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Anticipating the Next Big Thing: Energy Resource Decline

Behind all the misbegotten financial wizardry of the evening market reports lurks another ogre, one with potentially bigger teeth than anything we have seen to date.

White-Knuckled Anxiety

2008 was certainly a year of “interesting times,” as the Chinese proverb says. The evening market reports became an exercise in white-knuckled anxiety that rivals even the best Hollywood thriller. And while media pundits of every stripe play the blame game, few focus attention on those pins that first pricked the mortgage bubble: a major spike in food prices, driven by diversion of the global food supply into ethanol, followed by a major spike in fuel prices. Homeowners had been making their mortgage payments just fine until global demand for fuels outpaced global supply.

Energy resource decline

Behind all the misbegotten financial wizardry of the evening market reports lurks another ogre, one with potentially bigger teeth than anything we have seen to date. Its name is energy resource decline and, according to many observers, it ensures that when economic recovery comes it will not be because anything has been “fixed” — it will be because our economy has changed fundamentally.

In a nutshell, energy resource decline means that energy availability is falling due to fewer energy resources left in nature, particularly with regard to oil. Throughout 2008, the International Energy Agency conducted a survey of the world’s 800 top oilfields to determine how much oil remains in the ground. Its 2008 report, released Nov. 12 and titled World Energy Outlook, reveals that “decline rates are likely to rise significantly in the long term, from an average of 6.7% today to 8.6% in 2030.”

Think about that for a moment — the supply of petroleum products is currently contracting at almost 7% annually, and will accelerate contraction in coming years, due to the limits of nature.

Enormous implications for business

These figures have enormous implications for business. Since the beginning of the industrial revolution, increasing amounts of fossil fuels have powered the machinery that has generated increasing levels of wealth. Our economy is structured to grow as energy availability increases, particularly petroleum-based energy. Contracting oil supply means the existing global physical plant will have less energy to power it in coming years — including the energy investment required to shift our economy’s energy base to something other than fossil fuels. The net result is that we are in for an extended period of shrinking energy availability, which many people interpret to mean a shrinking economy.

The “Bumpy Plateau”

Certainly there is no panacea for this situation, and I personally am dubious as to whether there are even any solutions. There are, however, responses, and businesses that anticipate and adapt can still thrive.

One of the primary difficulties in the immediate future will be what some energy economists call the “bumpy plateau” — because of the way supply and demand work, the inevitable rise in oil prices causes “demand destruction,” when people use less oil; this causes the price to fall, spurring people to use more oil again, which drives the price back up; then comes more demand destruction, and the cycle continues. We have already seen the first of these cycles, as gas rose to $4+ per gallon earlier this year, only to crash to its current level below $2 per gallon. These price fluctuations will delay the arrival of alternatives as projects spring to life then sputter out of profitability, as is already the case many clean-tech and non-conventional ventures. But the long-term trend underlying these price fluctuations is ever upward.

Areas of business opportunity

No one can predict the future of course, but given these considerations, the biggest area of opportunity for a business to protect its profits is conservation, and the bigger the conservation effort, the more it will pay off down the line. Energy price drops can become periods of profit spikes to carry a business through the next price hike, rather than a period of playing catch-up on an accumulation of bills.

Moreover, there is significant opportunity for consultants and project managers who can advise companies through the process of becoming energy efficient. Energy cost management is poised to become the make-or-break issue affecting businesses across the spectrum — the closer a business can get to zero-energy use, the better insulated it will be from sticker shock and long-term escalating energy costs.

In addition to increased operating costs, energy resource decline also means a potential reduction in sales. Already some are declaring frugality to be “the new black,” indicating a cultural shift away from ostentatious luxury and toward simpler consumption. Wrangling sales from a culture of thrift is a daunting task, but here too is plenty of opportunity to trump the competition.

Frugal buyers want value, which we business people tend to confuse with low prices. But even in very difficult circumstances, customers will still pay more if they get more payoff than from a less expensive alternative. Adding value will become key in the competition for customers.

Fortunately, this does not have to be expensive. Entrepreneur and author Charles Hugh Smith makes the case in his book Weblogs and New Media: Marketing in Crisis that this value can take the form of social capital created through inexpensive digital media — but only if it is done in the spirit of open communication and community as a customer service, and not merely as another avenue for pushing a marketing message, which adds no value for customers. Beagle Research Group, an analyst firm in Massachusetts specializing in customer relationship management software, comes to a similar conclusion in its white paper Peak Oil and Sustainability: CRM’s Potential Impact. Through digital communications and improved software efficiencies, businesses can help customers reduce costs associated with front-office activities such as sales and support, thereby adding measurable financial value to its product or service. These are just two examples — certainly different industries can add value in various ways, opening the door to a great deal of opportunity for industry-specific consultants and firms that can coach companies through the process of adding value to their offerings at low cost.

Gaining a competitive edge

Energy resource decline may be an overlooked and impending economic complication, but for those businesses that anticipate and adapt it may also prove to be the very thing that bestows an edge over the competition. And when circumstances stabilize once again, those who’ve managed the transition may just find themselves in quite an excellent position.

Additional reading

For more information on energy resource decline:

  • Interview with Matt Simmons, author of the book Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy and founder & chairman of Simmons & Company International, the world’s largest energy investment bank. Simmons is one of the most knowledgeable people in the world regarding oil depletion.
  • Getting a decent return on your energy investment An overview of the concept of “energy return on energy invested,” including the energy returns of various alternatives.
  • The Hirsch Report — a study commissioned in 2004 by the U.S. Department of Energy, conducted by Science Applications International Corporation (SAIC). Published in February 2005.
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