Monday, June 23, 2008

Panic Over?

Tanker drivers back at work - oil price stable (more or less) - Dyson to build electric cars and Honda launches a hydrogen car - five new main railway lines - retail sales up in May - Gordon in Saudi - ...and a renewable energy strategy which will cut our use of oil. So is it all over?

I’ve been away on holiday and it’s amazing what can change in a week. Before you ask, no, we didn’t fly anywhere, we went to Newcastle by train and walked the whole length of Hadrian’s Wall. (Well, all but 10 miles!)

Hello. I'm Anthony Day and I’m back again to talk to you about staying in business and staying profitable. Last time we were worried about the price of oil and a tanker drivers’ strike which was making petrol unobtainable as well as unaffordable. This week the drivers have gone back to work for a pay rise of only 14% and oil has (almost) stopped rising. But who’s worried about oil when there are suddenly a range of alternatives?

First, James Dyson, the vacuum cleaner king, is turning his talents to designing electric cars. He’s developed a super-efficient electric motor. Honda have announced their hydrogen car and Network Rail are looking into building no less than five new high-speed rail lines across the UK. The feel-good factor is reinforced by the news that retail sales in May were the highest for 22 years, but if you still think we need cheaper oil Gordon’s been out there in Saudi not only asking them to pump faster but also suggesting that they should invest in renewables in the UK.On 26th June the government publishes its Renewable Energy Strategy. The predictions are that this will include plans for 3,500 wind turbines and will reduce the nation’s use of oil by 7% by 2020.

So is this all good news? Is the panic over? Can we all go back to making money? People accuse me of being depressing, but all I’m trying to do is be realistic and look at the best choices for business in a future that’s far from clear.

The most important point is that we have an energy crisis, and while there are solutions like electric cars, new railway lines and thousands of wind turbines; none of these can become a reality in less than 5 years and the rest will take more like ten or twenty. Oil prices are high today. They may drift up and down over the coming months, but they are unlikely to drop below $100. My prediction is $180 by the end of the year and $300 by the end of 2010 unless we see a dramatic global recession. as I predicted last time, gas and electricity are on the rise and some reports talk of a 40% increase by Christmas.

As business people, what can we do? Maybe we should try a protest - it worked well for the tanker drivers! However, few businesses can hold their customers to ransom like that. Rather than waste time and effort on protests and demonstrations (a bit like Canute trying to turn back the waves) we should consider what to do to make the best of it. We need to assess the effect on our supply chain; on our suppliers and our customers. This need not be negative - suppliers of home insulation are surely going to see an upturn!

We need to act now, but we also need to plan for the future. Scenario planning lets you prepare for a number of alternative futures and therefore be more ready to cope with what actually happens. Take some time with your team to brainstorm to think the unthinkable and decide what you could do about it.

The truth is that the future is not rosy for those who believe that we can go back to business as usual. The good news is not good when we examine it in detail. For example, electric cars need to be built and bought, and are you going to buy one? How much energy will it take to replace the UK’s 30m cars? We’ll all charge them up a night when electricity demand is low - except demand won’t be low because we’ll all be charging our cars. So we’ll need more coal or gas or nuclear to run the power stations. Could be a bit of a problem as we are already finding it difficult to cope with current demand for electricity without all this demand displaced from oil. Much the same applies to hydrogen. The car itself is pollution-free but there’s a massive carbon footprint at the power station where they generate the energy to produce the hydrogen. The renewables strategy will apparently reduce our dependency on oil by 7% over 12 years. Given that North Sea oil output is declining by about 6% per annum, this is merely a drop in the bucket. And even Gordon Brown admitted that his visit to Saudi would have no immediate effect on prices at the pumps.

My message is that we have to plan for a different future in order to succeed. Those that don’t, like Canute, will first get their feet wet and then be washed away.

I’m Anthony Day. If you want to talk about scenario planning for how energy, climate and resources will affect your business, give me a call on 01904 654 986.

Wednesday, May 28, 2008

Fuel Prices and Your Business

It’s always tempting to say I told you so, but those of you who have attended one of my workshops or seminars will know that I have been predicting energy shortages and fuel price increases and I always said that they would hit us much sooner than climate change.

Will climate change your business? Yes that’s still an issue, but what about the current fuel situation? We have hauliers protesting and threatening a blockade if the government doesn’t cut tax within a week, we have politicians saying that the government should shelve the increase in car tax and the proposed 2p increase on fuel duty. Apparently the Prime Minister and the Chancellor are meeting the oil industry today to find out whether they can pump more oil out of the North Sea.
So what’s the background to all this? Simply, supply and demand. Rapid economic expansion in China and India are driving the demand for oil and the supply of oil is finite. There is only a certain amount of oil in the ground and at the moment there are some problems with refinery capacity as well, which is restricting supply. Last week the International Energy Agency revised its forecasts for future oil production downwards leading to some of the speculation which has also driven up the price. So oil has gone up, and this has driven up the price of petrol and diesel, but it’s the government which is getting the pressure. It’s all too easy to blame the government and at the moment people are busy blaming it for everything. But it’s not just this government; it’s the previous government and every government we’ve had for the last half century. This is not an oil shock; this is not a surprise. Shortages and price increases have been predicted for about 50 years. Anyway, we are where we are so what do we do about it?

As you will have noticed, prices accelerated over a relatively short period of weeks. Any solutions like finding more reserves, just supposing there are any, will take years if not decades to bring on-stream. Even though the government may bow to pressure in the short term, we have a problem. In the long term we face continually rising energy costs and we may well see the pace of that increase rising rapidly.
In today’s Guardian, Gordon Brown talks about free insulation for people on low incomes, smart metering, carbon capture and storage generating stations and more nuclear power. None of this will solve the price or supply of petrol and diesel. Oil prices are going up and gas and electricity will not be far behind. This will affect you individually and it will affect your business.

Governments can be criticized because they have assumed that oil and energy will continue to be widely and cheaply available, in spite of the evidence which has been around for at least 50 years. It does not make sense to build more roads and more airports if there is going to be an energy shortage. It does not make sense to close post offices and to centralize schools and hospitals and other public services if there’s going to be an energy shortage. It does not make sense to encourage out of town shopping and the growth of supermarkets if there is going to be an energy shortage. Supermarkets are fine for the operators because they rely on the consumers to handle the last part of the distribution. The last part of the supply chain –from store to home – is arguably the most expensive and has the biggest carbon footprint. But it’s the consumer that pays for this.

Let’s also remember that oil and gas are not just fuels. They are raw materials for plastics, pharmaceuticals, fertilizers and many other products. We have not yet seen the full effect of the oil price on product prices, due not only to increased distribution costs but increased costs of manufacture. So everyone is going to see increased costs of living.

Your business will be affected because it will cost you more to run your vehicles, it will cost you more for lighting and heating and it will cost you more for energy used in the production processes. Most of us, though, are in a global supply chain so we need to understand the effects all this will have on our customers and the effect this will have on our suppliers. Even if the government cuts road tax and fuel duty there is a point beyond which it cannot go, and in any case it will have to replace lost revenues through other taxes. As the oil price continues to rise, the cost of fuel, the cost of travel, will rise. As an individual you will become increasingly aware of the costs of driving to the supermarket, of taking the kids to school, and taking trips at the weekend. You and your staff will become increasingly aware of the costs of commuting to work and for some people that will be a deciding factor on who they work for. We need to look at how people can work from home and we need the government to ensure that the bandwidth is available so that people can work from home. Of course we have to recognize that many jobs cannot be carried out from home so we have to plan to be able to get the right staff in the right places.
We live in a global economy and very many organizations now either have their own factories in China and the Far East or buy from suppliers in those countries. The decisions to rely on those sources of supply were not taken overnight and were frequently many years in the planning. You need to look again at your supply chain and ask how increasing energy costs and material costs will affect it in the future. If you need to change, you need to plan. You may be facing a process which will take years to implement. Unless you start now you could be out of business if things get really bad in a few years time. Now is the time for scenario planning. What if? What if? What if?

I know it’s a cliché but the pace of change is accelerating and only those who plan will survive. Oh, and what about climate change? Climate change is still a business issue in even though the signs are that the government will cave in to pressure over fuel prices and help people to continue to use as much energy and emit as much carbon as before, at least in the short term. Nevertheless, there is still the Climate Change Bill shortly to be passed and there is still a wide range of environmental regulations affecting all businesses. We have still got to make sure that we comply.

Next month I present a workshop entitled Best Practice for Environmental Champions at the Low Carbon Innovation Exchange in London. I shall be covering all these issues, and whatever else has arisen in the meantime.

Maybe see you there, but if you want to talk about scenario planning and how these issues affect your business give me a call on 01904 654986.

I’m Anthony Day and I look forward to hearing from you.