Saturday, December 4, 2010

Pausing in the garden

As detailed in previous posts, the decline of oil production necessitates demand reduction.  In other words, we have to use less to avoid the price spiking.  Whether the impetus is geological restraints or the dangers of speculators causing problems while lining their own pockets is hardly relevant to the challenges ahead, oil consumption goes down one way or another.  Reducing demand by reducing income (allowing unemployment to stay high or even increase) may be politically unacceptable to say out loud, but the statistics say it is happening already.  As much as individuals might want to blame others based on whether they follow a red elephant or a blue donkey, the fact of the matter is that they too are subject to the mindless tides of history and the unassailable forces of resource depletion.

Unemployment numbers are apparently stable.  That is to say, the number of people falling between the cracks, no longer seeking work because they have given up looking, falling off the 99-week unemployment numbers, etc, is roughly equal to those losing jobs.  Two years without a job. As one poster in a forum said a while ago, “After 99 weeks you are no longer unemployed, you are a stay –at-home parent.”  This brings up an interesting point and highlights how things have changed over the last century.

Whatever happened to the household economy?  So few people have heard about it these days. Yet for our parents’ and grandparents’ generations were intimately familiar with it.  It is recognition that a person staying at home and not entering the job market can make a major contribution to the household.

Since World War II, when “Rosie the Riveter” left the comfort of the kitchen and went out into the workplace while her husband battled on foreign soil, the idea that both adults in a home can work and still bring up a family has become common.  There is an impression today that a “stay-at-home” parent is not contributing that much.  Today that can be true.  A few decades ago it was a long way from the truth.
The household economy is more than getting kids to school, cleaning the house and then watching the shopping channel for most of the day.  It used to be normal for houses to have kitchen gardens.  Instead of a perfectly manicured lawn surrounded by pretty flowers and a picket fence, the average home of even a half-century ago had a garden that produced food and herbs for the family.  Even in the 1970’s, in my home town, almost the entire rear garden of our modest townhouse was dedicated to producing food.  Potatoes, carrots, string beans and peas were regular annual crops. Strawberries and raspberries grew in the corners.  I vividly remember, around the age of eight, helping my father put in a large solar greenhouse that allowed us to grow tomatoes and germinate the seeds a little earlier each year. 

Today most people outsource their food production.  I know that is not the normal term to use for going to a supermarket and picking up a bunch of microwaveable pre-processed packages of food, but essentially that is what we’ve done.  

Outsourcing began in your home and eventually spread to other areas of the economy.  Sure, there has always been some outsourcing of food production.  Not every home in history raised meat or even enough vegetables for everyone.  But the format of purchased food has changed significantly.  Potatoes that were once grown at home were replaced with store-bought potatoes from the local shop, which in turn spurred the economies of scale as supermarkets sent small grocers to the trash heap of history.  Real, fresh potatoes, with dirt still on them gave way to a myriad of pre-processed potatoes: tinned and peeled baby potatoes, washed bags of potatoes, frozen potatoes, pre-cut potatoes, bags of fries to be dropped into hot oil.  We even have fries with the oil impregnated into the surface so they will cook in the oven.  This outsourcing of the process of taking a vegetable out of the ground and making a meal out of it reached its apex with the powdered potato mix.  Just add boiling water, maybe some butter, and stir.

Growing food is not the only activity that used to be done inside the home but was outsourced after World War II.  Clothing is another item that became cheaper to buy than to make oneself.  I remember many of my sweaters and jumpers being knitted by my grandmother and later my mother. A bunch of ladies sitting and talking while knitting was not an uncommon sight.  Even blankets were often produced by hand.  Preserving food also used to be very common, with drying and canning a regular skill of previous generations.  Child care, a major contribution to the household that grandparents used to make – and loved doing so – has been replaced by nannies and day care centers.  Very few people repair items today. Instead, we throw those items away and replaced with the latest model from the shops.  

This outsourcing has grown the economy.  Having both adults in the typical household out in the workplace requires more money spent, which in turn increases the velocity of money moving through the economy.  With cheap oil, large agricultural businesses produce potatoes, corn, wheat -- any manner of foodstuffs -- far cheaper than at any time in history.  For every ten calories of oil energy used we can get one calorie of food delivered to our supermarket.

In recent years, with both people working and bringing in wages, the cost of food was not such an issue.  Food became cheap not because of economies of scale alone, but because of the advantages of petrochemical fertilizer and pest control.  In the same way as manufacturing jobs were undercut by factories in developing countries, the household economy was undercut by the subsidies of using oil in the production of food.  As money passed through the economy to pay for goods and services that used to be handled at home, the result was a growing economy, growing tax receipts and growing regulation. 

An entire bureaucracy has grown up around food, mainly geared to promoting large-scale farming controlled by corporations who can afford to make the correct level of campaign contributions necessary to ensure a free market for food is no longer tolerated. Under the guise of “health and safety” the FDA in the US is little more than a mercenary force hired out to the big agribusinesses to make sure nothing threatens the cartels of big producers.  Rules on making a living from producing food and selling that product are written in such a manner as to make cottage industries unprofitable.  Even when the rules are followed, small producers are harassed until they quit competing with the politically connected corporations.    It’s sold to the public as “health and safety” even while the majority of the food borne illnesses that afflict the US population each year come about from the unsavory conditions of giant factory farms.  Fines for breaking the rules are set high enough to put a small farm out of business yet low enough that it is cheaper for a factory farm to pay them than to make their processes sane and sanitary. 

With every activity outsourced from within the home to the marketplace, the economy grew as those services now required cash changing hands.   Without us realizing it, the world changed to one that required both adults in the typical household to be out working just to pay the bills.  For an economy based on debt to grow, more has to be produced each year.  Part of that growth is in the form of inflation.  Food and energy, two of the biggest costs of any household, are excluded from the CPI – the consumer Price Index – the standard measure of inflation.  Food prices in the UK went up 9.8% over the last year.  The US is seeing price increases two or three times the CPI.  So again this year, typical wages will not keep up with the price increases for necessities.  

As unemployment stays steady by virtue of a large number of people no longer counted among the unemployed, and as food prices rise, there is increasing pressure being put on the consumers.  Even without a so-called ‘credit crunch’ there would be a downward pressure on consumption, the heart of the American economy.

What does this have to do with Yellow Pages?  I’m glad you asked.  Yellow Pages do well when local communities do well.  When people are hurting, so are local businesses, and part of that pain is passed on to the service companies that help maintain a vibrant local marketplace. 

For the local business to return to a healthy turnover, people need more money in their pockets to spend.  Government and state debts make using tax cuts as a way of putting money in pockets very unlikely, the government being very reluctant to risk the inflation that would ensue.  Borrowers are, for the most part, reluctant to take on additional debt in the current economy, and credit is hard to come by as banks reduce their exposure to consumer bankruptcies.

A return to some of the principles of the household economy is one way forward for local communities.  Home gardening is one such aspect that could be of benefit both to the local people, the business community and the local Yellow Pages.  For a start, a community that can produce and preserve a portion of its own food is much more resilient to the vicissitudes of a disintegrating economy.  Stores typically have no more than three days worth of supplies in stock, and any number of disasters, natural or man-made, can interrupt deliveries.  People rarely keep long-term supplies of food and other essentials at home.  This is a concern for many people who follow the news in detail and are interested in the resiliency of our communities.  John Michael Greer’s “Green Wizards” project is a grass-roots movement to share knowledge of local gardening and to encourage food independence in the face of an uncertain future.

When I was a child, shopping was a weekly activity and in bad weather, bi-weekly.   The trip to the supermarket was for tinned items that were not grown locally, things such as fruit (like oranges and bananas) from exotic lands and those little luxuries we enjoyed, like tea and coffee.  Milk was delivered to the door each morning, along with yogurt or a variety of other dairy products.  We purchased meat from the local butcher’s shop, all locally raised and prepared. Entire carcasses of pigs and cows hung from hooks at the back of the shop, glimpsed though the open cold-room door from time to time.  Bread was baked locally - and cut while you waited.  Sound like a picture of the long-forgotten past?  This was a South Wales village in the 1980’s, struggling to cope with unemployment from mine closures and an official inflation rate over 15%.  These are skills that were commonly practiced in living memory even within the most affluent of western economies. 

Today, it’s unusual to go more than three days between visits to the supermarket.  As prices go up, the proportion of money going to grocery stores will increase at the expense of discretionary spending, further depressing the local economy.  A lot of that increased revenue on foodstuffs will flow to the big banks and hedge funds that have been speculating on the cost of commodities like corn and wheat, driving prices higher.

So the promotion of growing food at home can have multiple impacts on the local community.  Supermarkets and grocers would see a decline in trade as more people consume produce that is grown locally, but they are not exactly the biggest purchasers of Yellow Pages advertising.  By reducing the total cost of putting food on the table, people free up money for other discretionary spending. 

So how can Yellow Pages help?  Guides are a common feature of modern Yellow Pages that have a track record of delivering valid and valuable local information.  A local growing guide for fruits and vegetables could prove to be an excellent source of useful information for the would-be gardener. Since each directory is produced for a local community, the data and advice can easily be tailored to the local conditions.  Useful tips could include information like sunrise and sunset times; expected first and last frost; and estimated dates for sprouting, planting and harvesting. What grows well and at what time of the year?  How do you deal with local bugs?   How about a blank lined page where people can record planting days, estimated harvesting days, etc.?

Not all are blessed with a green thumb or a patch of land they can grow food on.  That opens up opportunities for Community Supported Agriculture, particularly those who have work-sharing arrangements, to advertise in the guide.  Gardening shops would also benefit from being able to purchase advertising in such a specialty section. Landscapers and gardeners who are willing to move outside the realm of lilies and lawns can develop a whole new line of income -- advising and even helping their clients grow some of their food.

A lot of people feel that the telephone book is an anachronism and serves no useful purpose.  Usage studies show this to be a false impression, promoted by online marketers who are competing for the advertising dollars.  Making the book more practical and useful for the consumer goes a long way to countering that image.  At the same time it creates opportunities for local business to advertise in a new guide section.  It would be nice, as I pause in my garden and think about the Yellow Pages, not to be thinking about what I can do to improve it but what it can do for me.   

Friday, October 29, 2010

A world of limits

As detailed recently, we are running up against hard limits in oil production and this has a huge potential impact on business. Declining incomes for the majority of American families have a cascading effect on consumption. With the uncertainty of the economy, many people are saving more. For most, saving is accomplished by paying down debt, not by storing up wealth for hard times. For many, it is too late; those hard times are here now.

By paying down their debt, people are destroying money. That may seem a strange idea to many, but money is created and destroyed by the stroke of a pen. When you buy something on credit, the money that pays for that item comes into existence at that time. It did not exist before. It is secured against your word that you will pay it back with interest. That promise to pay is treated as an asset, a lien against your future productivity. Like any asset, it can be and is traded. So when you pay down you debts that money you paid back no longer exists. Your cash cancels out your promise to pay.

With less money available, demand for goods drops. To attract what money is flowing through the economy, prices come down. We call this deflation. Many people think we are in a deflationary spiral. As jobs disappear, the money available to be spent decreases. People declare bankruptcy, which discharges all the debt they hold. This is good for the individual, but the income stream from those debts is lost to the banks. With the money gone, there is less money left to chase goods and services, the effect being that prices decline. Those still in business have to cut costs and this can impact all forms of advertising, even Yellow Pages.

Since contracts for Yellow Pages advertising are a long-term investment, paying off over the year that the book is next to people’s phones, the industry tends to be slower losing revenue in a recession but also slower coming back out. A business wanting to advertise in newspaper, direct mail, radio, television or even the internet can start and stop their programs at any time. Yellow pages run on an annual cycle, which makes it a good medium-term indication of business confidence. Want to know how well your local business community is doing? Look at the relative size between the books this year and the next ones that land on your door. Some will tell you that it’s because Yellow Pages is dead. Market research tells us otherwise, with 64% of respondents who were surveyed by telephone (rather than self-selecting on an internet poll) saying they used printed Yellow Pages only, and a further 19% turned to print when they gave up searching online for what they wanted to buy locally.

Money on a larger scale is produced at the stroke of a pen. Through the Federal Reserve (a private bank) and the U.S. Treasury, money is borrowed into existence. The details are beyond the scope of this post but suffice to say that billions of dollars are borrowed on behalf of the taxpayer. Currently the amount owed is in the trillions. Since 2007 we’ve been adding to it at a rate never before seen. Before 2007, the word trillion was most often heard during cheesy science fiction films. In the 1997 film “Austin Powers” the sum of “one hundred billion dollars” was the ludicrous sum Dr. Evil wanted from the world – or else he would destroy it. In 2007, Paulson went on his knees before Congress to beg them to give the banks seven times that or their actions would destroy the US.

The problem is not limited to the American consumer and the businesses that the American consumer keeps afloat via his or her spending. Both the UK and many of its European neighbors have run deficits for a long time. So what happens when the bubble pops for everyone? We are in the middle of finding out the answer to that right now. Since 2008, the central banks of various economies have been working together to try and manage the crisis. That accord is beginning to break down.

The problem changed this summer, when most countries chose to face the issue of their debt now and begin implementing austerity measures. Some countries (Portugal, Italy, Ireland, Greece, Spain – the PIIGS) have little choice. They are bound by the rules of their membership in the Euro zone. These moves by sovereign governments are not popular, as evidenced by the internal conflict with their citizens who are faced with paying the bill for what they see as the actions of a few bankers.

The UK implemented frugal measures voluntarily, using the mandate of the recent election to introduce cuts that will cause social problems for decades to come. In both cases, the cure is seen as better than the long-term consequence of a collapse of their currency.

The USA, however, chose audacity over austerity. For us, it is business as usual - until the rest of the world intervenes to cut our government's reckless addiction to credit. The American people are saving more and spending less, adopting personal measures of frugality. Many do so with no choice, unemployment bringing an end to their middle class lifestyle. Others still have jobs but find the difference between earning and spending can no longer be hidden with easy credit. For individuals, the bills are already coming due in the form of reduced credit lines and the end of the ATM-house.

The government, however, has no such problem at present. They have the keys to the vault, or rather, the printing press.

It will not be easy for the rest of the world to rein in the American government. For many years the American consumer was the beating heart of global trade. For many economies, the health of the USA was their health too. American imports have fueled the growth in many markets. A lot of the jobs people now do in poorer nations were once done in the US. We exported those jobs over the last few decades so that prices could fall slightly and profits could soar. In the theoretical world of economists, where growth hath no bounds, this is an effective model, with the profits from off-shoring jobs creating value for pension funds. Those pension funds keep the increasingly aging population of America spending long into retirement. Unfortunately, growth has limits and the models failed. Businesses collapsed and confidence in the economy plummeted.

The American consumer is no longer buying as much as a few years ago. When the jobs went abroad, so did their income. The money we send abroad to buy things we think we need continues to come back in one prevalent form: the purchase of US treasuries. In other words, we export one major product: debt.

We can do this because of the Dollar’s status as the reserve currency of the world. This will be challenged in the coming years; the BRIC nations (Brazil, Russia, India and China) are among those pushing for Special Drawing Rights – based on a basket of currencies, to be the new reserve currency.

When the Dollar loses the reserve currency status, then the voluntary adoption of austerity measures will no longer be necessary. America will compete equally with other countries around the world. Our other major export, hi-tech arms, will continue. Life in the US, however, will get more interesting.

It looked, for a while at least, like central banks around the world would try and inflate their currencies out of the debt trap. That option closed in June 2010 when the US resisted the idea of austerity at a G20 summit.

With the writing on the wall for the Dollar’s status, America has to become an exporting nation. The problem is our goods are too expensive compared to far eastern markets. To be competitive, the Dollar has to lose value against other currencies, although no government can afford to admit to doing so openly. So far efforts to do so are working to a small extent. Over the last few weeks the Dollar has lost ground to the commonly tracked Dollar index. It has also lost a lot of ground when compared to the value of Gold and Silver, which are pushing new highs.

Other countries are opposed to this. America is still a major importer of certain types of goods, some raw resources (oil being the best known) and luxury goods. To avoid becoming the dumping ground for goods coming out of the exporting countries, each nation is seeking to devalue their own currency. The ‘race to the bottom’ for wages has evolved into the ‘race to the bottom’ for currency value. It’s the public basis for the stance against China’s currency being pegged too low against the Dollar and the demand from Congress that it be revalued by around 20%.

The goals are not just to prop up exports and keep the level of imports down. Governments want to do this to maintain a positive trade balance, but they are not the only influences. There are large financial sharks in the pool, and they are hungry for profits. In order to encourage borrowing, the government is holding interest rates at close to zero. The big banks are more than happy to borrow money on these terms. All they need to do is ensure that they get a decent rate of return on that money. Those returns need to offset the declining value of the Dollar. In light of this, how does the tension between American and Chinese currency come in? Borrowing billions from the Fed and buying China’s currency is potentially lucrative. Put simply, if the Yuan is worth $ 1.00 today and next week, thanks to currency movements, it is worth $ 1.20, the banks make a huge windfall. When I was in Europe last June, one Euro would buy $ 1.19. Today it will buy $ 1.39. If I’d borrowed money at 0.25% four months ago and put it into Euros, I’d be laughing all the way to the bank. Oh wait, I would be a bank.

Why lend money to Americans who are saving instead of borrowing, when you can park the money in a different currency and see it grow in relative value to the Dollar?

Just like other countries oppose being the dumping ground for export goods, other nations do not want to be the dumping ground for dollars. Speculators, who cannot get a good return on investments when the interest rates are close to zero in the US, want to invest those dollars elsewhere. As they flood the marketplaces in other countries, they create inflation. This is good for the investors, who reap the benefits of the economy that overheats and inflates. Speculation is like a parasite that attaches to the host and pumps in an agent that causes inflammation, then draws out vital fluids. The end result can be seen in the US today.

This process makes Americans poorer in comparison to the citizens of other developed nations – at least compared to a year ago. Americans are still better off by far in respect to their access to resources, food, clean water and many other essentials. But they can afford far fewer luxury items. In terms of paper wealth, a foreign millionaire has seen his riches rise in comparison to US millionaires. A dollar buys less pounds, yen or yuan than a year ago. For American millionaires to keep up with the foreign Joneses, their net worth -- measured in dollars -- needs to rise.

Income is a zero-sum gain in the face of the production limits of oil. For one to become significantly better off, others have to reduce their standard of living. This is well underway in the US with continuing unemployment, cuts in welfare spending and inflation of necessities while non-essentials are undergoing a deflationary spiral.

High unemployment drives down wage levels, which translate to higher profits for businesses and higher dividends to shareholders. However, it is not a long-term solution since employers are also consumers in the marketplace and overall sales of everything but the most essential supplies will be impacted. With the American consumer impoverished then those goods that were exported to the US must find a new home.

So how will this impact Yellow Pages? An increasingly polarized population and a disappearing middle class will mean two disparate audiences, each with different priorities and spending patterns. For those who get the end of the stick with the sponge on it, the internet will again become a luxury. People who do not need a computer at home will cut costs. Internet cafés, common in Europe, may become a feature of communities. A lot more manufacturing will need to be done in the US if Americans are to afford goods. Many products will no longer be cheaper to import. The printed Yellow Pages will still be delivered for free to everyone who chooses not to opt out.

On the other end of the spectrum, those who do well in the coming collapse will see their personal fortunes soar in everything except comparative value to the rich in other countries. The import market will increasingly target the very rich, who will expect a level of personal service. With energy being less of an issue for those with plenty of money, online advertising may target this market, with elements of personalization and security becoming key factors in the decision on which internet search product to use.

Tuesday, October 12, 2010

Seattle introduces opt-out for Yellow Pages

Seattle city seems to have missed the memo.   Independent Yellow Pages are putting together a national registry for opt out.  Every book that gets thrown into a dumpster is wasted printing cost for them.  In an era of decline resources and an economy in recession, they will take every cost-saving measure they can.

So with an industry solution, paid for by the Yellow Pages industry, why would Seattle go to the expense of setting up a competing registry?  Don’t get me wrong, I’m all for competition where it benefits society.  Where’s the benefit here?

It’s certainly not about saving the environment.  Yellow Pages are made almost exclusively from recycled paper and wood chips.  The glue and ink is biodegradable.  Compared with the amount of junk mail and unsolicited catalogues we get every year, potential wastage is quite small.

When I first heard that the Yellow Pages business model was being labeled unsustainable, despite industry efforts, I was curious.  I felt sure I received more junk mail than Yellow Pages books - we get three Yellow Pages delivered to our door, AT&T’s book, Yellow Book, and the Valley Yellow Pages.

For one year I saved every piece of junk mail and unsolicited catalogue I could, throwing them into a box.  After one year, I weighed all this junk mail.  It weighed in at 75 lbs – compared to 5 lbs for the phone book.   Don’t believe me?  Here’s a photo:

One year's worth of junk mail!

So if environment was the issue, the city would be tackling junk mail as well.  It’s unsolicited and often even more unwanted than a telephone directory.  The offers are only good for a day or two and there’s another coming next week on “junk mail day.”    So if wastefulness is not the issue, what could be Seattle City’s motive?  Maybe money?

$ 0.14 for every book delivered
$ 148 per ton of books to be recycled
$ 100 (for now) license fee to operate a Yellow Pages in the city
(Taken from on-line research, not the bill itself.  E.A.O.E.)
Based on the figures from Seattle Public Utilities, detailed on this blog, the delivery fee will raise $ 280,000 and the recycling fee $ 350,000.  For now - as city revenues decline I expect these taxes, like many others, to rise.

A tax by any other name is still a tax.  This is a hidden tax on every small business in the city that is listed in the Yellow Pages.  Since Yellow Pages list every business for free, both in the classified yellow section and the alphabetical white business section, even that service to the community is now taxed.

A foolish move on the part of the city.  Locally delivered Yellow Pages helps keep money in the local community.  By giving a competitive advantage to online over local print, the city is driving shopping patterns online, where consumers often buy from out of state in the hope of avoiding sales tax.    

This is all about revenue raising.  Hopefully, the Association of Directory Publishers will challenge this in the courts before more cities jump on this tax-raising bandwagon.  

Sunday, October 10, 2010

The Wider Impact of Peak Oil

Yellow Pages Publishers, like all industries, rely on both a vibrant business community and a confident consumer base. Over the last few years, confidence in both sectors has taken a dramatic hit. For a while there was discussion of the decline being a “second great depression.”  Luckily, we only suffered a “great recession” rather than a depression. Cynics point out that it is a recession when someone else loses a job and a depression when you lose your own.

As Jeff Rubin, formerly chief economist of the CIBC pointed out, four of the last five recessions were preceded by a shock to the price of oil.  The most recent recession was not unexpected. A number of experts, including the renowned Nouriel Roubini, were warning anyone who would listen, back as early as 2006, that a spike in oil prices would have serious negative effects on both the US and global economies. James Hamilton of UC San Diego has detailed the causes and consequences of the Oil shock of 2007.  As he says in his abstract:

"Whereas historical oil price shocks were primarily caused by physical disruptions of supply, the price run-up of 2007-08 was caused by strong demand confronting stagnating world production."

Hamilton goes on to show that while the previous oil shocks of the last century were primarily caused by geopolitical events, from the Yom Kippur war to the invasion of Kuwait.  He explains how the shock of 2007 was different.  The inability of oil producers to keep up with demand caused the prices to rise, potential profits from buying long term contracts and selling again before delivery, drew speculators who pushed the cost to $ 145 a barrel in July 2008. 

None of the above is news to those who follow Peak Oil news on a regular basis.  However, Hamilton’s analysis of what was happening with physical production and delivery during the most recent shock was a source of new information for me.  I was not surprised that stocks of oil declined.  It makes good business sense to draw down reserves, purchased at previously lower prices and take advantage of the developing bubble only to replenish later when prices fall. The paper clearly demonstrates that speculation alone would not have accounted for the spike in prices.  A shift in the fundamentals created the opportunity for speculation, rather than money looking for a good return.  Peak Oil, specifically the inability or unwillingness to increase production, was at the heart of the problem. 

The impact on behavior of consumers was on a scale higher than expected. Oil at $ 135 a barrel represents 15% of all US take home pay – around $ 1 Trillion.   Hamilton states that although the increase in gas prices should only have caused a 1.7% decrease in non-energy expenditure, the reduction was 2.2%, the bulk of that decline took six months or more. 

Car purchases took an immediate and unsurprising hit.  While energy prices increased around 20%, it still only accounted for 5% of household expenditure.  However sales of vehicles dropped 10%, a big enough shock to the automotive industry to warrant government intervention. 

A bigger factor, one identified by Edelstein and Killian is the impact on consumer sentiment.  Rising gas prices in early 2008 hit the confidence of consumers and sales of truck and SUV sales by as much as 25% and car sales by 7%, as consumers shifted to more fuel efficient vehicles.  They recovered in the summer only to take a second hit in the fall. That second hit impacted all vehicle markets, cars more than SUV’s, which indicates the drop was not so much from the gas prices, but rather from a drop in income. 

Fear is an important metric in the marketplace.  It can drive consumption as well as hinder it.  Safety features of vehicles leverage the fear of an accident.  Fear of terrorism allows governments to channel billions of dollars to favored security industries and curtail civil liberties.  Fear of losing one’s job or of not being able to afford necessities can impact spending patterns.

One point, which I do not believe has received as much attention as it should, was the key determinant of demand in Hamilton’s paper:

"The most important principle for understanding short-run changes in the price of oil is the fact that income rather than price is the key determinant of the quantity demanded."

If income and not price determines demand, and there is a requirement to reduce demand (or the wheels come off the economy) then an increase in unemployment is what we would expect.

What does that mean for jobs?  Tackling unemployment in any efficient manner would create increasing demand as the working people can now drive happily around and consume.  Extra energy to deliver the goods they are now able to buy.  We bounce our collective heads off the ceiling of stagnant production again.

It should come as no surprise, then, that all efforts to reduce unemployment have not worked as well as the politicians told us they expected.  It may be pure coincidence that the stimulus package led to a level of unemployment the economists predicted, despite the assurances it would create or save jobs.  Is it now possible that unemployment is now a factor of energy availability and the plans and machinations of politicians are impotent in the face of that reality?  

The spike in oil prices caused ripples throughout society. Gas companies were very quick to raise gas prices with every upward move of oil but people felt they took their time lowering the prices as oil fell. Gas prices have direct and indirect effects on the behavior of consumers. It hit the pockets of families directly as they saw the cost to fill up the family SUV rise week after week. As a result they drove less, shopping less. At the same time, the cost of delivery also went up; the further materials or goods had to travel, the greater the impact. As prices rose, demand fell until equilibrium was reached. In many areas, the rise in costs was hidden by keep prices constant but reducing quantity.

Oil prices dropped significantly as the speculative bubble popped, but the damage was already done. Confidence and credit has yet to recover. We hear every day that there is money sitting on the sidelines waiting for investment. Pundits and commentators tell us that the problem is the banks are not lending, that credit is too tight but not to worry.  The economy us recovering well and green shoots can be seen everywhere and soon credit and money will flow and we will be back on track.

The state of retail tells us otherwise.  Many malls have empty shops. Closed and shuttered businesses abound. Even those shops that are still open have less products. The aisles in the big box stores are noticeably wider and there are less display stands at the end of those aisles. Talking to a relative who works for a distributor delivering to both Wal-Mart and Target, I learned that the better performing stores are moving 10% less product than a year ago, while the worst are down more than 25%.

If the money that is ‘sitting on the sidelines’ were to start moving though the economy, what would it be spent on? With less goods on the shelves, less stores open, that increase in credit moving though main street would have an inflationary effect on prices, which still remains the biggest threat to fiscal stability.

How serious of an issue is the threat of inflation?  Enough to cause politicians to do an end run around themselves to avoid increasing the money supply on main street.   

We narrowly averted such a disaster earlier this year when the financial reform bill passed through Congress. I’m referring to the Lincoln Rule being stripped out of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The press gave a lot of coverage to the stripping of the Volckner Rule but far less about the Lincoln Rule. That is, until Matt Taibbi of Rolling Stone Magazine published a very detailed description of the political machinations surrounding the so-called reform.

In his usual style, Taibbi attributes the defeat of the major reforms to corruption of the political system. What he seems to fail to take into account is the impact the Lincoln Rule would have had on the wider economy. In essence, the Lincoln Rule, had it been implemented, would have forced banks to consider carefully if they wanted to play in the derivatives market. As Matt pointed out,

“Thanks to Clinton-era deregulation, the market for derivatives is now 100 times larger than the federal budget, and five of the country's biggest banks control more than 90 percent of the business.”

Put simply, this rule would have required the big banks to give up cheap loans from the Fed if they wanted to continue to play in the derivates market. So where would that money have gone if the derivatives market had been declared off limits? What would have been the impact on inflation if just one percent of that money had been redirected into the physical economy? That would have been the equivalent of the entire Federal Budget trying to find something to buy, creating its own shock in the marketplace. That could have created an earthquake in the economy that I, for one, feel thankful we have not yet had to face.

We are between a rock and a hard place. Businesses need easier credit if they are to get the economy moving, but too much credit in the system may precipitate a huge adjustment that many businesses are not ready to survive.  As we struggle to navigate this bumpy plateau, our models need to assume less energy and less wealth.

Friday, October 8, 2010

It's the data, not the brand, that counts. are no longer hording their data. They are now allowing the advertising they carry in their database to be displayed in other applications.
They have recognized an important point in digital delivery of advertising: you don't need to rely on a particular Yellow Pages brand. With the analytics that digital media affords, you can show how many eyeballs parsed the customers’ advert. It does not have to be on a web site or in a mobile application that is branded as Yellow Pages. Eyes on ads are what the advertiser really cares about. It's what Yellow Pages have been doing for decades. In the past, brand recognition was the way of showing usage of a telephone directory. Now customers demand metrics. Impressions are the digital equivalent of distribution and much more accurate.
A move in this direction also affords opportunities for mobile developers. Looking at the iPad, iPhone and Android Mobile Yellow Pages offerings, there seems little to differentiate them based on the icon and description in the store. In the same way as most users are blind to whose telephone book they pick up and use, most people with a smart phone really do not care who is providing the data to their phone - so long as it is accurate and useful.
If brand loyalty to a Yellow Pages company does not inspire downloading of an application, what will?
People often make decisions based on emotion. The stronger the feeling, the more likely they are to act. So mobile developers have an opportunity to partner with Yellow Pages and give people a good reason to download their application. At the same time, they can do what Yellow Pages has always done, serve their local communities.
How? By partnering with good causes that need fundraising and let them market the end product as a way of raising those funds.
For example, a cancer charity may raise funds by having a downloadable local search application in the iTunes store that costs the end user a donation of $ 4.99, a portion of which goes to the charity. With a sliding scale of contribution based on volume, the more the charity promotes the mobile application (maybe a flyer in the next mailing or an email blast) the greater the charitable part can increase - once development costs are offset. It’s an easy way for people to contribute to a good cause if they have a smart phone, making this an especially attractive impulse purchase.
The mobile developer shares part of the revenue with the good cause promoting it. The only real difference between a children’s charity application and a cancer charity or even a “vote Joe Blog for Mayor” application is cosmetic. The required development time and effort, beyond the initial development, is minimal. Effectively, they “skin” the mobile application for each “good cause” that signs up.
From a Yellow Pages perspective, it's a win-win situation. If they develop in-house, they get part of the revenue sharing for the download of the application - with all revenue collection handled by the download service like ITunes. If someone else does the development, they still get eyeballs on their data and the analytics to show their customers.
They also have the opportunity to sell premium (top of results) opportunities. In this case, using the Yellow Pages model, the charity acts like a Certified Marketing Representative (CMR) and sells enhanced placement when the data is delivered to that particular application. All the mobile application has to do is tell the API which application it is, and the order of data returned will reflect corporate sponsorship of that “good cause.” The charity gets commission on the sale, and the Yellow Pages processes the order in a manner similar to any other order from a CMR-type reseller.
'Pay for performance' is also a possibility, since gathering the metrics is key to demonstrating the value of having your advertising included in that Yellow Pages data. Premium positions are sold on a performance basis with the advertiser paying per impression or click through to additional profile data. The revenue generated pays “commission” to the “good cause.”
Of course, the long-term success of a concept like this requires that the energy needed for a mobile infrastructure remains available for the foreseeable future. Given the decade-long timescale I expect the impact of Peak Oil to take, the opportunities for mobile will be there for awhile, certainly long enough for the market to mature.
Here’s an interview with Stéphane Marceau of which prompted me to get around to posting this now rather than at some future time.

Monday, September 27, 2010

Why does Peak Oil matter to Yellow Pages?

I work in the Yellow Pages industry, in the Information Systems area - and I am a firm believer in the predicament of Peak Oil. I call it a predicament, rather than a problem, in that while problems have solutions, there are no solutions for a predicament – and there are no easy solutions for peak oil.

Oil contains millions of years of fossilized sunlight. The amount of energy we can extract from oil is far greater than any other resource we will have access to in the foreseeable future. The population of the earth currently uses approximately one cubic mile of oil a year. The United States population consumes one third of that astounding amount. To replace oil we would need to build more than fifty nuclear power plants each year for fifty years, or thirty three thousand wind turbines a year for the same period, or a hundred million solar panels a year until my teenagers retire, assuming there still is retirement when they reach that age.

That level of commitment to the future of society might have worked a quarter of a century ago. The oil shocks of the 70’s started us down a road to sustainability. We abandoned that road in the 80’s; without realizing it, we chose to sell our children’s future for a quarter of a century of reckless partying. We paid for that party by a system of trade that we call “globalization” - but historians, looking at similar societies in the past, call it a tribute empire.

Often we hear from Peak Oil skeptics that we are not running out of oil. This, at best, shows a lack of understanding of the principles of Hubbert's Peak. While it is true we are not running out of oil, peak oil is about reaching the point of maximum extraction and the inevitable increase in cost as the oil that remains is more difficult to reach. Peak oil is that top of the bell curve, where the ride down the other side begins.

The top of the curve is an interesting time to live. One only has to look at countries that have peaked in their production. Take Mexico for example, the Cantarell oil field peaked at 2.1 million barrels a day in 2004 and has been declining ever since. By 2009 this field only produced 772 thousand barrels a day, down two thirds in only half a decade. The Mexican government lost the revenue they were collecting on that oil and like all politicians, they tended to think the money would coming in forever and budgeted accordingly. How has that impacted their society, infrastructure and ability for the government to project its power throughout the country? By the latter, I mean law and order, which is always a good indicator of a government’s ability to have a meaningful influence on society.

While extraction rates decline in countries that were once net exporters, demand is increasing in other societies. Driven by the expectations of their population, who aspire to a future that looks like our present, they consume more and more energy. China and India are increasing their imports at an alarming rate, considering production of conventional crude has not increased since 2005 and is unlikely to increase again. A global chess game is developing as countries and power blocks maneuver to ensure their slice of the ever-decreasing pie.

Currently we make up the difference in what the oil importing markets want and what is pumped out of the ground with non-conventional sources. Tar sands, which use large amounts of energy and even more fresh water, manage to convert a sticky mess into something resembling oil. Even though this is highly inefficient, it is touted as the current solution. However, it hides the fact that millions of barrels of oil are used to power the extraction process. In effect, we double report the oil available since the oil and its derivatives assigned to extract oil out of tar sands is no longer available to power the rest of our 21st century economy. The same goes for biofuels, where petrochemical-dependent infrastructure is now used to grow crops for use as fuel for vehicles instead of food as fuel for humans.

Nuclear power faces depletion of easily extractable radioactive materials. Coal is not only environmentally damaging but is also well over the peak of the better quality coal. Having grown up in a coal mining village, I would have been very upset if what is currently being shipped out of the Appalachians to coal stations was delivered to my door for us to burn for our domestic hot water. Anthracite supplies are close to exhausted. Much of what we have left in the US is brown coal, hardly a net energy producer when all aspects of the process are taken into account. Natural Gas, often touted as a another alternative to oil will last maybe a decade or two at present consumption levels. While it can be processed into oil it is hardly efficient. Germany in WWII relied heavily on coal to liquid technologies and it didn’t work out to well for them.

Many potential solutions have been suggested. Most are sincere and the only flaw is in an understanding of the scope of the challenge that that Peak Oil presents us. Others are not much better than waiting for aliens to land and give us some new technology. A more practical solution is to develop coping mechanisms that will allow us to navigate each step down. In the case of Peak Oil, the predicament will be over when society exists on whatever energy sources are still available to us.

At the center of a society that faces these challenges is the Yellow Pages industry. Advertising touches nearly all aspects of commerce, business, and social interaction. Yellow Pages is undergoing its own evolution in the face of new technologies, in many ways in the opposite direction to that which Peak oil will lead.

As Yellow Pages goes digital, evolving into the wider concept of Local Search, the infrastructure required to support those Local Search platforms will require greater and greater amounts of energy. Local Search is the term given to the use of the internet to find geographically relevant information. Often tied to GPS, today it is beginning to become a key component in social networking. Check-in sites that allow a user to divulge their location will give rise to very specifically-targeted advertising. Local Search drives Google maps and many products you can download to your tablet or smart phone.

As with all systems that rely on modern technology, Local Search uses a lot of energy. That energy is used to power the cell phone transmitters and charge up your mobile phone while you sleep. It is used to build the transmission towers and every part of the infrastructure it depends upon. Energy went into the construction of the factories that made that smart phone. Energy for shipping of raw materials into the manufacturing countries. Energy to ship the finished product to the consuming economies of the West.

The arrival of Peak Oil impacts the economy in many ways. As energy costs rise, the economies of scale gained from centralizing production will be overwhelmed by rising energy costs. Decentralized, more locally based business will have a strong competitive advantage. Yellow Pages, printing a good, old fashioned book, will outlive their on-line only competitors. When consumers have to think about the cost of firing up the PC or the rising cost of digital infrastructure makes mobile phones luxury items, the Yellow Pages book will still be on the coffee table.

Yellow Pages Publishers, already part of the local communities, will be in a position to watch and influence that transition in more ways than one would otherwise think. In fact, they are influencing business in sustainable directions even today. Recently a number of Yellow Pages and even some online Local Search products have introduced recycling guides. By increasing awareness of recycling options in the community, they have increased the supply of materials people want recycled. This is driving growth in an industry that will be vital in a future when the cost to recycle materials is lower than that of producing them new. Best of all, this recycling information is delivered free to almost every household in the United States.

The same type of guide could be produced to encourage more reuse within society. As frugality becomes chic, we may see the development of guide sections that appeal to that emerging demographic. Advice on buying from second hand shops, flea markets, or concession malls. Where to go to look for product recall information. What not to buy second hand. Such a guide could offer advice from charity shops on what to bring in at different times of the year. Filler (adverts that abound in Yellow Pages and provide useful information and advice free of charge) containing public information on tax benefits of donating can help encourage reuse. The easy availability of this type of information could drive growth in the raw material – in this case people giving or selling their unwanted goods rather than simply throwing them in the bin.

Yellow Pages already publish many millions of community pages each year, providing useful local information. The printed book does not require 110 volts coming out of the wall to plug in a computer - or the cell phone tower nearby to get a signal on the smartphone.

As energy availability declines, opportunities will arise and markets will change. Yellow Pages is not only in a position to leverage its strengths in a time of change, but also to contribute to the communities they serve.

Wednesday, September 22, 2010

Peak Oil and Yellow Pages

Peak oil and local search may seem a strange combination but it is one that is very much on my mind as an individual working in the Yellow Pages industry, in what may be the twilight of the industrial age.

Everyone knows what Yellow Pages are, the large book that is dropped on the doorstep once or more a year.  A lot of people do not realize that there are many Yellow Pages, the epoch of lumbering dinosaurs owned by the telephone company are well in the past.  The market now dominated by the leaner, more nimble and responsive independent puiblishers; competition bringing costs down and greater choices for everyone.

What many do not realize is how sustainable the Yellow Pages industry has become in the twenty first century. More trees were cut down to support the infrastructure needed to allow me to write this post than went into the seven billion pages of advertising we printed last year.  

In an industry that is moving from the a relatively low energy modality of print to one that requires the modern infrastructure of internet and mobile, how will businesses change if the energy available to society significantly changes?  How will buying patterns change when oil prices spike again?  What will $5.00 a gallon gas do to the way people shop?   

Of course, it's possible that humanity may find a solution to the increasing scarcity of oil.  It won't be biofuels, tar sands, solar or wind power; in fact there is no fuel source we currently know of that can compete with oil and its products.  But who knows, humanity has overcome many challenges in the past and maybe we can keep going onward and upward for ever.  I'm not betting on it, though, while the myth of infinite progress may be one of the most prevalent beliefs today, we should remember that the citizens of Rome never believed Rome would fall anytime before the second coming.

So what would local search look like after a century of techological progress?  Perhaps we'll all have our own personal Jeannie who knows our tastes and will select the vendors, products and services for us.  Perhaps she will also handle introductions and take care of the mundane details.

On the other hand, if society declines and the cost of energy increases to the point where people are choosing carefully what they use it for, systems will revert to lower energy models.  In such a scenario, the printed book could once again become a dominant player in the marketplace.  Local search will really become local if the cost to ship goods from across the continent becomes excessive. People will be buying local not out of loyalty to the community they live and work in, but out of practicality.

Which way will society go?  As much as I'd like to believe that it is up to us, we may well have passed the threshold beyond which all we can do is hope we have a relatively soft landing.  We've climbed a long way in a short number of centuries; I hope we have a long descent rather than a fast crash so that we have time to adjust to a world that would be familiar to our great, great grandparents.