Coal, Oil and Gas Need the Best Minds
This week’s theme is called, “Coal, Oil and Gas Need the Best Minds.”
If you read any major news publication, you’re going to see two big trends. One is due to activist pressure, major banks like the Japanese company Mitsui—which is a trading house that owns banks—are withdrawing their funding of coal-fired plants and their funding of coal mines.
The other trend you’re seeing is big mining companies are divesting coal, oil and gas. Well, not so much oil, but they’re trying to push out quite a lot of coal. They’re bundling them up into separate companies, selling them to people and so on.
You’re one of the smartest people in the world, obviously. You’re someone who actually takes the time to listen to new insights. I want you to think through what we’re doing. And I want you to think about the opportunities that come up because of this and the problems we’re creating.
We know that coal is going to be phased out over time, but it will take a long time
Let’s assume that I’m a good parent, and I want my children to have a bright future in the world. I don’t want them to be coughing and suffering from all kinds of problems because a coal mine leeched heavy metals into the ground or a coal mine did not extract the gas and the noxious fumes from a smokestack that was coming out.
Who do you want managing something that you know is dangerous? We know that coal is going to be phased out over time, but it will take a long time. We know that if it’s not managed well, it’s going to cause tremendous damage to the environment. That’s a fact. Who do we want managing an oil field when there’s a spillage that could destroy the environment? Who do we want managing a gas field that if they don’t capture carbon correctly, it’s going to cause untold damage?
Do you want the world’s top mining companies who have the brightest minds, the best engineers, with boards of directors that have some of the most critical, well-governed processes in place? They’re listed in Western stock exchanges and have some of the highest reporting and disclosure requirements. They’re scrutinized by hedge funds, private equity firms and investment funds. They’re held to account by a fair and viable free press that reports on everything they do. They have the money to fund the best research to manage these facilities in the best way. They have diversified portfolios of commodities and assets, so that they can take some losses to do the right thing in managing coal. When they want to shut down a mine, or when they want to build a new mine, they know they have to do it right because of extreme pressure.
Who will do the right thing in managing coal?
The question is, do you want that team managing it?
Or do you want a team managing it that’s sitting in a country where they want to buy coal assets because for whatever reason, the governance requirements, the disclosure requirements, the investment community, the press and the consumer isn’t worried about whether the coal is as clean as it could be? They’re not worried about whether the mine is as well developed as it could be, whether everyone is as safe as they could be. If a new mine is developed, the environmental procedures are rushed through.
This country has so little reporting and disclosure requirements that even if the free press wants to report about what’s happening, they cannot. They can’t get in. The government is supporting the company to do whatever is necessary to kickstart growth in this economy.
Who would you want? The A team, or the B, C or D team? There are a couple of insights here about what’s happening with the whole discussion about oil, gas and coal.
One, we are pressuring the best companies in the world to withdraw from dirty power. But if we think a few steps ahead, it becomes clear that we want the best people and best companies there. Because if this is as bad as people say it is, let the best people manage it. Making the best companies withdraw from coal, oil and gas only works if these coal, oil and gas assets are going to be shut down. But if all we’re doing is transferring coal, oil and gas assets to companies that we know aren’t the best, then we’re handing over a dangerous substance to someone who is not best equipped to manage it.
But it gets a little bit more layered than that. If you create a standalone coal company that is not part of a diversified conglomerate, that coal company is going to do everything in its power to stay in business. The shareholders of that coal company, the workers of that coal company, the management of that coal company don’t have a fallback plan. They can’t say, “We’re managing coal as part of a process to do phased drawdown over 10 years, and we know we can do this because we have a diversified portfolio of other commodities that we’re going to reinvest in and grow.” No, if we’re creating standalone coal companies as a mechanism through which the majors are going to divest, we’re creating standalone companies that have a high self-interest in keeping that asset running as hard and as long as they can. Again, I’m not saying these managers are bad, but if you don’t have the A team, clearly, they’re not going to run it as well as the A team would run it.
That’s what we have to think about here. There have been many newspaper articles about how we are celebrating the withdrawal of the best minds in mining, resources extraction and power production. We’re celebrating the fact that the best minds, the most accountable investors, are not going to be focusing on it. But you actually want the best minds focusing on this.
Why is this happening? The world has changed in two significant ways. World War II, which was traumatic for every possible reason, led to two significant changes. One is the withdrawal of the British Empire away from its role as a global power, and the arrival of the United States. The United States created a set of global institutions that locked the US in as the central and most prominent player, and it locked in the levers of American control, which is the dollar as a lever of power. There’s nothing wrong with that. That’s what you should do if you’re the most dominant country. Of course, whoever is going to come after the US is going to do the same thing. That’s the way the world works.
Bretton Woods, IMF, World Bank are American-led institutions. If I remember correctly, America has veto power in all of them. But if it doesn’t have veto power, it has the dollar and the largest military in the world, and for a long time it had the world’s largest consumer market.
So what are the two changes taking place? The first change is that, previously, if you pressured a Western country—usually thought of as Canada, the US, most of Europe, Singapore, Japan, Australia, New Zealand—to not do something, the rest of the world had to follow in lockstep because if you blocked those markets, if your product was no longer available there, you hardly could go anywhere else and replace the income you lost. If you were sanctioned by the US government, that was a significant issue. Such provider could not use the swift banking system, could hardly do anything in the world because everywhere you go, the US has some interest or allies.
In the old model, the system of activists pressuring Western companies and consumers to do things worked because that was the only viable market, and as soon as you blocked access to that market, there was basically nowhere to go.
The first big change is the West is no longer the world’s only viable market. You now have China, which is enormous. In some cases, it’s bigger than the US. It’s not just China anymore. You have countries like India, Indonesia, the Philippines and Vietnam, which is posting crazy double-digit growth rates. The world has changed. Previously, you could block one market, and it was the only market—which is the Western alliance—and constrict and modify behavior. Now, if you block people from a market, they’ll just go to another market. It’s not about which market is right or wrong. It’s about the reality of having more than one market.
Now you have activists who are running the same playbook they’ve run for many years, and they expect the same outcome, but the world has changed. The point is, right now there are big enough markets outside the so-called Western alliance that if you force the Western alliance to do something, you haven’t actually fixed the problem. You have simply shifted to another part of the world.
And to be fair, in parts of the world, activism doesn’t always work, and there’s not even a culture of activism. Even in Japan, which is part of the Western alliance, shareholder activism is a pretty new thing there.
That’s the first insight: How do we work in a world where there are two decision-making authorities? There are two centers of power. You can actually arbitrage that. You can go to one place, and if you don’t get what you want, you can pull out your roots and say, “I’m going to serve this other market, and I’m not worried about the former market I served.” It’s going to come to that. You can’t change that.
The other insight is that it doesn’t matter if we limit supply if there’s demand for it. If there is demand for it, there will be supply. That’s the law of markets. The supply may be under the radar. It may be vilified. It may be ostracized in the press. We may not even talk about it, but there will be supply.
I mentioned this in a previous Strategy Insights piece. Basically, I said that if Indonesia, the Philippines, China and so on want that to be successful and to take care of their citizens, they need to move them up the income curve. To do that, they need cheap power. Even if it’s a little bit dirty, they’re willing to do it. Are we saying that these countries are going to deliberately give up their growth just so that they don’t use coal, oil or gas? Of course not. They’re absolutely going to do whatever it takes to get those commodities to drive their growth because the more they grow, the more money they have to eventually fix the problems they think they’re going to create. There’s a precedent for that. In places like London and New York many years ago, when there were no proper sewage systems and there were horses all over the streets, they were pretty grimy, terrible places. London was covered in smog for a large part of its industrial life. As it got wealthier and people demanded more, they developed things to fix it.
What Does It Mean For You?
Insiders—smart people, capable people, leaders of the world who want to do big things—you know it’s not enough to just have this insight. What does it mean for you? What does it mean that we are now in a bipolar world? Not just a bipolar world because of military conflict and China is buying a lot. It’s a bipolar world because the decisions that were made, the institutions that existed, the assumptions that were made for a world led by the Western alliance. You need to rethink that.
This is what you need to do: Whether it’s for your personal life, your career, your business, whether you’re putting together a letter for your CEO, which maybe you should do. You have to ask yourself, what were the four or five biggest assumptions that underpinned all of the biggest decisions you have made, your division has made and your company has made?
On one side, list three or four big decisions. Then list five big assumptions, and I’m talking about big, macro, underlying assumptions. I’ll give you an example of this. One underlying assumption is that to grow, you just need to manufacture more. No, to grow you need more people who are becoming adults, getting married, and so on. You can’t do anything unless you have people. If you’re investing in a country where the population is dropping, you need to rethink that very carefully, or at least be aware of how you’re going to extract value in a place where the primary driver of growth is being pulled away—like in the case of China and suburbanization. So the first thing you need to do is think about these assumptions.
The next thing you have to ask yourself is, who is going to benefit from these changes? I don’t mean just which countries are going to benefit. Also think about which sectors are going to benefit? Which types of companies will benefit? Which types of consumers will benefit? Think about that very carefully.
The third thing you have to do is ask yourself how do you personally benefit from this? Do you want to work for those companies? Do you need to serve these companies? I’ve spoken about in the previous episode—do you need to create a law practice helping with divorces in China? How does your company get exposure to these companies, these sectors which are going to benefit? Do you get exposure by going all in in green-fields, M&A or joint ventures?
The final step is, what are you going to do to act on it? These are long-term, secular trends. They’re not going to change soon. The world isn’t going to go back to a one-consensus model any time soon. If you’re planning for that and making decisions for that, you have to change that.
What does it mean for lobbying? Let’s start with the most basic one. Lobbyists are paid consultants that speak to politicians. Lobbying is big business, but what happens for lobbyists when their lobbying doesn’t lead to the results they want? Yes, coal companies and coal assets are being divested, but they’re not being closed down. Someone’s going to pick them up.
That’s what you need to think of as an Insider. That’s the deep insight, and now you have to unpack each step. Remember, the most important thing you have to do is act on this. Knowledge without action is just scribbling on a piece of paper. Knowledge without action is setting yourself up to feel regret. And knowledge without action is an opportunity that you saw first, and then later you’re going to kick yourself because you didn’t respond to it.
Here’s a final thought. Notice how whenever I look at things, it’s not about what is happening. It’s about why it’s happening. What are the implications? How will this play out? We have a Western mindset to score things. That’s the way we’re taught. If you go to an MBA program, they teach you to look for flaws and criticize, that’s the Western model. That’s the whole model behind peer-reviewed papers. A peer reviews the paper, looks for flaws, criticizes, changes it, or asks for you to never publish it or maybe to retract later.
It’s a good model. It’s served us very well. But the problem with a critical mindset is that we’ve assumed that “critical” means to critique things. No, every time you read something, you have to ask yourself, “This is being done for this stated reason. They’re doing X to solve Y. Will Y be solved with X?” That’s what you have to ask yourself. Then you have to ask yourself, “What’s going to happen seven moves down the chessboard?” What will happen seven years down the line? I would look at it and say, “Okay, this year, what’s going to happen if this coal mining company spins out?” What are they going to do? How are they going to manage it? Did it solve the original problem? No. Did it made the problem worse? Yes. You now have people incentivized with their salaries, jobs and shares in a company that is only focused on coal. Of course, you’ve incentivized them to keep this running as long as possible, and you’ve incentivized people who are not the best at doing it.
Then you can ask yourself, “What’s going to happen in two or three years to this company, and to other companies who follow this activist route?” Again, it’s not that activists are wrong. They are doing the right thing. They are forcing companies to make good decisions. But even if they do it perfectly well on this side, it’s not going to fix the problem because of the two changes. The first is that we don’t live in a world of one alliance anymore. Two, you have to think about what will happen if demand is going to be there for a long time.
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Are Coal, Oil and Gas Dead?
Almost any pundit or forecaster will tell you that oil, coal and gas are dead. But the reality is that they’re probably not dead, and they’re probably far from dead. There’s a reason for this. The balance of power in the world has shifted. Growth today comes from Asia. We may not see it, and we may not know about this while sitting in a nice office in Boston, New York, London, or Los Angeles, but the balance of power has shifted. In the West, if we say that coal is dead and we need to get our institutional investors to withdraw their equity holdings in coal, oil and gas companies, we could probably do that. Although, it would be better to continue investing in oil, coal and gas companies and force them to become carbon neutral because that’s the goal of climate change policy.
But it’s not going to matter as much because if Indonesia, Vietnam, China, India and other major growth markets of the world today need energy, they know that having a clean, carbon-neutral environment makes sense, and they’re making good decisions in that direction. But of course, they need energy, and there’s only so much energy they can get from carbon-neutral sources. It’s not possible that they’ll get all the energy they need from carbon-neutral sources, which means they’ll continue relying on oil, gas and coal for a large part of the future, whether because they need those energy sources, or they need them as feedstock for things like manufacturing steel.
The deep insight is that previously, when we made a decision in the West, we forgot that the underlying assumption, which turned out to be true, is that the decisions made in the West set the demand pace for the world and set the global standard. But that is no longer the case. If growth, or the majority of growth, shifts to a new part of the world, that part of the world sets the pace for the world. It sets the standard for the world. The entire Western world could phase out coal, oil and gas. It would make a big impact, but it wouldn’t lead to the end of coal, oil and gas. That’s something to think about as we think about climate change policies. We have to distinguish between what we want to happen and what is really going to happen. We may really want something to happen, but we have to put in place policies for what is actually going to happen.
This is an excerpt from Monday Morning 8 a.m. newsletter, issue #14.