From Bits to Barrels

One person later said it was the best dinner speech he had ever heard. Another wasn't nearly so kind.

Perhaps because of the various threads we've run here over the last couple of years on everything from Enron's illegal market gaming to recommended paths for future energy technologies, Warburg Pincus had the courage to invite me to talk with the CEOs of their invested energy companies last week.

Knowing just next to nothing about the oil and gas business, I felt inspired by the challenge, and I thought I would use this discussion to share some of the ideas we discussed that evening.

Almost all of the participants were smaller-to-midsize operators on the extraction side of the business ("price takers," as my host put it), vs. the ExxonMobils of the world: they were entrepreneurial, interested in new technology, and subject to the vagaries of price.

I called them the "New Energy" business. I pointed out that we were all in the same room because we shared an interest in the hydrogen covalent bond (the central source of petroleum energy), and that we should perhaps see the energy business in that light.

I mentioned that people have historically thought of oil as resulting from vegetable matter put under heat and pressure conditions for eons, but that perhaps we should think differently. Diamonds, after all, are also carbon-based formations caused by even greater pressure and for longer periods (some say billions of years), and yet the startup firm Apollo Diamond in Boston can now grow a five-carat diamond in a week, indistinguishable from a de Beers (and priced at two-thirds less).

I could also have mentioned work by Karen Brewer of Virginia Tech, in conjunction with the Air Force Research Laboratory, focused on streamlining the creation of hydrogen from water. At first using "collected electrons," and now using a metabolite she calls an "activated catalyst," Brewer is trying to increase production efficiency of molecular Hydrogen.

In other words, both of these teams, like the people in that room in Houston, are focused on obtaining hydrogen covalent bonds at increasingly higher efficiencies.

[It might be worth noting that Bryant Linares' work with Apollo will lead, he thinks, to increased holographic storage, perhaps an enabling step for development of the SNS Spherical Memory device.]

I wanted to talk to this group about two ways of doing business: this modern, technology-driven way, focusing on productivity and real social benefits, vs. the old bag of tricks involving market manipulation, supply control, chokepoints, etc. I suggested that we could look at two platforms - energy and broadband - and find similar lessons, and old vs. new dichotomies, within their stories.

This led directly to a short discussion of Enron, once Houston's pride and joy, and now the source of an endless series of indictments, trials and convictions on fraud and related charges. I suggested it was no accident that Enron was in both energy and broadband, and reminded the group of how Enron gamed the California markets, using some of the same tools used in defrauding broadband-related investors.

Although I didn't really expect any argument over Enron's perfect qualifications as a fraud, I wanted the group to understand that I had some knowledge of the Old Style energy business, so I told them a story about an in-law of mine who worked for Gulf. This fellow was about as close to genius-level IQ as anyone I've met, and the company quickly promoted him to special assignments for the chairman.

At the conclusion of one of these jobs, he asked to speak privately to his boss. (This would have been, I think, just at the end of WWII.) He told the Chairman that he must be confused, because the work he'd done indicated that, through a series of misrepresentations about the source and transport of oil, Gulf was getting paid a depletion allowance, a foreign port allowance, and for the oil itself. Gulf was getting paid three times for each barrel of oil treated this way.

His boss told him he was one of three people in the company who knew this, and to keep it strictly to himself.

I suggested that similar problems had occurred under the 1996 Telecom Act, leading to the current pathetic global standing (18th and falling) of the U.S. in broadband penetration, and I again recommended that we all stop using the word "broadband" to describe the paltry 256k DSL service that most U.S. residents get today.

I linked this failure to the market balkanization that happened during the cellphone license auctions, and made it clear that I thought the U.S. government had demonstrated a clear inability to recognize the economic value of technical standards, hampered in no small part by the oligopolies who benefited from the status quo.

At the beginning of our discussion, I mentioned I had predicted oil would go to $100 per barrel, that I still felt that was a likely event, after a fall perhaps down to a floor of $50. I noted the pressures driving oil price, including Hugo Chavez in his PetroAmerica push, the Chinese and Indian economic growth stories, and the entry of purely financial traders into the markets.

One figure I didn't use, but should have, was that currently about 84.6MM barrels of oil are produced globally each day, and 84.3MM are consumed. This near-matching of supply and demand leads to high price volatility (beta), which in turn attracts financial trades. I described one chart I had seen on recent pricing that suggested perhaps one fifth to one quarter of the total price was being supported by financial-only trades, a non-contributor a year ago.

I think I surprised the group by telling them I thought reasonably high oil pricing was good. Among other things, it provided the headroom for technically-advanced extraction techniques, as well as for alternative sources and conservation investment. I mentioned our discovery at SNS that about four-fifths of the fake science done to rebut global warming had been paid for, directly or indirectly, by ExxonMobil. I told the group I thought this was dinosaur-like behavior, intended solely to confuse buyers and resulting in social harm, and had no place in the New Energy marketplace.

Finally, I tried to give them a new goal to shoot for that I thought might be worth their combined energies: expensive, but infinite, energy. I think this is an achievable goal that would eliminate wars, could create unending social benefits, and was worth pursuing.

My suspicion is that finding a chemical or biological means for producing unending hydrogen covalent bonds would probably lead to expensive, infinite energy resources. The Houstonians seemed to think that was a great idea.

During Q and A, I was asked how to improve America's ability to make better decisions. I said the answer was easy: make it illegal for any corporation to give any money to elected representatives. Return to the vision of a republic/democracy framed in the constitution, where there is no mention of corporations (they didn't exist). Go back to the Greek view of one person, one vote. And get rid of all the lobbyists.

Later, at the bar, that second guy, the one who didn't like the speech, wouldn't stop hassling me. Finally I asked him what he did for a living. Yeah, you guessed it: a lobbyist.

Your comments are always welcome.

Sincerely,

Mark R. Anderson