When technology changes, early adopters become risk takers. If you sit and wait, you will eventually know which technologies win or are even worth pursuing. Early adopters either see something that the rest of us have missed, or they truly believe in a new technology. But what do the early adopters see that we’ve missed? And when do early adopters throw in the towel when they’ve clearly backed the wrong horse?
As hard as it is to remember, there was a time when everyone said that no one can outsource complex jobs. It just won’t work. Then early adopters saw the value of freeing up managers and resources that could focus on creativity and the creation of new products. Today, it’s hard to find a lot of evidence that outsourcing unleashed creativity or was responsible for new innovations. However, there is a lot of evidence that a good outsourcing program can create a pile of savings. Yet, while savings are the primary artifact of a well-run outsourcing program, survey after survey still talks about creativity and new products.
A few years ago, “sustainability” became an important term / trend in business. Especially, but not exclusively, when applied to food products. Early adopters talked about the benefits… the environment, health, family values. Sustainable fuel programs spoke to all of these benefits and… were a lot cheaper than gasoline. But now petroleum prices at record lows. If the cost savings go away, will sustainability still matter?
Everyone wants to be the hero. We want to do the right thing. At least, we want others to think we want to do the right thing. A business leader today has been hammered throughout their career to take responsibility for the environment. Other generations have been pressured to do social good, but never before has the pressure been so high, nor have business leaders (and consumers) had as many business options to make a positive environmental impact. Sustainability touches on many issues but is especially strong when we talk about the generation and use of energy.
Petroleum generates pollution. Much of our petroleum comes from the middle east, a region roiled by political conflicts and violence. In order to keep the oil flowing, the US has committed its military, its reputation and huge quantities of dollars to the ever more complicated alliances and politics that make up the middle east. Before the start of the last Iraq war, oil was cheap. In March of 1999, the national average for gasoline was $0.95. Throughout the 1990s prices remained close to a dollar. As yet another middle eastern war arrived, the price of gasoline rose to $4.12, and then began dropped to a low of $1.67 at the end of 2008, when the world economy collapsed. Between 2012 and 2014 the price of oil appeared to stabilize at just above $3.40.
Many pundits said that oil had hit it’s “new normal”. They were very wrong! Instead this was that strangely quiet place at the top of just about every roller coaster, where new riders say, “What? That’s it? I thought this was a scary….. riiiddddeeeee!” And down we go as a new generation of energy companies came online. Down we go! What’s that up ahead? “Drill baby Drill” became big petroleum’s new motto. Drill we did and…. down we go again! New fracking technology delivered massive new quantities of oil and natural gas from North Dakota, New York and Pennsylvania while tar sands start to ramp up in Canada. Wait! Is the ride over? Can we get off? Not yet! The Chinese economy starts to sputter and the stock market rises and falls by 1,000 points every other week. By December 2015, gasoline prices fell to $2.28, and fell again to a low of $1.83 in February of 2016.
OK, OK that MUST be the end of the ride! Nope, not yet. Get ready for the real thrill ride! None of the OPEC countries want to slow down production and give up market share. And But now Afraid not! As of February, Iran is back on the international oil market and will ramp up to another million barrels of oil a day. As quickly as it can. But at least, that’s the end of this ride! Unless… the price of oil rises and the frackers who shut down open up those wells again. Or if they come up with a new drilling technology and lower prices again. Or maybe they start replacing workers with robots, or… ?
If oil has been on a wild ride, natural gas has been tumbling even faster. Fracking has delivered a vast amount of oil, but it delivered even more natural gas. Oilfields used to burn off gas instead of trying to sell it. When oil (and gasoline) prices peaked, natural gas became a phenomenal buy. It been at least 25% to 50% less expensive than gasoline, and it is a lower pollution fuel. Farms and factories started converting to natural gas several years ago. Some started conversion due to pollution issues, some for cost, and many as part of a sustainability program.
Natural gas comes in many forms, at different price points, but generally its use has some additional costs. Such as converting existing trucks to natural gas, or buying new trucks (approx. $35,000-$70,000 per truck), and adding storage tanks or infrastructure for pumps. Natural gas continues to be cheaper (and more environmentally friendly) than gasoline, but lower fuel costs translate into a longer pay-back time for converted infrastructure. It still makes sense to convert to natural gas, but the numbers are no longer as compelling.
Looking at other sustainable fuel programs, we have Storms Farm in North Carolina. They developed a large-scale biogas converter that turns waste from pig farming into fuel. A still larger operation is planned at Loyd Ray Farms, also in North Carolina. The exact cost of bio fuel is difficult to price. Since all sorts of organic matter can be fed into the process, and the mixture changes with the seasons, the price (and quantity) of the fuel produced will change. There are also bonus benefits of bio-fuel. Pig waste and other organic waste has to be stored and hauled away. By turning waste into fuel, these other costs are minimized or eliminated. But with petroleum-based fuel at half the price it was a year ago, fewer farms are finding that bio-fuel still makes economic sense.
Elsewhere in North Carolina, solar power has made huge strides. According to cleanpower.org, North Carolina is the 2nd fastest adopter of solar power in the nation. In fact, one of the world’s largest producers of solar panels, the Chinese firm GCL New Energy, has been buying the rights to build new solar projects around the state. With direct access to China’s solar panel producers and ultra-low interest rates from Chinese banks, we can expect these projects to set a new low price per kilowatt. But, just like bio-fuel, there will be some point… perhaps at a dollar a gallon? … where solar will no longer make sense. Unless. More than just the money makes sense.
I’m not talking about going full tree-hugger here. The economics of sustainability is shifting. On the one hand, the lower return on investment may cause it to fade away. On the other hand, the definition of sustainability may become a bit blurrier and merge with other “green” initiatives, and have a higher indirect value. “Green” has become a powerful consumer and corporate marketing force. If a farm or food operation is sustainable, it is assumed to be: natural, environmentally responsible, better thought out and even more humane. The combined movement towards Green and sustainable yields intangible social benefits, and increasingly very real monetary benefits. In the US, 42% of consumers say that they would choose to buy products from Green. Let’s look at it a different way. A research report from McKinsey (the world’s largest consulting firm) surveyed consumers to quantify how much consumers preferred Green products. In an article by Mehdi Miremadi, at McKinsey Consulting, we learn that a survey showed that only around 10% of consumers would pay of premium of over 25% for Green products, between 60% and 70% of consumers would pay 10% more. Depending on the market you want, the numbers will vary, but there is a very definite financial premium for being Green
Consider the humble egg. Years before “sustainable” was a marketing term, “Cage Free” was well-established. Cage free was a litmus test for the humane treatment of farm animals. Cage-free eggs started to sell in health food stores, and then in high-end specialty grocers and eventually went mainstream when they showed up at Whole Foods. McDonalds is one of the largest consumers of eggs in the world. In order to distance themselves from the “fast food” label, McDonalds has gone from liquid eggs to pre-cooked eggs to “fresh cracked” eggs. In 2015 McDonalds announced that they will shift to 100% cage-free eggs. In rapid succession, every fast food chain signed on to cage-free eggs. Target and Costco have joined the cage free movement, and Taco Bell has given its suppliers just one year to switch to cage-free operations. One year? Conservatively, the industry needs 10-20 years to rebuild its hen houses, identify different breeds that work better in a cage-free environment, and solve a lot of other issues that drove the industry to cage chickens.
Cage-free eggs are chemically identical to caged eggs. The “greener” solution is not the more nutritious solution. But it is highly likely that cage-free eggs will also be higher cost eggs. Depending on how big poultry farms must change over, and how many old hen houses will be destroyed before their time, the cage-free movement may significantly raise the cost of eggs. All to make an egg that is no more nutritious or tasty. It doesn’t even guarantee a morally superior egg.
You see, one of the main reasons for caging is that when chickens are left on their own, they tend to want to peck other chickens to death. Especially, the young and the weak. And then, they eat each other. I’m not saying that the cramped cages are better than occasional cannibalism. I’m just saying that taking away the cage does not necessarily lead to a more humane environment. Of course, pastured hens that wander around a spacious and sparsely populated farm would be morally superior, but their eggs would be astronomically expensive. Cage-free eggs don’t do all that much to move “Green” forward, bit it sure does show the power of “Green Marketing”!
Will the same hold true for sustainable fuels? Even if sustainable fuels lose most or all of their direct cost advantages, will a “sustainable” label make up for cost in marketing advantages? As we’ve seen, Green related labeling definitely allows you to charge more for your product. What have we learned? Consumers are interested, very interested, in the social benefits of Green products. But you need to know where your customers stand on this issue. The more Green your customers, the more they are likely to reward you financially for going Green. Which means that you not only need to know how Green your customers are, you need for your customers to know how Green you are! Conventional (non-organic) farms differ dramatically in their green commitments. Some conventional farms are arguably more Green than many of their organic peers. If your customers are green, and you are green or going green… SAY SO! And that’s my Niccolls worth for today!
Don’t agree? Do you see other trends dominating in sustainability? Let us know!