Developing Intelligence for a Complex World

THE ORACLE’S SECRETS TO PRODUCING BETTER FORESIGHT

We’ve always assumed oracles of the future got their answers from breathing mountain air or from the gods looking down. The reality is the good oracles were canny oracles that did their homework first before delivering their fateful responses. They had access to great intelligence networks to help them, and most importantly before they gave a foresight response to a tough question they purposely disturbed the dynamics of the situation using quick probes to see what information would be revealed. We can’t look at a used car and expect to know how it will run; we have to kick the tires, turn on the engine, and give the car a test ride to have any sense of the future. Good oracles understood they weren’t passive participants in how the future played out; they were active, engaged ones. Whatever they said or did could influence the final outcome. Before delivering their foresight response, which was irreversible, they probed or stimulated the complex environment to see what possible behaviors could develop.

In modern day organizations, oracles have been replaced by effective intelligence practices that focus on getting “intelligence from the trenches,” conducting as much experimentation and testing in the market as possible, and learning quickly from emergent behaviors in the market. Google and Amazon have created amazing probing or active-intelligence capabilities that should enable them to remain very competitive for the foreseeable future.

INTELLIGENCE NEEDS FOR COMPLEX ENVIRONMENTS

Real-world environments are very messy. They evolve in nonlinear ways and are largely unpredictable. Even with a computer, we barely understand how the many forces interact and behave. We can have voluminous information about a situation, but it’s always very incomplete, often inaccurate, and very hard to integrate and analyze quickly. We generally have limited insight about the individual forces shaping the situation and the situation as a whole, and only understand in retrospect why things happened. We need intelligence practices that will help us better understand the situations we’re facing, that will coax out better foresights about future threats and opportunities, and that will enable us to act effectively in response to the changing environments.

Our intelligence needs start with understanding better the dynamics of complex environments. Real-world environments are complex because many interrelated forces interact unpredictably. Change in one type of force, social or economic or physical, inevitably affects the others, but the unfolding behavior of the system cannot be predicted by understanding the individual forces or any set of force interactions. Importantly, every stakeholder in a situation is a force, playing a role and acting on the other forces.

A complex environment is simultaneously dynamic and resilient. Resilience is the capacity of the environment to absorb disturbance, to undergo change, without crossing some threshold to chaos and a different dynamic. This capacity to undergo some change without a radical change in general dynamic is defined as the resilience of the system. The more resilient the system, the more anti-fragile (a term from Nassim Nicholas Taleb, the author of The Black Swan and Antifragile: Things That Gain from Disorder) it is.

The complex social-physical system becomes unstable and chaotic when changes in the interlinked forces result in thresholds being crossed. Shocks and disturbances to a system, such as from a natural disaster, technological disruption, etc., can push a system across thresholds into a different state or dynamic, often with unwelcome surprises. An accumulation of nonlinear changes can also push a situation over thresholds. Eventually the system reconfigures into the new dynamic and state with new thresholds.

Complex environments can be defined at many levels or scales. The highest level is the Earth system, but any real world issue, like the copper commodity market, the urbanization of Southern California, the development of renewable-energy sources in Europe, or migrations in Europe, can be defined as a complex situation.

Facing complex situations creates a number of strategy and intelligence challenges for organizations.

  • First, because real world situations are interactively complex and non-linear, they are difficult to explain, let alone predict some cause and effect. A relatively minor action like publicizing a foresight of the future can create disproportionately large effects. When Elon Musk makes a market prediction, he can have a large impact. However, the same prediction for the same issue at a later time may produce a different effect.
  • Second, each situation is unique and novel. Historical analogies can provide useful insights on individual aspects of the larger issue, but the differences among even similar situations can be profound and significant. The political goals at stake, the stakeholders involved, the cultural milieu, the histories, and other dynamics are unique.
  • Third, a complex situation can’t be known, only surrounded. The organization’s understanding of the issue depends on who’s involved, and each individual will see the relationships between the forces driving the situation and their importance differently.
  • Fourth, every description of the issue points in the direction of a set of foresights. The description puts blinders on what we see as foresight. For example, if one describes bankrupt commodity producers as the result of falling demand and lower commodity prices from a weak economy, the foresight of the future will be different than if we describe bankrupt commodity producers as the result of building too much supply capacity.
  • Fifth, any stakeholder’s action, including its intelligence activities, can disturb a situation with non-linear effects.
  • Six, real-world situations have unlimited possible outcomes; there’s no fixed set of possibilities. Also, there’s no way of knowing if many of the foresight possibilities have been identified and considered.
  • Seventh, foresight ideas for an issue are better or worse, not right or wrong. The suitability of a foresight and its perceived quality will depend upon how individual stakeholders have understood the situation and what constitutes success for them. The perceived quality of a foresight can change over time; yesterday’s foresight might appear good today, but disastrous tomorrow.
  • Eighth, every foresight for a real-world situation is a ‘one-shot operation.’ The interactive dynamics of a situation are continuously creating a new situation and cannot be undone. The consequences of change are effectively irreversible.
  • Ninth, real-world situations have no ‘stopping rule’. It is impossible to say conclusively that a situation has been resolved. Work will continue on an issue until strategic leaders judge the situation is “good enough,” or until stakeholder motivations, will, or resources have been diverted or exhausted.

ORACLE SECRETS FOR COMPLEX ENVIRONMENTS

Based on these challenges, we can surmise what were the secrets of the good oracles. How did they come up with good foresight for the tough questions of the day? There were seven things.

First, good oracles did their homework before coming up with a foresight response to a tough question posed to them.

Second, good oracles had intelligence teams to assist them. An oracle must develop a superior ability to identify signals of change from the external environment and see the new possibilities for all the players. The oracle needs a team to accomplish this and the team must specialize in watching complex situations—watching non-linear dynamics, emergent behaviors, etc., identifying the key uncertainties and the ranges of possible outcomes, spotting signals of change, gathering new data, managing probes in intense environments, and developing new insights on threats and opportunities. Oracle team persons need to have an entrepreneurial mindset to operate in those fluid situations, work with the open network, and communicate their insights upward. They must be able to recognize new patterns in a changing environment, know which types of relationships within the network are crucial at specific times, and mobilize relationships in order to accomplish objectives.

Third, good oracles developed a wide network of sources in the field, a network of players well beyond traditional players and boundaries.

Fourth, good oracles recognized they’re not outside observers in unfolding dramas, but active players in those dramas. Like every other player, an oracle action—particularly its foresight response—can shape the situation’s dynamics and possible outcomes.

Fifth, before settling on a foresight response, oracles first stretched their teams to identify the full range of possible dynamics in a situation and outcomes. The teams did this by focusing their intelligence activities on the big uncertainties, developing an understanding of the conditions from which opportunities or threats could emerge, and identifying the threshold boundaries—the tipping points—beyond which the possible outcomes and dynamics would change in chaotic ways. Very often the big uncertainties would be about the various players, who could emerge, how anyone might behave, etc. But there were many other possible big uncertainties—technology innovations, the success of new products and services, and local government rules.

Sixth, oracles extensively used probes. Instructive patterns can emerge from complex dynamics, if one can disturb or probe the situation and watch the effects. Probes can be a field test of a new product, an external-stakeholder interview, a publication of a blog, the posting of something to sell on eBay, etc. The objective was to coax out information about a major uncertainty, particularly about how key players might behave, so the oracle team could develop a better foresight response. Most probes will fail to produce anything, so oracles need a portfolio of them to create the opportunities for informative patterns to emerge.

 

Finally, good oracles made most of their money from retainer services because real-world situations rarely got resolved and clients wanted timely foresight updates. In fact, clients needed the oracles’ coherence in the midst of all the change, for seeing how the situational players were learning and adjusting to the changing dynamics. So good oracles developed processes for ongoing development of their network, watching of the dynamics of a situation, and probing the situation to stimulate new intelligence, if necessary.

HIGH TECH’S RELIANCE ON PROBES

In modern day organizations, oracles have been replaced by effective intelligence practices. Twenty years ago, Richard Pascale, former McKinsey consultant and Stanford Business School professor, described in a Sloan Management Review article, “Surfing the Edge of Chaos,” a set of strategic principles for organizations operating and competing in complex ecosystems and how Royal Dutch/Shell was attempting to apply those principles. One key principle was that in a world constantly evolving in ways one can’t predict, where one has a limited ability to understand the world and shape events and outcomes, organizations succeed best not by trying to control an unpredictable environment but by constantly disturbing it. Another principle was that decentralized organizational units were best positioned to develop the intelligence and insight for responding to the changing environment that was changing often in non-linear ways. At the time of the article, Royal Dutch/Shell was implementing a new management system that would rely on “intelligence from the trenches,” involve as much experimentation and testing in the market as possible, concentrate on rapid learning, and implement continuously adapting action plans. That new management system of Royal Dutch/Shell characterizes the approach many fast-growing corporations use today.

Probes are the techniques for generating intelligence from the trenches—by making small disturbances—and conducting market experiments and tests. They are the product tests, product announcements, market experiments, and interviews designed to get stakeholder responses. Probes are the means for resolving the uncertainties about what the stakeholders might do in the future. Will customers buy this new product idea? How might regulators respond to the new product or service? How might suppliers and competitors respond? Probes can be used to reveal emergent strategies of new entrants.

Online environments have totally changed how companies conduct probes. For example, the use of online surveys and tools like Survey Monkey has transformed how consumer research is done around the world. Corporations that compete in online industries and have access to millions of online users or customers are creating significant competitive advantages for themselves through their probes. They can run many probes, quickly, for little cost and are leveraging that capability to build their new products or services. Probes are a key for leveraging big data.

A major strategy of online companies is “ship and iterate.” This is essentially a strategy that leverages probing skills to commercialize a new product or service. The company doesn’t focus on getting a perfect first product introduced online but instead they initially make available online a close-enough product and then focus on iterating quickly to get improved versions into the hands of users. That first product shipment is in effect a big probe and generates a lot of useful information even if the product fails.

Google finds some of the most important data from the product-shipment probe is the negative feedback because it’s so motivating to the product development team. Google also believes in soft launching new products—i.e., only providing minimal marketing and public relations support with the initial launch, forcing the new product to gain momentum and succeed on its own.

Amazon believes speed matters with new products or services and, when there’s uncertainty about what might happen, it just tries something and takes advantage of the opportunities stimulated by doing something first in the marketplace. Being first also attracts to your product or service the critical segment of users and customers that is strategic and risk-taking—the innovators and generates for you the first feedback information from the marketplace that no one else will have. This bias for action is a characteristic of Amazon’s culture that is focused on continually trying to improve customer experiences.

For online and software companies, it’s easy to ship a new product or version. For hardware companies, it’s a little more difficult, but cost-effective probes can still be created. Online environments have enabled for hardware companies an array of new approaches and technologies for generating and testing product and market ideas fast, at low cost, and with not-much risk. For example, one can ship the design of the hardware, or one can create a virtual model that users can play with.

Peak Coal Demand? Followed by Peak CO2 Emissions?

ORACLE’S RESPONSE

Global coal demand could peak much sooner than what the major reference scenarios of the US Energy Information Administration and International Energy Agency currently show. China’s and India’s changed outlooks for coal demand would be the biggest factor in demand peaking sooner, driven by China’s clean air concerns, falling energy intensity of economic growth in China and India, and rapidly expanding supplies of natural gas around the world. If that’s the case, it’s plausible CO2 emissions could also peak in the next 10 years. Increased momentum will develop for the policies that contributed to reaching this tipping point. A new economic system for electricity will emerge in the next 15 years, but no one can predict what the dynamics of that system will be because of the uncertainties. China and India could emerge as the global leaders on energy and the environment if they’re able to achieve economic success without the energy intensity required by OECD countries.

RECENT SIGNALS OF CHANGE

Demand for electricity in Asia is surprising stagnant and this is affecting coal demand. Apparently, the falling energy intensity of economic growth wasn’t taken into account very well.

  • Asia accounts for two thirds of the world’s coal demand, but that demand may be falling and sooner than everyone’s base-case scenarios show. In China in 2016, coal consumption fell 4.7 percent. This was the third year in a row of declining use. Coal currently supplies about 70 percent of China’s electricity, but the Chinese government is focused on cutting coal’s use, and succeeding. Coal-fired plant capacity in China is still being added—in November 2016, China’s National Energy Administration announced it is raising coal-fired power capacity as much as 20 percent by 2020, from 900 gigawatts in 2015 to as much as 1,100 gigawatts by 2020—but capacity utilization of coal plants has fallen steadily in China from around 60 percent in 2010 to around 50 percent in 2016. It appears coal will only provide 55 percent of China’s electricity mix in 2020.
  • Primary energy demand in China declined in 2015, the first fall in 20 years. Despite recent years of little or no growth in demand for power in China, the government is forecasting growth of between 3.8 percent and 4.6 percent by 2020. China continues to dominate major industries that use a lot of electricity, but environmental problems from heavy manufacturing are influencing national government policies. China’s aluminum production accounts for more than 50 percent of world production. China’s production grew 60 percent from 2011 to 2016, reaching 31 million tons in 2016. Aluminum production is an energy-intensive process and China’s aluminum smelters receive 90 percent of their power from coal. In the world steel industry with global oversupply, China, the world’s number one steel producer, has been producing steel at a record pace.
  • Coal makes up 61 percent of India’s power-generating capacity, but India has announced it doesn’t need any new coal-fired power stations in the next decade beyond what it is currently building. Capacity utilization of coal plants has fallen steadily in India from over 75 percent in 2010 to less than 60 percent in 2016. Even with the rapid economic growth of the last decade, about 40 percent of India’s coal-fired power plants are now idle because of weaknesses in the distribution system and because government planners overestimated the growth in demand.

The coal reference case in US Energy Information Administration’s (EIA) International Energy Outlook 2016 has world coal consumption increasing from 2012 to 2040 at an average rate of 0.6 percent/year. Much of that increase is from India. What if China’s coal consumption is peaking now and not in 2025? And what if India’s large increase in demand for coal over the next 25 years doesn’t materialize?

Plenty of oil and gas is around and few limitations to producing more.

  • Global oil supply has steadily risen—almost 20 percent—since the year 2000 to over 95 million b/d in 2016, with non-OPEC producers leading the charge, competing strongly with OPEC producers for market share. In 1995, proven oil reserves (i.e., oil discovered and economic to produce) in the world were 120 trillion cubic meters. In 2015, proven oil reserves were 187 trn cubic meters.
  • Fueled by commodity prices, particularly oil exports, sovereign-wealth funds—financial vehicles owned by governments—doubled in size from 2007 to 2015 to $7.2 trillion. Since 2007, the number of sovereign funds increased by 44 percent to 79, many in Africa and Asia. Nearly 60 percent of sovereign wealth fund assets are related to energy exports. Many sovereign-wealth funds, including most likely several from the Middle-Eastern oil exporters, came to the aid of the Russian Direct Investment Fund when US and European sanctions restricted business between the Russian fund and Western companies.
  • Developing economies account for 43 percent of global GDP but 65 percent of crony wealth. Crony capitalism is where an individual’s wealth stems from a special relationship with the government. Since globalization took off in the 1990s, the wealth of billionaires in high-crony industries, like natural resources, real estate, construction, telecoms, and defense where there’s a lot of interaction with the state or are licensed by it, grew substantially in developing countries. Russia’s crony industries represents approximately 18 percent of Russia’s GDP.
  • The world’s seas are becoming more efficient in moving hydrocarbons. The major Panama Canal expansion, opened in June 2016, more than doubles the canal’s capacity and includes a third lane to accommodate ships large enough to carry 14,000 TEU. A key market of the future for the canal could be LNG carrier traffic. Also, Russia’s US$27 billion Yamal LNG project within the Arctic Circle will begin operation in 2017. This remarkable project will use West-designed and Far East-built ice-class LNG tankers to enable year-round export shipments from northwest Siberia to European and Asian markets. The LNG tankers are intended for navigation both westbound and eastbound along the Northern Sea Route (NSR), the Arctic seaway along Russia’s coast linking the Atlantic and Pacific. The Russian company, Novatek, has a 50.1% interest in Yamal LNG; China National Petroleum Corporation and France’s Total Group both have a 20% holding; and the Chinese state-owned Silk Road Fund has a 9.1% interest.
  • Gas is turning into a better opportunity than oil for producers. The technology of shale oil production is rapidly advancing despite current cost constraints. Over the last five years, production well productivity has risen more than 400%, 40% in the last year. US exports of natural gas have just exceeded US gas imports for the first time in 60 years with most of the export increases going to Mexico and Canada. From 2000 to 2015, the percentage of total energy production of natural gas in Shell, Eni, Total, ExxonMobil, ConocoPhillips, and Chevron went up significantly. Only in BP did it go down slightly. In Shell, Eni, and Total the share of natural gas is almost 50 percent.
  • However, new environmental risks from natural gas operations are coming to light. Recent figures indicate that around a third of the annual methane emissions in the United States can be traced to the natural gas industry. While methane doesn’t remain in the atmosphere as long as carbon dioxide (12 years compared to 500 years), it is about 25 times more potent as a cause of global warming. The Environmental Defense Fund, an American NGO that often works with industry, estimates 2-2.5% of the gas flowing trough the supply chain leaks out.

In developed countries, wind and solar renewables are contributing to the changing the energy supply mix. Will this momentum change with lower hydrocarbon prices? A key signal is that wind and solar renewables are becoming a significant energy source in Texas, the center of the US oil and gas industry. In 2001, renewables (wind, solar, and hydro) accounted for 2% of Texas energy; in 2016 they will account for 16%. One night this past winter, nearly 50% of the power flowing into the Texas grid came from wind turbines in the state. Federal subsidies for renewables have been a big factor, but equally big have been the falling costs of solar and wind technology.

With renewables expected to account for half of the growth in global energy supply over the next 20 years, the costs of the changeover will be huge. The electricity system around the world is fundamentally changing because of the orchestrated growth in the use of renewables largely with subsidies. The costs of these subsidies were modest when the renewables contribution to overall energy supply was marginal, but that’s changing. Since 2008, public subsidies for renewables have been $800 billion. In 2014, the IEA estimated that decarbonizing the global electricity grid will require $20 trillion in investment in the next 20 years, and that still leaves much to be done. A new economic system for electricity is required, but the ecosystem of energy and the economy is too complex for anyone to know what that should be and how to make the changeover efficiently. Source: The Economist, “A world turned upside down,” February 25, 2017, pp. 18-20.

US electricity generation from coal shrank from its peak in 2008 at slightly more than 2 billion megawatt-hours to about 1.3 billion mega-watt hours in 2016.

  • In 2016, natural gas’s share of US electricity generation at 33 percent exceeded coal’s share at 32 percent for the first time. Coal’s share has steadily fallen from a high of over 55 percent in the mid-1980s, while natural gas’ share has steadily risen from about 10 percent then. Nuclear remains steady at 19 percent, while renewables, not counting hydro, have risen from zero in the mid-1980s to 8 percent in 2016.
  • The Tennessee Valley Authority historically has been a major user of coal plants, but that has changed radically since 2007 because of environmental agreements to reduce coal emissions, the lower prices of natural gas, and increased production from nuclear. In 2007, over 55 percent of TVA’s energy mix was coal; in 2017 a little over 20 percent of the mix will be coal. Since 2011, TVA has shut down 24 coal-fired units out of 59 in its network.

Clean coal technologies are not economic yet, and maybe never will be. Southern Co. also announced in February 2017 that the first of its kind “clean coal” power plant is almost complete, but that it won’t be economic to operate the plant competing against natural gas power plants using today’s low gas prices. The new coal plant that will be able to burn coal and capture the carbon-dioxide output has taken 7 years to complete and cost $7.1 billion to build. If Southern had built a natural-gas power plant of comparable size, it would have cost about $700 million to build—one-tenth the cost of the clean coal plant.

Given all the changes and uncertainties, the world’s oil expert forecasters can’t agree on whether oil demand growth will peak in the next 30 years or not. Just another indication of how uncertain is the energy picture around the world and the global economy. A major issue that is perhaps already affecting investment decisions in oil companies is the affects of new technologies for fuel efficiency and electric cars and of future carbon rules on oil consumption in the future. The Wall Street Journal published on May 22, 2017 the results of an informal survey of big oil companies and the International Energy Agency on when they expect global demand for oil to peak. BP and Exxon Mobil don’t foresee a peak in the near future, while BP thought it would peak in the 2040s, Royal Dutch Shell 2025-2030 (so soon!), Statoil 2030, Total as soon as 2040, and the IEA after 2040. In May 2016, Shell’s scenario group published a plausible scenario of the world meeting international climate goals and achieving a net-zero emissions state. Shell described a number of key developments over the next 50 years that could lead to net-zero emissions, including significant investments in solar, wind, and nuclear sources, carbon capture and storage technologies, many country de-carbonization strategies, and a global carbon pricing system—whether through carbon trading, carbon taxes, or mandated carbon-emission standards.

Even if oil demand peaks in the foreseeable future and the world achieves a net-zero emissions state, oil and natural gas will continue to be key energy sources. Shell’s scenario group in May 2016 highlighted that for the future global population of 10 billion people to have a decent quality of life, the global energy needs would have to double by the end of the century. Oil and natural gas would have to remain important energy sources for the next forty years, until solar, wind, and nuclear sources can assume the burden of meeting the global economy’s needs. If the net-zero emissions state is reached, let’s say by the end of the century, the share of oil and gas in the overall energy mix will have fallen from 57 percent to around 15 percent, while the non-fossil-fuel share would be just under 80 percent.

China is rapidly reshaping its energy supply and demand mix and its foreign trade in energy commodities.

  • US coal exports to China have recently shrunk to almost nothing. They were almost 6 million short tons in 2011, 10 million tons in 2013, and less than 1 million in 2016. Out of seven West Coast export terminals proposed in the past five years, none has opened.
  • In January 2017, Mongolia announced a new deal to sell coal to China. With Chinese coal production falling rapidly because of China-government environmental concerns, the deal effectively transfers China’s pollution to Mongolia. Trucks carrying coal are backed up for nearly 40 miles at Mongolia’s southern border with China. Observers call it the world’s largest traffic jam.
  • North Korea’s economy is heavily dependent on China’s purchase of North Korean coal and China’s supply of oil. China is essentially the only importer of North Korean coal. New UN sanctions toward North Korea because of nuclear-weapons development activities have limited North Korean coal exports to China. China has recently supported those sanctions.
  • China Petroleum & Chemical, or Sinopec, is attempting to double domestic natural gas production in the next five years by rapidly expanding natural gas production from shale reserves in order to reduce coal usage in the country and reduce China’s need for imported liquefied natural gas. Many investors around the world were counting on sending natural gas to China.

Nuclear energy plants are progressing in many parts of the world, but not in the United States and Germany. Electricity from US nuclear plants at about 1.5 mega-watt hours per year is expected to decline very slowly over the next 25 years. Toshiba’s subsidiary, Westinghouse, recently declared bankruptcy over escalating costs involving billions of dollars to finish Southern Co.’s Vogtle Electric Generating Plant, the first new nuclear plant in the United States in three decades.

The International Energy Agency (IEA) report on CO2 Emissions from Fuel Combustion highlighted that the growth in global CO2 emissions was slowing down. In 2014, the IEA indicated the global CO2 emissions were 32.4 gigatons of carbon dioxide (GtCO2), an increase of 0.8 percent over 2013 levels. The growth in 2013 over 2012 levels was 1.7 percent, while the average annual growth rate since 2000 has been 2.4 percent. Work by the Intergovernmental Panel on Climate Change (IPCC) shows that holding warming to 2°C typically requires global annual emissions to peak sharply around 2020, fall steeply by 50% before 2040, and be close to net zero towards the end of the century. The EIA’s International Energy Outlook 2016 reference case has global energy-related CO2 emissions growing about 1 percent/year from 2012 to 2040, but will CO2 emissions peak much sooner than anyone expected?

CO2 emissions aren’t the only environmental issue of coal. An immediate problem—in developing countries in particular—is particulate emissions. China’s government is actively tackling smog created by burning coal. New instructions were issued in February 2017. These may have a greater impact than previous instructions that are sometimes ignored by local authorities. The concentration of fine particles, or PM2.5, in Beijing’s air—about 65 micrograms per cubic meter in 2016—still exceeds the World Health Organization’s recommended limit of 25 micrograms per cubic meter. Beijing’s fine particulate level is getting better—it was over 100 micrograms per cubic meter in 2013, but still more than double the recommended limit.

ORACLE MUSINGS ABOUT THE FUTURE OF COAL AND CO2 EMISSIONS

Global Energy Mix. For the next 20 years, the range of uncertainty on the energy sources used in the world will remain extremely wide. The use of nuclear, the government restrictions on hydrocarbons, the technology innovations in renewables, natural gas development, and clean carbon, etc. all remain uncertain. Still it’s very plausible:

  • Nuclear power will gain more advocates and expand.
  • Oil demand will remain high because consumers in both developing and developed countries will continue to prefer internal-combustion-engine cars and trucks over alternative-fueled vehicles.
  • Renewable power will expand more rapidly than projected in non-OECD countries. For many countries, in ten years more than 50 percent of new power capacity will be from renewables sources. Major investments in infrastructure for using more renewable technologies will be made.

While the demand for oil will increase for the next 20 years, the demand for natural gas is going to explode.

  • Natural gas production could grow even more than base case scenarios because of technology innovation, a raft of new government restrictions around the world on use of coal in power generation, and high costs of clean coal technology.
  • Technology innovation will likely continue to lower the costs of shale gas development. China and Argentina will see rapid expansion in their natural gas productions.
  • The two big hurdles for companies developing the new oil and gas reserves will be the large capital required to explore, develop, and produce oil and gas in hard to reach places, and the liability risk to companies from oil spills and contributing to global warming.

Future of coal: Global coal demand could begin to fall soon.

  • The momentum to substitute natural gas for coal in electricity generation will likely accelerate.
  • Coal use will continue to decline in the United States. It’s uncertain how Trump administration policies could affect that decline, but in general the trend won’t likely reverse.
  • The biggest changes in coal usage will be in China and India. As long as natural gas prices remain low, coal demand will most likely keep falling significantly. In fact, China and India will struggle to keep up with the forces driving those declines.
  • Clean coal technologies will struggle to become commercial. Few new coal plants will be built, but retrofitting old facilities with expensive clean coal capabilities is not likely going to happen.

CO2 tipping-point. Global annual CO2 emissions may be peaking and could start to fall, perhaps even sharply, from 2020 to 2030. Momentum will increase to continue the policies that led to more efficient energy usage in the economy, the expansion of nuclear, the substitution of natural gas for coal in electricity generation, etc.

China’s Leadership on Energy and the Environment

  • China’s changing policies toward improving the country’s air quality and energy supply in the next ten years will have the greatest impact on global CO2 emissions and the world’s goal of reaching a net zero CO2 emissions state as soon as possible.
  • China will ride the wave of coal use reduction and expand its commitments toward global environmental goals. China will assume a much large leadership role on environmental issues in international forums, like the IPCC.
  • Chinese corporations will continue to invest heavily toward becoming global leaders in renewable-energy technologies, like solar electricity generation and electric cars.
  • China companies will be the industrial leaders around the world in all commodities, including oil, gas, and coal. The Chinese companies will be the biggest, invest the most money, and generally be aggressive to capture the most market share.
  • The Chinese government will likely support Chinese companies moving abroad with various means of support to help them penetrate foreign markets and avoid trade and tariff costs.
  • In general, transparency of commercial transactions between governments and commodity producers will go down worldwide; corruption levels could increase.
  • In many respects, India’s accomplishments will be greater, but they will follow China’s.

The battles over the development and use of fossil fuels could become even more intense.

  • Greenhouse gas emissions will continue to accumulate in the atmosphere and ocean for the foreseeable future. CO2 emissions from gas will continue to grow because of the growth in natural gas production.
  • NGO’s will continue to object to natural gas and oil development and production activities and the companies that conduct them.
  • Gas companies will never be viewed as good world citizens.
  • Large private oil and gas companies could experience more protests wherever they operate.
  • Russian and Chinese companies will be singled out more and more by NGOs.
  • Many western governments will find themselves simultaneously penalizing and sanctioning Russian and Chinese companies involved in oil and gas operations.

New economic system for electricity will emerge over the next 15 years: But no one can predict the dynamics of that system because there are too many uncertainties in technology, geopolitics, human behavior, climate change, energy supply sources, energy demand, and economics.

  • Major disruptions in energy supply could occur.
  • No one can predict what the costs of energy and environmental protection will be. The range of possible outcomes is very wide.
  • If CO2 emissions peak, societies will likely place a higher priority on lower costs and more robust economies than on less chance of significant climate change and higher costs.

Energy Industry and the Governments that Depend on It

  • A restructuring of the global energy industry is underway.
  • Renewable energy will be at the center of the industry, but fossil fuels will still be essential for the global economy.
  • The players will change quite a bit, and power will shift to developing-country producers, both state-owned and private ones.
  • Sovereign-wealth funds will continue to accumulate wealth and power.

 

Question to Oracle: Will Streaming Video Change the World?

RESPONSE

Yes. The internet has already changed how people conduct their lives. Now new video over the internet and smart phones will change those lives even more. Google’s YouTube viewers watch more than 1 billion hours a day of video. The large internet players are rapidly penetrating video/TV markets with streaming video, and live video over the internet is already being seen by hundreds of millions of users. In as little as five years, high-resolution video from space satellites could reveal much more about globe events and people. All this new information about the world will stimulate social, political, and economic change. New norms and rules for monitoring everyone’s public activities will develop. National governments everywhere will seek to control the specificity of live video. Public servants and senior corporate officials should expect the public will have access to video of their work activities. Streaming video of the world will become a very large market, and a new generation of technology companies and services will likely be born.

RECENT SIGNALS OF CHANGE:

Imagery satellites are being launched with global video capabilities.

  • The Alphabet imaging-satellite subsidiary, Terra Bella, recently acquired in early 2017 by Planet Labs is building and launching a constellation of satellites that can capture the first-ever commercial high-resolution video of Earth from a satellite.

Dramatic rise of video that’s being watched over the internet

  • Google’s YouTube’s viewers watch more than 1 billion hours a day. Total video watched on the internet rose from 5 billion hours per day in 2010 to 15 billion hours per day in 2016, while broadcast and cable television hours were level or slightly declining over the same period at around 22 billion hours per day. 400 hours of new content video is being uploaded to YouTube every minute, or 65 years of video per day. Source: The Wall Street Journal, February 28, 2017, p. B1.
  • In the United States, all age groups except those over 50 years old are watching less broadcast and cable TV every year. For all age groups, TV watching shrank almost ten percent from 2010 to 2016. Source: The Economist, October 29, 2016, p. 56.
  • Alphabet’s YouTube service is launching a new web TV streaming package of over 40 broadcast and cable channels for $35 per month. That is the same price as AT&T’s cheapest bundle. But Alphabet didn’t have to pay $49 billion to buy DirectTV like AT&T did—Alphabet’s margins must be significantly better than AT&T’s.
  • Headline of Wall Street Journal columnist, Christopher Mims, on February 8, 2017: “How Millennials Are Turning Snapchat Into the New TV.” Snapchat video clips are never longer than 10 seconds, but they can be strung together into “stories” that can be several minutes. Sims suggests that for Snapchat users watching these stories is a lean-back experience like watching TV. Snapchat in February reported its users view 10 billion videos (not longer than 10 seconds) a day.

Live video over the internet is capturing hundreds of millions of users.

  • In January 2016 GoPro teamed with Twitter-owned Periscope to allow users to broadcast live from their GoPro devices connected to iPhones. Users have the ability to switch instantly between the GoPro and the iPhone’s video camera—i.e., each user can do two-camera live action shots.
  • Live video is the current big battleground for Facebook, Snapchat, Twitter/Periscope, YouTube, and many smaller startups. China has 200 live-streaming platforms. In September 2016, ii-Media Research predicted there would be over 300 million viewers of live streaming in China, or about half of China’s internet users, by the end of 2016. Source: “Cash Flows in China Live Streams,” The Wall Street Journal, 9/28/16, p. B6. Until recently TV and cable broadcasters exclusively broadcast live video. Live new media video is totally disrupting the traditional media industry.
  • In December 2016 China issued new regulations requiring foreigners to submit a formal application with the Ministry of Culture before they can post live-streaming videos from their smartphones and websites.
  • In November 2016 The Wall Street Journal reported Amazon has been talking to major sports organizations like the National Basketball Association, Major League Baseball, and the National Football League about providing streaming live sports.

Smart phones are becoming the future platform for almost everything.

  • Four of the top five smart phone vendors in China in 2016 were Chinese. The top three companies (Oppo, Huawei, and Vivo) grew significantly in 2016 compared to 2015, with Oppo’s and Huawei’s shipments almost reaching 80 million units. Apple was No. 4 in the market and its shipments shrank in 2016 compared to 2015. No. 5 Xiaomi’s shipments also shrank. Source: The Wall Street Journal, March 18, 2017, p. B3.
  • Samsung’s new Galaxy S8 smartphone that will be on retail shelves in late April 2017 will have a larger and better screen than all its major competitors and can also serve as a desktop computer.

Advertisers are rushing to online, digital ads, creating major opportunities for those platforms able to attract the most users’ time. Online, digital ad spending is beginning to approach TV ad spending.

  • Digital ad spending is rapidly catching up and could soon be greater than TV ad spending. Global ad spending in 2017 is expected to be ~ $180 billion (33 percent of the total) in digital, online media and ~$220 billion (40 percent of the total) for TV. This compares to global ad spending in 2010 of ~$66 billion (16 percent of total) for digital, online media and ~$181 billion (or 44 percent of total) for TV ad spending.
  • An article in The Wall Street Journal on February 1, 2017 titled “Facebook’s Steep Wager on Online Video Has to Pay Off” noted Facebook’s revenue in 2016 is expected to increase 46 percent from the year before, but that this growth is going to “come down meaningfully” in 2017. The article indicated Facebook is betting on video, including Facebook Live, to play a much bigger role in the future. CEO Zuckerberg has apparently said he envisions the company becoming a “video-first” company.
  • The advertising world is struggling with this major shift from traditional advertising platforms, such as print and TV, to digital. In early March 2017, the world’s largest advertising firm, WPP PLC, reported its slowest quarter of growth since 2012 of only 2% this year. Magna Global, the adbuying agency owned by Interpublic Group of Cos project global ad expenditures will grow 3.6 percent in 2017 compared to a higher 5.7 percent growth in 2016.

Large internet video players are paying more and more for unique, high-quality content

  • The tech companies with streaming capabilities like Netflix, Amazon, and Hulu are developing strong content production capabilities. Source: The Economist, August 20, 2016.
  • In early March 2017, Facebook was reported interested in funding or contracting for original TV-like programming. The focus wasn’t on live content. This pivot in paying probably large amounts of money for content is a big change for the company.
  • Online businesses are buying traditional media assets. In December 2015, Alibaba Group, China’s e-commerce giant, bought the South China Morning Post and all other media assets from the SCMP Group. Alibaba’s digital strength will enable the 112-year-old newspaper to become a global media entity covering China for readers around the world. While the Hearst Corporation’s Cosmopolitan magazine just announced it is teaming up with Snapchat to launch the Cosmo “channel” on Snapchat’s “Discover” newsstand.

All major corporations now have major digital media presences.

  • For most corporations, new digital media has become an important new channel of corporate communications, marketing, and selling the company’s products and services to millions of customers and potential customers. For many corporations—particularly new, high-tech ones—it’s the primary channel. A new book published in 2016, “Super-Consumers,” by Eddie Yoon of Cambridge University describes the importance and influence of the group representing ten percent of consumers that accounts for 30-70 percent of sales and almost 100 percent of “customer insights.” This high-passion group is defined by both its sales size and its attitude to the product. Facebook and Google are focused on developing strong relationships with their super-fans.

PLAUSIBLE DEVELOPMENTS WE COULD SEE IN THE FUTURE

High-quality video content will likely engage billions of smart phone users in the next ten years and likely shape world behavior.

Streaming video will make the world smaller.

  • People around the world will have substantially greater access to video of local, national, and global events and places through their smart phones.
  • The volume of live video generated by smart phones will continue to increase rapidly.
  • Live video from space satellites with the resolution to distinguish a person from a car could be available in as little as five years.
  • The demand for high-quality video content to engage billions of smart phone users will grow.
  • The need for tools to curate video content quickly will increase.

Live streaming video will be a very large market

  • Live high-quality content like sports could be particularly valuable.
  • Breaking news and live coverage of global events could become very valuable.
  • New live video apps focused on global events like armed conflicts, natural disasters, seasonal migrations, etc. will grow.
  • New sporting events that use large geographic areas and can be covered live could develop: ocean sailing, cross-country races, county hide-and-go-seek competitions, etc.

Increased video information of individuals and the activities of commercial and government organizations around the world will be available

  • Surveillance and monitoring of everyone in public will increase.
  • Demand for full coverage of work activities of elected officials and employees of government organizations, particularly of police, fire, emergency response, and maybe even schools will increase.
  • There could be growing demand for information about the lives of senior executives to be made publicly available.

New regulations and tools:

  • Governments at all levels will likely develop policies for the capturing and dissemination of video of people, companies, and government organizations.
  • New restrictions on how video information can be accessed, transmitted, and used will likely vary significantly around the world from tighter restrictions to fewer restrictions.
  • Authoritarian governments could go to extremes to limit access to the new video, particularly video emanating from foreign sources.
  • Public opinion will likely vary significantly within each country, and from country to country, on how open and transparent the internet should be and what personal information, particularly about government officials and senior corporate executives, should be private and what protections should be provided.
  • Online media companies that search for, gather, store, or transmit personal data could implement new policies to protect an individual’s personal information on video and minimize the ability of third parties to use video information with individuals that can be identified in them.
  • New tools and technologies for protecting an individual’s video information online or identifying an individual online may develop.

Business Winners

  • With their current global market positions in social media and internet services, US firms could benefit significantly from the growth of streaming video.
  • A new breed of firms—the next Snapchat—will emerge focused on video experiences.
  • Traditional news organizations will need to figure out a way to provide unique high-quality live video or better analysis of breaking events to remain in business.
  • Global social-media campaigns using video may influence governments to discriminate against multinationals they can’t control because of their national origin (e.g., Chinese companies in the United States) more than they do today. Could China treat German companies different from US companies?
  • International operations of Chinese and Russian multinationals involved in capturing, disseminating, and storing streaming video will likely be monitored, controlled closely, and possibly severely limited by governments.
  • Most advertising monies will likely be spent in online advertising and the most important consumer groups will be spending the majority of their time online. If they already haven’t, companies that sell consumer products or services will need to focus on digital marketing and the use of the internet.
  • The massive amounts of video data about events and responses could enable people or organizations to become more effective in predicting or purposely triggering desired surge responses.

Corporate affairs

  • New media campaigns may become much more effective.
  • New public affairs capabilities—reaction time (time to get in front of an issue), crisis management, managing the information flow, use of new media tools, participation of more employees in social media responses, monitoring of employees’ social media and online activity, use of live video will likely be required
  • New corporate policies about employee behavior outside the workplace or online may be needed, even if only to reaffirm no restriction.
  • New corporate policies may be required for executives’ social media postings.

 

Question to Oracle: Will Populist Media Campaigns toward Corporations Be a Major Threat?

ORACLE RESPONSE:

Yes. New media campaigns are starting to shape consumer-purchase and business-policy decisions of corporations. This new media is enabling blitzkrieg communications, including fake news, to the public by individuals, social groups, and political groups about the political, social, or economic attitudes of corporations or their senior executives. Those blitzkrieg communications about corporations and their products and services are likely going to increase and become more effective in the speed, targeting, and messaging. In the future a company’s identity, business reputation, and brand could be heavily influenced by the demographics, attitudes, and beliefs of company’s employees, particularly the senior executives. It’s very uncertain, how big populist attacks are going to become for corporations, particularly consumer-product/service companies, and it’s uncertain what can or will be done to protect a corporation’s identity and business activities from those attacks. But it’s critical for corporations to have a business policy for how it addresses political, social, and economic issues, whether and how it communicates about those issues, and how it will manage blitzkrieg campaigns against them.

RECENT SIGNALS OF CHANGE

New media is changing how people conduct their lives, including how they participate in their communities and the political process and how they make choices about the products they buy and services they use. Everyone now has endless opportunities to say something or act in some way. Each act provides the individual a feeling of satisfaction or pleasure, while the cost or risk to the individual feels small, unless you’re in China where the goal is to register every individual act and keep a tally. The influence of the new media is getting bigger and bigger.

  • Advertisers rushing to online, digital ads. Online, digital ad spending is beginning to approach TV ad spending. Newspapers are really suffering.
    • Digital ad spending is rapidly catching up and could soon be greater than TV ad spending. Global ad spending in 2017 is expected to be ~ $180 billion (33 percent of the total) in digital, online media and ~$220 billion (40 percent of the total) for TV. This compares to global ad spending in 2010 of ~$66 billion (16 percent of total) for digital, online media and ~$181 billion (or 44 percent of total) for TV ad spending.
    • An article in The Wall Street Journal on February 1, 2017 titled “Facebook’s Steep Wager on Online Video Has to Pay Off” noted Facebook’s revenue in 2016 is expected to increase 46 percent from the year before, but that this growth is going to “come down meaningfully” in 2017. The article indicated Facebook is betting on video, including Facebook Live, to play a much bigger role in the future. CEO Zuckerberg has apparently said he envisions the company becoming a “video-first” company.
  • Rise of live video
    • In January 2016 GoPro teamed with Twitter-owned Periscope to allow users to broadcast live from their GoPro devices connected to iPhones. Users have the ability to switch instantly between the GoPro and the iPhone’s video camera—i.e., each user can do two-camera live action shots.
    • Live video is the current big battleground for Facebook, Snapchat, Twitter/Periscope, YouTube, and many smaller startups. China has 200 live-streaming platforms. In September 2016, ii-Media Research predicted there would be over 300 million viewers of live streaming in China, or about half of China’s internet users, by the end of 2016. Source: “Cash Flows in China Live Streams,” The Wall Street Journal, 9/28/16, p. B6. Until recently TV and cable broadcasters exclusively broadcast live video. Live new media video is totally disrupting the traditional media industry.
    • In December 2016 China issued new regulations requiring foreigners to submit a formal application with the Ministry of Culture before they can post live-streaming videos from their smartphones and websites.
    • Another WSJ article on February 6, 2017 about the content of Snapchat’s registration filing for its initial public offering was titled “How Millennials Are Turning Snapchat Into the New TV.” Snapchat noted in the registration that its users view 10 billion videos a day.
    • In November 2016 The Wall Street Journal reported Amazon has been talking to major sports organizations like the National Basketball Association, Major League Baseball, and the National Football League about providing streaming live sports.
    • Online businesses are buying traditional media assets. High-quality content online will likely differentiate new media companies. In December 2015, Alibaba Group, China’s e-commerce giant, bought the South China Morning Post and all other media assets from the SCMP Group. Alibaba’s digital strength will enable the 112-year-old newspaper to become a global media entity covering China for readers around the world. While the Hearst Corporation’s Cosmopolitan magazine just announced it is teaming up with Snapchat to launch the Cosmo “channel” on Snapchat’s “Discover” newsstand.

Two big brothers: New Media Superstars and Government. An individual’s private life and work life are increasingly inseparable and increasingly visible to everyone, while at the same time governments and corporations are gathering more and more digital data everyone, including a lot of information about how individuals behave in a wide variety of circumstances.

  • Big data enabled computational politics. In December 2015, a database containing the records of 191 million US voters found its way onto the internet. Politicians and government agencies could target individuals with personalized messages. But this is not just happening in the United States. In Britain, the Conservative Party used targeted ads on Facebook to help win the general election in 2015.
  • Hangzhou’s local government is piloting a “social credit” system the Communist Party wants to roll out nationwide by 2020. The aim of the national social credit system is to “allow the trustworthy to roam everywhere under heaven while making it hard for the discredited to take a single step.” The plan for the system is to compile digital records of citizens’ social and financial behaviors to calculate a personal rating that will determine what services they are entitled to, and what blacklists they go on. A person can incur black marks for infractions such as fare cheating, jaywalking, and violating family-planning rules. The Economist notes “The scale of the data-collection effort suggests that the long-term aim is to keep track of the transactions made, websites visited and messages sent by all of China’s 700m internet users.” The Economist, “Creating a digital totalitarian state: Big data gives Chinese rulers new ways to monitor and control citizens,” December 17, 2016, p 21.
  • For most corporations, new digital media has become an important new channel of corporate communications, marketing, and selling the company’s products and services to millions of customers and potential customers. For many corporations—particularly new, high-tech ones—it’s the primary channel. A new book published in 2016, “Super-Consumers,” by Eddie Yoon of Cambridge University describes the importance and influence of the group representing ten percent of consumers that accounts for 30-70 percent of sales and almost 100 percent of “customer insights.” This high-passion group is defined by both its sales size and its attitude to the product. Facebook and Google are focused on developing strong relationships with their super-fans.
  • In a special report in The Economist, September 17, 2106, entitled “The rise of the superstars” Adrian Wooldridge described how high-tech companies become superstars by discovering niche markets and then scaling up as fast as possible. This “blitzscaling” is required to develop the necessary millions of customers to earn any money and prevent potential competitors from reaching those customers first. The article points out a downside of the emergence of superstars with global scale, namely the negative feelings they generate in the general population toward big business. One reason is a customer’s perception of being at the mercy of one company. Another is the emergence of superstars and the consolidation of industries result in unique, large relationships between the superstars and government. And because of those connections to government, the government policy preferences of superstars and the political connections of their business leaders are news information.

Social and political dynamics. Digital media communications is today’s means for creating political or social action.

  • ISIS might not exist without the internet and social media.
  • We are now experiencing chaotic pluralism where mobilizations spring from the bottom up, often reacting to events. Thousands of events are occurring each day, most of which don’t result in surge responses.
  • Collective action based on online postings leaves a big digital footprint. Governments can use this information to monitor protests and intervene when they feel it’s necessary. They can also identify and do something about the online activist leaders.
  • Most governments, particularly those with authoritarian regimes and some resources—like Russia and China—are investing heavily in web-based propaganda. These include social-media bots and other spamming tools to drown out real online discussions and “trolls” to act on their behalf in Western comment sections, Twitter feeds, etc. China authorities have an extensive censor system for blocking any comments or online postings.
  • A study at the University of Konstanz found that the internet tends to grow fast in countries in which the governments are concerned about the flow of information, but there is no evidence so far “that democracy advances in autocracies that expand the internet.”
  • It was reported in early February that Facebook and Google have active programs in Europe to combat “fake news”—the rapid spread of online misinformation—in upcoming important elections in France and Germany.

New Media Actions toward Corporations. An important new development is that opponents of a corporation’s business policy, its industry, its products or services, or even the politics or social positions of key executives are starting use this same new media infrastructure against the corporation. And given the potential speed, intensity, and potential impacts of the new media actions, this is critical business policy for every corporation to address and plan for.

  • The Trump election result stimulated a number of business boycott and support actions. A group called Grab Your Wallet identified after the election a number of stores that shopper should boycott during the Christmas holiday. Trump supporters are using Twitter to encourage consumers #buytrump or #buyivanka or asking people to boycott Starbucks stores because Starbucks Corp. pledged to hire 10,000 refugees. The success or failure of the various actions will be closely analyzed for lessons learned. The first analysis of Grab Your Wallet’s campaign indicated it had little impact on the targeted merchants’ sales.
  • In January 2107, Uber fell behind its much-smaller competitor Lyft in the Apple App Store after Uber app users deleted their accounts largely in protest over Uber CEO Travis Kalanick’s ties to President Trump. Kalanick then resigned from Trump’s business advisory council in the first week of February.
  • The CEO of Under Armour was criticized recently for remarks made in a television interview where he said he respected President Trump’s willingness to make bold decisions and said, “To have such a pro-business president is something that is a real asset for the country.” Some groups called for boycotts of Under Armour products and a financial analyst covering Under Armour’s stock downgraded his rating for the stock to “negative” from “neutral” saying “We believe the decision to express a view in today’s highly charged political climate was a mistake.” A week later the CEO announced he would publicly fight President Trump’s proposed travel ban, trying to mitigate the damage of his earlier comments.
  • President Donald Trump praised Boeing Co. on February 17, 2017 in a visit to a Boeing manufacturing plant in South Carolina. He also said, “This is our mantra. Buy American and hire American.” Boeing CEO has met a number of times with following Mr. Trump’s initial blast on Twitter in December 2016 against the cost of the new jets it will build to serve as Air Force One and threatening to even cancel the plan.

 

PLAUSIBLE DEVELOPMENTS WE MIGHT SEE IN THE FUTURE

New-media actions could be a major threat for corporations. At a minimum, corporations need to consider the range of possible campaigns they could face and develop plans for how they monitor new media activities and how they would respond to a major surge action affecting them.

More powerful new media actions likely in the future:

  • Larger online user bases will enable testing of thousands of models about the behavior of online social networks, including the movement of misinformation or fake news online.
  • The massive amounts of data about events and responses could enable people or organizations to become very effective in predicting or purposely triggering desired surge responses. In other words, new media campaigns may become much more effective.
  • More and more will be targeted at corporations.

Less privacy for corporate employees:

  • More information will be available online about each individual’s personal and work lives. A lot of that online information will be restricted, but an increasing amount will publicly accessible.
  • Government agencies, corporations, activist groups and the general public will likely increasingly seek personal information about employees of large corporations.

Nationalism and multinationals:

  • Most corporations are already readily identified with their original home country and not seen as independent of geopolitics. Those country-to-company alignments could become catalysts even more for new-media actions.
  • A multinational’s identity may become even more aligned with their home country’s policies and behavior, despite protests to the contrary.
  • Social campaigns on new media may influence foreign governments to discriminate more than they do today against multinationals based on nationality. Will China treat German companies different from US companies?
  • Issues for new media could be the locations of the company’s headquarters, political views of company executives, nationalities of work force, geographic footprint of the multinational, environmental footprint, etc.

New online rules and tools:

  • European efforts to help individuals to be forgotten may stimulate efforts around the world for individuals to be able to manage what information about them is available online.
  • Online media companies that search for, gather, store, or transmit personal data could implement new policies to protect an individual’s personal information online, minimize the ability of third parties to publicize personal information about an individual, and provide individuals the means for controlling what personal information is shown, including perhaps the ability to hide information already online.
  • Public opinion will likely vary significantly within each country, and from country to country, on how open and transparent the internet should be and what personal information, particularly about senior corporate executives, should be private and what protections should be provided.
  • Governments will likely impose new restrictions on how personal information can be accessed, transmitted, and used. Those restrictions could likely vary significantly around the world from tighter restrictions to fewer restrictions.
  • New tools and technologies for protecting an individual’s online personal information online or identifying an individual online may develop.
  • Applications may develop for the Dark web so an individual’s online personal activities remain hidden.

For companies that sell consumer products or services:

  • They could experience significant new media actions based political, social, or work activities of their senior executives.
  • An executive’s social and political identity could increasingly be a factor in corporate brand strength and reputation and vulnerability to populist action.
  • With the heightened publicity, discrimination lawsuits by individuals often employees against corporations may increase over issues of employee nationality, religion, language, hiring of foreign legal residents, etc.

Corporate affairs, identity, and brand management:

  • Corporations large and small and not just consumer companies will most likely need new business policies, marketing strategies, and corporate affairs capabilities for navigating a business environment where customers and users overnight can be turned off or on in response to new media surges, stimulated by external events or outside agents, friend and foe.
  • New corporate affairs capabilities—reaction time (time to get in front of an issue), crisis management, managing the information flow, use of new media tools, participation of more employees in social media responses, monitoring of employees’ social media and online activity, use of live video will likely be required
  • Managing the risks and opportunities from new-media actions will require corporations to spend more resources on corporate affairs, identity, and brand management.
  • Corporations may need to develop a new business policy with regard to corporate positions on social and political issues and how corporations should participate in political or social processes related to those issues. Should corporations attempt to remain neutral on social and political issues because of the risks, participate more strongly on social and political issues, or what.
  • New corporate policies about employee behavior outside the workplace or online may be needed, even if only to reaffirm no restriction.
  • New corporate policies may be required for executives’ social media postings.
  • Executives could be required to sign morals clauses with their employers—like pro athletes, entertainers, and newscasters do now—to help protect their employer in the event the executive engages in reprehensible behavior or conduct that may negatively impact his or her public image and, by association, the public image of the corporation.
  • We might also see reverse morals clauses where executives protect their personal reputations against actions or behavior of an employer that negatively impacts the executive’s public image.

 

Question to Oracle: Will Current Investments in New Transportation Technologies Pay Off for Multinationals?

RESPONSE

Yes, if they enable future growth in market share in Asia. Over the next ten years, the explosion in urban populations in Asia will likely create the biggest opportunities for the industry. New integrated transportation systems based on automation advances will transform the movement of residents and goods throughout the world. The best opportunities with automated vehicles in the next ten years will likely be with heavy-duty trucks. Electric vehicles with models being produced by every manufacturer will slowly enter the marketplace, but they likely remain loss leaders for the next ten years. CEOs of multinationals involved in transportation will earn their pay for making so many major global decisions in the face of the many political, economic, cultural, technological, and competitive uncertainties. Multinationals with strong positions in China will be in the best positions to take advantage of future opportunities

RECENT SIGNALS OF CHANGE

Recent signals of change in how people and goods are moving around include the following:

Demand for Mobility

  • The world’s growing population continues to move to urban areas. In 1950, 0.7 billion people, or 30 percent of global population, lived in urban areas. By 2015, 4.0 billion, or 55 percent, lived in urban areas. If current trends continue urban journeys that already account for two-thirds of all miles traveled by people will increase by 200 percent in 35 years (by 2050). “Transport as a service: It starts with a single app,” The Economist, October 1, 2016, p. 58. In the developed world, the growth of urban journeys is hardly growing; in developing economies, it’s exploding.
  • Ford Motor Company estimates the global car market is worth $2.3 trillion per year, while the market for transport services (car sharing, mass transit) is $5.4 trillion per year. “Transport as a service: It starts with a single app,” The Economist, October 1, 2016, p. 59.
  • In the United States, the percentage of people aged 20-24 with a driver’s license fell from 92 percent to 77 percent between 1983 and 2014. “Transport as a service: It starts with a single app,” The Economist, October 1, 2016, p. 59.

Automation and the Mobility of People and Goods.

  • Tech companies and traditional auto and auto-parts manufactures are scrambling to develop the new hardware and software systems of future automated and self-driving vehicles. The competition is widespread among tech firms like Alphabet, Uber, Mobileye, Intel, Infineon, and Apple and among carmakers and suppliers like BMW, Ford, Volvo, Delphi, ZF Friedrichshafen AG, and Tesla. Tech firms are partnering with carmakers; tech firms are going it alone; carmakers are going it alone. It’s intense.
  • Waymo LLC, the self-driving car group of Alphabet Inc., is developing a sensor-system package for automakers that includes an 360 degree-view radar, eight vision modules, and three different types of Waymo-built lidars. Waymo’s testing of sensor and software systems reached 2.5 million miles over the past 8 years. Waymo plans to have driven 3 million miles by May 2017. That’s a lot of data being gathered.
  • Technology is also changing how people and goods move around urban areas. A number of new concepts are being tested for using technology (apps) that mixes and matches a variety of public and private means of transport. Helsinki is currently testing an app from MaaS Global (Mobility as a Service) to do just that. Around 70 percent of residents of London use apps with live travel information for movement planning.
  • Transport-as-a-service is rapidly expanding around the world. New technology companies like Uber, Lyft, and Didi Chuxing already provide e-taxi services in most of the world’s cities. Didi Chuxing has 300m users in 400 cities. Besides taxi-competition, those same companies are using their technology to expand into car sharing, carpooling, and ride sharing with cars and mini-buses.
  • Uber announced in January 2017 that it will start releasing anonymized ridership data from dozens of cities in which it operates. Urban planners can use the data to analyze traffic patterns and make better decisions about urban infrastructure.

Mobility-Asset Supply

  • Car manufacturing is a global, yet local enterprise. Car manufacturers are continually looking to lower the costs of production by building plants where wages are significantly lower, work forces are more productive, or where countries have negotiated free-trade deals with other countries. Wages in Mexico are significantly lower than in the United States, on average 85 percent lower, and Mexico’s car manufacturing has been growing steadily. “Trump’s Auto Bluster,” The Wall Street Journal, January 7, 2017, p. A12. Mexican light-vehicle production increased from a little over 2 million per year in 2008 to about 3.5 million per year in 2016. A little over 75 percent are shipped to the United States. “Build Them and Ship Them,” The Wall Street Journal, January 1, 2017, p. A5. Still, about 82 percent of US automakers’ vehicle production remains in North America.
  • Many politicians are advocating a more nationalistic economic system, challenging the current economist mind-set that globalization is natural and good for everyone. But many perceive the costs of globalization can be significant at the country level. After China’s entry into the World Trade Organization in 2000, it’s estimated Chinese imports eliminated 2 million jobs in the United States with no equivalent increase in US jobs linked to exports to China. Greg Ip, “We Are Not the World,” The Wall Street Journal, January 7, 2017, p. C2. At the same time, China has generally violated the WTO spirit by discriminating against foreign investors and products.
  • The backlash against globalism in developed countries may not be economic but cultural. A large percentage of each nation believes a commitment to national identity will bring more long-term benefits than a commitment to an uncertain global system. They are upset about immigration and terrorism, and are worried about their economic future. They have no faith in global institutions. In 2016 two researchers at the London School of Economics noted a growing migrant population rather than rising unemployment made British voters more likely to vote to leave the EU. As President Obama noted after the 2016 presidential election that, “for the majority of the American people, borders mean something.” Greg Ip, “We Are Not the World,” The Wall Street Journal, January 7, 2017, p. C2.
  • According to the Pew Research Center, at the end of 2016 around 25 percent of Republicans said free-trade agreements were good compared to approximately 55 percent who thought so at the beginning of 2009. Approximately 55 percent of Democrats thought free-trade agreements were good in 2016 compared to slightly less than 50 percent in 2009. 49 percent of the US general public say that US involvement in the global economy is a bad thing compared to 44 percent who say it’s a good thing. Josh Zumbrun, “Economists Grapple With Public Disdain,” The Wall Street Journal, January 9, 2017, p. A2.

Electric Vehicles

  • Chinese companies dominate the sales of electric cars worldwide. China electric car production grew by 50 percent in 2016 to 300,000. Outside of China, electric-car production was 260,000. The Chinese cars are small and generally have a poor-quality reputation. So far no market leaders in China have emerged. Primarily Chinese companies are producing electric cars in China because the government only subsidizes local companies and foreign manufacturers have been reluctant to share their technology with local venture partners. The government is trying to force foreign carmakers to participate in making electric cars in China through a new carbon credit-based trading system that will motivate carmakers to increase production of electric vehicles over the next five years. Anjani Trivedi, “China Shaky on Electric Vehicles,” The Wall Street Journal, January 6, 2017, p. B12. Volkswagen, already well established in China with partners SAIC Motor and FAW Group, is exploring a venture to make electric cars with a state-run company, China Anhui Jianghuai Automobile. General Motors plans to launch alternative-energy cars with its partners, SAIC and Wuling, by 2020. While Nissan Motor and its partner introduced an electric car in China in 2014. Rose Yu, “Volkswagen Is in Talks to Make Electric Cars in China,” The Wall Street Journal, September 8, 2016, p. B7.
  • All the major German manufacturers, including Daimler, Volkswagen, and Porsche, are introducing electric cars by 2020. The current auto market leaders all appear to be targeting Tesla.

Self-Driving Trucks

  • The commercialization of automated heavy-duty trucks is proceeding fast—at least at the pace of automated cars. The return on investment opportunities are clearer in trucks than in cars, and driving on highways is much easier to automate than driving around cities. Self-driving trucks are already used in mines. All the big truck makers, including Volvo, Daimler, and Iveco, are working on driverless trucks.
  • German vehicle manufacturers are beginning to dominate the North American heavy-duty truck market. Daimler already owns Freightliner and engine supplier Detroit Diesel, giving Daimler 40 percent of North American truck sales market. In September 2016, Volkswagen AG acquired a 17 percent share in Navistar, a US-based truck maker. Navistar currently has about 11 percent of the North American market. The total North American market is around $30 billion per year.
  • Daimler announced in September a new venture to develop drones for its new electric delivery vans. Daimler purchased a minority stake in the US startup Matternet to help enable the venture. Amazon.com, China’s JD.com, and Germany’s Deutsche Post DHL are attempting to use drones in package delivery, while the US Postal Service is considering using drones from delivery vehicles as well.
  • Data from the American Transportation Research Institute shows insurance costs for truckers in the United States increased by almost 30 percent in 2015, compared to an increase in driver wages of 8 percent, and a decrease in fuel costs of around 30 percent. The number of accidents is declining, but the payouts for accidents have increased substantially. “Insurance Costs Soar for Truckers,” The Wall Street Journal, October 15, 2016, p. A1.

PLAUSIBLE DEVELOPMENTS WE MIGHT SEE IN THE FUTURE

The transportation is rapidly changing around the world. There are many large uncertainties about how people and goods will be moving around in ten years.

Urban developments in ten years:

  • In developed economies, only modest changes will occur between urban and rural populations numbers. In a sense the current divide between urban and rural populations will become permanent.
  • In developing economies, including China, the development of urban settlements will continue to be dramatic.

Mass transit in ten years:

  • A number of new mass transit system projects will start in developing countries.
  • In developed countries however very few new large systems will be built. Most mass transit investments will in upgrades and retrofits and buses.

Global demand for cars in ten years:

  • There will be an explosion in demand for small cars in Asia to serve rapidly growing urban populations.
  • However, the demand for new cars in developed economies could begin to slowly decline. Electric cars won’t make up the difference at all.

Transportation services in ten years:

  • Transportation services are going to expand in both developed and developing economies, stimulated by big data, new transportation-as-a-service business models, and urban mobility needs. Great opportunities will be realized.
  • Families will use third-party transportation services in lieu of owning a second car.

Automated vehicles in ten years:

  • While driverless vehicles won’t be a reality in ten years, heavy-duty trucks with driverless capabilities could be implemented. These trucks with attendants could be self-driving on highways. The attendants would take over in an emergency and when not on highways.

Electric vehicles in ten years:

  • It’s unlikely electric vehicles will become mainstream and have any real impact on the use of petroleum around the world.
  • Most electric vehicles will be made and sold by Chinese companies.
  • And most of them will be small, particularly in developing economies.
  • The Chinese companies could eventually dominate the foreign markets for new energy vehicles with their much lower-cost small models.
  • Electric cars will likely remain a niche product in North America, primarily purchased by those with high disposable income.

Vehicle manufacturers and transportation services providers in ten years:

  • But the industry is changing rapidly. Demand is changing significantly; new competitors are entering; new technology is required; and new transportation markets are emerging.
  • While manufacturers will continue to diversity globally, parts and vehicle manufacturing centers will remain close to large demand areas. In other words, vehicles sold in the United States will generally be built in the United States, Canada, or Mexico.
  • Traditional manufacturers will compete in transportation as a service markets, but will likely find it unprofitable.
  • The industry will remain relatively fragmented with many international manufacturers and models.
    • A shakeout of existing large manufacturers will occur.
    • German manufacturers have the potential to become even bigger.
    • Who could buy Fiat Chrysler?
    • Some Chinese manufacturers will become very large because of Chinese market demand and demand in other developing countries.
    • Some Chinese companies could begin to challenge international companies in developed economies.

 

Are the Chinese government and Chinese Multinationals in Cahoots?

ORACLE’S RESPONSE

Absolutely. It’s China’s system. Every Chinese stakeholder—government agency, Chinese company, and Chinese citizen—contributes in the global struggle that is not a game. The government plays a central role in shaping every stakeholder’s long-term goals, in setting economic and industrial priorities, in nurturing and protecting domestic companies, in creating opportunities for Chinese companies to become industry world leaders, and in shaping a world order that favors the Chinese. The keys of the strategy are for the Chinese government to enlist each stakeholder in the effort, create an unlevel domestic playing field so competitive that the Chinese companies that emerge are potential global leaders when they go abroad, and provide strong direct and indirect support to Chinese organizations competing in strategic industries.

Since a critical feature of global industrial markets is how rapidly situations can change, researchers, companies, and investors around the world are in an unrelenting struggle to learn and adapt rapidly. If they don’t, they won’t succeed. The Chinese government/industry system enables the country to stay focused on long-term goals, while actively supporting various parts of the system to prevail in the strategic markets that are constantly changing interactively complex, non-linear, and chaotic. The Chinese multinationals contribute by taking risks in the foreign markets and using the Chinese government’s offered support. This decentralized approach for competing in many complex markets is not unlike the US Army’s doctrine for planning and executing operations against insurgencies in the Middle East and Africa.

With this coordinated system, in the next ten years Chinese multinationals could replace American multinationals as the face of global capitalism.

RECENT SIGNALS OF CHANGE

Recent signals of this integrated Chinese government and multinational system and their overseas potential include the following:

Private (non-state) Chinese multinationals grow up in a crony-capitalistic system that shapes their organization, business practices, and foreign growth objectives. They ultimately owe an allegiance to China. Increasingly, their key shareholders are state-owned organizations.

  • In a recently published book, China’s Crony Capitalism: The Dynamics of Regime Decay, the author Minxin Pei, a professor of government at Claremont McKenna College in California, describes how the state decentralized the rights of control over state property to local officials, but left the rights of ownership murky. According to the author, the Chinese state holds the residual property rights of maybe half of the new worth of the China economy. This has led to a system of corruption at every level of the government/economy, an absence of a system of checks and balances, and the motivation of political officials to keep the system in place. In a crony capitalist system it’s awfully difficult for any private Chinese corporation to grow without local politician support; successful corporate leaders learn how to thrive in this environment. All Chinese corporations must grow up playing with a different set of rules than what western corporations grow up playing with.
  • A Washington Post article on December 30, 2016, entitled “China’s $9 billion effort to beat the U.S. in genetic testing,” described China’s effort to become a world leader in the use of genomics and an example of a Chinese’s company’s advanced DNA technology being used to help an American child in Boston. The article noted China is “battling for dominance in innovation and science that is more likely to determine the economy of the future” and believes “[genetic testing] technology could prove as transformational as the Internet.”
  • In the past year ending in September 2016, two state-owned investment funds have become top-10 shareholders in 39 percent of listed companies in China, according to UBS Group AG, which analyzed the shareholdings. (Interestingly, in Japan the situation is similar: According to The Wall Street Journal about 30 percent of all the companies in Japan’s three main equity indexes now have Japan’s central bank as one of their top ten shareholders. Six years ago, the Bank of Japan’s equity presence was “trivial.”)
  • A recent study by Fitch Ratings, Moody’s, and Standard & Poor’s showed state-owned Chinese enterprises received more generous lending terms from banks than private firms, largely because of the perception that the state will stand behind the state-owned enterprises.
  • An analysis by Wind Info in November 2016 indicated almost 14 percent of listed, nonfinancial companies’ profits are attributable to Chinese government support. And that’s up from 5 percent six years ago.
  • Private Chinese firms often have government shareholders, and approximately 11 percent of their profits come from the state.
  • Priority sectors, even if they’re doing well, get government support. Subsidies to China’s car manufacturers have grown 50 percent since 2010. Approximately 19 percent of Geely’s gross profits over the past five years are government subsidies and grants.

China’s domestic markets are complex, very messy affairs and Chinese business models are evolving in response to the dynamic conditions. The complex relationships with government organizations are changing and manufacturers are relying less on foreign inputs in domestic-manufactured products. China’s economy is shifting from a labor-intensive manufacturing to higher-tech industries and services.

  • President Xi wants to put politics (federal dictates) back in command, but progress against corruption and local deviation from federal policy has been slow. Market forces, local governments, and corruption often wield more power over corporate actions.
  • Chinese manufacturers are buying more raw materials and components from domestic suppliers rather than from abroad. The portion of foreign inputs in China’s exports has fallen from over 40 percent in 1995 to less than 20 percent in 2015. The annual value of China’s high-tech and new-tech imports has been slowly falling since 2013.
  • In 2015 services generated 50 percent of China’s GDP, up from approximately 40 percent in 2000; while industry generated a little over 40 percent of GDP in 2015, down from about 45 percent in 2000. Official unemployment rates have been notably steady at around 4 percent for many years, but those figures don’t reflect reality because they exclude migrants from rural areas.
  • China’s domestic demand for high-tech products has grown so rapidly that in some markets new products are being developed and introduced first in the world in China. For example, China is leading the adoption of virtual reality. Chinese companies will be able to leverage initial customer sales and experiences to become the market leaders in the G-20 countries they first enter.

The Communist Party is continuing to assert strict control over the political/economic/social system.

  • Hangzhou’s local government is piloting a “social credit” system the Communist Party wants to roll out nationwide by 2020. The aim of the national social credit system is to “allow the trustworthy to roam everywhere under heaven while making it hard for the discredited to take a single step.” The plan for the system is to compile digital records of citizens’ social and financial behaviors to calculate a personal rating that will determine what services they are entitled to, and what blacklists they go on. A person can incur black marks for infractions such as fare cheating, jaywalking, and violating family-planning rules.
  • China continues to limit the ability of Chinese affiliates of the Big Four accounting firms (Deloitte, PwC, EY, and KPMG) to share documents about Chinese companies publicly traded on US stock exchanges with the US Securities and Exchange Commission.
  • China is implementing new rules for nonprofits in the country. The types of activities that the nonprofits can participate in are prescribed—not everything is allowed—and foreign nonprofits that are allowed to operate will be tightly monitored and controlled.cropped-dsc_0083.jpg

Despite being the world’s second largest economy, China still dictates the participation of foreign-owned corporations in China to best serve Chinese consumer needs, transfer knowhow and capabilities to Chinese companies, and stimulate local companies to become world-class leaders.

  • After rejecting battery-operated cars—in favor of hybrids and fuel-cell vehicles—China is forcing Toyota into electric/battery cars. China is the world’s largest car market and new regulations will penalize car manufacturers that produce an insufficient number of electric, plug-in hybrid, and fuel-cell models. By 2018, such cars must account for 8 percent of the maker’s production, and the percentage will rise from there. (Sounds like totalitarian California.) It doesn’t look like Toyota will meet the deadline.
  • Didi Chuxing’s acquisition of Uber’s China business will essentially preserve China’s ride-hailing market for Chinese companies. Uber probably discovered this is the outcome the Chinese government wanted to happen.

In 2016, China made pledges to create a level playing field for foreign and domestic investors. But will it? China has a long list of industries in which foreign investment in the country is either restricted or off-limits and where Chinese companies are provided direct support. Time will tell if this one-sided policy will change.

  • After two decades Beijing is now considering whether to let Goldman Sachs and J.P. Morgan Chase operate investment banks in China on their own. Other foreign banks would soon follow. But the opportunity may no longer be that attractive. The closed market allowed China banks to develop large balance sheets, develop close relationships with corporate Chinese clients, and become formidable competitors. Chinese banks had a 10 percent share of investment banking revenue in Asia, excluding Japan and Australia, in 2006; in 2016 that share has increased to 61 percent of a much larger market. Although US banks have invested heavily in the region, their share has declined from 43 percent in 2006 to just 14 percent in 2016.
  • Interestingly, China has become a more attractive place to seek legal action for companies that accumulate patents for litigation and licensing purposes. Canadian patent-licensing firm, WiLAN Inc. filed a lawsuit against Sony Corp. recently in Nanjing, alleging that the Japanese company’s smartphones violated WiLAN’s wireless-communication-technology patent. The Chinese government has been strengthening its patent laws and China’s courts have developed rapidly over the years, driven largely by Beijing’s objective to promote homegrown technologies and protect the increasing number of patents Chinese companies own. In China, lawsuits are less time consuming and costly than in the United States—the normal venue for such suits. Germany is another favorite international venue for these suits.
  • International companies will be open to the new opportunities being developed by the Chinese. General Electric Co. recently announced it wishes to develop new sales in industrial equipment in developing countries by piggybacking China’s push to open more markets to Chinese companies, particularly President Xi Jinping’s initiative, “One Belt, One Road,” focused on roads, ports, and other infrastructure in some 65 countries.

It’s tough for Chinese companies to expand abroad. For the most part, China’s large high-tech companies currently have only small overseas presences. Part of the reason for not being more successful is Chinese companies have tried to enter developing-economy markets first before expanding into developed-economy markets.

  • For high-tech markets, emerging market demand simply isn’t there yet. As an example, app developer Cheetah Mobile has over 600 million monthly active users, 79 percent of them overseas-mostly in India and Indonesia. But its overseas sales still account for a small portion of its overall sales.
  • Huawei has been an exception. Led by its founder, Ren Zhengfei, China’s Huawei Technologies has expanded rapidly in the global market for telecom gear and smart phones, and despite market barriers in key markets like the United States, Huawei’s revenue doubled to $60 billion in the last five years. Mr. Ren laid out an intense management philosophy when he founded the company in 1987 and Huawei employees’ dedication to the company today stands out among Chinese companies.

Leading China-market competitors are using different strategies. The Chinese government is a factor in many strategies.

  • General Motors started selling Chinese-built Buick’s in the United States in late spring 2016. The Buick Envision is built by Shanghai GM, a joint venture with SAIC Motor Corp, but was designed by GM in Michigan. The Envision is one of Buick’s top sellers in China. Made-in-China cars aren’t expected to become a big part of overall US car sales because manufacturers historically have found it more profitable to build cars where they are sold. But with China’s car factory capacity now at 40 million cars per year, it may be much more practical (and profitable) to simply build all cars in China.
  • Market access/cybersecurity problems produce foreign corporate allies. Microsoft and Chinese company Huawei Technologies just announced their joint support of the EastWest Institute, a nonprofit focused on encouraging open discussions of cyber security issues and new information technology products. Microsoft is facing the antitrust heat from Chinese regulators while Huawei can’t compete for US telecommunications-equipment opportunities because of US government concerns over cyberspying.
  • In September 2016, Nvidia Corp. of Santa Clara, CA, and Chinese internet firm, Baidu Inc. announced a partnership to develop a self-driving car. Baidu is already testing self-driving cars in China and recently received approval from California regulators to test its self-driving cars there.
  • In October 2016, Jack Ma of Alibaba and Steven Spielberg of Amblin Partners formed a partnership, Holding Ltd., to help Amblin distribute its movies in China and enable Alibaba to become a bigger part of Hollywood’s production and distribution ecosystem.
  • The number of acquisitions by Chinese companies is taking off. The acquiring company may pay a premium, but it can develop a strong market share quickly. But acquisitions are subject to many government agencies’ approvals.
    • The Dalian Wanda Group acquired Legendary Entertainment in January 2016 and has pending deals to take over Dick Clark Productions and Carmike Cinemas Inc. to become the largest movie exhibitor in the United States. It already is the largest exhibitor in the world. While the media industry is closed to foreign companies in China, the movie industry in the United States is not closed to Chinese companies. Senate Minority Leader-elect Charles E. Schumer (D-N.Y.) said China’s investments in U.S. industries, including film, deserve a more critical look from Washington regulators. China’s protectionist policies, he said, have put American companies at a significant disadvantage in the world’s most populous country, even as Chinese companies like Dalian Wanda Group reap the benefits of the U.S.’ open market. “I am concerned that these acquisitions reflect the strategic goals of China’s government and may not be receiving sufficient review.”
    • The Chinese conglomerate, HNA Group, that has China’s biggest privately held airline, hotels, supermarkets, etc. has agreed to spend $20 billion this year to buy 25 percent of Hilton Worldwide, the aircraft-leasing arm of CIT Group, the US computer-logistics company Ingram Micro, and the Radisson and Country Inns & Suites chains—some of these deals are pending.
    • A key feature of many Chinese investments in foreign markets is the quid-pro-quo to have an offsetting benefit in China. The HNA Group bought the Hilton stake from the US private equity firm Blackstone Group LP. Is it coincidental that Blackstone Chief Executive Stephen Schwarzman made a $100 million donation in 2013 from his personal fortune to fund a scholarship program modeled after the Rhodes Scholarship to bring 200 mainly US students to China every year?

China’s government is quick to protect Chinese corporate interests when foreign governments or regulators take positions against those interests. China recently responded to suggestions in the United States (including Trump) and European Union that they—the US and EU—will take actions to punish those that benefit from Chinese subsidies and discourage Chinese companies from dumping.

  • The number of trade remedy cases against China by G-20 members has been steadily rising since 2010. In 2016, trade with China became a hot political issue in the presidential campaign.
  • The China government continues to support state-owned companies in becoming national champions in global industrial markets, even if those companies remain inefficient and showing signs of getting worse. In September 2016, China’s two largest steelmakers, Baosteel Group and Wuhan Iron & Steel Group, or Wisco, announced their plans to merge. If the government adds a couple more mills to the merger, the new company will become the world’s largest producer, topping Luxembourg-based ArcelorMittal SA. The government expects the new firm to trim excess production capacity and compete in international markets.
  • The Chinese government links international policies and economic opportunities in its foreign relations. Australia’s Liberal government announced in October 2016 that it wouldn’t be conducting freedom-of-navigation patrols in the international waters of the South China Sea, effectively ceding control of the Sea to China. Sixty percent of Australian trade moves through the Sea. Chinese companies are investing in Australia, while China is the biggest buyer of Australian commodities.
  • Chinese takeover deals (44 each) in Germany in 2016 so far are worth more than $11.3 billion. That’s more than the previous 14 years combined. Germany’s openness to Chinese investment is changing; German government officials are trying to limit the acquisitions, reviewing proposed acquisitions more closely, and saying no to some. After Germany withdrew its approval on security grounds for a $736 million purchase of German chipmaker Aixtron SE by China’s Fujian Grand Chip Investment Fund LP. Chinese government officials immediately complained about Germany’s protectionist tendencies. German officials then complained about investment reciprocity in China, in effect saying, “We’ve always been open to foreign investment, but you haven’t been.”
  • The UK government approved a contract for Huawei to supply equipment for Britain’s telecoms infrastructure. But recently, the new Prime Minister, Theresa May, delayed approval of a nuclear power plant to be part-funded by Chinese investment. Xinhua, China’s official news agency, immediately commented that ditching the nuclear plant would create repercussions for Britain and British companies elsewhere.
  • A Global Times—a Chinese state-run publication— editorial predicted China will punish American companies if Trump follows through with his pledge to get tough with “cheating China. It said, “China will take a tit-for-tat approach . . . A batch of Boeing orders will be replaced by Airbus. US auto and iPhone sales in China will suffer a setback, and US soybean and maize imports will be halted.”
  • The EU is debating whether to grant China “market economy status,” which would potentially make it harder for the EU to protect its industries from what it deems unfair trade practices by Beijing. China’s government will likely threaten retaliation if the EU doesn’t grant market-economy status to China.

PLAUSIBLE DEVELOPMENTS WE MIGHT SEE IN THE FUTURE

The system of cooperation and collaboration between Chinese government agencies and Chinese multinationals will evolve as the number of expansion strategies get used and tested in the dynamic overseas markets, China’s economy matures, and the global order and China’s role in it changes. Global markets will operate less openly. G-20 countries will build up their trade-restriction policies. We can expect to see many of the following outcomes.

Globalization

  • Global trade could continue to grow in the next ten years, stimulated by the wide-ranging activities of Chinese multinationals.
  • By 2030 maybe 40 percent of the Fortune 500 will be based in emerging markets, compared to 26 percent in 2015.
  • There could be a massive shift in control of global markets from West to East.
  • On the other hand, globalization trends could stall if Western countries impose major trade barriers and severely restrict the activities of unfriendly-nation multinationals on security grounds.

Over the next ten years the Chinese government will continue focusing on strength and perpetuation of the Communist Party regime. Still plausible, but maybe less likely is for the government to focus largely on protecting the country’s territorial integrity and enhancing the wellbeing of the Chinese population.

The Chinese government will be trying to increase its surveillance and control of its citizens. Perhaps the Chinese government will gain access to DNA data of its citizens for its social-credit system. The Washington Post article about China’s investment to beat the US in genetic testing noted the “vast warehouses of genetic information” that will be created.

China’s priority going forward will likely be to continue protecting domestic industries and Chinese multinationals and not to overhauling the Chinese system to make it more market oriented.

The Chinese government will also continue to maintain a level of authority over every Chinese corporation—state-owned or not—and every move by a Chinese corporation in a foreign market will provide the Chinese government an additional presence overseas.

China government’s active role overseas will continue. The system will provide results.

  • China’s government will actively encourage Chinese multinationals to compete in the largest markets in the world, particularly strategic ones, and become global market leaders.
  • The government will encourage Chinese companies to try and dominate commodity supply chains to protect China’s future access to commodity resources, like the United States has protected the world’s access to Middle Eastern oil.
  • At the same time, the China government will actively combat protectionist measures imposed against Chinese corporations.
  • China will continue to use domestic-market subsidies, access to low-cost financing from state-owned banks, etc., and new strategic initiatives like President Xi’s “One Belt, One Road” to help Chinese companies become global leaders.

Chinese Multinationals Going International

  • Over the next ten years the number of investments by Chinese firms will increase steadily in all the G-20 major economies and stimulate increased global trade from which everyone will benefit.
  • Leveraging their protected market positions in China against foreign competition, Chinese multinationals will blitzkrieg the United States and European countries to develop market share rapidly.
  • Chinese commodity producers will lead the way. As the demand for commodities begin to grow again and as prices increase in the next two years, Chinese commodity producers and product manufacturers will expand rapidly into G-20 countries. They will buy existing producers and distribution companies, taking advantage of their weakened financial states because of the commodities slump.
  • Chinese companies will operate in any country as long as their staff is reasonably safe and they get paid—North Korea, Russia, South Sudan, Venezuela, the United States, Iran, and Congo—no problem. American and European firms will continue to be limited by national laws, international sanction, and business standards for activities such as environmental management.

The partnerships between the Chinese government and Chinese multinationals will rapidly gain more experience in penetrating foreign markets and will likely become more effective in entering and competing in developed-country markets. The Chinese companies with their government sponsors will eventually dominate in many of those markets.

Chinese multinationals could replace American multinationals as the face of global capitalism. Chinese multinationals in the next ten years could become the global leaders—displacing the US and European ones—in many industries. Given recent signals of change, plausible outcomes range from a dynamic global trade realm with Chinese multinationals acting as leaders to an ugly global business environment where governments act to support national champions and restrict the opportunities available to foreign competitors.

  • G-20 multinationals will partner or merge with Chinese multinationals as opportunities arise. Some interesting East-West combinations could result.
  • Chinese companies will challenge and surprise many in a number of global markets. For example, US, German, Japanese, and South Korean firms dominate the global car and truck manufacturing industry. That could quickly change with one or two acquisitions or the emergence of a new type of car manufacturing organization (like Tesla) in China.

The United States and European Governments

  • The number of proposed deals involving Chinese multinationals that must be approved will increase dramatically in both the United States and in Europe. Individually each deal appears rational and is hard to dispute under the country’s commerce laws, but collectively they suggest structural shifts might occur if they all are allowed to go through.
  • The explosion in number of proposed deals could overwhelm the G-20 government bureaucracies and market regulators. Governments may struggle to review and evaluate the deals in a consistent manner.
  • G-20 countries will dedicate more authority and resources to government offices to manage the growth of Chinese multinationals in their countries. Given the Chinese companies’ inevitable ties to Chinese government officials, security concerns and unfair government subsidies will be most often cited.
  • European Union markets will be particularly vulnerable to Chinese competitors because European competitors are already not dominant in many industries. EU authorities might encourage large foreign investment from Chinese companies or fight it, or do both. Given nationalism trends in the EU, Chinese companies may not be welcome; but given the unemployment problems, outside investment will be very welcome.

The aggressiveness of the Chinese companies and the Chinese government’s uncooperative approach in helping Chinese companies compete globally will likely spark large anti-trade sentiments in North America and the EU, create major political and security issues for G-20 governments, and force a variety of penalty and protectionist policies to be implemented.

The business climate in G-20 countries in general will become more nationalistic.

  • Business practices in the next ten years and the business leaders we follow will often be Chinese, and the business culture and competitive practices in G-20 countries will evolve. Just like there’s a Silicon Valley model based on the emergence of the online companies, there will be an East-West model that reflects the cultural, economic, and business norms of China.
  • Crony capitalism will remain strong.

Have Oil and Gas Companies Seen Their Best Days?

ORACLE’S RESPONSE:

No. The actions of large oil and gas companies will continue to shape the global economy for the foreseeable future. Despite efforts around the world to diversify away from hydrocarbons, state-owned oil and gas companies and large independent producers will grow and prosper, and be critical players in efforts to move toward a net-zero emissions regime. If you’re a pension fund, buy stocks of the major oil and gas producers, including those from China, Russia, and Saudi Arabia (after Aramco’s IPO).

RECENT SIGNALS OF CHANGE

Oil and natural gas will continue to be key energy sources for the foreseeable future. In May 2016, Shell’s scenario group published a plausible scenario of the world meeting international climate goals and achieving a net-zero emissions state. Shell described a number of key developments over the next 50 years that could lead to net-zero emissions, including significant investments in solar, wind, and nuclear sources, carbon capture and storage technologies, many country de-carbonization strategies, and a global carbon pricing system—whether through carbon trading, carbon taxes, or mandated carbon-emission standards. However, for the future global population of 10 billion people to have a decent quality of life, the global energy needs would have to double by the end of the century. Oil and natural gas would have to remain important energy sources for the next forty years, until solar, wind, and nuclear sources can assume the burden of meeting the global economy’s needs. When the net-zero emissions state reached, let’s say by the end of the century, the share of oil and gas in the overall energy mix will have fallen from 57 percent to around 15 percent, while the non-fossil-fuel share will be just under 80 percent.

According to the International Energy Agency (IEA), to have a chance at keeping global warming to less than 2ºC above pre-industrial levels, oil demand would have to peak in 2020 at 93 million barrels per day (b/d), just above current levels, and oil use in passenger transport would have to decrease dramatically. Shell’s chief financial officer said he expected oil demand could peak in 5 to 15 years. State-owned China National Petroleum Corp. recently forecast that China’s oil consumption would begin to decline by 2030. But the uncertainty is high on when demand might peak. It could be much later. In its most likely scenario, where more stringent government policies to limit global warming aren’t effectively implemented, the IEA says oil demand will continue to increase beyond 2030.

There is plenty of oil and gas. In 1995, proven oil reserves (i.e., oil discovered and economic to produce) in the world were 120 trillion cubic meters. In 2015, proven oil reserves were 187 trn cubic meters. Global oil supply has steadily risen—almost 20 percent—since the year 2000 to over 95 million b/d in 2016, with non-OPEC producers leading the charge, competing strongly with OPEC producers for market share.

The last three years have been tough on OPEC countries that rely on oil and gas revenues for their government budgets. The International Monetary Fund in October 2016 estimated the oil price needed to balance Middle Eastern government budgets ranged from a low of $47.76/b for Kuwait to a high of $216.46 for Libya. The prices are a key indicator of the governments’ dependency on oil revenues and the budget difficulties they face when prices fall. Surprisingly, Iran at $55.29/b is perhaps less motivated than Saudi Arabia at $79.71/b for a large price increase. In 2015, Saudi Arabia posted a budget deficit of $98 billion. In October 2016, the Kingdom issued $17.5 billion of bonds, its largest amount ever. Governments facing years of economic difficulties are struggling with how much effort should they apply to save existing ventures (and the jobs), mitigate the impacts of the closed or canceled ventures, and change the incentives to attract new multinational and local investments.

Government incentives and hurdles toward increased oil and gas development activities vary significantly around the world.

  • Government stakeholders in the United States are questioning the companies’ financial and accounting practices, business models, and oil-spill and climate-change prevention efforts. The US Securities and Exchange Commission is looking into whether ExxonMobil values its unproduced-reserves appropriately after the oil price declines and potential regulatory action on climate change.
  • The US Energy Department recently curtailed licensing and development plans for Alaska’s Arctic region. The US Energy Information Administration in its 2016-published energy outlook shows oil production from Alaska decreasing to less than half its current level after 2030.
  • The governor of the Bank of England suggested in September 2015 the companies should disclose how they would manage climate-change risks.
  • Saudi Aramco, the largest oil producer in the world, is producing oil at record levels.
  • Russia is developing oil reserves as fast as it can under western-government sanctions. Iran is aggressively trying to expand.
  • In November 2016, at the end of China’s President Xi Jinping’s visit to Latin America, China’s state media released its strategic blueprint for China-Latin America relations. Latin America is already China’s second-largest investment destination after Asia. Much of the investment is in energy projects. An example, state-run State Grid Corp. of China, the world’s largest electricity provider by revenue with $312 billion, is pursuing a takeover of CPFL Energia SA, the Brazilian electric company, for $13 billion.

The environmental risks of commodity operations are not going away, and new ones continue to come to light.

  • Recent figures indicate that around a third of the annual methane emissions in the United States can be traced to the natural gas industry. While methane doesn’t remain in the atmosphere as long as carbon dioxide (12 years compared to 500 years), it is about 25 times more potent as a cause of global warming. The Environmental Defense Fund, an American NGO that often works with industry, estimates 2-2.5% of the gas flowing through the supply chain leaks out.
  • Petrobras is implementing a divestment plan to sell $15 billion in assets to help pay off the company’s very high debt load of $126 billion. In the spring and summer of 2016, Petrobras sold stakes in Argentina and Chile subsidiaries, a large offshore oil field to Norway’s Statoil, and petrochemical units to Mexico’s Alpek.

Fueled by commodity prices, particularly oil exports, sovereign-wealth funds—financial vehicles owned by governments—doubled in size from 2007 to 2015 to $7.2 trillion. Since 2007, the number of sovereign funds increased by 44 percent to 79, many in Africa and Asia. Nearly 60 percent of sovereign wealth fund assets are related to energy exports.

Oil prices peaked in August 2013 over $110 a barrel. They bottomed out below $30 a barrel in January 2016. Since May 2016, prices have been relatively level, bouncing around between $40 and $50 a barrel. Not surprisingly, the number of rigs drilling for oil in the United States is up by 50 percent since May.

The world’s seas are becoming more efficient in moving hydrocarbons.

  • The major Panama Canal expansion, opened in June 2016, more than doubles the canal’s capacity and includes a third lane to accommodate ships large enough to carry 14,000 TEU. The Canal hopes to recover the 10 percent to 15 percent of annual revenue lost to the Suez Canal from 2013-2015. A key market of the future for the canal could be LNG carrier traffic.
  • Russia’s US$27 billion Yamal LNG project within the Arctic Circle will begin operation in 2017. This remarkable project will use West-designed and Far East-built ice-class LNG tankers to enable year-round export shipments from northwest Siberia to European and Asian markets. The LNG tankers are intended for navigation both westbound and eastbound along the Northern Sea Route (NSR), the Arctic seaway along Russia’s coast linking the Atlantic and Pacific. The Russian company, Novatek, has a 50.1% interest in Yamal LNG; China National Petroleum Corporation and France’s Total Group both have a 20% holding; and the Chinese state-owned Silk Road Fund has a 9.1% interest.
  • Ship transport of Russian Barents Sea oil along the Norwegian Arctic coast in the first part of 2016 reached new highs because of cumulative oil-development and port infrastructure investments over the last decade in the Russian sector above the Arctic Circle.

Producers are following the market toward gas. From 2000 to 2015, the percentage of total energy production of natural gas in Shell, Eni, Total, ExxonMobil, ConocoPhillips, and Chevron went up significantly. Only in BP did it go down slightly. In Shell, Eni, and Total the share of natural gas is almost 50 percent.

  • US exports of natural gas have just exceeded US gas imports for the first time in 60 years with most of the export increases going to Mexico and Canada.
  • China Petroleum & Chemical, or Sinopec, is attempting to double domestic natural gas production in the next five years in order to reduce coal usage in the country and reduce China’s need for imported liquefied natural gas—that many investors around the world were counting on. Sinopec is counting on rapidly expanding natural gas production from shale reserves.
  • US coal exports to China have recently shrunk to almost nothing. They were almost 6 million short tons in 2011, 10 million tons in 2013, and about 300 thousand to date in 2016. Out of seven West Coast export terminals proposed in the past five years, none has opened.

During the last three years of low oil and gas prices, independent oil and gas companies have been reluctant to start new ventures, even to secure low-cost reserves.

  • In 2016 ExxonMobil lost its triple-A bond rating that it has had since 1930. In 2015 it failed to find enough new oil and gas to replace what it produced for the first time in 20 years. And in October 2016 it announced some 4.6 billion barrels of its reserves, nearly 20 percent of its oil and gas reserves, mainly in Canada, may be too expensive to produce.
  • Exxon Mobil is not continuing its involvement in a venture to build a new LNG export terminal in Alaska. The project is not forecast to be very competitive in the world. Just a year ago, the Alaska state government paid $65 million for TransCanada Corp.’s 25% share in the overall project that was expected to cost between $45 billion and $65 billion. BP and ConocoPhillips, other shareholders in the venture, are also expressing concerns about the project.
  • In November 2016 Blackstone Group cancelled an $800 million venture it set up two years before to invest in distressed oil and gas assets in Southeast Asia. Potential sellers such as international oil companies hung onto assets rather than selling on the cheap.

But Russian and Chinese companies have been getting bigger and better while the prices have been low.

  • Russia’s oil and gas companies, Rosneft, Gazprom, Gazprom Neft, Lukoil, and Surgutneftegas—all operating under guidance by Putin’s government—continue to grow and become more capable. Their development and production activities are Russian focused, but the companies have extensive international relationships with technology partners, financiers, service companies, and customers.
  • Russia’s oil and gas ties with both China and India have increased significantly in the last three years. In October 2016, Russia’s state-controlled Rosneft announced the purchase Indian refiner and gas-station owner, Essar Oil, Ltd. for $7.5 billion.
  • Russia also has deals to supply oil and gas to China and for Chinese companies to buy stakes in Russian energy projects abandoned by western firms due to the sanctions. China’s support to Russian energy and infrastructure projects is critical but fragile. For the Yamal LNG project Chinese lenders recently signed a $12 billion loan agreement after two years of talks. But many other agreements signed in the last two years haven’t yet led to firm contracts, and the perception is China has been able to take advantage of Russia’s weak negotiating position. Also, China’s goal of building land and sea routes that will enable Europe to connect more easily with China could reduce Russia’s role as a trading partner of Europe.

As the technological and operational leader in the Arctic region, the partially state-owned Norwegian oil company, Statoil, is continuing to pursue opportunities throughout the region, including in Russia despite the strained political ties between Russia and Norway and the EU. Statoil’s strategic cooperation with Rosneft involves joint exploration in the Russian Barents Sea and Sea of Okhotsk (in the far east of Russia), as well as pursuing interests in a license in the Norwegian Barents Sea. Statoil began drilling in June 2016 in the Sea of Okhotsk. “We are pleased to have entered a key stage in our long term cooperation with our partner, Statoil . . .,” said Igor Sechin, chief executive of Rosneft and an ally of Russian president Vladimir Putin in July 2016. On the other hand, Norway and Statoil would like to continue selling natural gas extracted from Norwegian waters to Europe. But replacing the aging gas fields in Norway has been difficult, and Statoil and other energy companies haven’t yet made the next big discovery in Norwegian waters that would justify building the large necessary gas export infrastructure.

Some integrated oil and gas companies are also investing in alternatives to oil and gas. Solar and wind energy sources are growing rapidly around the world and their prices now are competitive with fossil-based sources. In a figure by IHS Markit in The Economist November 26, 2016 issue, the cost of power generation in the United States from solar is competitive with oil (although oil isn’t used anymore in power generation). The cost of natural gas is on par with coal. Worldwide, renewable energy passed coal as the world’s biggest source of power-generating capacity. Statoil, Norway’s state-owned energy company, is investing in carbon capture and storage technologies and offshore wind farms.

ORACLE MUSINGS: PLAUSIBLE DEVELOPMENTS WE MIGHT SEE IN THE FUTURE

Large oil and gas companies around the world will do well for the next 20 years largely because demand for oil and gas will continue to increase because the world economy will depend on them. The major uncertainty for all the companies is the policy restrictions on carbon sources that will be implemented. Unless extensive bans on using fossil fuels are implemented, the companies will remain major players in the global economy.

After the next 20 years, the range of uncertainty on the energy sources used in the world remains extremely wide. The use of nuclear, the government restrictions on hydrocarbons, the technology innovations in renewables and CCS, etc. all remain highly uncertain.

While the demand for oil will increase for the next 20 years, the demand for natural gas is going to explode.

  • The two big hurdles for companies developing the new oil and gas reserves will be the large capital required to explore, develop, and produce oil and gas in hard to reach places, and the liability risk to companies from oil spills and contributing to global warming.
  • For oil and gas companies, NGOs, and other energy stakeholders, a key to their success will be their abilities to manage in a complex environment, subject to disruptive changes. Will organizations develop the necessary capabilities, processes, and strategies for an environment of continuous change?

Prices will grow slowly over the next five years.

  • The large, integrated oil and gas producers will specialize in developing low-cost oil and gas reserves anywhere they can be found.
  • They will flock back to Russia when sanctions are lifted.
  • If sanctions aren’t lifted, Russia will get the expertise and financial support it needs from China, India, Brazil, and special deals made with Statoil and others.
  • Africa and North and South America will be major areas of activity.
  • Technology innovation (e.g., in fracking) will continue to lower the costs of extracting oil and gas from source rock.

Greenhouse-gas (CO2 and methane) emissions will likely increase each year and accumulate in the atmosphere and ocean.

  • The battles over the development and use of fossil fuels could become even more intense.
  • NGO’s will continue to object to natural gas development and production activities and the companies that conduct them. Becoming a good world citizen will be hard for gas companies to achieve.
  • Large private oil and gas companies could experience more protests wherever they operate.
  • Russian and Chinese companies will be singled out more and more by NGOs.
  • Many western governments will find themselves simultaneously penalizing Russian and OPEC producers or taxing imports from them while welcoming them as important gas and oil suppliers to their countries.

Most of the large independent oil producers will become majority gas producers. They will follow the various government incentives to increase natural gas production to displace coal and enable a net-zero emissions system. However, the companies will continue to be seen as dirty and dangerous to the environment because of their extensive oil operations and the safety issues associated with the natural gas.

Large western companies will compete well for large projects because of their project experience, use of new technology, and ability to raise large amounts of capital.

  • Chinese companies will become fierce competitors of the large western companies around the world.
  • Russian companies may expand operations outside of Russia.
  • Technology innovation will be extensive in the pursuit of low-cost oil. Many technologies will be valuable in other realms—security, environmental monitoring, automation for underwater and harsh environments, etc.

OPEC Producers are not going to slow down. OPEC producers will not reduce oil production to any degree in order to boost market prices. They might pledge to limit production, but they will continue seeking ways to expand production to meet future demand around the world. Aramco will still produce at high levels.

Sovereign-wealth funds will be more important financiers of oil and gas developments in the future—often the only sources of capital for very large projects.

Oil and gas companies will perform very well financially, and will remain amongst the largest corporations in the world in terms of revenues. But the costs to them of catastrophic environmental events will rise. It’s uncertain how a foreign company, even if it were Chinese, would fare if they were responsible for a major event in the Arctic region that couldn’t be cleaned up.