Digitization and the Energy Industry after Coronavirus
Networks are fundamental to how people do business. They are the basis for building business relationships: Networks have connected the world for centuries.
But the extent to which we can use them depends on the amount of energy available. So communication depends on energy.
1. We live in a time of enormous change: Where energy and globalization meet!
In this article the argument is put forward that digitization is nothing new. It is part of a larger historical phenomenon. This is not to deny that digitization plays a central role in the 21st century, to the same extent as energy. The point is that energy is the basis for social and technological developments. Without cheap and readily available energy, we cannot move forward and expand the boundaries of society. Over time, social and technological developments lead to globalization. Globalization is changing the structure of the world economy and fuelling social developments that create an ever increasing demand for more energy.
The point is that digitization is the latest iteration of a global communication system that takes advantage of the planet’s existing energy resources. Digitization has led to far-reaching changes in the energy industry and society as a whole. This change, this digitization, is not yet complete, and we have not even reached the eye of the storm. We are still at the beginning of this new global communication system based on a fully functional energy system in which more and more aspects of our lives are being digitized.
What is often missing is a sense of historical perspective. In fact, many existing trends are a continuation of what has already happened. Global trade flows are a good example. As early as the 18th century, international trade took on global dimensions. If we were living in the 18th century, we would look back at previous centuries and see that the 17th and 16th centuries were quite global. Global trade, global transport was not fast, but there was the Silk Road and maritime transport from Europe to East Asia.
But there is one aspect that makes the 19th and 20th centuries unique: from the 17th and 18th centuries onwards, trade shifted from land to sea. Maritime transport and the availability of energy (improved sailing techniques using wind energy, later the use of coal and later even oil as a fossil fuel) made this shift from land to sea possible. New trading networks opened up.
In the 18th century, water-based transport allowed more flexible logistical arrangements. A traveler could reach many more places. In addition, larger quantities could be transported across the vast, blue ocean. The main point is that world trade was made possible either by wind energy, coal or oil.
This is very important. We must not forget that energy is the basis of world trade. Without energy nothing can be achieved. The growth in international trade would have been negligible in comparison if it had not been for the incredible growth of coal as an energy source. At a later stage, oil replaced coal because it was considered more beneficial for energy use. The energy yield contained in this fuel was much greater. We refer to EROI (Energy-Return-on-Energy-Invested).
To investigate this more closely: Energy is the foundation of the engine of progress, it is the lowest stratum needed for the transport of goods and for the further differentiation of work into ever smaller work functions. To give a concrete example: In the 18th century no one would have hired a social media manager. At some point, physical trade between nations became possible, and on a much larger scale than in the Middle Ages. The scale of operations grew enormously. This enabled an exchange of information of unprecedented scope. This led to further differentiation and the division of labor that drove the web of globalization.
We have developed an intangible infrastructure to facilitate trade movements between countries. This includes financial capital flows and international finance. What we traded with each other was information. Trade became more and more abstract, (global) communication became a value in and of itself.
This was the precursor of the modern internet. From this we learn that intangible assets are based on tangible assets. The growth of intangible assets has led to a greater need for a global infrastructure. This has boosted international trade.
2. The global energy system gave rise to global corporations. Digitization is the latest iteration of a process that began centuries ago.
Speaking of intangible assets: Intangible assets continue to drive Amazon’s share price upwards. The sharp rise in Amazon’s share price is strongly reminiscent of the early years of the Dutch East India Company (in Dutch: Vereenigde Oostindische Compagnie) or VOC, which enriched itself in the spice trade. The company existed from 1602 to 1799 – an almost 200-year company history! So global companies are not necessarily short-lived. They depend on the availability of energy, or in other words on their access to cheap, readily available energy and access to the global trading network.
What happens when we have gained enough energy? We try to solve an urgent problem. For the VOC, spices were the most important commodity.
This solved an important problem of that time. Most people today cannot even begin to imagine how tasteless food was in the 17th century. Pepper and saffron and other spices were in great demand. It also preserved food and allowed it to be stored for longer periods of time. There were no refrigerators and no plastic films. Later in the early 20th century, Standard Oil also solved a social problem. There were more and more people who no longer worked in their fields at home. They needed a means of transport (horses were too slow to get to town on time at 8:00 a.m.). Standard Oil supplied the oil so that the people could drive to work.
To put it in a modern context: In the industrialized world we are getting older and older. Amazon solves a big problem of the early 21st century. Amazon automates, simplifies the entire work process (Amazon receives the goods, markets the goods, sells the goods, delivers the goods, takes care of the payment process) and maintains a flexible logistics system. But all this depends on cheap, readily available energy sources.
3. CONTEXT: Energy is the basis for networks and innovation. The question is: What is the next big thing? We had maritime trade networks, the internet, what comes next?
In a broader social context: nanotechnology. With regard to the energy industry, chemical recycling.
Nanotechnology and related technologies will probably be part of a much larger trend. The aging of industrial societies means that we have to position ourselves anew, especially in the fields of health and medicine. This will certainly lead to new developments in nanotechnology. But this is just the beginning. The applications are manifold, and nanotechnology is a broad term with many possible uses.
Perhaps the pandemic is also the trigger for such a revolution in the physical world, through nanotechnology. Since the 1930s, there have actually been few major innovations that have fundamentally changed the physical world in which we move, such as the invention of commercial aviation, the automobile, modern telecommunications technology and the chip. Nanotechnology would bring us closer to the physical world, because the internet is relatively abstract.
The internet has pushed us into the realm of the abstract. The internet was an isolated case that helped civilization to postpone a major recession or depression by perhaps 10 to 20 years.
New emerging technologies must solve fundamental problems of human existence, such as aging and/or replenishing dwindling natural resources. It seems reasonable to assume that nanotechnology will be the next big thing. Nanotechnology could also find its way into other areas such as waste management or chemical recycling. Nanotechnology(s) solve a societal problem: The core problem for the middle of the 21st century is the drifting apart of the physical and digital worlds and that the economy is slipping away from us as complexity increases. Linked to this is the problem of declining productivity: We have to cope with increasing complexity, but at the same time have limited resources to do so effectively.
Nanotechnologies serve as a bridge between both worlds. From this perspective, chemical recycling is part of a much larger overall economic development. The key for companies is to gain a foothold in the nanoworld. The smart thing to do is to do this by combining digital technology with nanotechnology.
4. Is there any credible evidence for this?
Perhaps. It is not surprising at all that oil companies are currently investing heavily in Leuna and Bitterfeld-Wolfen in Germany. Leuna concentrates more on processing crude oil, Bitterfeld-Wolfen more on processing plastics. So we see the first hints of a new age.
5. So what must energy companies do to be successful in this new digital age?
The first piece of advice is to avoid having large, expensive shops whereever possible. They are a significant cost factor. Amazon seems more dynamic dispite its overall size. How can that be? How can a regional company be more fragile than a global company like Amazon? We have come across the following factors here:
1.) Entrepreneurial thinking and acting is the cornerstone of the corporate philosophy and is encouraged in the organization.
2.) Healthy corporate entrepreneurship: The problem is to be addressed immediately. Companies that don’t work today have no future in the tomorrow.
3.) Profits are initially reinvested in the development of the firm. Costs are continuously cut, and investments flow into specific business areas. Work ethic fuels progress. Everyone partakes in creating these intangible assets that will be worth a lot more in the world of tomorrow.
4.) Each intangible asset complements the existing assets.
The aim should be to create an extensive network of contacts, customers and supply lines. Everyone who passes by has to pay rent. This distribution network should be distinguished by its quality and depth. That makes it an enviable success.
I.e. strategy resembles a Roman army form. Impenetrable from the outside, its legion takes small but brisk steps, leaving its competitors with fewer and fewer strategic options and business opportunities. In the end, energy companies should take on or cooperate with their competitors in the adjacent industries.
The key is the acquisition of strategic targets. For example, Amazon logistics moves up the value chain, followed by the construction of the Amazon Warehouse and Distribution Centers. Underpinning all this are the nodes of the supply chain that are now part of Amazon. This guarantees permanently lower prices than competitors can offer to locals. Distribution and logistics guarantees Amazon’s control of an industry against rebellious competitors.
6. What we can take away from this to strengthen our business.
From this we can derive: If we want to be successful, we must make full use of the networks and energy resources available to us. We must focus on creating a productive, effective network that makes the best possible use of these energy resources. Reach, quality and depth are critical for further growth.
Many thanks for the shared interest in the energy world!
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