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The Perilous Path of Predicting Energy Implications

Week of 25 May 2009

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Energy and the Environment are on everyone’s lips these days—perhaps this is our way of ignoring the economy. Having had the privilege of living as an adult through every energy “crisis” of the modern era, I think I stand at a point that may provide some wisdom and insight for younger professionals pondering our energy future.

There are several key points one must not miss when thinking about energy. The first is this: while some energy sources are more particularly suited for stationary applications and some more so for mobile applications, there are enough that can work in either case to make the shifts back and forth important to overall energy use. The second is humans and corporations will drastically change their energy consumption patterns based on price relative to alternatives. “Relative to alternatives” is extremely important and one must not lose sight of this, for alternatives are constantly changing based on supply and demand.

I am an excellent example of these principles. In 1973, I graduated from college. Pardon me while I explain the following in English units. I lived in a western Cincinnati suburb because I had bought a house from my parents there. I commuted to a northern Cincinnati suburb to work, about 25 miles. I did this in a 1968 Chevelle, on which I had already disconnected the air pollution pump used in those days, for it saved me about 3 mpg. That summer, oil was $2 per barrel and gasoline was about 28 cents a gallon at the pump. Life was good. On 6 Oct 73, half a world away, the Yom Kippur War started. By November, gasoline had nearly doubled in price. On a young engineer’s salary, this was a big bite--suddenly commuting energy cost went from 2 1/2% of my gross salary to 5%. I started looking for a job closer to home. On February 22nd, I went to work for Procter & Gamble, only ten miles from my home—a decision driven by energy costs. This had long term implications. I most probably would never have joined the pulp and paper industry nor would I have met Laura had it not been for the Yom Kippur War of 1973, for this job move brought me to our industry.

There is another important point here--you can rightly criticize my behavior as pertains to the pollution controls on the Chevelle. But it drives home a point we often do not consider: both as individuals and countries, the poorer you are, the less you can do about environmental stewardship. Stated in a crass way: environmentalism is a hobby of the wealthy. By the way, also in the fall of 1973, a little company from Japan had an extraordinary piece of good luck. Honda came to America to sell cars. They had a little tiny model and one slightly bigger called the CVCC (it evolved into the Civic). Total allocation in Cincinnati must have been less than 100 cars--they were snapped up immediately by those that could get there first.

In the fall of 1981, I was looking for a job. I found one at a mill 46 miles and three states away from where I lived at the time. I took it and didn’t even think about moving. The relative cost of gasoline (and I was driving a 1967 pickup truck to work at the time—it was my “mill car”) compared to what I made was not important.

On Tuesday of this week, President Obama announced new standards for automobile and light truck fuel economy, scheduled to be fully implemented by 2016. My reaction was not one of “I can’t wait for one of these new cars.” Instead it was one of, “I better step up the maintenance on the vehicles I have for they may need to last me the rest of my driving life.” I picture the American landscape becoming “Havanaesque” in nature as people hang on to old vehicles much longer than they would otherwise. Perhaps the Administration has not considered this alternative, but I suspect many are thinking this way. I know this happened in the seventies as pollution controls reduced gas mileage and auto sizes shrank. It will happen again.

The very same things happen in the corporate world, too. In the 1970’s I was intimately involved in insulation projects at Procter & Gamble. A year after the energy crisis of October 1973, we were certain we had added all the insulation that made economic sense in the company’s production facilities worldwide. The key phrase is “that made economic sense” for we did not add any more insulation than that whose installed cost would be paid back in three years or less. It had to meet our investment criteria—it was not some sort of patriotic or good citizen of the world activity.

One more example from the corporate world. In 1976, General Electric and Utah International negotiated the largest corporate merger in history up to that time. What did Utah International have that GE wanted? Multi-decade exclusive contracts to deliver uranium (which it mined and refined) to nuclear power plants. It was considered a sure thing moneymaker for at least forty years. GE was held in awe for negotiating this deal. Then along came Three Mile Island. It would be interesting to see if one can find the legacy of any of those contracts still in existence today.

In the pulp and paper industry today, we are still heavily focused on energy, for we consume a great deal and, in current times, we are worried about utilities taking our wood supply as an easy out for their pollution problems. It is hard to predict what will happen, but I will say it will be something we have not yet even thought of doing. For the realm of possibilities, alternatives and unknowns are so great as to be almost unpredictable. Does this mean we shouldn’t try to predict these things? Of course not—we must, to the best of our ability, plan for the future. It is just that a fair portion of that plan must be assigned to uncertainty and maintaining flexibility.

One thing that we treat as a certainty that should not be, if history is any guide, is the incentive and disincentive actions of governments. What seems to be a sure thing in this area has almost never proven to be so. Therefore, if you are reading a plan and it holds a government incentive or disincentive as a cornerstone premise, be careful. Such premises have never proven stable or reliable, at least in the 36 years since 1973. Build your plans on classic supply/demand theory and you will be much more likely to see them succeed. This applies anywhere in the world, from the most centrally planned economies to the most laissez faire—supply/demand behavior is as constant as gravity and has never been defied in the long term.

At the bottom of this week’s issue of Nip Impressions we have a new department called “In the balance: Energy and the Environment.” We plan on featuring speeches and white papers by others about this important subject. Feel free to submit them to us at our regular email address. Expect questions as to the source and legitimacy. If the paper needs copyright clearance, please provide that as well.

OK, these days I am a living safety example (you know what I mean if you read last week’s Nip Impressions). This shoulder injury is, well, a pain in the shoulder. Please, watch for safety issues all the time.

Be safe and we will talk next week.

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