Monday, May 21, 2012

North America’s upcoming Golden Age

‘Creative Destruction’ is a term coined by Joseph Trumpeter in his 1942 book: Capitalism, Socialism and Democracy”.  I got that 'knowledge' from Bing, Microsoft’s search engine. If you want to see examples of ‘Creative Destruction’ look no further than the High Tech industry.  This weekend, I got the new Windows Phone which runs basically on the new Windows 8 platform.  It is fantastic!  Although still a work in progress. Windows Phone 7.5 as it is referred to integrates the power of a tablet with cloud computing (Windows Live) and a revived Zune. If you hate the antics of iTunes – software written somewhere around Trumpeter’s time, then Zune is an breath of fresh air (that was how many clichés in a few sentences?).
In earlier posts I speculated that Microsoft Windows would cause a paradigm shift by integrating PCs, tablets, phones and any other ‘smart’ appliance or house into a single operating system. Well Window Phone is the harbinger of this shift with the rest of the world eagerly awaiting the release of Windows 8. Microsoft has learned from its predecessors, in particular Blackberry who released its software and gadgets prematurely and the world did not forgive the company for its buggy software. Don’t get me wrong, at the time of its release, Blackberry Playbook was 'best in class' and Steve Jobs was so scared, he lowered himself to trying to ridicule Playbook's smaller 7 inch size.

But iPhone improved the design of the Blackberry, just like Apple improved the design of the MP3 player and created iPod. Microsoft had been sporting an computer pad for many years, but Apple through superior design and marketing scored with iPad. So, when it comes to gadgets, the consumer has no loyalty and recent history is full with past gadget designers that could not keep up such as Kodak, likely Blackberry and possibly Apple who couldn’t compete in the personal computer market and is now again starting a defensive phase losing out against Google’s Android. And now both Apple and Android will succumb to Microsoft’s Windows 8 et al.'s new paradigm.

 Creative destruction takes not only place in the technology arena but also in Energy and this may prove to be at least as important as Technology. Just think about it! After the war, the U.S. controlled most oil and gas supply with the Seven Sisters as its power brokers - affordable and stable energy prices resulted in unparalleled prosperity. Then the Middle East woke up through OPEC and combined with dire prediction from the 'Club of Rome' regarding upcoming energy shortages they formed the heart of the 1970s Oil Shocks. The U.S., mostly an energy consumer at that time, could not handle high energy prices and its power declined culminating in the humiliations in 1979 with Iran's revolution and Jimmy Carter’s disappointing presidency. Then in the 1980s energy prices, especially that of oil fell and the U.S. came back with a vengeance culminating in the High Tech Revolution and Bill Clinton’s budget surpluses. September 11, 2001 heralded the end of that era, not only because of the Dot.Com crash in 2001 but also because of the reality of ‘Peak Oil’. Energy prices shot up to new records and Canada’s golden decade arrived culminating in Canada's Harper Governments and the 2008-2009 financial crisis. Jeff Rubin claimed that $147 per barrel oil was laying at the root of the Financial Crisis and he may have a point although the corrupt, soppy and arrogant bankers of Wall Street and an overactive real estate market surely were also significant contributing factors.

During the financial crisis, in fact as early as 2004, the North American petroleum industry developed two important new technologies: Horizontal drilling and Multi-stage fracturing. Combined these technologies created a paradigm shift in the energy world. First ‘Tight Gas’ and today ‘Tight Oil’ production opens up uncounted BTUs in energy. The energy markets are adjusting, first with a glut in natural gas and a pipeline shortage to handle this abundance of new, affordable energy. The impact of the new technologies is so immense that North America could not export its new found energy abundance to the rest of the world and the price of natural gas collapsed from peaks as high as $12/Mcf to the lows of this spring at just $2.00. Reality is, that to produce natural gas profitably we’ll need prices in the $4 to $7 range and now having experienced a ‘gas glut for nearly five years, we may approach a turning point (see my earlier post Something rotten is happening in the state of Gas and some older posts). BTW, that I started the 'Something rotten' post with a quote from Shakespeare’s character Marcellus was an unintended pun on the Marcellus Shale Gas Play in the Appalachian.

The petroleum industry and the overall economy will need to adjust to these new energy realities. Oil and gas companies need strong, diversified balance sheets to survive the shocks in the oil and gas markets. Companies like Encana and others based their project economics on gas prices much higher than today’s $2.65 and some may not survive. But those that come out of these turbulent energy markets in tact will flourish for many years to come. Those that cannot adjust to the new realities will fall victim to ‘Creative Destruction’.

Investors who look beyond the initial turmoil may see golden opportunities ahead. Stable and predictable energy supplies in North America for years to come. Less dependence on inhumane, oil based dictatorships, a return of manufacturing to North America. With energy cheaper combined with our innovative and entrepreneurial spirit, the growing affluence of BRIC Countries and thus of their middle class, the democratic reforms in the Middle East we will get an economy that does no longer depend on the ‘lowest labour costs’ but rather on optimum production conditions. The latter is more likely a combination of labour costs, education level of the working population or innovation and new technology. This could restore the trade balances of countries and the finances of governments. Yes it will not be a problem free world society, but I foresee a reprieve of the doom and gloom of the first decade of this century.

If we learned something from the last century, I hope that we don’t forget about the importance of a more even world-wide distribution of prosperity! If some parts of the world population fall too far behind in prosperity there will be an 'extremism of hopelessness' – whether that is masked as religion, culture, race or ideology. In the end it is economics and opportunity that really determines our quality of live. And let’s not forget that an abundance of energy does not mean unlimited consumption at the expensive of our beautiful planet with its sensitive ecological balances. We must continue to strive to true ‘sustainability’ and economies based on a stabilized world population. But I see no reason for an attitude of perpetual doom.

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