Fracking and Methane: Response to a Comment

In a Comment to the "Follow-up on Fracking" post below, Reader Chris Johnson calls us to task for not mentioning the methane issue.  This Reader Chris is quite right.  It is an important consideration.  If fracked gas wells and/or pipes have leaks, methane will escape.   Methane is the main chemical component of "natural gas".   It has good uses in making fabric, plastics, anti-freeze and fertilizer, among others.  But if it leaks uncontrolled into the atmosphere, it acts as a greenhouse gas that is at least as harmful as carbon dioxide.  Recent academic research, cited by our favorite author on these topics, Russell Gold, in a February Wall Street Journal blog article, suggests that methane emissions are quite sizable.  Indeed, he describes that using natural gas as fuel for transportation in cars and trucks, because it can leak out, may not be any better for the climate than regular gasoline.  However, in the confined space of a power plant producing electricity or a home producing heat, natural gas does have significant net benefits over coal and fuel oil.

Another important point is one we alluded to in our original article.  Building the fracking wells themselves and then transporting the gas must be done carefully.  If the cement shell of the well cracks, methane will escape.  Notably, the leakage of methane does not come from the inherent design of the fracking wells, but rather from flaws in the materials and construction of wells and pipeline.  These can be fixed by the oil companies, or better yet, prevented by careful construction in the first place.

All this underscores our basic conclusion yet again.  Use less energy to begin with.  But we can use natural gas quite effectively in electricity plants and furnaces, as long as the gas is obtained through safe fracking practices.  This is important to know.

Source: http://blogs.wsj.com/corporate-intelligence/2014/02/14/despite-leaky-methane-is-natural-gas-is-still-worth-the-switch/

Some Follow-Up on Fracking

In response to our Earth Day article on fracking, three helpful readers posed questions about natural gas and fracking or gave us additional information resources.  This topic is a hot one and press reports and journals present new material nearly every day.  To wit:

1.  Reader Chris wants to know what difference fracking has made in US production of petroleum and natural gas.  In other words, is it such a big deal in our overall energy supply situation?

The answer is "plenty" of difference.

See this graph of production data from the Department of Energy's Energy Information Administration (shaded areas are recession periods).

This includes crude oil, natural gas, coal, nuclear, hydroelectric and other renewables; you can see the upturn in 2007, a pause during the Great Recession and since then a sharp uptrend.  Earlier years had seen at best a flat pattern in these production numbers, with crude oil in particular falling consistently.

Now, if we are producing more of our own energy, are we then using more energy?  Well, no.  What our increased production has meant is a pronounced decline in imports, as visible here:

In fact, the amounts imported during 2013 have returned to 1997 levels.  So the new production from fracking has already eased our dependence on foreign energy producers.

2.  Our article mentioned the potential for exporting fuels.  Reader Carolyn wants to know how it might work to export natural gas.  There are two aspects to the reply, one physical and the other regulatory.

From the physical standpoint, it obviously sounds impractical to ship natural gas in ships across oceans, doesn't it?  A quick Google on "how to export natural gas" brings us to a whole discussion by Shell Oil Company, which in fact does just that around various parts of the world.  They do it by chilling the gas into a liquid form; there are liquefaction plants in seaport cities and gas arrives at those plants via pipeline.  The gas is super-cooled to -260 degrees Fahrenheit (-162 degrees Celsius); this shrinks the volume some 600 times and produces a clear, toxin-free liquid, known as liquefied natural gas or LNG, which is easily shipped in tankers.  At the receiving end, it is heated at "regasification" plants and sent off in pipelines to final users.  The U.S. has imported lots of natural gas this way for decades.  [Source: http://www.shell.com/global/future-energy/natural-gas/liquefied-natural-gas/what-is-lng.html]

Now, the reverse is happening in the U.S.  Several liquefaction plants for exporting are either in the planning or construction stages in Louisiana, Texas, Maryland and Oregon.  But there is an important regulatory constraint:  according to a recent USA Today article, exporting natural gas requires a "public interest" ruling from the Energy Department if the buyers are located in countries where we do not have a free trade agreement.  So shipping to Europe, China, India and Japan, among others, must undergo extra regulatory processes.  Altogether, 31 plants have applied for this approval and the ones just mentioned have received at least a conditional OK.  One in Louisiana, owned by Cheniere Energy, is in final construction stages and should open next year. [Source: http://www.usatoday.com/story/news/nation/2014/04/07/us-natural-gas-exports-to-begin/7204925/]

3.  Reader Mary, who lives in Colorado, calls our attention to a very informative website, www.studyfracking.com.  While the material is geared specifically to Colorado, much of the information is general and is accompanied by extremely helpful diagrams and pictures.  For instance, one of the diagrams is a cross-section showing how much farther below ground fracking occurs, compared with the location of groundwater.  Mary's own comments highlight one of the benefits of fracking that we also mention, the good jobs the drilling industry provides that can help people move up and succeed economically.

4.  We can elaborate on a couple of other points in our article.  One, we referred briefly to earthquakes that might be caused by fracking.  The U.S. Geological Survey announced last week that it plans to map "manmade earthquakes" in more detail, since the rate of seismic activity has increased in the last few years when fracking has been taking place.  The earthquakes are small, with Richter Scale magnitudes of around 3.0, but there are more of them.  Notably, the quaking seems to result from disposal of the wastewater used in the fracking, not from the fracking itself.  So all this bears keeping up with.  Source: [http://online.wsj.com/news/articles/SB10001424052702303948104579535991486675268]

Two, we can point out that our general concluding mandate, "use less energy!" need not mean we have to feel deprived.  Here is a picture of a new BMW vehicle, the i8, which will be on sale in the U.S. in the fall.  It is a plug-In hybrid made of carbon-fiber reinforced plastic; this material is as strong as steel and weighs markedly less, more than offsetting the added weight of the necessary lithium-ion batteries.  While carbon fiber has been used in cars before, such as Lamborghinis and McLarens, this is the first adaptation of mass production for a carbon fiber body shell.  This sports car goes from 0 to 60 mph in 4.2 seconds, the same as a Porsche 911, but its gas mileage is 50-60 mpg, similar to a Toyota Prius.  Now, we won't all want to buy one; the price will evidently be something like $135,700.

We describe this to highlight that these environmental issues are technological.  Engineering and chemistry can work on them.   So innovation can advance products to meet new issues of the day and we don't have to sit in the dark and creep along in a slow car to save fuel.  We can still have fun.  [Source: http://online.wsj.com/news/articles/SB10001424052702304677904579535612915387656]

On Earth Day 2014: Energy and Fracking

Occasionally on a main street in my neighborhood, groups appear with petitions asking the New York State government to ban fracking, the process of oil companies’ drilling wells deep into rock formations to release natural gas or crude oil.  I have always declined to sign because I have thought that New York State is losing out on the rural economic development that would result from the fracking operations and that the United States would be more secure in this troubled world if it used more of its own energy resources and relied less on imports.

These opinions are well grounded.  However, the anti-frackers have valid points as well.  We can list some, and we will.

First, though, in this Earth Day commentary, let me give one disclaimer and one general conclusion.  The disclaimer is that what follows here is a collection of thoughts and ideas, not a clean, well-conceived analysis that leads to a neat conclusion.  Partly, this is because there is not a neat conclusion, or all this would in fact be settled.  In addition, my own conclusions have lately become more fluid – no wordplay intended.

Use Less Energy!

There is the one general conclusion.  The best answer to these debates and their associated turmoil is for all of us to use less energy.  Turn out more lights.  Put the air-conditioner on a higher temperature and the heat on a lower temperature.  Combine errands you run in your car so you don’t waste gas.  All this feels like environmental kindergarten, but it’s really the best way to deal with pollution and the depletion of natural resources.

What About Renewables?

“But there are also alternative sources of energy, Carol!”  Right.  Solar, say.  That has sounded attractive, especially as solar panels become less expensive.  But we learned not long ago that if there’s a fire in a house with panels on the roof, firefighters who might have to be on the roof can be badly injured by the electricity in the panels.  Oh, dear.  Wind?  By its very nature, wind is intermittent and cannot be counted on to deliver specified amounts of power at any specified time.  Birds fly into the blades of the windmills.  For wind, the timing issue can be at least partially dealt with by installing storage devices.

These alternative sources are thus not perfect.  Obviously they have the great advantage of being “renewable” and also not carrying the burden of carbon emissions.  But delivery is not perfect.  Also, they account for very little of the world’s energy consumption, providing only 1.8% of the world’s total in 2011 and 2.2% in the US[1].  There is also hydroelectric, which certainly yields high quality energy, but long ago reached its generating capacity.

So we are sent back to our look at fracking as a source of meaningful energy growth to – literally – fuel the world’s population and economic growth.

If you are particularly interested in the issues about fracking, go right away to a brand new book, The Boom: How Fracking Ignited the American Energy Revolution and Changed the World, by Russell Gold.  It was published just a couple of weeks ago by Simon & Schuster[2].  Gold is a senior energy writer for the Wall Street Journal.  Despite the impression one might get from his affiliation and the book’s title, the discussion is balanced.  Is fracking good, or is it bad?  His answer would be, “Yes”.

Positive Views on Fracking

Why is fracking good?  In particular, the fracking that brings out natural gas has several benefits.  While it’s still a fossil fuel, natural gas has the least carbon emissions of the three, crude oil, coal and gas, by a sizable margin.  Its CO2 emissions per BTU of energy are about 45% less than coal and 25% less than gasoline.  So it’s clearly the fuel of choice for heating and numerous other uses.  According to Russell Gold, backers of wind and solar believe energy production facilities using a mix of natural gas and the renewable source will work very well together; when the wind is still or clouds cover the sky, an associated natural gas plant can operate intermittently, while coal plants must be on consistently.  Gold also argues that the availability of ample supplies of natural gas gives developers of the renewable sources time to build their own production plants.  Finally, as we mentioned above, in this time of world turmoil that particularly involves many oil producing regions, the US can substantially reduce its fuel imports.  It can even export some fuels.

Fracking Negatives: the Environmental Ones

Fracking has drawbacks.  These are of two kinds, we realized, in reading Gold’s book.  First, the environmental issues, besides the fact that natural gas is still a fossil fuel.  We became uneasy reading the description of how fracking is done: a hole is drilled down about a mile into dirt and rock and then turns horizontal for another several thousand feet.  Cement is poured into the hole to make a pipe.  Water, lots of water, mixed with chemicals, is poured down the pipe.  The water coming out at the end of the pipe exerts such enormous pressure on the surrounding rocks, that they crack – they fracture – and natural gas comes out of the cracks and flows to the surface.  There are thousands of these wells in any given shale deposit.  It is water pressure, not any explosive, that is used to make the cracks, so the process is “hydraulic fracturing”.  Much of the water can be recycled in the fracking of other nearby wells, but the water is a brine and if it spills, it makes a huge mess.  The drilling goes down to what is known as “source rock”; on rare occasions, people at the surface can feel modest earthquakes.  This doesn’t sound good to us, although writers in a New York Times piece have argued that the quakes are so small that hardly anything is felt and certainly no damage is done.[3]  Hmmm.

One problem that really does seem to be less than many people believe is water supply contamination.  Fresh water sources generally lie several hundred feet below the surface.  Fracking wells are far deeper.  The NY Times writers point to a study in Pennsylvania in which only one water well in 200 showed any evidence of contamination.  Many complaints turn out to involve water that was already contaminated, but not complained about until the disruption from the fracking.  Over time, however, gas may leak into water sources if the fracking wells themselves are not carefully constructed.

Fracking Negatives: the Personnel Ones

This last point  brings us to the other kind of drawback to fracking.  Apparently, judging from the stories in Gold’s book, oil companies have not been particularly cordial or careful in many of their fracking operations.  We won’t outline the details here, but it seems that on many occasions, speed overtook manners as the oil company operators moved into a community in a huge hurry to dig as many wells as fast as they could.  The point can be made by highlighting the contrasting story of one town in north Texas, Bartonville, that finally got a grip on the situation and gathered citizens and oil company employees together to make some simple rules: don’t trundle truckloads of water through people’s backyards at midnight, erect sound barriers around drilling pads to limit the noise, whatever the time of day the drilling took place.  This has helped this community tremendously.  In addition, though, some of the haste has made waste too in the quality of materials used, especially the cement.  Efforts are now in process to develop tools for testing that before bad cement lets gas out of the pipe and into a water aquifer.

Should There Be Fracking in New York and Germany?

So we’re left with a hard question.  There are shale deposits in New York State – an extension of the Marcellus Shale that is in Pennsylvania.  Fracking brings good paying jobs as well as income to the owners of the land where it takes place, factors that are huge helps to local economies.  But the topic is so controversial in New York that the state energy commission has postponed promulgating rules until April 2015 – after the next state-wide elections this November.  There are shale deposits all across Europe, especially in France.  But France has already banned fracking.  And 40% of its energy needs are met by nuclear power plants; is that safer?  In Germany, solar and wind provide a much larger portion of energy needs than in other countries, but they still only made 8% of the total in 2011.  Fracking hasn’t been banned there, but there is an indefinite “moratorium”.  At the same time, of course, Russia threatens Ukraine with huge hikes in the cost of its natural gas or a complete embargo.  So the political advantages of being able to produce natural gas locally become more evident – and more urgent.

As we said, there is no neat conclusion.  Russell Gold suggests that oil companies are starting to get more careful, to realize that headlong rushes into people’s backyards with half-baked cement won’t really do anyone any good.  Indeed, he just wrote in yesterday’s Wall Street Journal[4] that investors now appear to want the companies to conduct operations more prudently from a financial point of view and with more focus on quality.  The wildcatters and the wildcatters’ backers are perhaps growing up.  As they mature and balance their approach, perhaps the gas can flow more easily and more safely.

In the meantime, turn off the lights when you’re not in the room and buy a hybrid car!

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[1]Data on fuel use in various countries all come from the U.S. Department of Energy, Energy Information Administration.  “International Energy Statistics”: http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm. Accessed April 19, 2014.

[2]Russell Gold.  The Boom:  How Fracking Ignited the American Energy Revolution and Changed the World.  New York: Simon & Schuster.  April 2014.  Available from Amazon, Barnes & Noble and independent booksellers.

[3]Susan L. Brantley and Anna Meyendorff.  “The Facts on Fracking”.  The New York Times, www.nytimes.com.   March 13, 2013.  Accessed April 18, 2014.

[4]Russell Gold.  “The New Winners and Losers in America’s Shale Boom”.  The Wall Street Journal.  April 21, 2014.  Page B1.

The Bangladesh Factory Collapse and Sustainability

The last issue we talked about on Ways of the World was sustainability.  We thought we would be moving on from that when we shifted to the garment factory disaster in Bangladesh.  But it seems not, as we find ourselves reading about "fast fashion" and "recycling clothes"; sustainability is a concern even for garments and fabrics.  Who would think?

The play-out of the factory collapse near Dhaka, Bangladesh, on April 24 continues.  As well something should that claimed over 1,100 lives.  We want to give you some of the backstory of that factory and of clothes-making in general in Bangladesh, and then we'll try to draw the link to sustainability.

1.  Garment production requires almost no skill, experience or education on the part of workers and relatively modest sums for the capital investment to get the operation going: just a space and some sewing machines.  So it is a very good way to get industry established in a new region.  Recall, as some writers did for us, that even the American colonies started their manufacturing activity during the Industrial Revolution with cloth weaving and clothes making, and industry in other countries often begins with garment factories.[1]

2.  Bangladesh has the lowest labor costs of any East Asian garment manufacturing center, a mere $38 a month minimum wage.  While this might sound to many readers more like an opportunity for exploitation, it in fact helps workers get a lift up out of poverty.  Our current source for this train of thought comes from World Bank research.  Statistical analysis has shown that if we account for the low level of education and little experience, these workers actually make a decent wage compared to other industries.  This is especially notable because the vast majority of these workers are women, who are automatically paid less than men.  This condition may not be desirable, but it is indeed better than abject poverty.[2]

3.  Labor costs in the biggest Asian producer, China, are rising and fairly rapidly.  There is no longer a ready surplus of workers, especially in coastal regions near shipping points.  In part, this is due to the one-child policy, now limiting the availability of younger workers.  Labor costs overall in China rose an average of 8.5% a year in the five years through 2011.  In sharp contrast, those in Taiwan actually fell 2% a year over the same period.[3]  The rise in Chinese labor costs is sending retailers to other regions to seek cheaper production sources.  Hence a rush to Bangladesh, Cambodia and similar areas.

4.  Safety regulations and building codes are in place for Bangladesh factories.  However, these are sometimes not enforced.  The specific building that fell, Rana Plaza, was constructed over a former pond where the landfill is sand, a kind of swamp then.  The building's generators were on the upper floors; when they were running, their vibrations could be felt in neighboring houses.[4]  The mayor of Savar, the Dhaka suburb where the factory collapse occurred, says, though, that there was such a rush to construct new factories that the local government did not have time to process the applications and inspect the new structures.  He was suspended from office within days of the disaster. 

5.  Retailers, located in markets far from production centers in the Far East, face complicated circumstances in responding to these situations.  Producers are generally independent companies, and while they are direct contractors with the retailers, they may subcontract with smaller firms for specific parts of the production process.  Thus, the retailers may be two or more steps removed from the actual site where cloth is cut and basic garments assembled.  Control is hard, even when there are good intentions.

Leading retail chains are taking a couple of approaches to the safety issue.  Wal-Mart is known to have basically a "zero-tolerance" tack: produce safely and meet our standards or we'll cut you off.[5] H&M, the Swedish chain with stores in the US, is trying to work directly with the factories to reform their practices.  Neither way covers everything, but there are heightened efforts to exert what control they can.

6.  At the same time, there has been a shift in marketing and consumer buying patterns in the US, the UK and Europe which call for speedier production of new clothing styles to offer at retail almost as soon as they are first shown in fashion shows.  Consumers and retailers seem to have adopted a new pattern of rapid changing of whole wardrobes.  One brand we read about has created five seasons annually, meaning there is total turnover of product lines about every ten weeks.  Thus, the emphasis in the production process is now on speed more than care and safety.  The trend in retailing is known as "fast fashion".  Maybe you are more aware of it than we are.

This is where sustainability comes in.  Besides labor and factory safety considerations, it takes lots of resources to make clothes.  The British newspaper The Guardian explained recently that it takes 1,500 liters of water to grow the cotton for a single pair of Levi's 501 jeans[5], oil to ship raw materials to factories and finished product to market and land, of course, all of which face intensifying demands.

H&M is a leader in an approach to this issue as well, with a recycling program at 1,500 of their stores.  Recycle clothes?  We've sometimes put old clothes in bins in shopping center parking lots or given them to church rummage sales, but this is a new, semi-commercial effort.  Turn a garment in with the store's cashier and get a coupon for x% off your next purchase.  The used garment can be sold to a recycling company that may well give them to charity or sell in second-hand stores, or the garment can be turned back to a manufacturer who uses the fabric and/or fibers to make new clothes.  Either way, the fabric is used again.  Since increasing numbers of customers have closets full of clothes already in this fast fashion era, this practice can help take some pressure off resource usage, including financial resources.[6]  Indeed, we personally encountered such a "trade-in" promotion at an Alfred Dunner outlet just this past weekend.

In sum,  the Bangladesh factory collapse was an awful thing.  In the aftermath, we are learning about world-wide clothing manufacturing and global retailers' efforts to manage their production with increased emphasis on worker safety.  Also note that while wages and union organizing were only a small part of our discussion, they are getting greater attention as well.  Some of these efforts by the retailers are not especially new, but all of them are putting more emphasis on the importance of working conditions.  We also see that we as consumers have something to do with the rush to produce.  Obviously we want clothes to be as low-priced as possible, and all the latest styles are "must-haves" for us.  Maybe we could slow this down a bit.  Do you suppose we could wear last year's shirts and capris or crops this summer too?

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[1] Gladys Lopez-Acevedo and Raymond Robertson.  Sewing Success? Employment, Wages and Poverty following the End of the Multi-fibre Arrangement.  Washington, D.C.: The World Bank.  2012. Page 9.  This is a book placed in the public domain by The World Bank, intended for anyone to use for information on the world garment industry and poverty reduction.  Includes a chapter on Bangladesh. The Multi-Fibre Arrangement was a quota system that expired in 2005.  It was thought Bangladesh and Bangladeshi workers would suffer then as world garment markets opened up, but they did not due to its low cost structure.  This was, however, yet another reason for rushing in the construction of factories, so they could be among the first to meet demand.  https://openknowledge.worldbank.org/handle/10986/13137 

[2] Lopez-Acevedo and Robertson, page 8.

[3] China National Bureau of Statistics and Taiwan Directorate-General of Budgeting and Statistics, compiled by Haver Analytics, Inc.

[4] "Rags in the Ruins", The Economist.  May 4, 2013. Page 42.

[5] Jens Hansegard, Tripti Lahiri and Christina Passariello. "Retailers' Dilemma: Cut Off or Help Fix Unsafe Factories", The Wall Street Journal.  May 29, 2013. Page B1.  Online: http://online.wsj.com/article/SB10001424127887323336104578501143973731324.html.  Accessed May 29, 2013.

[6] Oliver Balch.  "H&M: Can Fast Fashion and Sustainability Ever Really Mix?" The Guardian: http://www.guardian.co.uk/sustainable-business/h-and-m-fashion-sustainability-mix? .  Accessed May 29, 2013.

We also reference this introduction to the structure of world garment manufacturing.

Karina Fernandez-Stark, Stacey Frederick and Gary Gereffi.  "The Apparel Global Value Chain: Economic Upgrading and Workforce Development".  Duke University: Center on Globalization, Governance & Competitiveness.  November 2011.  Bangladesh is one of the case studies.

Wetlands, GMOs and Rogation Day Prayers

Last week on Earth Day, we spoke of Nature's Fortune and how businesses are prospering by making investments that enhance Nature and the environment instead of eroding them.  At the end, we made casual mention of two items that are worth more attention: built wetlands and GMOs.  There is actually a suitable church-calendar occasion for this further commentary on Nature, the upcoming Rogation Sunday and Rogation Days.  The Sunday is observed on the 6^th Sunday of Easter in the Episcopal Church calendar and the Days are the following Monday, Tuesday and Wednesday immediately before Ascension Thursday; the petition is for blessing of crops as they are planted and for the stewardship of creation.

Ways of the World has offered prayers before at this time of year, especially since our current Prayer Book commemorates industry as well as agriculture in the prayers it presents.  This year, as we googled a bit on "Rogation" – it means "asking", as in "interrogation" – we came across commentaries from priests in rural settings in Alabama and in Wyoming who worry about this shift in emphasis away from agriculture and nature, fearing that it will lure people away from their role as stewards of Nature.  Perhaps.  But as our own current lessons are teaching, we now see that we can use this occasion as a catalyst for talking about both wetlands and GMOs as they clearly represent the meeting of industry and Nature.

Why Would a Company Build a Wetland?

In 1996, Dow Chemical was pressured by regulators to do something about water pollution at its Seadrift, Texas, plant; a new wastewater-treatment facility was clearly necessary.[1]  The company's engineers began the design work for a big concrete system they estimated would cost about $40 million.  But one of them had a different idea: "build" a wetland.  This would work because as wastewater flows through such a wetland, as the EPA's website explains, "it slows down and many of the suspended solids become trapped by vegetation and settle out. Other pollutants are transformed to less soluble forms taken up by plants or become inactive.  Wetland plants also foster [the development of microorganisms, which] transform and remove pollutants from the water."[2]  The Dow version at Seadrift occupies 110 acres and treats 5 million gallons of water a day.  This "green infrastructure" cost $1.4 million, a tiny fraction of the much more involved "gray" installation.  Wildlife also like these places, so here is one instance in which man has helped Nature along in at least a couple of ways.

You've read and heard plenty about how big companies, especially chemical companies like Dow, hurt the environment.  This is an example of how they are evidently coming around on this issue.  The EPA reports[3] that there are more than 1,000 constructed wetlands in the US and 5,000 altogether around the world.  Dow also has a one at Pittsburg, California, and their enormous plant at Freeport, Texas, is becoming an experimental center for a huge project with The Nature Conservancy.  Sustainability officers at many companies are now part of the main operational management, not just offshoots of P.R. or public affairs departments.  As seen in the Seadrift example, the company's bottom line got big help from the built wetland innovation, and such cost considerations are part and parcel of these decisions.  The lower cost way was the better way.

What Good Are GMOs?

The GMO issue is trickier, since not all the science on GMOs agrees about their safety.  They have also not been handled in the most helpful way by the companies that produce them.  Here's some of what we do know.  Genetically modified plants are meant to help food production in three ways.  They are intended to make the plants more resistant to insects so less insecticide is needed, they are meant to increase resistance to viruses so plant yields are greater and they are meant to make plants more resistant to herbicides so weeds can be killed without killing the plants themselves.[4]  These are all good things.  But the chemical formulas to achieve these characteristics must be varied for each growing region according to the soil content and the weed situation in each locale.  So GMO production and distribution are more customized, leaving farmers and consumers more dependent on the individual companies making the seeds.  This has generated a kind of monopoly situation, with public emphasis often focused on the profits made by the companies over and above the benefits of the GMO plants.

There is also concern over what the genetic modifications might do to the soil and whether people might have a greater tendency to be allergic to GMOs than to un-modified plants or to have other reactions to the genes in the modified plants.  Information from the World Health Organization (WHO) assures that for GMOs traded in world markets, no additional "allergenicity" is present; they do urge caution in the use of antibiotic-resistant products in which the modified genes might get transferred to those who consume the foods, though WHO says chances of this are small.  In the main, the WHO experts inform us[5], plants sold in international markets have been found safe.

So why use these if they are questionable?  Because plant yields are indeed greater, and less chemical application, such as insect-killers and weed-killers, is needed in their production.  Being able to produce more food with less raw material will be absolutely necessary in coming decades as the world population grows, Mark Tercek of The Nature Conservancy points out, and all the more as people are lifted up out of poverty into more active lives; that's one of the main reasons he wrote the book Nature's Fortune.  Business and industry must invest in and be stewards of agriculture and nature for all of us, all 7 billion of us, to grow and prosper together.[6]

Indeed,

Almighty God, Lord of heaven and earth: We humbly pray that your gracious providence may give and preserve to our use the harvests of the land and of the seas, and may prosper all who labor to gather them, that we, who are constantly receiving good things from your hand, may always give you thanks; through Jesus Christ our Lord, who lives and reigns with you and the Holy Spirit, one God, for ever and ever.  Amen.

And

O merciful Creator, your hand is open wide to satisfy the needs of every living creature: Make us always thankful for your loving providence; and grant that we, remembering the account that we must one day give, may be faithful stewards of your good gifts; through Jesus Christ our Lord, who with you and the Holy Spirit lives and reigns, one God, for ever and ever.  Amen.

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[1] Mark R. Tercek and Jonathan S. Adams.  Nature's Fortune: How Business and Society Thrive by Investing in Nature.  New York: Basic Books. 2013.  Pp. 168ff and various Dow Chemical Company reports.  See www.dow.com.

[2] Office of Water, U.S. Environmental Protection Agency.  "Constructed Treatment Wetlands". http://www.epa.gov/owow/wetlands/pdf/ConstructedW.pdf .  August 2004.  Accessed April 30, 2013.

[3] Ibid.  Some of the constructed wetlands are associated with farms as well as industrial uses.

[4] World Health Organization. "20 Questions on Genetically Modified (GM) Foods".  http://www.who.int/foodsafety/publications/biotech/20questions/en/index.html .  Accessed April 30, 2013.

[5] Ibid.

[6] Tercek and Adams.  Page 3.

Food Sustainability, Business and Earth Day

During Lent, my home parish, St. Ann & the Holy Trinity in Brooklyn, New York, studied food sustainability.  Guest preachers, a book group[1], a tour of a museum exhibit[2] and even a cooking class conducted by two vestrymembers taught us about honoring creation, urban farming and serving locally produced foods.  One lasting feature of these events is Sandwich Sundays, for which parishioners make and contribute bunches of simple sandwiches for the benefit of a homeless drop-in center elsewhere in Brooklyn.

This year, then, these notions make a quite suitable theme for Ways of the World for Earth Day.  It was all new territory for this retired Wall Street economist, but as we googled and browsed, we made a connection: investing in nature.  Growing vegetables on the roof of an apartment building and shopping for organically produced foods are important for individuals.  But to feed the world's 7 billion people, we still need the mass-production efforts of big business and industrial agriculture.  What's important, we learned in our recent studying, is adapting mass production methods in ways that support nature, not erode it.  Business can indeed "invest in nature" and even build "green infrastructure" in the place of "gray infrastructure".

There is a brand new book (publication date: April 9) about all this, Nature's Fortune: How Business and Society Thrive by Investing in Nature, by Mark Tercek and Jonathan Adams[3].  Tercek is president and CEO of The Nature Conservancy[4], a major nonprofit that works on land and water issues.  He went there from Goldman Sachs, where he had been an investment banker for some 24 years.  The promotional endorsements on the dust jacket thus come from such diverse personalities as Bill Clinton; Henry Paulson, former chair of Goldman and Treasury Secretary in the Bush Administration; and Andrew Liveris, Chair of Dow Chemical; as well as noted biographer Walter Isaacson, who is also CEO of the Aspen Institute; and sociobiologist E.O. Wilson.  Co-author Adams is a science writer and conservation biologist.  The book's proceeds all go to The Nature Conservancy.

Nature's Fortune covers issues of water, agriculture and climate change.  Here are two topics concerning sustainable food production and big business.

Coke and the Water Supply in India

First, Ways of the World hasn't talked to you about water, and we need to do that more thoroughly.  For the moment, just one example.  It takes a lot more than 1 liter of water to make 1 liter of Coke.  A lot more.  In addition to the beverage, 1 liter is used in producing the Coke, 10 liters in making the plastic bottle and 200 liters of water in growing the sugar.  In 1999, a Coke bottling plant opened in the State of Kerala, India.  In just five years, the water wells there dried up and farmers were unable to irrigate their crops.  While there turned out to be several reasons for the water shortage, outcry from the local community forced the company to close the plant.  It later reopened, but Coke and other beverage companies in India and basically everywhere else came to understand their relations with water supplies.  Coke began efforts to restore the water it uses there and elsewhere; Coke began to "invest in nature".

Chicken McNuggets and Amazon Deforestation

Second, we also learned in Nature's Fortune about the global importance of the Amazon rainforest.  We'd heard this concern but hadn't understood how great the stakes are:  those trees pull water up from deep in the ground and pump it into the sky.  The forest contributes 8 trillion tons of water to the atmosphere every year and much of that water vapor circulates around the world (page 90).  So as farming has expanded in Brazil and farmers have cut trees down, the consequences are vast.  One key incident of deforestation also involves the global reach of the food supply chains.

Among other crops, Brazilian farmers grow soybeans and demand for them has increased greatly in recent years.  Grain dealer Cargill (an American company) built a deep-water shipping terminal on the Amazon River in 1999.  There hadn't been much farming in that specific region, but the installation of the transportation center spurred big growth.  Consequently, rates of deforestation doubled in just four years.  Cargill buys soybeans from the farmers and sells them in particular to farmers in the UK who raise chickens; those chickens in turn are used to produce the Chicken McNuggets sold by McDonald's in the UK.  In 2006, Greenpeace issued a report about this, and their publicity included Ronald McDonald with a chain saw, cutting down trees in Brazil.

McDonald's could have barked back, issuing some tirade about Greenpeace, and then tried to go on about their business.  But they realized both that the bad publicity would only get worse and also that they really should do something about the problem itself, in order to preserve the food supply for their own product.  So they began to work with Greenpeace and with Cargill.  McDonald's and Cargill announced they would not buy soybeans grown on land cleared after 2006 and Cargill installed a satellite monitoring system to keep track of the origin of the soybean shipments.  Deforestation continues, but rates have dropped back dramatically since this policy change by the companies.

The Role of Business in Environmental Progress

Tercek points out that business is a key link in policy chains like these.  Individual farmers or individual consumers  may be hard for policymakers and advocates to reach in sufficient numbers.  But businesses are the implementing agents in producing and distributing goods and services.  Working with them is the most effective way of effecting the desired change.  Further, it doesn't help at all to work against businesses.  "…what if, instead of saying no, environmentalists ask 'How?'" Tercek suggests (page 166).  We'll continue with more on all this in other sectors.  We have to share some of the story, for instance, of Dow Chemical building a wetland in Texas.  Yes, you read that sentence correctly.  Today we talked about food and there's more to that story too.  Tercek talks favorably about GMOs – genetically modified organisms – which many commentators love to hate.  But GMOs increase production at a time when millions more people need to be able to get more food; GMOs represent a technical answer to that issue and we have to figure out the most equitable way to foster their use.  Altogether, there is progress to report on Earth Day and the ways forward are multiplying.  Now, go have a Coke and some Chicken McNuggets and know they are produced with more care for the Earth than ever!

--------------------------------------

[1] Sara Miles.  Take This Bread.  New York: Random House Publishing Group. 2008.

[2]"Our Global Kitchen: Food, Nature, Culture." New York: American Museum of Natural History.  Through August 11, 2013.

[3]Mark R. Tercek and Jonathan S. Adams. Nature's Fortune: How Business and Society Thrive by Investing in Nature.  New York: Basic Books. 2013.  Available from The Nature Conservancy as well as book stores and online.

[4]The Nature Conservancy: www.nature.org

Steve Jobs . . . .

. . . . the Chairman of Apple, passed away today, October 5, at age 56.

In our household, we were watching a game show on network television at about 7:45 tonight, when the network's news department interrupted it to present the bulletin reporting Jobs' death. I can't recall such an interruption for a business leader ever before.

Many of us use Apple's products and they have provided the technological infrastructure for increasingly popular social networking, up to and including the political revolutions this past spring in Egypt, Algeria and Libya.

The music industry has been changed forever by the iPod, which will celebrate its 10th Anniversary on October 23rd.

Henry Ford enabled us all to drive and Steve Jobs has helped us all communicate better with each other, as we carry our worlds around in our pockets.

Thank you, Mr. Jobs. Thank you, too, for your bravery and fortitude in the face of serious illness and the grace with which you facilitated a professional transition as your illness overtook you. May you rest in peace and may your family find comfort in your legacy.

Japan

We have so much to talk about – a follow-up to our article about oil prices last week, the "sequel" to it on food prices, the condition of state and local government budgets and so on – but clearly this Monday, there is only one topic: Japan.

First, here is a statement from the Archbishop of Nippon Sei Ko Kai, the province of the Anglican Communion in Japan: http://www.anglicancommunion.org/acns/news.cfm/2011/3/14/ACNS4815. Archbishop Uematsu describes about the churches there the same kinds of issues we are hearing about homes and other buildings: worrying that facilities near the sea might have been totally destroyed and simply not knowing their condition and/or the condition of their people due to the breakdown in communications. Writing Monday afternoon Tokyo time, he says that he has spoken to the Bishop of Tohoku, who was able to phone him Saturday. The Archbishop is establishing relief efforts. Indeed, we also refer you to the site of Episcopal Relief & Development, www.er-d.org, which is already mounting a fund-raising effort here in the U.S. for this purpose. Archbishop Uematsu asks our prayers as well. Absolutely.

O God,
who in Jesus stills the storm and soothes the troubled heart,
bring hope and courage to all
who are affected by this earthquake as we wait in uncertainty.
Bring assurance that you will be with us in whatever lies ahead.
Give us courage to endure all that we now face,
for you are our refuge and strength.
You are God, and we need you.
We pray in the name of Jesus Christ, our Savior and Lord.

[adapted from Evangelical Lutheran Worship: Pastoral Care, page 174.
© Evangelical Lutheran Church in America. From www.elca.org. Accessed March 14, 2011.]

Some of the Disaster's Impact
In my former Wall Street career, I worked for the New York office of Nomura Securities, the largest Japanese securities dealer, and I still receive email material from my colleagues there. My inbox began to fill at midday Sunday – that would have been shortly after midnight Monday morning in Japan – with extensive analysis of the impact of the earthquake and tsunami on the industry of the country. Here are a couple of the major points.

The region directly impacted by the quake encompasses plants and other facilities accounting for just under 7% of industrial output in Japan. The industries with the largest concentrations there include mining, agriculture and food manufacturing, metals – especially steel, electrical machinery, precision equipment and electric power generation. The electrical machinery and precision sectors contain a large amount of IT-related industry. In this last category, semiconductors are very important and there is also a major manufacturer of the screening material used on LCD TVs. Sony, Pioneer and Casio are familiar names whose plants are presently shut down. In some cases, the shutdown is due to power outages, not plant damage, so those could reopen relatively quickly, but there may well be bottlenecks in world semiconductor production and availability.

Among food products, there are a number of beer breweries in the region. Asahi, Kirin and Sapporo brands are particularly affected, with 10% to 40% of each company's total output impacted. At one plant, storage tanks collapsed, at another, the plant itself suffered major damage, and electricity seems to be out everywhere.

Obviously, by contrast, some sectors will get boosts due to the nature of the disaster. Companies that inspect and repair nuclear power plants and construction and construction equipment-makers are examples. In a different vein, the Nomura analysts cite Alfresa Holdings and Medipal, which are wholesale distributors of pharmaceuticals and cosmetics; these and other companies "may suspend regular wholesaling activities . . . to create emergency distribution networks in the Tohoku region".

The loss is great, unimaginable for us. But in the Japanese reaction, we see immediate evidence of adaptability and courage in the face of the sorrow and mourning. Still, even as the Nomura commentators try to describe for us a basic assessment of this massive disaster for business and industry, they also give a caveat; that statement is not meant to tug at readers' hearts, but it does: "This report is based on the existing knowledge of our analysts . . . . We have not yet discussed any issues with company representatives, as disaster response is currently their top priority." Indeed it is. Just now, as we have finished typing this paragraph, a new headline reports yet another explosion at Unit 2 of the Fukushima Daiichi nuclear power plant. Lord, have mercy on them.

Videogames, Innovation and the Future

Over the Christmas holidays, two seemingly unrelated events grabbed our attention. First, Time Magazine picked Mark Zuckerberg, the founder of Facebook, as its "Person of the Year". And second, my roommate's godson visited us from the West Coast; Bill* came with his duffle bag and his smartphone. While Chris and I both have cellphones, neither of them is a souped-up model, so all of Bill's pictures and "apps" were a novelty for us. Another young cousin joined us one afternoon and the two of them talked to each other in what I decided is a new foreign language, "App-ese". They immediately began emailing each other, sharing apps and playing games.

Videogames a Source of New Technology
There are two reasons Ways of the World has some interest in this vignette, over and above relating the family events of the holiday season. First, video games are a leading-edge technology from which business and government applications are emerging. This, of course, seems backwards. Historically, as highlighted in a recent Op-Ed piece in the Wall Street Journal[1], many technological innovations have come from government, especially the military, and then moved to the private sector and finally to the toy market. Granted, many of today's games have military themes, but even so, the path for origination and adaptation is the reverse of traditional practice.

Andy Kessler, a former Wall Street hedge fund manager who now writes on these topics, points out in that Wall Street Journal article another new wrinkle in this technology: connectivity and networking. Many of the games are played in teams, in which individuals in different towns and regions collaborate on strategy, tactics and implementation. The distances and geographical separation are not barriers to the performance of the game. Later on and in different venues, players will show up for work in offices, plants and stores equipped with genuinely useful skills; they'll think nothing of conducting meetings with far-flung colleagues. Further, despite the irritations of advertising to us users, the age of mobile ads is with us and helps pay for the availability of all this on our hand-held machines.

Advancements Come Despite the Recession
The second major point about the growth of these videogames and their associated equipment and networks is that much of this development has taken place during a terrible period in the economy at large. We get so focused on what bank has failed recently and how high the unemployment rate is that we may not catch the significance of these favorable advancements. Moreover, this aspect is not distinctive to this recession. Innovation is no respecter of the business cycle. These new ideas and new "toys" can come just as well, if not more easily, when overall times are tough as when there's an expanding business environment.

People can have good ideas at any time. The sparks of innovation and entrepreneurship may even be pushed by hard times. Suppose, for instance, that we need to find ways to cut costs because we can't pass our costs through fully to our prices at those times; we'll figure out a new way to operate that we'll still be able to make good use of when fortunes improve. Or suppose we got laid off from our big corporate job. Maybe we can turn our sewing or crafts or electronics hobby into a business to boost our income. These are not trivial notions. While puzzling over this phenomenon in recent days, we've learned that a whole raft of well known companies have got started during recessions. Here are some[2]:

Proctor & Gamble: the panic of 1837
Barnes & Noble: the Depression that followed the panic of 1873
The Hoover Company and Neiman Marcus: after the panic of 1907
Macy's, Carvel, United Technologies, Global Van Lines: the Great Depression of the 1930s
Newman's Own and Sun Microsystems: the 1981-82 recession (before now, the worst since the Great Depression)

These are only a few of the multitude of firms that started during periods of drastic economic conditions over the last 200 years and have sustained themselves through to today. A study by scholars at the Ewing Kauffman Foundation[3] compiled a tally of two groups of companies, the Fortune 500 list of the largest companies and the Inc. Magazine list of the 1,000 fastest-growing companies. They find that almost half of these notable firms were founded during recessions.

Good Ideas, Easier Supply Chains Both Help
How can this happen? The numbers of recession-era firms are so large that it's clearly not accidental. Sometimes, it's just the novelty of the idea itself. In 1982, everyone knew Paul Newman, whose homemade salad dressing already had a following; both his carefully crafted products and the company's aim to serve charities with its profits were easy to market, regardless of the tenor of the times.

There's also a fundamental characteristic of recessions that we've talked about before: their cleansing and healing effect directly on business operations. In extensive polling of new business managers in the early 2000s, survey-takers for the Entrepreneurship Research Consortium[4] learned that budding companies face three major kinds of uncertainties: operational, financial and competitive. The most basic is the operational uncertainty; specifically, can the new firms obtain raw materials, attract skilled, productive employees and then get access to a distribution system? The competitive environment and the availability of financing are important, but not relevant if the firm can't first make the product and/or deliver a reliable service. During a boom, all of the operational factors are squeezed: raw materials are expensive, the employees we need are gainfully engaged elsewhere and distributors have all they can do to put out what they have already. But during a recession, all of these conditions are reversed. Prices come down, labor resources become more available and distributors are hungry for something new and different to offer to retain or regain their customer base. There's room to maneuver.

A Bottom-Up Economy
The U.S. economy is incredibly dynamic and all of this just happens, in a bottom-up process. Top-down government stimulus programs may help in some ways, but the genuine source of new growth for economies comes from these adaptations and innovations by people, like Bill Gates and Paul Allen, who formed Microsoft in April 1975, just at the bottom of the 1974-75 recession. Or Robert Wood Johnson, who, with his two brothers, started producing a bandage that would become Band-Aids in New Brunswick, New Jersey, in 1887, right in the middle of another recession.

So it's no accident at all that Facebook and Android phones and all the associated products have taken off like rockets over the past three years, and my young Christmas-tide guests are showing us the way.
_____________________
*Name changed to protect the guilty!

[1] Andy Kessler, "How Videogames Are Changing the Economy", The Wall Street Journal. January 3, 2011, page A17.

[2] Thomas A. Meyer. INNOVATE! How Great Companies Get Started in Terrible Times. Hoboken, NJ: John Wiley & Sons, Inc. 2010. Chapter 1: "Recession".

[3] Dane Stangler. "The Economic Future Just Happened." Ewing Marion Kauffman Foundation. June 9, 2009. http://www.kauffman.org/research-and-policy/the-economic-future-just-happened.aspx. Accessed January 18, 2011.

[4] Nancy M. Carter, Paul D. Reynolds and William B. Gartner. "Perceptions of Entrepreneurial Climate" in Gartner, Shaver, Carter & Reynolds. Handbook of Entrepreneurial Dynamics. Thousand Oaks, CA: Sage Publications, Inc. 2004. Pages 412-421.

The Gulf Oil Spill: A Red Flag for Energy Conservation

The Gulf of Mexico oil spill is a major disaster. It evokes numerous topics for discussion and elaboration. In response to our query, "what about this would you like us to explore?" friends have asked about the ecology and economy of the Gulf region – which has output valued at $234 billion annually according to a 2009 study by the Harte Research Institute of Texas A&M University[1]. Other friends want to know about clean-up methods – the standard ones include everything you've been hearing about: chemical dispersants, sand berms, relief wells and others, according to an aptly named article "How Do You Clean Up an Oil Spill?" on Howstuffworks.com [2]. In addition, the Presiding Bishop of the Episcopal Church, in a recent Sunday bulletin insert essay, calls our attention to oil usage and our dependence on oil companies.[3] It is this aspect we will focus on here.

We are in fact making progress reducing our consumption of oil. In 2005, the United States went through an average of 20.8 million barrels of oil every day. In 2009, this had dropped to 18.7 million barrels per day (b/d). Some of this 10% reduction is due to the recession and is being partially reversed now as the economy works toward recovery. Even so, projections made in early June by the U.S. Department of Energy point toward oil use in 2011 of 19.1 million b/d, which would still be lower than any other year since 1998.[4]

We're anxious to have you know this, since it seems to be in contradiction with a statement by the Presiding Bishop that "…we continue to extract and use [oil] at increasing rates and with apparently decreasing care." Surely she is right – as she goes on in her discussion emphasizing the interconnectedness of people, plants and animals with each other and the oil – to bemoan the fact that the spilling oil is creating a huge mess and harming innumerable innocent victims. But we would assert that there is much more to this situation that's constructive, which we and church leaders might consider and lift up in response.

First, let's take some credit for our reduced use of oil. This is no small accomplishment. And it's even more impressive when measured against the size of the economy. Converted to the heat-equivalent BTUs [you know that BTU measure from your air-conditioner], oil and natural gas consumed per dollar of GDP has gone from 11.66 in 1973 to 4.51 in 2009. This measure has decreased consistently throughout these years; it went up only in 1987 and 1988, and then by very marginal amounts.[5]

Several actions contribute to this result. Our personal vehicles are increasingly more economical. In 2008, cars averaged 22.6 miles per gallon, up from 20.2 in 1990. Vans, pickups and SUVs achieved 18.1 mpg in 2008, up from 16.1 in 1990. We're also averaging fewer miles of driving for both types of vehicles. Also, despite the growth in population and the number of homes, the so-called primary use of energy in residences has held to a flat trend over the past 20 years. The use of electricity in households has expanded somewhat, but the use of natural gas and petroleum has not. Similar patterns prevail for businesses, offices and industry.[6]

Second, continuing progress along these lines can feel "good". With enhanced knowledge and technology, we don't have to feel deprived as we continue to restrain energy consumption. Do you know anyone who feels deprived driving a Toyota Prius? Or a hybrid Ford Escape? They'll usually tell you they enjoy driving by gas stations instead of stopping at them. And the Prius is a very good-looking car with a nice ride.

In another vein, a year ago on Earth Day, we discussed the Empire State Building's "green" renovation. That work is still going on, but the building is already showing progress. It received an Energy Star rating of 90 from the EPA in late May, putting it above 90% of buildings nationally, regardless of age. A press release from the building tells that some full-floor tenants are managing on 2.5 watts of energy per square foot, including air-conditioning, compared with an industry standard of more than 6 watts per square foot.[7] It was formerly thought that the best way to retrofit a building for energy efficiency was to tear it down and start completely over. The Empire State Building shows that substantial reforms are plausible and profitable in an existing structure, even if it is 79 years old.

Even apparent "failures" can have their own contributions to make. We were surprised to read good things about the Boeing 787 Dreamliner plane, despite the repeated disappointments over malfunctions during the testing of its operating systems. But Amory Lovins, chairman and chief scientist of the Rocky Mountain Institute, informs that the plane's body is constructed of a 50-percent carbon-composite material which saves substantial weight, and the innovations in its engines, aerodynamics and other parts will save one-fifth of its fuel at no extra cost. Boeing is using some of the components on all the rest of the planes it makes. Lovins also reports that Wal-Mart, everyone's favorite firm to beat up on, is innovating in its freight-delivery system, and has cut its truck fleet's diesel use per ton mile by 38% between 2004 and 2008. If every trucker made the same changes that one factor by itself would cut U.S. oil use by 6%.[8]

So indeed we agree with the Presiding Bishop that the Gulf oil spill throws up a huge red flag about our oil consumption and the absolute necessity for curtailing it. Her presentation stops short, though, in simply reciting a litany of the near-term damage the spill is likely to cause. The ugly conditions she describes are indisputable, but they are hardly the end of this story. They're in fact barely the beginning of how we can handle the future of oil use. Many of the remedies are already in place if we just look for them and expand their application. It's probably one of the more worthy and rewarding challenges of our day.

1. David W. Yoskowitz. "The Productive Value of the Gulf of Mexico", Chapter 2 of James C. Cato, Editor, Gulf of Mexico Origins, Waters, and Biota, Volume 2, Ocean and Coastal Economy. College Station, TX: Texas A& M University Press. 2009. Page 25.

2. Josh Clark. "How do you clean up an oil spill?" http://www.Howstuffworks.com. September 2008 (approx.). Accessed June 15, 2010.

3. The Most Rev. Katharine Jefferts Schori, "A Lesson from the Gulf Oil Spill: We Are All Connected", Episcopal Life weekly bulletin insert, June 20, 2010, http://www.episcopalchurch.org/documents/ENSW_insert_062010_eng_color_lettersize.pdf. Accessed June 28, 2010.

4. U.S. Energy Information Administration. Short-Term Energy Outlook, "Table 3d. World Liquid Fuels Consumption". June 8, 2010. http://www.eia.doe.gov/emeu/steo/pub/jun10.pdf . Accessed June 20, 2010.

5. U.S. Energy Information Administration. Monthly Energy Review, Table 1.7 "Primary Energy Consumption per Real Dollar of Gross Domestic Product. May 2010. Page 16. http://www.eia.doe.gov/emeu/mer/contents.html. Accessed June 20, 2010. An update is due June 30.

6. U.S. Energy Information Administration. Op.cit. Table 1.8 "Motor Vehicle Mileage, Fuel Consumption and Fuel Rates", Page 17, and Table 2.1 "Energy Consumption by Sector", Pages 23ff.

7. Empire State Building Company L.L.C., "Empire State Building Receives Energy Star Rating of 90 from EPA". May 27, 2010. http://www.esbnycleasing.com/release.phtml?id=287. Accessed June 28, 2010.

8. Amory Lovins. "Freeing America From Its Addiction to Oil", Snowmass, CO: Rocky Mountain Institute. http://www.rmi.org/rmi/Library/2010-01_FreeingAmericaAddictionOil. Accessed June 19, 2010.

Chrysler: A Discouraging Follow-Up

In our story below about Chrysler's debt and bankruptcy, we related that some lenders held back from signing onto a proposal to settle the outstanding debts for substantially less than their face value. We explained that they were disturbed by the dilution in their supposedly "secured credit" in this plan, even as a union organization was being promised a proportionately larger share in whatever proceeds there will be when Chrysler's assets are sold. In withholding their approval, these lenders took considerable heat from Washington policymakers, from talking heads and others.

As the days passed following the bankruptcy filing on April 30, these lenders began to back away from their backing away. In the end, by this past Friday, May 8, only three small money managers remained, and they too gave in to the proposal. As their numbers dwindled and the first bankruptcy court rulings started to come, it became apparent that they would not be able to increase the value of their returns. The prudent course became to stop fighting the plan, to stop throwing good legal fees after an evidently hopeless cause. So now, the reorganization will go through as planned and the company will be sold, in all probability to Fiat, the Italian automaker. Production at Chrysler plants, which has been suspended, will be able to resume and work will start toward a new small, high-gas-mileage car of Fiat design.

We want to reiterate our sentiment here in favor of those hold-out lenders. Assuming we can believe their public statements of the last 10 days, we see that they are not mean-spirited and greedy, out to cheat others or only in this for whatever bucks they can grab from everybody else. Back in 2007 and through the middle of last year, these firms made what markets there were in Chrysler's "distressed debt". They priced their participation in the company's borrowing on the basis of the words in the security agreements supposedly backing the bonds. But these terms have been abrogated. These investment funds, which took no taxpayer bailout, are themselves being cheated. Possibly everyone will interpret this event as a "special case", that people should have known that Chrysler would go down the tubes and anybody should be glad to get any of their money back. At the same time, these very factors were presumably at play in the way the dissenting firms' valued their original investments.

One of the goals of Ways of the World is to try to demystify Wall Street and business behavior. That's a tall order, especially at times like this, and it's hard to give this particular situation a realistic appraisal without resorting to harsh criticism of several parties here, including some very popular and highly placed political leaders. The dissolution of the group of dissenting lenders means that the principle of secured lending will not be hashed out in law courts at this time. This is unfortunate. Lack of transparency and complexity have already been big problems in the current financial meltdown, and at the least, we are missing an opportunity to get some clarity. The result is likely to be still more complexity – and higher borrowing costs – in the future as lenders try harder to ensure that "security" means something in the final resolution of financial transactions that go awry, that is, when the security itself actually matters.

The Chrysler Bankruptcy

Monday, the stock market rose more than 200 points, pushing one of the key indexes into positive territory for this year-to-date, as signs of life in the economy become more visible. We are anxious to tell you about these things. However, other events continue apace as well, including the U.S. auto companies' financial restructuring; Chrysler is in bankruptcy and General Motors could follow. As we've complained about before here, there's too much to talk to you about all at the same time!

There are so many reasons U.S. car companies are in trouble, we can't begin to count them. And they have several groups of stakeholders, complicating their efforts to adapt. What we want try to do here is explain why Chrysler has resorted to the bankruptcy court to sort out its issues. We are hardly experts in the complexity known as the auto industry, but we can highlight some of the main players and what's at stake.

Weak Car Sales, More Restrictive Financing
First and most fundamental, vehicle sales have fallen precipitously. In April, 9.3 million* cars and light trucks (mostly SUVs, some pick-ups) were sold in the U.S., almost 36% fewer than a year ago and about 45% off the average pace of the last 7 to 8 years. In fact, the first quarter of this year saw the lowest sales since the fourth quarter of 1981, more than 27 years ago.

We see little press these days about the impact of high fuel prices on vehicle demand; everyone seems to think that the credit crunch is mainly to blame. It surely plays a big part, but last summer's $4.00 gasoline hurt a lot too, as well as the continuing burden of cheap-but-still-expensive $2.00/gallon fuel. This is especially painful for auto companies whose product mix favors large SUVs, souped-up high-end sedans, vans and trucks. Read GM and Chrysler.

Financing is a second problem. The impact of the credit crunch can be seen in interest rates on auto loans. In April, loans from banks reached what is at least a 4-year high of 7.32% on a 48-month loan [we only have 4 years worth of these figures], and while rates at auto finance companies dropped in February [latest available official information], the previous couple of months they ran well above 8%. Other terms, including loan-to-value ratios and average amounts financed, have become less generous as well. So it's been more expensive for vehicle buyers to borrow. Dislocations in other parts of the financial markets have meant that the auto companies themselves have faced high rates meeting their day-to-day cash-and debt-management needs.

More Retirees than Workers
The third issue has nothing to do with making cars, but it's certainly part of the U.S. auto industry: worker pay and retiree benefits. The following graph shows the magnitude of the second aspect of this problem, the large and growing population of retirees and the large multiple they constitute of the current pool of active workers.**

The companies and the UAW have all been racing against time to find some sustainable way to manage retiree costs, especially for health care. The 2007 contract included reforms to contain these burgeoning costs. One has been some cost-sharing by the retirees, who now pay a small monthly premium plus some co-pays and deductibles. A further action has been the formation of a VEBA for each company, a "Voluntary Employee Beneficiary Association". Rather than handling the insurance themselves, the companies began in 2007 to make payments to their respective VEBAs, which are administered by the union. However, with falling revenues, the companies are all still strained in making these payments. In February and March, Ford negotiated with the union to make part of the payment in company stock in order to conserve its cash supply. Chrysler, too, wants to switch to this kind of arrangement, indeed putting a 55% ownership interest for its VEBA in its proposed new financial structure.

Which brings us to the fourth issue, a hybrid that amounts to a combination of the financing and health insurance problems. Chrysler was bought in mid-2007 by Cerberus Capital Management, a private equity firm. Associated with that transaction, it borrowed heavily by mortgaging some factories and other facilities and taking sizable loans, altogether totaling some $22 billion. It soon became evident that running the company, much less paying off the debt, would be increasingly difficult, leading up to the first set of government loans back in December. Times only became tougher, eliciting ever more strident calls for restructuring of financing and of the labor cost arrangement. Finally, ten days ago, April 26, the UAW and the Company announced they had reached an agreement on still more health-care changes by retirees – taking away dental and vision coverage, in particular – and other concessions. Staying out of bankruptcy court then depended on the creditors, the investors in the debt that is secured by those mortgages on the factory properties.

Auto Company Lenders Object to "Cramdown"
Some of these creditors, especially the banks that have received TARP monies from the government, acceded right away to the terms of an agreement. But some 20 other lenders balked. They were being offered only $2.25 billion for the $6.9 billion in debt they own. They contend that since they hold mortgages, their debt should get satisfied first and only then should any remaining funds be disbursed to the other lenders or to the workers. This would be the usual course of bankruptcy settlement. This is what their standing as "secured creditors" normally means. In this instance, since there are specific assets backing their bonds, those assets would be sold and the proceeds used first to pay their bonds. Then the workers and their health insurance fund could have access to what is left; they shouldn't have their share decided first, this argument goes.

Apparently, members of the Obama Administration are arguing that since taxpayer funds are involved, the government can try to persuade the parties (possibly with considerable pressure) to accept a non-traditional settlement. While trying to keep up the retirees' health insurance is a noble concept, accomplishing this by altering the terms of loans that are already in place could add an arbitrary element to the financial outcome. This would be a hazardous precedent to impose on the whole financial and legal system. Others in government have already dealt with similar concerns in another context. Last week, the Senate actually defeated a proposal that would call on bankruptcy judges to ease the terms of residential mortgages, a practice described as a mortgage "cramdown". If cramdowns were mandated or even encouraged, lenders would likely make the initial loan more costly as they would face the added uncertainty that the interest rate or other loan factor might be arbitrarily reduced. Oh, my. These things are never as easy as they look at first.

All this said, the third of the "Big 3", Ford Motor Company, seems to be limping through on its own. That surely deserves discussion here, and we will do so soon.

*These monthly sales figures are quoted at an "annual rate", which means that the amount is expressed as if it were sustained over an entire year. Much economic data is shown this way; then periods of varying lengths can be easily compared.

**The graph, showing 2007 numbers, comes from the blog of Mark Perry, a professor of management at the University of Michigan at Flint – right in the heart of auto country.