Unique Challenges for Energy Organizations to Expand

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Unique Challenges for Energy Organizations to Expand

HBS professors share their insights
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Globalization creates a unique challenge for energy organizations to expand, #HBSEE http://ow.ly/bxeur
Wednesday, June 27, 2012 - 2:30pm

The challenges facing the global energy industry are more complex than ever before. Today’s companies must navigate not only heightened environmental concerns, but also uneven globalization, regulatory restrictions, investment risks, and other issues. In this interview, Harvard Business School (HBS) professors Rawi Abdelal, Forest Reinhardt, and Richard Vietor discuss how these challenges—along with ongoing technological advancements and recent political developments in the Middle East—are shaping the future of the global energy marketplace.

How is globalization creating unique challenges for energy organizations seeking to expand internationally?

Abdelal: We are living in the second great era of globalization. One of the key challenges we face in this era is that politics are ever-present in the energy business, and these political underpinnings can sometimes be quite fragile. Therefore, we need to understand the connection between energy markets, the pressures to integrate them, and the politics that might pull them apart. A second challenge is that today’s globalization is unevenly distributed, so some parts of the world are more connected to the global economy and its processes than others. And third, the international strategies of many governments around the world are being driven by the strategies of energy companies. For instance, the decisions made by big oil and gas companies are producing patterns of international politics more than they are reacting to them, which creates tension between profits and geopolitics.

Reinhardt: Whether companies are state-owned enterprises or privately held, the essential nature of the energy commodity makes the collision of public policy and business strategy inescapable. At the same time, previous eras of globalization have taught us that integration is not necessarily inevitable or desirable. Globalization is a fragile entity, and it can be reversed by national governments if the benefits to them seem small compared to the cost.

Vietor: The International Monetary Fund has come out with a chapter on global fossil fuels that characterizes the global environment as a dichotomy. On one side are consumer countries that import fossil fuels, which include virtually all of the developed countries plus China and India. And on the other is a small group of fossil fuel exporters. The IMF believes that any kind of economic growth in the near future will cause oil prices to go up. Gas prices may follow, although the existence of shale gas may hold prices down.

Abdelal: One of the important questions today is whether this historical linkage between oil prices and gas prices is likely to continue as the structure of the gas market changes. The answer should become clearer in the next couple of years.

Vietor: The linkage between oil and gas prices is broken today. In the United States, gas prices are nearly at record lows, while oil prices are very high.

Reinhardt: Right, so the question is whether the recent decoupling is a temporary phenomenon, or we’re now embarked on a new journey in which oil and gas prices will move increasingly independently of each other.

How is recent regulation affecting traditional energy providers and producers of alternative and renewable energy?

Vietor: Renewables are becoming more prominent because many people are worried about carbon and carbon dioxide. Wind, solar, geothermal, the conversion of electricity and storage and batteries—all are alternatives to carbon-based fuels. My sense is that all renewables are affected by government policy. Virtually all governments are creating regulations to affect both the supply and the demand. The one possible exception is the United States, which doesn’t have a clear energy policy and is falling severely behind. The Chinese in particular are surging ahead in wind and solar because of their public policies, their restriction of foreign content, and their industrial subsidies to state-owned enterprises. They’re also surging ahead in batteries, and even in nuclear because of their current production plans. The Germans are ahead on solar. And the United States is just watching as technology and trade slip through its fingers.

Abdelal: There are two interesting issues surrounding energy dependence. One is the impact of carbon on the environment. The other is related to politics, in that many governments are not comfortable with some of the regimes that sell oil and gas around the world. These issues affect how different national societies come to terms with their dependence. Some don’t see it as a problem, but others see it as a reason to focus more on carbon-friendly solutions.

Reinhardt: Right. We consumers want our energy to be clean. We want it to be local, which is to say under the control of entities whose resource allocation decisions we can affect more directly. And we want it to be cheap. In the United States, at least recently, we have been much more interested in having our energy be cheap than in having it be clean or local. Maybe that should change, maybe it will change. Right now, we have a set of targeted policies aimed at particular technologies rather than an overarching energy policy, which is not the way people concerned with efficiency or long-term stability would design an energy system.

Vietor: And many of those policies, at least in the renewables area, are temporary. In contrast, the Europeans put policies in place nearly a decade ago to stimulate wind or to stimulate solar, and they’re willing to sustain these policies for a long time.

How have the recent liberalization movements in Libya and other Middle Eastern countries affected the energy markets?

Reinhardt: In the short run, the political changes in those oil-producing countries and their neighbors are seen as threatening the stability of the markets. They erode the amount of spare capacity that exists, and therefore tend to drive prices upward. However, in the long run, it’s not at all clear that these political changes are a bad thing for the stability of the fossil fuel markets.

Abdelal: One of the broader questions related to the recent turmoil in the Middle East is the division between the energy-consuming and energy-exporting nations in terms of how the markets should be organized. The energy-importing nations always want more liberalization, less state control, less bundling of resources and the means of delivery. But what they find is that the energy-rich countries have great state control—almost always holding a majority stake in the major companies—and want to make these markets more oligopolistic. In regions where state-controlled firms have been dominant, it will be interesting to see if whatever replaces them will be similar. Most likely it will, so we’ll probably continue to see this divide between importers and exporters in terms of how the markets ought to be organized.

Vietor: On the other hand, the states that are experiencing revolution today are not significant oil exporters compared with the states that have remained fairly stable. Saudi Arabia, the UAE, Qatar, Iraq, and Iran still are the largest exporters, while Yemen, Syria, and Libya are relatively smaller producers. Still, a fall in energy output can quickly erode the spare capacity that currently exists, which is roughly six million barrels globally. That’s why the IMF is expecting prices to rise significantly in the next two or three years. But it’s not necessarily because we’re at risk of losing Libya.

In response to these issues, Harvard Business School Executive Education has developed the Global Energy Seminar, an opportunity to explore new ways to capitalize on global growth opportunities.

What will participants take away from the Global Energy Seminar?

Abdelal: One of the most important things they will experience is exposure to other industry executives. We prepare the cases and manage the discussion in a very open way, but much of the learning comes from the interaction among peers. Our audience tends to be experts in the subject matter. They teach each other—across energy sectors and across the vertical value chain, from small entrepreneurs to state-owned companies. In day-to-day business, an upstream nuclear professional doesn’t interact with a downstream wind professional. We provide opportunities like that. Overall, it’s a wonderful opportunity for them to talk with each other.

Reinhardt: We bring together people from big firms and little firms, from the oil business and the wind business and the nuclear business, from rich countries and not-so-rich countries, from producer nations and consumer nations. And we give them an opportunity to learn from one another in a relatively unstructured way. We understand that there is no shortage of opportunities for people to squint at someone’s PowerPoint in a dark room. But we’re not interested in providing that kind of seminar.

Who should attend the Global Energy Seminar?

Vietor: This program is ideal for a broad range of executives, from large companies to startups, from different functions, and from many countries around the world. These include finance executives, regulatory executives, professionals who are involved in technological innovation, and those focused on exploration.

Learn more and apply.


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