Labor Market, Stock Market, The Economy, and Why the JOLTS Report is Both Good and Problematic

The labor market is fine, but there are some concerns (and opportunities). Listen to the podcast of a conversation with Bloomberg’s Kathleen Hays and Vonnie Quinn of “The Hays Advantage” on Bloomberg Radio from April 10, 2012. These two posts and a link will also provide some background: http://bit.ly/wfpykq , bit.ly/zAEswR , bit.ly/H9EBHo .

Download the podcast

Marcellus Shale:New York::Prudhoe Basin:Alaska. Why Not?

The New York Department of Environmental Conservation has put out a 46 megabyte document with proposed regulations on horizontal drilling and hydraulic fracturing  of the Marcellus Shale formation in the state. The regs together with existing regs cover almost every known possibility of risk with some ways to mitigate the risk.  The DEC has asked for comments. I just posted one which you will see below. I don’t understand why these massive game-changing formations, the Marcellus, the Bakken and others, should not be treated the same as the Prudhoe Basin for the benefit of those states under which the formations exist.  These are depleting assets–and they produce GHG emissions. Why not create Permanent Funds designed to create something lasting beyond the lives of these assets. And why not create some mechanisms to deal with possible unintended consequences from the exploitation of these resources?  These formations and the technology to exploit them are game changers. They have certainly quieted the dialogue on Climate Change as we focus on Energy Independence and that natural gas takes us part way to reduced emissions relative to other fossil fuels. Let’s not forget: it is still a fossil fuel. I can’t solve everything in this post, but take a look at the suggestions for how to deal with the Marcellus. The submitted DEC comments begin below:

The SGEIS of September 7, 2011 provides a very comprehensive review of the risks associated with Horizontal Drilling and High-Volume Hydraulic Fracturing and provides mitigation against many of the known risks either through regulation, approvals or restrictions on where drilling can take place. However, in its work, the DEC with the assistance of Alpha Environmental does recognize that there are substantial risks and actual likelihood of occurrences of damage as indicated by the restrictions on where drilling can take place as well as the substantial amount of requirements necessary to be allowed to drill, to handle the materials and back-flow from the processes, to reduce the GHG emissions and to transport materials and the ultimate hydrocarbons resulting from the drilling. The Marcellus and the Utica formations as well as others that may be exploited represent a significant economic opportunity for New York and other states as well as the United States in general. There will be much comment on the proposals put forth in this document. No doubt, the Oil and Gas Industry will have comments on the costs of the proposals as well as whether the risks highlighted are significant enough to warrant all the proposals for mitigation.  Economics will be a key factor. These formations, the Marcellus in particular, represent a low cost source of domestic energy, in some ways not too dissimilar from the Prudhoe basin, which has been a major economic boon for Alaska and the US.  I would like to suggest that, in addition to the proposals in the SGEIS, that the state of New York, in conjunction with the other states that exist over these formations, consider the following:

1)    Much as the state of Alaska created a Permanent Fund for collection of royalties on the production from the Prudhoe basin and other Oil and Gas activities, there should be a similar Permanent Fund developed for the states where hydraulic fracturing and any other approaches are used to exploit these enormous and game-changing formations. An appropriate royalty (Alaska takes 33%) should be determined. While a small portion of the royalties could go toward the various state operating budgets, the majority would be available for the creation of alternative energy or energy efficiency opportunities to ultimately replace or supplement the production from the formations, as they are depleted. It could also be used for training of local residents in the technical skills required to participate in the manpower requirements for the industry. The royalties could also be used to support the inspection efforts and other mitigating elements in order to support the O&G industry in its exploitation of the formations. The DEC has indicated that drilling approvals will be slow as there are not sufficient resources to meet the likely demand.

2)    While the DEC has proposed many mitigations to avoid problems, specifically with water contamination, there is no certainty that problems, anticipated or unanticipated, will not occur.  The O&G industry is certainly of the view that there are no serious problems that could affect the various water supplies in the state or water that either contains animal life or is important to land-based animals’ survival. It would make sense for the industry to put up a sizable bond to deal with any problems that do arise, requiring treatment plants or other means to correct any such problems. If as the industry states, the occurrence of such problems is remote, such a bond would bear a reasonable price, and could be targeted to specific elements. For example, while the NYC watershed has been excluded from drilling specifically, drilling will be allowed to take place not far from the borders of the watershed area. NYC consumes about 1 billion gallons per day of unfiltered water for which it collects about $1 billion a year. To construct treatment plants and maintain them could cost as much as $30 billion and add about a billion dollars per year to operating costs.  In the event that the unforeseen happens or appears to be happening, it would be good to know that funds are available to insure that sufficient potable water continues to exist.

3)    The DEC has also proposed rules to mitigate GHG emissions, which could be high in the early stages of the process if methane releases are not contained. It is understood that under steady state conditions natural gas produces fewer GHG emissions than coal or oil, but there are still emissions.  And such emissions can exceed those of other hydrocarbons if there are methane releases during the early hydrofracturing activity. A CO2 or CO2e charge per ton above a certain level of emissions would provide an economic incentive for the industry to keep emissions levels in the drilling, production and transportation activity to a minimum. Such a charge could revert to the Permanent Fund.

I leave it to the experts to determine the feasibility of these suggestions and the appropriate economics. Exploitation of the Marcellus and other gas reservoirs in New York and elsewhere in the country can have a major impact on the economics of the United Sates and can serve as a significant interim step toward reduction of GHG emissions if done properly. Much as Alaska, Texas and other states have benefited greatly from the exploitation of resources within the states, New York should as well. I commend the DEC for the thorough review of the risks associated with this method of drilling and production and its proposed rules for mitigation of those risks. I would hope that we use this opportunity to benefit the state and its residents appropriately, and consider the long-term effects of exploiting a depleting hydrocarbon resource.

Shutting Down Nuclear Power in Germany? This May be the Best Thing for Renewable Energy and Emissions Reductions.

So, Germany is shutting down all of its nuclear plants by 2022. At the peak the plants produced 27.5% of Germany’s electricity. Renewable Energy is now up to 17.5%. There is a big gap to fill in a short period of time and it has German industry and the utilities screaming. This is on the path to have 80% of all its electrical energy come from non-carbon sources by 2050 in addition to a 50% reduction in consumption.  While one could question eliminating Nuclear from the clean energy picture, what Germany is doing will very likely produce an acceleration in innovation, efficiency and the development of intellectual property that will 1) keep Germany’s energy costs from rising, 2) expand Germany’s trade surplus 3) increase Germany’s share of global Intellectual Property and 4) reduce the world’s CO2 emissions more than would have occurred otherwise. This is a bold, audacious step and does require a leap of faith that the German engineers and scientists will accelerate the pace of economic renewable energy development, and German industry and its people will further increase the efficiency of energy usage. I think they will do it, primarily because they have to and they have the talent to do it. This may be one of the most exciting moves by a government to date in the renewable energy field—and a positive move on emissions.

In the meantime, the US is looking for more carbon in less mature formations to fill its energy needs. We’ve basically found all the pooled oil and gas that took 300 million years or more to produce and are now going after “tight” carbon in shale formations as our solution to meet energy demand and produce energy independence. While the shale gas most likely will produce fewer emissions than coal over the 100 year life of a formation, it is still producing carbon and requiring a fairly aggressive use of other resources, primarily water, and some real brute force in liberating the carbon. This, too, is a bold step with some big environmental risks associated with it. It may prove to be a bold step in the wrong direction. We will take a closer look at this in a future blog. The move by Germany is an exciting one, but it saddens me to see the innovation and the aggressive steps to produce the lower carbon world we need taking place elsewhere.

Light and Life in Rural India

We spent two days in villages in the District of Udupi in the State of Karnataka meeting with our sales agents and visiting homes where the Duron Solar Home System was in use.  We were there with three of our investors who had already spent a day in Bangalore at our headquarters reviewing the business and now wanted to see the system in use in the field. We chose Udupi, since it was “only” a ninety-minute plane ride to Mangalore and another ninety-minute drive to the town. Most of the installations were within 30 minutes of the town itself.

The State of Karnataka is reasonably well electrified. One has to travel deep into the rain forests to find an area without wiring.  Almost all of our systems in this state are in homes with electricity from the grid.  However, because of the uncertainty of when power is actually available and the cost, the villagers are interested in alternative power sources.

The grid in this area gets its power from both hydro and coal-fired utilities.

In the dry season the hydropower is less available because of low water levels.  What is available from whatever source gets diverted to the industrial sector. These are usually scheduled diversions that occur when the light is most needed, i.e., when it is dark. In the monsoon season, which is just beginning, the grid itself has more power delivered to it, but the violence of the storms causes unscheduled outages from lightning or power lines falling, which can sometimes produce two or three days without power.

The alternatives are kerosene lamps, diesel generators, inverters drawing power from the grid when it is available and storing it in batteries, or alternative energy sources, primarily solar, tied into a battery and lighting system of some sort. The Duron system is one of the latter. Cost, reliability, maintenance and simple knowledge of its availability are the primary factors determining which alternative is chosen.  Kerosene lamps are ever present as the ultimate fall back when all else fails.

The visit, while terrifying and certainly rugged for us Westerners, was exciting and gratifying. I say terrifying, because any time one is on the narrow roads with all forms of traffic moving in all directions, the near-death confrontations of two or more vehicles and an occasional animal seem continuous and only Providentially resulting in no accident.  The ruggedness comes from the climate, the accommodations and the rural nature of where the customers are, combined with the uncertainty of the ultimate outcome of drinking all the chai and eating the snacks offered by the owners of each of the homes we visited.

The excitement and gratification came from seeing the diverse ways in which the system is changing lives. A few examples:

A young tailor keeps the solar panel, the power pack and one of the three LED lights that come with the system at his small, unelectrified shop at the intersection of two roads near his village. He sits in front of a pedal-powered Singer sewing machine of uncertain vintage, making and repairing clothing for his neighbors. The single light is used to extend his workday by two or more hours, increasing his income. When he closes up his shop, he locks the solar panel inside and brings the portable power pack home where he has the other two lights mounted for use by his children to study and his wife to cook.  He is probably a customer for a second system when the income from his increased business and the cost savings from using solar as his power source allow a purchase.

A woman living far away from neighbors and help tends her very sick sister. The two of them are the only occupants of the home. She says simply that she needs light for her sister all night. Kerosene is not healthy for her sister and not easily available to someone with no ready form of transportation to replenish it.  And the grid is not there when she needs it.  It doesn’t hurt that the system also has a cell phone charger, which does mean, in an emergency she has a working phone to reach someone.

A large family, living in a quite beautiful and well-kept 150-year-old home, has the three lights each installed above a desk that is used for reading and study by the children and probably some of the adults. This is a traditional home with electric lighting but much of what seems a throwback to an earlier era. The kitchen has a wood cookstove and there are many other traditional elements as well. The family can clearly afford more amenities, but I would surmise that they are savers, not spenders.  The placement of the lights in specific reading areas may indicate that the saving relates to the children and their educational opportunities. Solar lighting eliminates most excuses for not studying as well as ultimately saving money. Here, we were offered and ate freshly cut jackfruit. It would have been pleasant to spend an afternoon with the family, understanding more about their history and their current lifestyle. Our sales person had another important visit she wanted us to make, though.

This was our best sales person in the region—a senior member of a local self-help group with a personality and an element of persuasiveness that made her a natural Dale Carnegie graduate without having taken the course.  We were an out-of-place group of three Americans, three Spaniards, and two other senior Indian executives of the company. She felt it was an auspicious occasion. Our visit was to her temple. She was feeling very happy about having us there and wanted to perform a Puja (look it up) in thanks for the good feelings and the success she was having. It was quite an honor for us and clearly very important to her. As recognition of her success it certainly beat the classic over the top celebrations for the best producers that I experienced in my years in the financial industry. I will participate in a Puja every time I visit the area if it is the motivator of success for our producers.

These producers are changing their neighbors’ lives. The selling process has a bit of a feel of Avon calling, but the product lights up faces in a different manner.  What a wonderful experience.

Light in Varanasi

Varanasi is a very old, very holy city in the eastern part of Uttar Pradesh, India. Named after two of the rivers, Varanu and Assi, flowing into the Ganges, Varanasi, to me represents all of India. A drive through the city unveils all aspects of the country—modern cars, modern buildings, but in small proportion to the masses of hindus, muslims and others using every form of transportation; construction everywhere; the small shops which become dwellings at night; the cows, oxen, pigs, goats, dogs wandering on the streets and occasional monkeys on window sills; families of five on a motorcycle, with only the driver wearing a helmet; groups of seven or 8 in a three-wheeled motorized rickshaw. tuk-tuk or auto depending on the namer’s provenance; horns, the essential driving accessories, blaring as two lanes become 4 or 5. As one crosses the Ganges and heads toward the villages outside of the main city, the rural character of the country exerts itself immediately. Brick, wood, straw and mud homes in clusters sit adjacent to very dry rice fields with ¼ acre rectangles surrounded by 8 inch high embankments waiting the beginning of the monsoon season.
Last year the monsoon season arrived late producing a smaller first crop and lower incomes. This year the season is expected to start early—good for the farmers, not necessarily good for the primary purpose of our visit. We, http://www.duronenergy,com, are selling a solar home lighting system with three LED lights and a cell phone charger. Six to eight hours of sunlight or a charge from the grid when it is working, provides six to twenty hours of light at three locations, depending on the intensity of light needed. It can also power a fairly robust fan for several hours. With electricity from the grid undependable at best and kerosene in use where the grid doesn’t reach, some form of clean light is needed for safety, security, health and, maybe most importantly, education. Two hours studying under a kerosene lamp is all a child’s eyes can take—forget about the long term impact on his or her health.
However, while the next month is prime season for us, the approach of the monsoon season raises questions about whether there will be sufficient sunlight to charge the system. The need may be greater as school begins and the grid becomes even less reliable. But the sale is a bit tougher. We have a dealer network with shops in the small towns that the villagers come to for a variety of goods, but a solar system at 6000 Rupees is not a drop-in sale. So we have the equivalent of Avon ladies or Fuller Brush men going door-to-door and village-to-village occasionally accompanied by a marketing van—not too different from a traveling medicine show. We are not selling elixirs, but something a bit more tangible. We also, fortunately, have a regional bank with branches in most of the locations we are interested in. The government is providing the banks with incentives to finance alternative energy systems. Ours has been a hit with this bank. It helps that the distributor, who manages the dealer network, has worked with the bank to finance his other product line–three-wheeler motorized rickshaws using CNG as the fuel source. He is already selling a product that is more efficient, produces fewer emissions and provides a higher level of income to the buyers. He is excited about another alternative energy product. While the ticket on the rickshaw is higher, sales don’t occur every day. The solar home system, with the right support, will keep his dealers busy and substantially increase their income. As one can tell, this is early days on retail consumer durable distribution in India. Whoever cracks this nut has a big business.