, just created more long term problems for the industry.

Although written in the early 1960's and late 1970's Professor Penrose' articles show the complexity of the information inherent in the pricing of oil. The articles also intimate the power that OPEC has in these times of reduced supply and very high demand, however, this week saw the Saudi's somewhat turn their back on the cartel.

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Professor Robert Shiller

"Shiller Sees Subprime Crisis as Opportunity for Change"

Bloomberg has some of the best PodCasts about the economy. Particularly Tom Keene's "On the Economy" is a must for everyone that participates in the economy. The guests provide the show with depth and analysis that I don't think is available anywhere else. Truly original and informative, make sure you also check out the "Best of On the Economy". This particular PodCast is with Professor Shiller.

Professor Shiller's fame is partly attributable to the S & P / Case - Shiller housing index that is widely quoted today. He is also the Arthur M. Okun Professor of economics at Yale University. (Check out his new book "The Subprime Solution".) What he sees in this current economic malaise is

...an opportunity for change, for fundamental change. Where the financial crisis is a systemic mis-allocation of capital, and we can do better. We want to go forward, we can think creatively.

Obviously he is talking about the sub-prime and housing related issues, but I think in his comments we see the same information that Professor Carlota Perez has been suggesting for the last few years.

Perez has researched the previous economic cycles and has mapped out how the long wave economic cycles impact the day-to-day economy. She has suggested that due to Information & Communication Technologies (ICT) we have a 25 to 30 year economic up-swing ahead of us. In her writings she stated that the .com meltdown was not substantial enough to mark the end of the previous long range cycle. (Autos) Projecting that a housing bubble may be the beginning of the end of the old economic cycle and the commencement of the ICT based economic upswing. A projection she made before 2004.

Perez has also claimed, and is confirming Shiller's assertion, that the financial capital markets should be re-regulated. And she suggests that product capital markets will be the new drivers of value. Anyone looked at Apple's stock recently? Shiller takes this one step further and suggests that our reliance on the Efficient Market Hypothesis is flawed. Neither of these professors is suggesting the end of markets. What they are saying is that it is necessary to have broader regulations to ensure leverage is not enabled again through innovations in the financial marketplace. Both Professors are quick to point out that highly engineered financial innovations are good and necessary, but regulations are needed to stop the over the top leveraging of wealth.

These ideas resonate with me, and as a result Professor Perez' theories have made a substantial contribution to the Draft Specification. But are they right? And here we see the beginnings of the resolution to the decline of the auto phase, and the beginning of the ICT stage in the current productivity numbers.

We are rocking, economically that is. The annual U.S. productivity was revised upwards to 4.3% in the second quarter of 2008. Based on most of the comments on that page it is assumed that this level of productivity growth is due to people being told to do more with less. I think they show that ICT is having a substantial, and predicted, effect on the economy. Perez suggests these "golden age" attributes are systemic through the various economic cycles that she has studied.

In terms of re-regulation Professor Shiller points out the Blueprint that Treasury Secretary Paulson published in March 2008. Therefore all the parts are in place for this golden age to begin and carry us for the 25 - 30 year life.

A lot is happening in the economic world. Opportunities are difficult to focus on, however, I think we have to look beyond the current and looming train wrecks to see where the world is heading. These two Professors help to identify the direction. A direction where People, Ideas & Objects is moving to. If you wish to participate in this development please email me. If you wish to donate please use the PayPal button in the left hand column.

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