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A New View of Oil

Several entries in this blog have focused on oil prices. It’s an overarching driver of future factors that range from consumer behavior to geopolitical influences.

Lately I’ve studied oil prices more carefully and drilled into (forgive the inadvertent pun) the data that looks ahead. I’ve been a forecaster of a long-term rise in prices due to supply and demand pressures for a commodity with declining output.

I’m now adjusting my views in line with advice I give clients. A forecast is foresight that takes into account uncertainty and adjusts with time and new information. Time has passed since I began forecasting a rise and new information is available.

Frankly, the Bakken is making me a believer that more oil that will be available over the next two decades than we’d been able to forecast before. There’s been evidence of this in the past but now it’s being put into practice to a greater degree.

For many years I lived and worked throughout California’s Central Valley. The oil-producing fields to the west of Bakersfield were a constant source of amazement to me as someone who minored in geology in college. The estimates of the field and its productivity continued despite the forecasts of depletion. The Kern River Field was supposed to have fallen off in production in the 30’s, 40’s, 50’s and especially the 70’s and 80’s.

Today Kern River still forms a foundation of the strategic national reserves. Chevron began injecting steam underground in the 60’s and today the formation still yields about 80,000 barrels per day. It was a harbinger for what we see today as the unprecedented emergence of “tight oil” – petroleum that is brought to the surface through new technology both in new discovery fields and old fields that were thought to be defunct.

That’s what’s going on in the Bakken which I doubted was a significant or long-lived contributor to oil production. Today we know that it is and while so-called “cheap oil” – where you punch a hole and oil and gas flow to the surface – could be gone the creation of new reserves is going to be with us on an increasing basis.

Oil over $200 a barrel? Less probable if geopolitical events don’t cause problems in the Gulf. But I think the planet may have been blessed with some more time to use fossil fuel reserves while it makes the transition to sustainable sources of energy.

The Drought and Farmer Viewpoints

It’s been almost two decades since I first worked with a bunch of smart farmers who lead their state associations for the corn and soybean commodities. I’ve learned their business, watched them navigate a series of farm legislations, try to wean themselves away from government subsidies, and then prosper as prices came up dramatically over the past five years.

This year I returned to the same gathering for a fresh class of state association leaders. I didn’t know quite what to expect in a severe, brutal drought. I talked with some producers who were not going to harvest much of a crop. A very few lucky farmers located further north in the country or in the relatively moist East are going to do extremely well. But even the unlucky were optimistic as one can only be when you put almost everything in your business on the line every year and throw yourself on the mercy of nature.

If you want to see an example of resilience listen to these men and women as they talk about their ground, the crops, and their plans for the future. Certainly crop insurance plays into the situation. But they firm their jaws, speak frankly about the risks, and when asked about another drought “event” (that’s the term they use) they become gravely contemplative.
“That would take us back to zero,” one farmer told me. Another said, “We could deal with that but we’re probably going to sit back and see how the winter reestablishes our moisture before we even decide to plant next year.” The implications are serious for food supplies, energy prices, global trade.

If the breadbasket of America was to see anything similar to the conditions that have ravaged Texas for almost a decade we might look at food security suddenly becoming a strategic concern. The executive branch might need to step into the farm situation instead of allowing Congress to continue to argue over food stamps for the poor instead of providing a safety net for the people who feed the country.

The Race for Sustainability

It was obvious 5 years ago that the term replacing “green,” environmentalism, or “save the planet” would be sustainability.

The signs were obvious. In manufacturing, energy, and agriculture the shift had been underway for some time. But the “s-word” was popping up in unanticipated fields like financial services, municipal government, hospitality, and healthcare.

The driver: consumer attitude. When people are asked whether they want a product that’s “green” or “organic” they hesitate. Experience tells them it’s going to be somehow a sacrifice of quality and higher priced to boot. Not a great choice unless you’re in the minority of the market that wants to save the planet at any cost.

But the term “sustainable” refers to the concept of renewable or the ability to be perpetual. A UN commission in 1987 established a definition that holds today,
“meet the needs of the present without compromising the ability of future generations to meet their own needs.” Consumers sign on to that thinking readily. So readily, in fact, that the future is going to be full of battles over the ability to use the term.

A conflict in an active segment of my practice is a good example. Organic food producers would like to claim the sustainable term as their own. An organization called the Leopold Academy applied to the American National Standards Institute a few years ago to establish a standard, a definition, of “sustainable agriculture.” When forming the group that would put forward the criteria they pointedly omitted the largest food producers in the US – production agriculture. You know, the farmers that use chemicals and genetics to be the most productive on the planet and which account for well over 80% of the food production in our country.

The US Department of Agriculture intervened and the Leopold Academy agreed to put 11 production ag representatives on the committee where they were outnumbered 3-1 by organic producers and environmental group representatives. The new participants tried to turn the standards to what’s known as the “triple bottom line” – defining sustainable as not only environmental but based on
economic and human capital issues as well. The short version is people – planet – profit. The discussions continued for some months but last fall the production agriculture reps pulled out of the talks.

Today it may be impossible to establish a standard until two sides of the debate can sit down in more equitable numbers to reach consensus on the definition. It’s a huge issue that could lead to more than standards and labeling. With a political overlay the standards would eventually translate to regulations.

Look for many more debates, discussions, and organizations positioning themselves as “sustainable” in the years ahead. Look for them to use the triple bottom line as the standard. In your own industry or field, no matter the level of environmental sensitivity, look for
sustainability to be a major issue in the future.

The E-Reader Killer

The other day I spent about an hour with an iPad.

Those of you who know me or follow this site know I’m a Mac convert. I switched from what the Apple cognoscenti refer to as the “dark side” seven years ago. It’s been a very good experience. Frankly, the Windows world has improved much since I left. But there’s a bigger issue here.

I believe I held the device that will kill the e-readers. Convergence is coming.

When I sit next to a Kindle or Sony user on airplanes I hear rave reviews. Convenience, long charge life, portability are the things they mention. But they also acknowledge it’s another gadget in the bag along with the laptop, smartphone, and various accoutrements of the business traveler today.

With the iPad – and what will be a shrinking horde of imitators over the next few years – you get much more than the reader. It’s really a true lap companion that does much more than just show you a replicated black and white page. It’s a full color, multi-tasking, e-mail and word processing handler – at the minimum. Some power users make them much more.

And the price is just a little more than double the e-reader. Why not spend the little more and get something that does way more than twice the lower priced gadget?

Key indicator – the dropping cost of e-readers. http://nyti.ms/afXw0u A price war has already begun. Developers see an adoption disruption early. Amazon bumps up its advertising.