This, too, shall pass?

Oct. 11, 2005
Energy Expert Peter Ganforth says a historical perspective is a bad reason for not managing energy productivity.

Many managers deeply believe the current high prices and concerns about availability are a passing aberration caused by temporary fuel supply disturbances, supply-chain bottlenecks or political factors. To be fair, this is a perfectly rational assessment based on management’s experiences of energy markets over the past decades. I call it “This, too, shall pass” syndrome.

Most of us in the industrialized world, and especially the United States, have been blessed to grow up during a period of unprecedented abundance of low-cost energy widely available with high reliability. From a historical view, this dates back to the 19th century industrialization of Europe, built on the back of cheap coal, and, in the United States, on the abundant supply of wood and coal. Subsequently, cheap oil and natural gas drove global industrialization and urbanization in the 20th century.

Our industries have evolved with this backdrop, leading to management decision-making that assumes that there will be an eternal supply of reliable, low-cost energy. This comfortable assumption has been occasionally challenged. In the early 1970s, the formation of OPEC triggered a short-lived spike in oil prices. In the following decade, we saw a flurry of books predicting peaking and ultimate decline of low-cost gas and oil within 20 or 30 years. At the same time, there were dire warnings about environmental collapse.

Then the Alaska and North Sea oil and gas fields came on-stream, the former USSR became a more efficient supplier and prices dropped to some of the lowest levels in history for nearly two decades. The environmental concerns shifted to climate change, widely viewed by many as long-term, overblown or just plain wrong.

With this learned experience, it’s perfectly understandable why management could assume that today’s high prices, supply and environmental concerns are yet another temporary disturbance, and decisions should be made accordingly. Energy buyers are discouraged from taking long-term positions to avoid being exposed to high costs as future prices drop.

The deep leadership and cultural changes needed to implement effective, long-term energy management aren’t trivial, and will cause significant organizational disturbance. If this, too, shall pass, why bother?

The area where this view effectively paralyzes decisions is committing high-level management, R&D investments and major capital projects to fundamentally rethink basic manufacturing processes and achieve breakthroughs in energy productivity. Even more challenging is rethinking the energy supply strategy to explore alternative approaches and fuels that minimize greenhouse gas production, improve reliability and further increase productivity.

Any reasonable assessment of the global energy scene today, as opposed to any time in the last 200 years, indicates we’re entering a completely new energy reality in the United States and around the world. A few key indicators are sufficient to highlight this.

Sixty percent of America’s oil is imported. Natural gas is now being imported by ship, and imports are rising fast, driven by demand of the building and electrical sectors. U.S. oil resources peaked in the 1970s, and global oil resources are expected to peak in the next decade or so. China and India are now major consumers that, combined, will consume more energy than the United States within a few short years. Most industrialized countries have some form of climate-change regulation, and some U.S. states are moving in this direction. This will affect the cost and the way businesses manage energy.

Until senior management embraces the probability that energy will be significantly more costly in the long haul, availability of consistent supplies won’t necessarily be guaranteed, and climate-change regulation will intensify, decisions will still be made on the assumption that this, too, shall pass.

The most important role of energy-management teams working in companies where energy has yet to make it high on the strategic list is to spend time and creativity communicating the changed global energy framework to high-level decision-makers. The challenge is to do this in a concise, businesslike way. In fact, I would go further: Until this is done, most efforts of energy-management teams will fail to deliver even modest results.

And what if history repeats itself, prices go down and other risks diminish? My experience is the plants with the best energy productivity also have the best safety, production yield, employee engagement and customer satisfaction. Good management of resources, including energy, invariably builds broader competitive edges.

E-mail Peter Garforth, principal of Garforth International LLC, Toledo, Ohio, at [email protected].

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