Push energy innovation

Edward Goldberg

Published on February 23, 2007
© 2007 - The Baltimore Sun

Modern American capitalism is the world's envy of growth. It successfully harnesses the human drive for competitiveness with the human need to create and innovate.

Apple booms with the iPod, and Microsoft works day and night to create a better version. But when competition becomes muted and market innovation is deemed not essential, the cornucopia that we call today's capitalism stalls and society is harmed. This is exactly what has happened within our energy giants.

The most efficient way of developing new energy resources should be through private enterprise. But our major energy companies have not been pressured by the forces of modern market capitalism to give anything but lip service to the development of new energy sources. While capitalism in America is constantly evolving, creating more efficiencies and innovations, the energy industry appears to be stuck in a mercantilistic mode. It is as if Adam Smith's famous invisible hand has been dislodged from the marketplace.

If this occurred in a small industry, few people would really care. But when the market becomes complacent in its role of innovator in our most vital industry, the government as the guardian of our nation's independence must become the catalyst for innovation.

Whether it was the Erie Canal, which led to the spectacular growth of New York City; the Manhattan Project, which gave rise to our atomic energy industry; NASA; or the Defense Department's creation of the Internet and the Pentagon's investment in computer chips during the Reagan administration, being the technological innovator for private industry is not a new role for federal or state government.

In the energy industry, the need to compete for consumers - and thus to innovate - has not been an obligation for years. When was the last time anyone has seen an oil company advertising on TV that its products or services were better than the competition's?

Although not monopolies, the energy companies are in effect large, privately owned utilities and delivery systems. Under the premise that energy is so important to the nation that it must be treated differently, these companies are supported unlike any other industry with massive American military investments to protect their supply lines and sourcing.

Unlike modern high-tech companies, energy companies are free to ignore Harvard business professor Clayton Christensen's maxim of "disruptive technologies": that new technologies replace existing ones because they are cheaper and more consumer-friendly. Able to disregard this need to create "newness" in the marketplace, energy companies primarily invest in growing and maintaining their supply systems.

Without market pressure to innovate to find alternative sources of energy, society receives a much-reduced benefit from the existence of these companies. Of course, in our system of capitalism, the relevance of these benefits is usually judged by the marketplace. If Toyota takes market share from Ford by manufacturing hybrids while Ford is still making SUVs, Ford is punished by the market.

But because they derive most of their profits from sourcing, the energy companies do not need competitive innovation to survive. And because their profits have been extraordinary, they are not punished by the market for a lack of innovation; in fact, they are rewarded - while at the same time, they are at liberty to ignore the market-driven changes that have moved American capitalism forward.

The energy majors know that if oil, year in and year out, remains cheaper than competitive energy products, there will be little pressure to invest in new forms of energy. And when the oil market falls, as it has for the last six months, it reinforces this corporate stagnation.

Thus the urgent need for Washington to become the risk taker of last resort. The federal government must assume the role of innovator by establishing a "superfund" to research and create alternative energy systems that would later be licensed to private industry.

Without such federal investment, the crisis for our country will remain. For in a world of energy shortages, America no longer can afford the luxury of allowing old-fashioned, non-innovative capitalism to be at the heart of its industrial system, distorting and threatening the system as a whole.

Edward Goldberg is president of a New York-based consulting firm dealing in international trade and trade finance. He was an adviser on U.S.-Russian relations to Sen. John Kerry's 2004 presidential campaign. His e-mail is edg@annisagroup.com.

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