Government & the Private Sector - Ernest Nounou*

During Labor Day Weekend's Katrina tragedy and skyrocketing gas prices, my high school daughter asked if we would have long lines at gas stations as we did in the '70s. I reassured her we'd learned a lot since then, but as the enormity of Katrina's consequences sank in, it was dismaying to see how little we've learned in 25 years.

The woeful responses to Katrina by all levels of government are merely the latest indictments of government generally as part of the problem rather than the solution. The popular alternative offered is more private sector/free market solutions, which ignores the human tragedies and destruction, caused by Enron, WorldCom and others. It also ignores the failure of Exxon/Mobil, Chevron/Texaco and the rest of the energy sector to do anything meaningful to find other energy sources that would make us less dependent on OPEC oil.

In recent memory neither government nor the corporate sector have particularly distinguished itself in the service of the US. The corporate sector has managed to increase productivity and profitability, even as jobs have been exported, health benefits cut, and pension benefits shifted to the government. In the vernacular, US corporations have become leaner and meaner.

Let's be clear: the corporate sector's first priority is to remain competitive and profitable, which is increasingly tougher in a globalized world economy. Competition from Asian companies, particularly lower cost base Chinese and Indian companies, must be addressed by the US as a matter of national policy. Otherwise, left to free market solutions, we will have more profitable American companies shedding higher US costs such as wages, benefits and pensions, and shifting jobs overseas.

ExxonMobil and ChevronTexaco were four separate companies during the '70s. Today they are wonderfully profitable stocks to have in your portfolio. But don't look for them to solve the energy crisis, for which there is no single answer. The answer does include alternative sources of energy including renewable and nuclear, conservation, and a more realistic regulatory environment. For this to finally happen, government and corporations must partner in energy solutions as they have successfully done in other fields.

Historically, the aerospace industry's military contracts for major new systems provided the basis for commercial aircraft technology, giving Boeing, Lockheed and other US companies unrivaled positions vis-à-vis non-US companies. In the pharmaceutical industry National Institute of Health (NIH) grants provide the major source of funding for research to find and develop new medicines. This research contributed to making Pfizer, Wyeth, Bristol Meyers, Merck, and the US pharmaceutical industry the envy of the world.

Sensible and competent government in partnership with the private sector is necessary to solve and wean American dependence off OPEC and Middle East oil. During the '70's crisis we learned there was enough oil in Canadian tar sands and Colorado shale equivalent to two Saudi Arabias. Experts estimated that it would require $20/barrel price to profitably produce oil from tar sands or shale. Nevertheless neither was developed because both required large up-front capital investments. Fear that oil prices would fall, wiping out any possible return on those investments inhibited this development. When the risks and rewards for diversifying their oil sources were calculated, major oil companies chose the more profitable status quo and pumped more oil from the usual sources. As private companies looked to maximize their profitability and return on investment, diversification made as little sense then as it does now.

Here is an alternative: Colorado shale requires large up-front investments to develop. Why not provide incentives in the form of purchase guarantees from the Strategic Petroleum Reserve to buy oil at premiums to the market price? Our domestic sources of oil would rise, pressure on world oil prices would ease as the Strategic Reserve buys less from the market, and US jobs would be created. A win-win all around! But it won't happen if we simply wait for ExxonMobil to do it. But venture capital would seize such incentives to create a new industry, providing jobs and boost to our domestic economy.

The truth is that sensible and competent government can make a major contribution to addressing our issues, just as in some circumstances the private sector left to itself cannot. We have a right to expect both to work together to provide direction and solutions for the major challenges facing the US economy. What we no longer have the luxury to tolerate is inept government and incompetent private sector companies.

*A graduate of Wharton, Ernie is a Founding Partner of Catalytic Group, Inc., a Technology consulting and execution firm. A former banker he enjoys writing on business topics and can be reached at ernie@catalyticgroup.com.