When we’re caught in a storm, we focus all our attention on the now – the immediate imperatives of a dangerous and uncertain environment. But when the bad weather lets up, we might find that we have emerged in a place different than where we entered. This is the concept of the “New Normal”.
In the New Normal, our options for the future are different than what they were previously, and the tools that worked before are not quite what we need now. Old uncertainties abate, but new challenges set in. That is precisely where the financial crisis that began in 2008 has deposited us – in a New Normal different in some important ways from the period before.
Some aspects of previous economic recoveries are being repeated this time, especially given the current environment of easy credit. The most obvious of these are the replacement of labor with capital, in particular through the increased automation of industrial processes. Another trend familiar from earlier recoveries is a rotation towards higher productivity, service-sector growth. And there is an encouraging resurgence in investment, not only into beaten-down assets like real estate and equities, but also in intellectual capital creation, from venture capital backed start-ups to large-scale government research in renewable energy and other capital-intensive, societal-scale innovation.
Today’s New Normal includes a new set of challenges and opportunities for the sectors of the global economy where DNV contributes, especially in the energy complex and in transportation. What follows
is a brief discussion of a few of them.
On petroleum production
While the causes of the Deepwater Horizon catastrophe are still under investigation, the impact is not hard to discern: there will be far more oversight and regulation of deepwater oil drilling. This disaster has done at least as much for changing the landscape of oil and gas as the Enron scandal did for corporate governance. The take-away: Since fossil fuels will remain the mainstay of the energy complex for decades to come, we can reasonably assume that increasingly stringent standards for operating in this industry will be the norm. The current depressed price of natural gas notwithstanding, every other operational element of the oil and gas sector is about to become very costly.
On natural gas
Massive new natural gas discoveries in the eastern and southern US have already led to a collapse in natural gas prices, which experts anticipate will persist for years, if not decades. Natural gas has the advantage that, while still a fossil fuel, it is cleaner in terms of CO2 and other pollutants than many other fuels, satisfying in part the demand for more environmentally-friendly energy. The message: Any power plant or other facility that can use natural gas, will use natural gas. That means more demand for pipelines, upgraded terminals and ports, and possibly an expanding LNG-based economy.
On shipping
The impact of the opening of a new set of locks in the Panama Canal, three times wider than the current locks, cannot be overstated. All of us fully expect that a substantial portion of the cargo from Asia that has for decades landed on the large ports along the West Coast of North America will now bypass these ports entirely, and the new option to do so introduces greater complexity in terms of cost models for moving freight and the types of ships required. The implications: Much greater flexibility will be called for in logistics management, scheduling, and optimising shipping configurations.
On sustainability
One of my graduate students recently asked in class, “Is sustainability sustainable?” setting off a lively and insightful discussion. Companies seem to be falling all over themselves to define “sustainability” before their competition does, in effect to create competitive advantage by being perceived as “in the right” on this issue. Certainly there is more to sustainability than as a vehicle to create competitive advantage … but yet that is where the US seems to have landed one year after Copenhagen. Recently, voters in California re-iterated their desire to drive down actual CO2 emissions through an aggressive plan for renewables and energy efficiency, but California remains something of an outlier in this progressiveness.
On risk appetite
The two poles of human endeavor, fear and growth, still define the landscape of business decision-making. If we have learned anything from the recent crises, we may see these two motivations braided in a new and constructive way: Growth in energy production and use, but with more attention paid to immediate (and perhaps long term) environmental impact; Growth in commerce and logistics with more careful oversight of physical and information security; Growth in investment with increased awareness of the consequences of over-heated markets. At least, these are laudable targets that may define the character of the New Normal.
Text: Andrew M. Isaacs
Date: 08 March 2011