June 24, 2008

Vinod K. Dar
Managing Director, Dar & Company
The world can have carbon control or it can have food and energy security.  The former means reduced energy supply while the latter requires greatly expanded energy supply, which in turn, for at least the next 3 or 4 decades, means substantially greater carbon expansion. A few rich nations, accustomed to energy and food security for about 50 years now, want carbon control to prevail.  The rest of the world seeks food and energy security since billions of people today have little of either.

Roughly about 600 million people live in societies or polities (not nations) where carbon control is politically fashionable and 6 billion is societies or polities where food and energy security are quotidian challenges. It is carbon versus bread.

The emergent great divide in the world today, that threatens to widen even further all the other fractures and fissures and chasms that contribute to global disunity and conflict, is the one between the advocates of carbon control at all costs versus those pursuing energy and food security, irrespective of consequences.  Quite explicitly, this great divide will roil global discussions, conferences, debates and most assuredly the global blogosphere (not known for its civility or even good grammar anyway) about free trade, international capital flows, resource capitalism or nationalism, international climate management, water management, technology cooperation, space and ocean laws and commercial development, intellectual property protection, military alliances, immigration, terrorism, role of international treaty and aid organizations and purpose of the UN.

Further, complicating the world for energy and utility executives and professional service providers is that the divide is not only amongst nations but also within nations.  Certainly there are thousands of elite professionals and government officials in poor nations (e.g., India, China, Brazil and South Africa) who believe carbon control is of vital importance.  There are also millions of voters in the U.S. South, Southwest and Mountain states, as well as in Western Canada, parts of the U.K., Australia and New Zealand and parts of Eastern Europe also believe energy and food security is much more important than carbon control; indeed, who view carbon control as an attempt by media, political and Wall Street elites to further consolidate power and concentrate wealth:  a thinly disguised cover for collectivism and intolerance.

There are also dissident voices in both rich and poor nations who say that in a world that is cooling, not warming, carbon control is not only irrelevant but a criminal assault on the most vulnerable and poorest people on earth.  In its most graphic terms, carbon control in a cooling world, shout these voices, is tantamount to the wholesale starvation of black and brown babies by the corrupt and callous elites of the West.  As they say, feed cars, not babies.

People on both sides of the divide are genuinely fearful that if they do not prevail in what is presented as an existential war, terrible consequences will accrue.  Fear leads to ugly propaganda and sophomoric lies which only widen the divide.  For the next few years, civil conversation and compromise are unlikely.  After that, there are so many scenarios that energy and utility executives might be forgiven for yielding to great frustration and even despair.

 Dealing with simultaneous globalization of issues, technology and money flows and fragmentation of beliefs, political identities and public responses is a very difficult challenge for executives.  Only the truly optimistic, empathetic, flexible and patient executives and organizations can really thrive in such circumstances.  Obviously, the upside from successfully navigating the globalizing/fragmenting world is greater than ever before (trillions of dollars, billions of consumers) but the downside risks are proliferating. 

Moreover, the management overhead needed for navigating in a world driven by this new great divide is about to rise dramatically, to the woe of CEOs, the astonishment of Boards and the annoyance of shareholders.  It is not just the cost of increasing organizational response capability that will rise sharply but also the costs of conducting transactions, managing global supply chains and defending corporate reputations and brand equity, especially this last item.

One identifiable consequence of the divide will be increased political volatility globally.  Where elections are held, the volatility will be obvious sooner and political lifecycles of elected leaders, parties and legislative and regulatory schemes will compress. This, in turn, means that business decision cycles will compress or be disrupted.

It seems that everywhere or almost everywhere citizens are discontented or just ill humored.  They are out of sorts and anxious.  In rich countries, citizens are angry because they feel a way of life based on cheap energy and food and a dominant influence on the affairs of the world are threatened.  In poor countries citizens are angry because a way of life and expected influence on world affairs are being denied.  One group fears losing what it has; the other fears not gaining what it does not have.  The sum of the fears argues for greater political volatility, either by ballot or by bullet.

Politicians in rich countries who promise carbon control will be thrown out when voters discover that carbon control implementation leads to tangible financial and lifestyle sacrifices, more erosion of personal liberty and decreasing reliability of energy supply.  Voters will not like it. Carbon control means less freedom and prosperity based on any reasonable analysis of proposed legislative and regulatory arrangements, according to the President of the Czech Republic. Voters want costless or low cost carbon control.  They cannot get it.  Politicians in rich countries who fight carbon control will also get thrown out for being ideologically disconnected.  Voters refuse to be held accountable for the implementation consequences of the very policies they vote for.
Politicians in poor countries who promise food and energy security  too will be thrown out once urban voters discover that implementation means diversion of scarce national resources from popular social subsidies and literacy and public health programs to energy projects and rural investments in agriculture, water management and logistics. Of course, very poor rural voters will resent being displaced from their land and alienated from their traditions by these very projects. 

Voters will be forced to choose between competing priorities and accept that food and energy security means more not less global economic integration, more not less reliance on global corporations.  They won’t like it.  In nations where no functioning democracy exists, tyrannical regimes that fail to deliver on food and energy security will be violently replaced by other tyrannical regimes or perhaps, in some happy instances, by elected or quasi-elected governments.

Substantial increases in food production in poor countries mean much greater use of fertilizer, of seeds that are bioengineered for pest and disease resistance (i.e., expensive, high tech seeds), irrigation and flood control systems, refrigerated transportation, better roads and rail tracks and navigable waterways and energy transmission systems and more warehouses: it means a great increase in the use of gasoline, diesel and electricity.  Increased food output means increased carbon input.  It means doing all the things big city elites in rich countries oppose as they are chauffeured in stretch limousines to a 5 star culinary establishment where the price of one splendid dining experience is greater than the annual per capita income of most people in poor countries.

An additional consequence of increased political volatility is that politicians, even those elected with great enthusiasm, will see their approval measures crash within months, if not weeks, of obtaining a mandate.  Commodity markets are beginning to drive capital and political markets.

Political volatility can easily lead to volatility in the Boardroom and the CEO suite. When politicians abandon an issue they often turn on their corporate supporters who championed the issue.  Sacrificing loyal corporate CEOs for political expediency is not infrequent.  When political leaders are replaced or political parties are rotated out of power, vengeful voters or political victors find it both useful and satisfying to attack corporations and corporate management that sided with the, temporarily, out of favor person or party.  This makes Boards very nervous.  CEOs who choose to be particularly visible or vocal on the carbon control or energy and security issues may find themselves and their companies financially decapitated and reputations ruined.  Consequently, one can expect to see greater CEO turnover in the next 5 to 10 years.

Another identifiable consequence is that all over the world in milieus where this is some rule of law, lawsuits on the issues of carbon control and food and energy security will be filed.  They will be pursued by people who have been demonstrably harmed by carbon control predictions or actions and by food and energy insecurity.  They are likely to be filed not only against operating companies but also financial houses, international organizations, advocacy groups and government agencies, as well as celebrities and very large professional service providers.  Energy and utility executives should brace themselves for this and a lot more time squandered in depositions, testimonies, hearings and investigations.

The volatility engendered by the divide means that issues, ideas and proposals on carbon control and food and energy security will move from the periphery to center and from the center to the margins with greater velocity than before.  Of course, the mainstream press will miss these movements until they are well along.  Politicians and executives are likely to be quite surprised by what they will term as the fickleness and indecision of consumers and voters.  They will find once highly favored and well nigh inevitable outcomes become unpopular while notions once deemed to be politically fatal or merely ridiculous gain momentum and sudden favor with the people.  This volatility will mean, naturally, public policy that reverses course or sets off on a new course with a swiftness disconcerting to energy and utility executives, financiers, professional service providers, lobbyists and advocacy groups.

Strategic planning with any degree of detail will be impossible; the focus will shift to scenario and contingency planning with a premium on rapid response and generating strategic options rather than leisurely plans.  Executives will be forced to do more leading, less managing, more improvising and less emulating.  This, of course, is only possible if there is great clarity about the true mission and purpose of the corporation, highly disciplined focus on the competitive advantages of the company and superior business, political and technological intelligence, as well as the organizational capacity to quickly synthesize many streams of information, live with contradictions and act within narrow windows of opportunity.  Business leadership will resemble successful political and military campaigns.

Great divides are not new.  There have been many in history. At the beginning of the divide no one can predict how it will end.  We do know, and energy and utility executives should not forget, that great divides lead to great transformations.

Will a poor African or Asian or Latin American kill to save his family from starvation, disease and exposure if he believes that willful carbon control is the proximate cause of his misery?  Will a Western European or Californian or New Yorker or Japanese kill to save his family from the ideological trauma and emotional distress of living in a world of carbon expansion, while he and they profit from carbon trading?

 We cannot say anything with certainty about the poor man, who is unknown to us.  We can say with certainty say that the prosperous man, who is known to us, will not kill. It is a matter of the poor man’s will versus the prosperous man’s velleity.  The former impels action; the latter is but a wish.  We may, however, find out in the next 10 years.
How many energy and utility executives are willing to speculate on the velleity of 600 million people versus the will of 6 billion? We may yet see on some college campus in some university town somewhere in the world bumper stickers and T-shirts that say “Make Carbon, Not War” as global carbon, energy and food markets change into something new and something strange.
Vinod K. Dar is an energy industry professional and has published articles for electric and gas industry journals and trade press for more than 25 years. He is the Managing Director of DAR & COMPANY, founded in 1990. He has operating experience in gas and electric trading, marketing, retailing and merchant generation, and has been CEO of two energy trading and marketing companies. Mr Dar has served on the Boards of five publicly traded energy and consulting firms.