Power Africa? Great Idea, Poor Execution

WASHINGTON – The same Obama administration that produced the messy Affordable Care Act, (Obamacare), and the totally mismanaged Department of Veterans Affairs declared in 2013 that it would try to do something even more complicated in Africa.

Power generation is a great force multiplier

At the beginning it seemed like a good idea. Instead of spreading US development assistance to Africa among too many small impact programs, let’s concentrate our focus on one big initiative that can work as a real “force multiplier”. Indeed, let’s concentrate on electric power generation and distribution, Africa’s true Achilles heel.

Not enough electricity

Great idea. Yes, we know that Sub Saharan Africa is finally on the move. There are impressive rates of growth (up to 7%) in many countries. Still, there is only so much you can do without adequate electric power and related distribution systems. How bad is it? Bad enough: 80% of rural Africa has no electricity!

And so the Obama administration in 2013 launched “Power Africa”, a mega power generation investment plan that would lead to  dramatic improvements in a few targeted African countries. In principle, this is a great idea. And I could not think of a better sector to focus on. Electricity is indispensable.

Bad design

The problem here is poor program design. For Power Africa to work as planned, the Obama administration assumed effective, close coordination among several US Government agencies, including USAID, (foreign aid), The Overseas Private Investment Corporation , (assistance to the private sector investing abroad), The Millennium Challenge Corporation, (another form of foreign assistance) and the US Trade and Development Agency, (another channel for development assistance).

All these Washington-based government agencies would work with the US private sector and pertinent African institutions, (heads of government, line ministries, local jurisdictions, utilities, local companies and more), in order to facilitate and expedite major US investments in power generation in selected countries.

Coordination?

Well, good luck with that. I do not know who had the idea to design a multi-billion, multi-year project, in such a fashion. This is a recipe for failure.

Simply stated: far too many cooks in this kitchen. Who is in charge? Are there real milestones? How do you coordinate any project with so many different actors with different agendas?

I know from direct experience that obtaining any type of real coordination among so many different institutions involving governments, local jurisdictions, donors and the private sector is very difficult even on relatively small, manageable development projects.

Not much will be accomplished

With a program this size it is virtually impossible. And, in fact, it turned out to be impossible. One year after the launching of Power Africa there is very little action on the ground. And I do not expect much more to follow. Sure, in the end “something” will be done. But nothing comparable with the ambitious goals originally envisaged.

We do not hear much about this

The difference between the Power Africa dud and Obamacare is that Obamacare inconvenienced directly millions of American voters. And so we hear a lot about implementation malfunctions and related complaints.

Power Africa is yet another development idea for Africa that is not working as planned. But the Africans do not vote in US elections, and so we do not hear much about this failure.




Financial Aid To The Ukraine? Great Idea But Huge Costs

By Paolo von Schirach

March 10, 2014

WASHINGTON – A few days ago, I argued in a related piece that it is hard to believe how Ukraine can be considered by either Russia or the West as a coveted prize in this emerging new version of an East-West confrontation. The country is vast, (almost the size of Texas), and it is home of a fairly large population, (somewhere around 45 million). Other than that, however, Ukraine is a real mess. It is poorly organized, very corrupt and essentially broke. Indeed, just to get things back together, we are talking about a $35 billion bill. I assume that includes all the unpaid natural gas bills that Ukraine owes Russia’s Gazprom.

Save the Ukraine?

And yet, notwithstanding this economic train wreck, now the talk is about the (semi-broke) West bravely stepping up to the plate in order to “save” Ukraine. Indeed, if I understand correctly the still hazy plans articulated by US Secretary of State John Kerry and some European policy-makers, we are in for a lot more than just an emergency financial rescue operation.

We are talking about a long-term commitment to turn the Ukraine around.

We are talking a major, multi-year assistance package, (including money, tools, technical expertise), aimed at helping the new leaders of the courageous Maidan demonstrators in planning and then implementing major reforms. The goal is nothing less than a reborn Ukraine that would prove to the world (and of course to its Russian neighbors) that a messed up, post-Soviet Republic can become a viable, modern country by adopting best practices when it comes to ensuring basic freedoms via good governance and the adoption of sound economic management. In a nutshell: if we are serious about this, we are talking years and years of sustained work, and tens of billions of dollars.

This is going to be expensive

Turning the Ukraine around is of course a great idea. The problem is that, even assuming good will and not too much negative Russian interference, (you can count on Moscow’s attempts at sabotaging pro-Western policies), this is going to be difficult and very, very costly.

Therefore, Western leaders should make this very clear. For instance, I am not sure that US voters, worried about unemployment, stagnant wages and massive student loans debt burdening millions of young workers are that keen on pouring billions of dollars into the Ukraine mess.

Let’s try

That said, I do hope that America and Europe, with the support of the IMF and others, will try this. If the Ukraine succeeds, if it becomes like Poland, a former Communist country that successfully embraced Western values, this would strengthen Europe and America. Furthermore, it would show the world that our model works. Yes, a well-functioning democracy is the foundation for sustainable prosperity.

Nation building? Again?

Look, I realize that here in the US any undertaking that even remotely resembles “nation building” evokes the truly bad experiences of Afghanistan and Iraq. And for very good reasons. Lacking judgment and even elementary common sense, the Bush administration and to a lesser extent the Obama administration poured tax payers’ money into costly and generally ill-advised development assistance projects aimed at these two countries. The US “Grand Strategy” at the time of the Bush administration was to crush dangerous tyrants and autocrats, have free elections so that the people would finally have a say, and then help the new, democratically elected policy-makers rebuild their countries following the tried and tested Western model. And so, thanks to America, there would be genuine freedoms, market economies, no more corruption, gender equality –and a lot more. Yes, people would vote, children would get immunizations, girls would go to school. A New World.

Nice and noble ideas. But it could not be done. Not because the aims were bad, but because there was a gigantic disconnect between the lofty goals on one side and the relatively small resources allocated, plus the (almost insane)  belief that much could be done in a relatively short period of time on the other.

It could not be done

Simply put, you cannot have gigantic social and economic transformations –premised on new values being genuinely embraced by millions– in a matter of a few years. At the time of the US military occupation in 2001, Afghanistan was a semi-destroyed country with almost no viable economic activities. Thanks to the Taliban, it lived virtually in the Middle Ages. It was disconnected from the rest of world.

The very fact that some people in Washington embraced the notion of  a turbo-charged modernization program as a viable proposition is baffling. And that approach, mind you, was developed before the rebirth of the Taliban-led insurgency made everything a lot more difficult.

Ukraine is different

Well, if we fast forward to today’s Ukraine with the still fresh memories of the Afghan and Iraqi failures in our minds, the idea of starting  all over along the same path looks really unpalatable. And for very good reasons.

The huge difference, though, is that the Ukraine, while in truly bad shape, is a semi-modern country. It has educated people and some of the building blocks to make things work. Therefore we can assume that our chances of success would be a lot higher. And, again, let’s keep in mind that helping to build a viable society in a vast country at Europe’s immediate periphery in the long-term would help peace and stability in the Continent.

Uncertain mission, but worth pursuing

That said, if America and Europe are serious about this undertaking, we are talking about tens of billions of dollars over a number of years. Beyond the immediate financial crunch, the Ukraine will need investments and help to modernize its industries, its infrastructure, its governance, its education systems, and what not. And, let’s not forget that this noble attempt may fail. If the country will not abandon its deeply rooted culture of corruption nothing much can be done.

Still, even keeping in mind the lessons of Afghanistan and Iraq, and the uncertainties embedded in any undertaking of this magnitude, the Ukraine is a far better place. And the stakes for the West are arguably much higher.

Vladimir Putin’s dream is to bring major pieces of the old Soviet Union back into the fold. But he has nothing good to offer. Beyond oil and gas, Russia is not a leader in anything. Whereas Europe and America can offer a new path to democracy and prosperity (via investments, technology transfers and trade) to the Ukrainian people.

And ultimately it is in our own self-interest to demonstrate that our values and our systems really work. This is the best lesson that we can offer to all the people who suffer under autocratic regimes, in Russia and elsewhere:

Democracy is the right choice, and it is really good for you.




Chinese Experts Say That China Needs A Lot More Natural Gas – Not Renewables

By Paolo von Schirach

February 17, 2014

WASHINGTON – In the often schizoid US national debate on energy issues the “good and enlightened people”, (those who would like us to stop using carbon based fuels immediately), frequently point out that China is way ahead of America. China, we are told, is investing massively in renewable energy, most notably solar. You see, the real point is that the wise Chinese technocratic leaders, capable as they are to serenely contemplate “the big picture”, figured out long ago that their vast nation needs to get out of carbon. The conclusion is that the Chinese are wise and smart. We are not.

Bad carbon based energy

Largely because of the evil works of the oil and gas lobby, we keep focusing on the outmoded, wrong formulas –fracking being the latest. Indeed, by developing this (sinister?) source of natural gas contained in shale formations we continue our perverse dependence on carbon, while we pollute our precious water supplies and create untold dislocations across rural America.

What is really happening in China

Well, the real picture is quite different. China’s state TV, CCTV, reports that in order to curb stratospheric levels of pollution, officials in the Hebei Province, (a large area surrounding Beijing and now officially the most polluted province in China), had to resort to the actual closing down or destruction of 8,347 industrial plants producing cement and glass, among other heavy polluters.

An expert from an official research agency, interviewed by CCTV, indicated that reducing horrible levels of smog will be very, very tough.

For one thing, he stated, if the province wants to move to renewable energy, making anything there is going to be much more expensive. This will be very tough for business, he pointed out. Furthermore, the general public will be hit by higher utility bills.  So, there you have it. Renewable energy costs a lot more and makes it harder for industry to stay competitive.

China needs natural gas

And so, what is the way out? Well, the expert said that China needs to increase its supplies of “natural gas” and “nuclear power”.

Got that? “Natural gas” and “nuclear power”. Not a word uttered by this presumably enlightened Chinese expert about solar and wind. And why not? Not because they are bad. It is because, to date, they are still too expensive.

So, here in America our incredible natural gas bonanza is demonized by the “good experts” as more of the same bad stuff, while they invoke the healing power of renewables supposedly pushed forward by the smart Chinese technocrats. But it turns out that in China the experts say that they would love to have access to a lot more natural gas, so that they could reduce their reliance of dirty coal.

Renewable energy has a future

The day of renewable energy no doubt will come. But we are not there yet. The American do gooders should look at China’s environmental disasters and the lack –today– of cost-effective renewable energy solutions. After that, they should look back at America and consider how lucky we are. Thanks to fracking and horizontal drilling –American home-grown technologies– we are now the largest producer of natural gas in the world.

Because of this abundance of domestic, cheap and relatively clean energy we can retire old, high polluting, coal-fired plants without any adverse economic effects.

What do you know: our natural gas is very cheap and it is much cleaner than coal.

And, yes, as a result of this shift from coal to gas for power generation we have cut our greenhouse gases emissions. China is indeed investing heavily in solar energy. But, thanks to a huge number of high polluting coal-fired plants that cannot be shut down, as there is no economically viable alternative, millions of wise Chinese live in cities that are virtual gas chambers.

Certainly, we in America have a long way to go in our quest for affordable, clean energy; but –thanks to our natural gas revolution– we are much farther along.




Anti-Immigrant Political Movements Gaining Momentum In Europe

By Paolo von Schirach

February 10, 2014

WASHINGTON – In a referendum, a majority of Swiss voters (although with a very narrow margin) indicated that they want restrictions on immigration. This change would affect mostly immigration from the European Union. This vote may cause serious problems for the Swiss government, since the free movement of people across boundaries is an integral component of agreements Switzerland signed with the EU. Restricting immigration unilaterally may not be possible without reopening negotiation on the entire package of complex agreements.

Anti-immigrant sentiment across Europe

Be that as it may, the Swiss vote has been quickly noted by all conservative, right-wing political forces across Europe as an indication of a new trend favoring real restrictions on immigration. True or false, the anti-EU parties now gaining momentum in France, the Netherlands, the UK and elsewhere claim that immigrants are usually citizens of poorer countries who want to come to rich countries in order to take advantage of developed social services and other welfare advantages. In other words, immigrants are leeches who come to “take” rather than to “contribute”. Now, by a small margin, the (neutral, non EU) Swiss indicate that they agree with this contention.

Poorer neighbors not wanted

Hard to say how all this will end up. The anti-immigrant parties may not be strong enough to force major policy changes within Europe. But their emergence is a sign of very lukewarm (if not altogether hostile) feelings towards Europe.

The grand idea of a borderless Europe where all people feel citizens of an entity larger than their own country of origin is just a fantasy. The “European Idea” is indeed just an idea, embraced by some elites; but with no popular appeal. Most Europeans are preoccupied with getting by in low or zero growth economies. The notion that their financially strapped countries have an open door for their poorer neighbors is not that popular.




3 D Printers Are Amazing; But They Also Tell Us That Factory Jobs Will Soon Disappear

By Paolo von Schirach

January 29, 2014

WASHINGTON – We know a lot about the dark side of globalization. Information technology, plus improved and low-cost logistics allowed a gigantic shift of most manufacturing activities from high labor cost Europe and America to low labor cost Asia, first and foremost China. And so, thanks to the new opportunities to outsource manufacturing created by globalization, Europe and America lost millions of jobs.

Old jobs are gone

Most of these jobs are gone –for good. And that’s the way it is. Some politicians try to gain points by blaming “evil” corporations that “choose” to export jobs to low-cost countries. This argument assumes that there is indeed a choice. Sure, how would you like to make T-shirts in North Carolina that would retail at $ 10 or 15 a piece when the same T-shirt made in China or Bangladesh retails for $ 5? Which company can stay in business with competitors selling essentially the same product at half the price or less?

More to come

Be that as it may, we have not seen the end of this tale. In fact, today’s Asian winners may be tomorrow’s losers. Picture this. If you are a Chinese migrant worker who left poverty in a rural village seeking a better life as a factory worker, your luck –such as it is, as working conditions in Chinese factories are grim– may end soon. In part it may be because your Chinese employer may want to relocate the factory to another country (Cambodia, Bangladesh) where labor is even cheaper. But most likely you may soon be unemployed because technology will cause your job to simply vanish.

Amazing 3 D printers

This is no exaggeration.  You may have read about 3 D printing. Well, at the moment this futuristic technology that allows you to literally “make” objects at home, without the support of a small factory or workshop, is still in its infancy. But it is getting better every year. Primitive 3 D printers could only make simple plastic parts. Now they can make metal parts. Soon enough they will be able to make fully functioning complex products.

Want a toaster?…

So, imagine this. Today here in the US, if you want to buy a toaster you go on-line and look for a good product at a good price. You find one on Amazon. In just a few minutes, you can place your order and complete your transaction. Your toaster will be delivered to your door by UPS or FedEx in just a few days. Low cost, simple, clean an efficient.

Your toaster was made in China by the migrant worker mentioned above who had left the village seeking a better life. It was shipped to America inside a container that had been loaded onto a mega container ship that landed in Los Angeles. Then the  container was moved by rail or truck to a large warehouse managed by Amazon. When you place your order on-line, the toaster you selected is placed on a plane or truck and delivered to you via UPS, FedEx or US Mail. The chain that begins in a factory in China and ends up at your door is long and complex. But it is lean and efficient.

…Make it at home

OK, fast forward to tomorrow. Tomorrow you will have at home a new generation 3 D printer that can actually “make” the toaster. You want a new toaster? You go on-line and you buy the specs for your toaster that are included in a  software package. You download the specs into your 3 D printer and the printer “makes” your toaster. Sounds far-fetched? Not really. We are not there yet. But we are getting there, probably sooner than we can all think.

No more jobs

If this is indeed the future, imagine all the implications. The implications are that the factory in China that makes the toasters is redundant, and so are all the people employed there: workers, supervisors, managers, janitors, you name it. Furthermore, the complex logistics network necessary to move the toaster from the Chinese factory into a container ship and then to the Amazon warehouse is also redundant. And that means that all the people who support it are redundant: from the shipyard workers who make the container ships to the truck drivers who move the container from port to its final destination. And this is not the end. FedEx and UPS, whose business is mostly about moving all these boxes with toasters, TVs and hair dryers in them, become redundant.

You get the picture. When your home is the factory, all the factory jobs and all the services jobs necessary to move products from A to B will vanish. We are not quite there yet. But this is the future.

Is the future really great?

The techno-enthusiasts claim that all this is great. They confidently predict that, while old jobs vanish, new jobs will be created to support the new amazing technologies of the future. May be. But what happens if there is a 10 year time lag between the vanishing of traditional manufacturing jobs and the opportunity to create new ones? For 10 years former factory workers will be unemployed or under employed. And, later on, many of them, (if not most of them), will lack the skills to work on the new technologies that have replaced the old factories.

The “Luddites” fight back; but they lose

And so a gigantic economic transformation brought about by truly disruptive technologies will become a social and political problem. Long ago, the “Luddites” in England fought against the mechanization of the textile industry by destroying the new machines that were displacing manual workers. But it was a losing proposition. The machines won. They always do.

Who takes care of the losers?

When the new machines will take over, what will happen to all the displaced workers? Who will take care of them? We better have  a plan, because very soon many societies will have to deal with this problem.




Cheap Energy Makes America More Competitive

By Paolo von Schirach

September 30, 2013

WASHINGTON – Does cheap energy make a difference when it comes to economic competitiveness? You bet it does. The Financial Times, (Eon chief warns Europe on energy gap with US, September 30, 2013), quotes Johannes Teyssen, CEO of  EON, a German energy company, saying that: “there is a  competitive advantage for America that we cannot prevent, at least for some time…It is a dream for politicians to suggest otherwise“. America’s energy edge is in part the fruit of geology (plenty of shale gas); and of Yankee ingenuity, (nobody thought it was possible to extract gas from shale and make money).

Germany’s electricity is too expensive

The funny thing here is that policy makers in Germany, using subsidies and other incentives, pushed hard to get more energy from solar, this way trying to be both modern and “green”. Well, this policy has driven up the cost of electricity, and so Germany’s energy intensive industries are looking for opportunities to relocate to the US because the shale gas boom has made American electricity very inexpensive. Meanwhile, “green” Europe does not have enough of its expensive renewable energy; and so it has to rely more on old-fashioned, dirty, high emission coal, this way increasing green house gases emissions.

Being “green” is not so good for the economy

The paradox here is that supposedly immoral America, the country where business people would do the worst things in pursuit of immediate gain, is actually reducing carbon emissions. Yes, abundant US shale gas has displaced coal, and this means more cleaner burning gas-fired power plants. “Green” Europe, the Continent where concerned citizens really think a lot about global warming, is actually increasing CO2 emissions because of misguided energy policies that subsidized expensive renewable energy, this way displacing natural gas.

 




Washington DC Mayor Vincent Gray Vetoed “Walmart Bill”

By Paolo von Schirach

September 13, 2013

WASHINGTON – Washington DC Mayor Vincent Gray vetoed the “Walmart Bill” passed by the City Council with an 8 to 5 vote, calling it a “job-killer” and a “bill that will deal a huge blow to economic development”. Pretty strong language. The ostensibly noble intent of the bill is to guarantee a “living wage” of at leat $ 12.50 for all workers in the retail sector. In reality this bill specifically targets Walmart, as it excludes unionized chains that already operate in DC. The retail giant, (the largest in the world), is planning to open 6 centers in the District of Colombia. Three of them are under construction, and three more are on the drawing boards. Walmart already indicated that, if this bill becomes law, it will scale down or cancel altogether its plans for entering the DC market.

Higher wages kill jobs?

The laudable goal of a higher minimum wage is of course to improve the living conditions of the working poor. It is true that there are millions of Americans who have a job but have a hard time making ends meet because of very low-income. Still, as Mayor Gray argued in his veto letter to the City Council, by making it a lot more costly for new retailers to operate in the Distric of Columbia, the outcome of this law will be losing Walmart altogether. 

The retailer will build stores elsewhere. And so, the net effect of legislation that would like to improve living standards for the working poor will be to kill new job opportunities altogether. If Walmart cancels its DC expansion plans, there will be no new jobs, whatever the minimum wage mandated by law. Besides, the city would lose tax revenue, while residents in poor neighborhoods would lose the chance to benefit from Walmart’s abundant offerings at comparatively low prices.

DC needs more jobs

Mayor Gray wrote in his letter to the City Council that Washington DC needs all the new jobs it can get. In the long run, it may be a good idea to progressively raise the minimum wage, currently at $ 8.25, for all workers. But to target large retailers by forcing them to pay higher wages (while exempting others) is the best way to convince them to go elsewhere; a net loss for the city in terms of employment, tax revenue and new shopping opportunities for chronically under served poor neighborhoods. 

Sustain this veto

The proponents of this bill would need an additional vote in the City Council to override Mayor Gray’s veto. For the sake of low-income DC residents, let’s hope that they will not get it. Low-income jobs are not a great prospect. But no new jobs and no affordable shopping for thousand of residents is an even worse one.

Let’s be clear, Walmart is not a charity. But its stores will improve quality of life in poor DC neighborhoods.




Underneath China’s Still Impressive 7.5% Growth There Is A Mountain Of Debt

By Paolo von Schirach

August 28, 2013

WASHINGTON – The official news about China is that the number two world economy, expertly managed by the careful Beijing technocrats, is adjusting to a slower but still very impressive rate of growth. After an amazing almost 30 year run with more than 10% growth, year after year, from now on China will be cruising at 7.5% a year. If you think that Europe is barely above zero, while the once mighty America is advancing at a pitiful 2% rate, 7.5% is fantastic.

Too much debt

Well, this is what appears. But it is not so. Not even close. The truth is that China’s growth is largely artificial and now mostly debt driven. And debt is growing at an alarming rate. If you read the hard-hitting pieces on China’s debt crisis published by The Financial Times on August 27 and 28, you get a truly scary picture. China’s construction boom, itself one of the major drivers of GDP growth is based mostly on speculation and enormous amounts of bad debt that now call into question the solvency of many local financial institutions. Likewise, Chinese corporations for years over estimated demand for almost everything. As a result there is enormous overcapacity in practically every sector, from coal to chemicals to steel. Corporate debt, much of it held by non official banking institutions, has skyrocketed. 

And this is has nothing to do with the predictable ups and downs of the business cycle. Here you have a major country whose growth is now sustained mostly by an enormous amount of debt. The good news is that China’s exports over time generated huge cash reserves. However, if a large portion of this capital will have to be used to cover all this red ink, there will be a lot less available for productive investment. Therefore, assuming that this scenario is correct, forget about 7.5% growth, year after year.

Local governments and corporations are in trouble

Just a few illustrative facts drawn from the excellent FT articles referred to above. China is now the most indebted among emerging markets. Aggregate debt (corporate, household, government) has soared from 40% in 2007 to 100% in 2012. Local government debt usually does not include debt carried by local non-bank financial institutions. Therefore, while official figures indicate local government debt level up to 16.8% of GDP, in truth this goes up to 57.8%.

At the local level, local governments used to make money by expropriating farm land that was then sold to developers. Land holdings were used as collateral to obtain cash that would finance infrastructure. Well, now the construction boom has halted because developers have over built. Many of them are in big trouble as they have unsold inventory that cannot be liquidated. In the meantime all the sectors, such as steel and cement, that used to be driven by the construction boom are suffering because of demand contraction. Back to the local government, with the end of the construction boom, now they own far less valuable land that is no longer accepted as collateral. Hence a mounting debt crisis at the local level.

Back to industry, many state-owned corporations now are kept artificially alive via easy government credit funneled to them via state-owned banks. Smaller companies that do not have easy access to credit are struggling. Some now pay their bills through promissory notes. Others disguise their troubles through increased unpaid leaves for their workers, so that official employment numbers appear unchanged.

No problem?

As all this is unfolding, we are told that there is no problem. And this is indeed the real problem. Denial and obfuscation is not a good way to deal with an emerging crisis. Remember Greece? Until the day (back in 2009) in which the Greek Government announced that it had cooked the books regarding the actual level of its debt, it all seemed perfectly normal.

In the US we have had our spectacular 2008 crash. While we can debate how the main actors and the regulators did not see this coming, after the collapse policy-makers and the public knew what had happened. And, sure enough, we have had our own gigantic bail outs. Still, when the Federal Government essentially took over General Motors, it did so publicly, at the same time demanding a credible restructuring plan that included closing down facilities, destruction of jobs, plus salary and benefits cuts for those lucky enough to keep a job.

No transparency

There is no such publicity and transaparency in China. Ttherefore there is far less pressure to restructure in order to obtain leaner and more competitive state owned corporations. As to the local governments and their troubled finances, most likely their debts will become government debts. Still, debt is debt –and it slows you down.

In the end, for sure China must have many healthy companies that are doing and will be doing well. Still, digging a bit deeper, as the FT has done, we discover a country with huge and as yet undeclared systemic problems. It is going to take time and a lot of money to fix all this. China’s economy will stay large. But it will be far less impressive than you would have thought.

 




Mexico Will Amend Its Constitution, Allowing Foreign Companies To Invest In Its Energy Sector

By Paolo von Schirach

August 13, 2013

WASHINGTON – If I were Vladimir Putin or Ali al-Naimi, Saudi Minister of Petroleum, I would be really worried about the latest news from Mexico. President Enrique Pena Nieto is pushing forward an amendment to the Mexican Constitution that would eliminate or at least curtail existing barriers to foreign investments in the country’s oil and gas sectors. 75 years ago President Lazaro Cardenas nationalized the Mexican oil industry. The sector became  a monopoly managed by Pemex, a state-owned corporation.

Amending the Mexican Constitution

But now the Mexican leaders realize that Pemex is very inefficient. Its technologies are not up to date. However, given the constitutional barriers that prevent outside investments, it is almost impossible to find good ways to involve foreign firms in the energy sector. The push to amend the Constitution comes from the knowledge that Mexico has huge untapped resources, both conventional oil and gas as well as unconventional (mostly shale) gas. Mexico’s official reserves are 115 bln barrels of oil equivalent, comparable to Kuwait. But the figure could be a lot higher.

US energy independence

It is obvious that with the active participation of major American, European and other energy companies, Mexico could start developing all these reserves. Beyond the economic benefits for Mexico, from a geo-political stand point The United States of America would have the opportunity to get a larger share of its oil imports from Mexico. Combined with increased domestic production and greater reliance on Canadian oil, the US would reach “Hemispheric Energy Independence” even sooner than expected.

And this means no more OPEC oil for America.

More gas

Furthermore, Mexico has the fourth largest shale gas deposits in the world. As soon as this gas becomes available, this would further increase world supply. As America has plenty of its own shale gas, most the Mexican gas will be turned into LNG and exported to energy starved Europe, China and Japan.

Russia and OPEC will suffer

This is why Russia and Saudi Arabia should be worried. Their only valuable resource is likely to become less valuable on account of increased global supply. Look, even in a best case scenario it will take a while for Mexico to amend the Constitution and then enact the legislation and all the necessary regulations that will eventually enable foreign energy companies to participate in the exploitation of its vast energy resources. But this is going to happen, for sure.

A new energy map

As a result, in just a few years the world energy map will look entirely different. North America will become a net exporter of shale gas. Thanks to increased domestic output and more supplies from Canada and Mexico the US will get all the oil it needs from North America. As a result, Washington will no longer be obsessed with the danger of oil supplies disruptions originating in the Middle East. Consequently the responsibility for ensuring the unhindered flow of oil through the Strait of Hormuz will shift from America to China and Japan –the major oil importers that rely on those supplies.

But, more than anything else, Russia and Saudi Arabia, countries that today make money because of high oil prices, will see their revenue flow go down and their influence diminished.




Elon Musk, Tesla Motors’ Founder, Came to America Because He Believed That This Country Would Offer Opportunity

By Paolo von Schirach

Related story:

http://schirachreport.com/index.php/2013/08/07/electric-cars-are-not-selling-well-but-quality-will-improve-for-heavy-trucks-though-the-future-fuel-is-natural-gas-not-electricity/

August 12, 2013

WASHINGTON – I wrote recently that it is going to be a while before electric vehicle (EV) maker Tesla Motors and others like it will be able to radically transform the US automotive industry. (See link above to related story). Indeed, while Tesla’s model S is doing very well, it is on track to sell at most 21,000 vehicles this year. This is obviously very good for a company that sells very expensive, high performance EVs; but it is hardly transformative.

The value of new ideas

Still, having said that, it is really important to reflect on the incredible value of entrepreneurs like Elon Musk, Tesla’s founder. What needs to be stressed here is that Musk is a true, modern trail blazer. Musk ventured into practically virgin territory with what appeared to most analysts a really crazy idea: making a high performance, high price, sporty EV. Remember that many years ago when Musk got started people thought that EVs should be designed for young or middle aged tree-huggers, people focused on saving the planet. Whereas Musk focused on an entirely different market: quality conscious wealthy people interested in a brand new experience: a high performance (and consequently high price) EV.

Well, this is beginning to work. Of course, when it comes to market expansion, much will depend on Tesla’s ability to roll out equally interesting but much more affordable electric cars. We shall see.

Enterprise is our future

But this is not the point today. The point today is to celebrate Elon Musk and many others like him. These are the people willing to take huge chances in order to see if they can indeed push the envelope. It is obvious that when it comes to innovation many “Grand Ideas” are destined to fail. But some will not. And the record shows how, failures notwithstanding, many determined entrepreneurs will keep going at it. May be on their second or third try they will come up with something really important.

Focus on stagnant sectors

And we should be grateful for all these efforts. Indeed, it is mostly because of people like Musk that America can keep its position as technology leader. In a recent TV appearance Musk  indicated that innovators should really focus on sectors that have been stagnant, sectors that no longer deliver any special value. Real entrepreneurs should really look at ways in which they can introduce disruptive innovation that will cause a real paradigm shift. He talked for instance about the “Hyperloop”. This is really science fiction stuff. A totally new idea for an ultra fast inter city transportation system that is light years ahead of even the best super fast trains that still rely on tracks and locomotives, however advanced.

The “Hyperloop” is on the drawing boards, and most likely it will not happen any time soon. Still, this is just an example of Musk’s ability to think big and think boldly, even when some of his ideas may invite jokes.

Once again, many “Bold Ideas” that promise huge technological transformation will be failures. Sometimes costly failures. But it does not matter. Hopefully, those who tried and failed will not be discouraged. They will learn from their  lessons and try something else.

Policy makers have to keep America’s unique pro-business environment

That said, US policy makers must realize that they need to put in place every possible incentive for innovators. Indeed, for America to keep its coveted position as the world’s premiere “Innovation Hub”, it needs to attract people like Elon Musk who are willing to think big and take big chances. To this end, we need to do our best to reaffirm America’s credentials as the best place for true innovators. Do keep in mind that Tesla’s Elon Musk was born in South Africa. He came to America because he thought that the US would be an ideal home base. If people around the world stop believing this, if we lose this edge, the smart innovators will go somewhere else.