Oil Scarcity and Its Impact on BusinessPublished: September 15, 2010 in Knowledge@Emory
The BP oil spill that continues to devastate America's Gulf Coast has reignited the debate over the country's dependence on oil. In a recent interview with Knowledge@Emory, Professor Anita McGahan discusses her current research on the growing scarcity of petroleum-derived oil and its strategic implications for business. Prior to the interview, McGahan, the Rotman Chair in Management at the Rotman School of Management, University of Toronto, was the keynote speaker at the seventh annual Atlanta Competitive Advantage Conference (ACAC), co-sponsored by Emory University's Goizueta Business School, Georgia State, Georgia Tech, the Ewing Marion Kauffman Foundation, and Beckmill Research.
During the conference, McGahan also served on a panel discussing organizational science in the public sector. But it is her research on oil, and in particular her recent paper entitled The End of Oil, that has garnered the most attention.
According to McGahan, corporations, international organizations, universities, and governments must commit to working together to create technologies and products that do not depend on this limited resource.
Knowledge@Emory: Can you give us a quick and convincing reason why corporate America should be committed to looking to other energy sources—beyond those of limited oil resources?
McGahan: It’s a huge opportunity for value creation. When clean, abundant, easy-to-extract petroleum runs out, we’ll need energy from other sources, and particularly gas.
Knowledge@Emory: Surprisingly, past increases in the price of oil haven’t dampened our use of it. Why is that?
McGahan: One reason is that oil prices really haven’t risen—at least not consistently. Oil prices are way down from their peak in the summer of 2007. It’s the volatility that makes things difficult. In times when oil prices are high, we’ve built out infrastructure to extract oil from marginally attractive sources just to find that these investments are not worthwhile in times when prices are low. And so they are abandoned despite the prospect of rising prices in the future.
Even putting aside volatility in oil prices, we don’t conserve enough, because conservation in our current way of life is like throwing a deck chair off the Queen Mary, to borrow a famous phrase. What we need to do is change the way we live. Our cities must be redesigned. As my colleague Richard Florida points out, we need to be satisfied less with material things and more with experiences. Plastics, communications technology, medical devices, computing—all of these uses for petroleum will eventually trump unnecessary transportation.
Knowledge@Emory: Plastics are such an integral part of the economic fabric of the U.S. and beyond. Obviously, the scarcity of oil—the building block for plastics—presents serious problems for U.S. business and infrastructure. Can you give us a sense of how critical plastics are to the U.S., whether for construction, industrial, technological, transportation, or pharmaceutical uses?
McGahan: Look around the room and name everything made out of petroleum: the paint on the walls; the fillings in your teeth; your pacemaker; the clothes you wear; your eyeglasses; your computer and your cell phone. Modern firefighting technology is completely dependent on petroleum. Agriculture is completely dependent on petroleum—fertilizer, harvesting, storage, processing, packaging and transportation. What about sewage, sanitation and water systems? The PVC piping in modern sanitation systems is essential to our water quality. Without petroleum, there is no air conditioning, which means that our hospitals cannot be cooled to a disease-combating temperature. Everything in health care depends on petroleum. Without plastics, we have to rethink everything that makes modern life modern.
Knowledge@Emory: You reference U.S. Department of Energy estimates that note a decline in oil availability as soon as 2035. But changing the status quo, as far as corporate America’s and the public’s reliance on oil, is a major undertaking. Should government force change?
McGahan: I think we are hitting peak oil right now, if not five years ago. There’s still time, however. What we need from government, in my view, is a vision for the future—expressed with commitment to implementation—so as to reduce uncertainty and create a framework for corporate investment. Private firms contemplating investments in electric train technologies, for example, will find the opportunity more appealing if uncertainty about standards, potential customers, and potential value creation are reduced.
Knowledge@Emory: You note that we need to consider alternative materials for industrial, technological, pharmaceutical, and consumer use. This could mean the best and brightest companies will be able to thrive through technological innovations in energy. This seems far off. When can we expect this to change and to see companies and green energy businesses reach critical mass to propel this forward?
McGahan: Best-case scenario: soon to within 5 years. Worst-case scenario: longer. The two critical drivers on which the scenarios turn are, first, whether governmental leadership creates a framework that gives structure to corporate entrepreneurship and second, whether companies can come up with enough new business models that capitalize on digitization to jump-start alternatives to the high-consumption oil economy.
Knowledge@Emory: It seems that automobile manufacturers, long accused of being behind the times, are now leading the way in developing alternative fuel sources for cars. What do you think has propelled this industry forward?
McGahan: The auto companies have long been leaders in alternative fuel sources. The cars they have—look at GM’s Puma—are astonishing. This is not news. What we know is that the most significant barriers to technological progress are organizational. The auto companies have to deal with commitments to unions, dealerships, and shareholders that are both their source of competitive advantage and impediments to change.
Knowledge@Emory: Many forget how reliant we are on fossil fuels for food production and transportation. Additionally, many oil sources are in areas of the world that are politically unstable. Yet there doesn’t seem to be a big impetus for change. Of course, the issue of cost becomes a factor. Who should pay for the massive changes and shifts in production and technology that are needed? And how can we get a coordinated effort on the part of business, government, academia, and international organizations to work for a long-term solution to our energy needs?
McGahan: Yes, the most abundant sources of clean, easy-to-extract oil are in places torn by conflict. There is a great deal of oil under the oceans that is quite expensive and difficult to extract, as the Gulf Oil disaster has demonstrated. Your insightful question reflects that we need to figure out who is responsible in the Gulf and around the world for safety. Even more fundamentally, we have to figure out whether to extract this oil at all. Two institutions are critical in the short run, I think: first, a free press that reports accurately on what is going on in places such as the Gulf of Mexico and the Persian Gulf, and second, international agencies keen to keep conversations about responsibility and governance open. In the long run, we need technological innovation that works organizationally, and this requires visionary leadership and a commitment to public-private partnership.
The Atlanta Competitive Advantage Conference, founded by Richard Makadok, associate professor of organization and management at Goizueta, fosters idea sharing, collaborative research, and networking for the international community of scholars who study competitive advantage. The conference focuses on “big picture” questions such as the origins of competitive advantage, why some firms consistently outperform competitors, and effective strategies for managers and entrepreneurs. This year’s event featured panel discussions and presentations of over 40 research studies by faculty from dozens of business schools and universities, including UPenn, Duke, NYU, Harvard, UNC, and INSEAD. The 8th annual ACAC will be held May 17–19, 2011, in Atlanta.