Energy Indpendence in Our Lifetime

November 25, 2008
(courtesy CNN)

(courtesy CNN)

John Hofmeister, former president of Shell Oil and now head of Citizens for Affordable Energy, spoke at WNED studios last Friday.  Parts of his speech were covered by the Buffalo News as well as the local television media.  An oil insider, Hofmeister made some great points that the media covered well.

That morning, John also spoke at the Buffalo Niagara Partnership’s Movers and Shakers series, making quite a few comments that didn’t make it into the paper or TV.  One of them was about the run up of oil prices this past summer.

Hofmeister pointed out that the dramatic rise in oil prices had nothing to do about speculation but about Asian aviation fuel demand and China’s preparation for the Olympics.  In its attempts to reduce smog, China demanded a change from burning coal for power to burning oil.  They basically bought up all the diesel fuel that they could, and this was principally responsible for the sudden increases.  Just as suddenly, demand pressure on diesel fuel started to drop shortly after the Olympics.

Interesting.   Since diesel is a middle distillate and gasoline is an upper distillate, one would think that as the world’s demand for diesel increases, a glut of gasoline (as a byproduct of the distillation process) will appear on the open market, depressing gasoline prices relative to diesel fuel.  This might make one question whether or not it is wise for the U.S., one of the few countries not fully converted to a diesel transportation infrastructure, to ever do so.

Hofmeister made a few other interesting comments:

  • Without a huge improvement to mass transportation there is no way that dramatic rises in gasoline prices won’t strain many American budgets beyond their limits.  And suburban sprawl makes the mass transit solution untenable.  Because the U.S. has no infrastructure available to support alternative energy transportation in more than a niche manner, there are no short-term alternatives to the internal combustion engine through at least the next decade.
  • When the U.S. was importing 35% of its oil from foreign countries the Nixon Administration, in 1973, declared that the U.S. would be oil independent in 5 years.  35 years later, 65% of our oil is imported and over that time no policies have been developed to reduce that dependence.
  • You would think that the Department of Energy determines – or at least implements – energy policy in the U.S.  Nothing could be further from the truth.  There are 13 Executive branch agencies and 26 Congressional committees that determine policy, plus the courts.  Energy policy is determined politically.

Hofmeister was animated about his last point.  Unless Congress adapts the same model for energy policy as they do for monetary policy – an independent board modeled after the Federal Reserve – no solution to our energy woes will be found.  After 35 years, Congress has proven itself incapable of fixing the problems, and needs to relinquish policy control to an Energy Resources Board with teeth.

Big Business’ Dirty Little Secret

November 21, 2008

Piggy bank

Several years ago my company’s average net receivable – the amount of time our customers wait before paying for our services – was just over 30 days.  Around 2002 that average started to rise, first to 45 days, then to 60.  Two years ago one of our largest customers – a big gorilla of a company – unilaterally raised their payment terms to 90 days.  Other companies followed their lead.  (So much for a contract being a contract.)

Last month the big gorilla sent us a letter indicating that they were again changing payment terms on our contracts to 120 days.  Any work we perform for this company today will generate payment to us in March.  To get payment we hope they survive that long, and that they don’t change the payment terms yet again.

Businesses that delay payments ruin our cash flow in order to preserve theirs.  The big companies are essentially using their suppliers as piggy banks to get cash – essentially for free – for which they would normally have to go to the banking industry to obtain.  Today’s tight credit markets will inspire many other companies to follow suit.  Picture yourself being told by your employer that your next paycheck will be delayed by a month.  Good luck staying atop your mortgage and utility bills.

With terms like this some companies are no longer potential clients of ours because we can’t justify the risk of their bankruptcy within that time frame.  Four months is too long in today’s economy to risk doing work in some teetering business sectors.

We’re just a tiny player in the game but luckily the big gorilla is only a small fraction of our business.  Pity the cash-poor companies dependent on a big gorilla for the bulk of their revenue, receiving the same letter as us.  Their cash flow is going to tank.

This is an artificial boost to the bottom lines of the S&P companies at the expense of everyone else.  Payment delays are a one-shot method to inflate the corporate balance sheet (and therefore the stock price) without addressing any underlying business problems.  Other than providing executives a way to hit their bonus targets I see no business upside to this practice.

So the stock prices of the Dow and the S&P are being silently buttressed by the small businesses being forced to subsidize them; and the small business community – still the heart of American capitalism – has its back to the wall because of it.

Business 101

November 20, 2008


If you’re going to borrow money for your company, the first thing any lender (outside of mom and dad) will ask for is a business plan.  You must have a plan that demonstrates how the borrowed money will successfully lead to business profits and eventual repayment.  This is as fundamental as it gets.

That the CEOs from GM, Ford and Chrysler did not so much as have a business plan to present to Congress says a great deal about their arrogance.  Or their incompetence.  Or both.

The act that the Big Three is trying to perpetrate on Congress goes way beyond contemptible.  It’s a shame that so many auto workers will pay so dearly for such inept management.

Just Say No!

November 18, 2008


With regard to saving the auto industry, there are at least two broad possibilities that have not been broached much by the media:

  • Merger with and/or buyout by a foreign auto manufacturer, say, Toyota or Honda.
  • Government aid not related to manufacturing operations but to the retirees that in large part are sucking the automaker dry.

I was not in favor of a financial bailout and I am not in favor of a direct auto bailout, either.  Management and the unions have only themselves and each other to blame for their predicament.  Americans voted with their pocketbooks years ago; it’s not like anyone other than GM management didn’t see this coming.

So instead of a bailout, consider those options above.

A buyout by a strong foreign manufacturer, however unlikely, is something that would change domestic management culture overnight.  A buyout (as opposed to a bankruptcy) would help to salvage the hundreds of parts suppliers on whom the foreign automakers rely just as heavily as the domestic auto companies.  The show-stoppers are health care, retirement obligations and the unions.  Especially the unions, who have far less leverage today than during strong economic periods; so if Toyota was to make a move, now would be a good time to buy into the domestic industry on the cheap.

The second idea is to improve competitive costs against foreign manufacturers by relieving the auto industry of a $1,500 per vehicle levy – retiree benefits – by taking them off the automakers’ hands, in return for ownership in the company.  Socialized health care and pensions for retirees.  Let’s call that, hmmm, Medicare and Social Security, respectively.

GM management will fight tooth and nail against the former, and the unions the latter.  So instead, Congress will be hard pressed not to take the easy way out and simply give the automakers a blank check with few strings attached.  It is the worst possible option, and the one they are likely to take.

La Mancha Negra, Part 2

November 17, 2008

So the answer to the question “What the heck were you doing in Caracas” is “Enjoying myself”.  I worked for a telecommunications company in the early 90’s and we had to make a trip – several trips – to support an installation of wireless units used by the banking industry.

And Caracas was a trip.  Really.  I went in the middle an attempted military uprising, and there were soldiers with guns, everywhere.  And lots of distant shooting at night – sounded like fireworks.  Since we were working with the banking industry it was especially tricky, what with private security forces and the military exchanging wary glances at each other as we would pull up to an ATM machine, electronic equipment in tow.

I loved the exotic nature of the city, and would go back in a heartbeat.  But it was especially frustrating because I was a runner, doing about 5 miles a day, and at that time no one ran in Caracas unless they were guilty of something, and those suspected of being guilty of something were often shot first, questioned later.  So I resorted to running up and down the 8 floors of stairs in my hotel.  It was not nearly as satisfying but it provided a workout.

I worked in a 26-story office complex with one working elevator.  People packed into it like sardines in spite of the weight alarm going off at every floor.  I took the stairs.

Caracas was (and still is) a typical large, third-world city, and is a great example of a middle-classless economy:  You end up with the filthy rich and the shantytown poor.  Just down a ways from the Gold District is a stream about the width of Tonawanda Creek, only it’s an open sewer.  You can smell it from blocks away.  Sanitation systems were and are not a high priority to the Venezuelan government.  Beggars with deformed body parts were everywhere.  And where they were not there were beautiful women and handsome men in fancy clothes.  If you had beauty – especially if you were a woman – you had a path to a great job; if not, you cleaned hotel bathrooms for a pittance.

It was obvious from La Mancha Negra that road construction, too, was not a high priority for the government.  Nor did there seem much in the way of decent health care or, for that matter, good educational facilities; though the Venezuelan government does have a pretty well-funded military.

While the U.S. has a long way before tumbling into such chaos, it is to our country’s advantage that we not let our middle class erode to the point where climbing back up becomes an exercize in futility.

La Mancha Negra

November 15, 2008


15 years ago on the way back from an assignment in Caracas, Venezuela, I asked my taxi driver to take me to the airport “the long way”, so that I could get a tour of the city and surroundings before heading home.  As we went up one mountain road adjacent to acres of tumble-down slum, he slowed and then swerved to avoid a black stretch of road.  La Mancha Negra, he called it.  The Black Blob.

Years later that blob has grown eight miles long and killed 1800 people in car accidents.  It’s straight out of some horror movie. Parts of it looked sticky, like tar, while other parts were obviously oily/shiny and very recent.

Although they aren’t positive, Venezuelan scientists say the blob appears to be a seep from poorly-made asphalt or something below the road surface (like sewage, perhaps) that oozes out in the intense heat of the day.  Road repair crews clean up the mess yet it quickly returns.  More than once, vehicles on the busy airport highway have careened out of control, creating multi-vehicle pileups and carnage everywhere.

It has since spread to various parts of Caracas highways.  And of course, at least one band now shares its name.

R.I.P. Donald Hess

November 14, 2008


Don Hess, the Hauptman-Woodward Institute’s board chairman, entrepreneur extraordinaire and friend, died last night in a private plane crash in Florida.

What a tragic loss for Buffalo.  Don was a techno-geek like me, someone who successfully co-founded one of Buffalo’s better-known companies.  Amherst Systems is now a division of Northrup-Grumman, but before its eventual purchase was grown from a couple of employees to one of the largest engineering firms in the area.

I don’t think Don ever forgot his roots.  Whenever we met we would discuss science, or engineering, or business, or any other matter of curiosities.  He was always willing to provide advice to me and, I’m sure, other local start-ups.  He was easy to talk to:  We had the same comfort zones.

He will be missed.