Marketplace - American Public Media

Sand turns a rural county upside-down

Thu, 2015-01-15 13:35

The fracking boom has transformed rural Trempealeau County, Wisconsin, and areas like it. There’s no oil or gas here —  just sand, the kind oil and gas drillers prefer. Fracking has made sand a $10 billion industry, and publicly traded companies have rushed in, digging enormous mines. Trempealeau — on the western side of the state, population 28,000 or so — has more mines than any other county.

“The onset of industrial sand mining pretty much flipped our county upside-down,” says Kevin Lien, who runs the county’s Department of Land Management. “And that’s probably an understatement.”

Pat Malone gives me a tour in her candy-apple red Toyota Corolla. She’s been here 26 years as a professor with the University of Wisconsin’s cooperative extension— kind of a full-time policy consultant to local government, on topics that include planning, health, and economic development.

 In March 2010, a woman came into her office, worried about a new neighbor. “She was talking about this sand mine, and all these awful things that would happen,” Malone recalls. “And in my head I’m going, ‘It’s just sand.’”

Malone had seen plenty of sand mines. Mostly small and temporary — gravel pits — supplying local construction projects.

But when she looked at the permit application for this mine, it was different. Most were a few pages long. This one was a few inches thick.

In the next three years, the county approved 27 more permits like it.

We go past that first site and lots of others: Giant silos, processing plants, and huge piles of sand. All on land that used to be rolling hills, covered with trees.

All of which have special value to people here, as Malone knows, having done many surveys and focus groups as part of the County’s planning process. “People really, really, really value the natural environment here,” she says. “Universally, top of the list.”

She says local residents pay a price for that value, in dollars. “If people took their job skills and went to New York or Chicago or Boston, they could make more money,” she says, “both in absolute and in real terms.”  

She gestures to the land around us. “But because they like this— these scenic hills, and the clean water, and the knowing-who-your-neighbor-is, and going and sitting in your patch of woods and hearing nothing— nothing!— they’re willing to pay for that.”

In addition to the changing landscape, people close to the mines hate the lights at night, the noise from blasting.

Then there are trucks carrying sand out. Most mines are permitted for at least 100 a day, and two-lane roads are the norm here.

“You look at this road,” Malone says as we idle near a mine, “and you’re like, gaad. Do you really want heavy truck traffic coming up and down this thing?”

Last, but not at all least, people worry about the air and the water.

Sand processing uses some potentially harmful chemicals, and there have been spills.

“A couple of years ago, we had seven mines operating here,” recalls Kevin Lien, the county land-use director. “And all seven were cited… for stormwater-runoff events. All seven. So the track-record isn’t great.”

With air quality, the big concern is dust — tiny particles that can be deadly over the long term.

In 2013, the county board declared a one-year moratorium on new mining permits, and Malone worked with a committee that studied the issue.

“For some of them I think they got sadder,” she says. “And for some of them, they got angrier.”

Among other things, the committee’s 150-page report found that mining had affected wells near some mines— and wells supply all of the county’s drinking water. With air quality, the committee found there wasn’t enough monitoring to know how much dust residents might be exposed to.

Malone takes me down County Road Q, where Hi-Crush Partners operates Trempealeau’s newest and biggest mine. A mile-long conveyor belt crosses the 800-acre site— and passes over County Road Q like a viaduct. It takes sand from the mine to a rail spur that Hi-Crush has built.

Chad McEver, a Hi-Crush executive who develops and oversees new mines, says the conveyor saves money. “Not having to truck is a huge advantage when it comes to costs,” he says. Less diesel, no drivers.

He expects the conveyor is also less annoying for neighbors. “We plan on on being here for a long time,” says McEver. “So we want people to like us, and want us to be here.”

That means financial support for local projects, and it means McEver tries to be responsive when neighbors complain. “If there are legitimate concerns or issues, we always take care of it, no questions asked,” he says. “We believe as a company in trying  to treat people the way we’d want to be treated, and I can honestly say that’s what we do.”

However, that doesn’t mean the neighbors are happy. They’ve still got noise from blasting, lights at night, and lingering concerns about air and water.

Bill and Angela Sylla live and farm across County Road Q from Hi-Crush. Their sons are two and five years old. Water has become their biggest concern.

A pump feeding their chicken barn failed last summer, not long after the Hi-Crush mine opened. Bill says it was clogged with sand. Hi-Crush had the well tested, and traces of lead and arsenic showed up.

“When you put everything together, they said it’s an OK level,” says Angela Sylla, at her kitchen table while her sons angle for her attention. “So it’s not unsafe, but it’s there.”

Chad McEver says the mine hasn’t hurt the Syllas’ water. Pat Malone has looked at the data and says it’s not conclusive.

When Hi-Crush first showed up, some of the Syllas’ neighbors sold land to the mine, at a big premium. Bill had just moved home to take over the farm his family has run for generations.

Now, they’re isolated, sleepless, worried about the water.

“The depression a person suffers some days is astronomical,” says Bill. “Because you just don’t know where to go, what to do. What can you do? What should you do? What’s your best option? You don’t know.”

By an agreement with the local government, Hi-Crush would buy the Syllas’ house for a guaranteed price, but not the $500,000 chicken barn the family installed a few years ago, and not the 200 acres they farm. For now, they’re staying put.

“These facilities are not going to make everybody happy,” says Chad McEver. “There’s no question about it.”

On the other hand, he says, the mine contributes to the local economy. “Every day I think of new examples,” he says. “Our plants buying parts from the local auto-parts store, the local hardware store, or the local janitorial company that comes out and cleans the offices.”  

Pat Malone ran economic-impact numbers when the first mine showed up, and found a modest contribution. A mine’s biggest expenditures— on heavy machinery— can’t be made locally. “You are talking about some big, honking pieces of equipment,” she says. “Well, there’s no Massive Pieces of Equipment retail outlet in Trempealeau County.”

Similarly, the profits go elsewhere, says financial analyst Brandon Dobell, who watches the oil and gas industry for William Blair & Company. “The sand’s being sold someplace else,” he says. “No one is headquartered in Wisconsin. It’s not like Texas, which has benefitted from the gazillions of dollars going into these wells, and the taxes from the oil and gas.”

Swiss National Bank gives up the ghost

Thu, 2015-01-15 13:23

The Swiss Franc is the sixth most-traded currency on the planet, and it exploded in value this morning by 15 percent.

That's because the Swiss National Bank surprised just about everyone when it stopped trying to control the currency.  It had been holding the currency down in value starting in 2011 during the eurozone crisis.  Investors at the time, fleeing the instability of the euro, sought to put their money in Switzerland.  That bid up the price of Swiss francs, hurting exporters.

The Swiss National Bank had printed nearly half a trillion Swiss francs in its effort to buy up other currencies and devalue the franc.  The bank called it quits without explaining its decision.  Perhaps it was concerns over inflation or public pressure, or fears that all the investments it was making were exposing it to undue risk.  Whatever the reason, the effect was immediate.

The economics of the sick day

Thu, 2015-01-15 13:06

President Obama is scheduled to deliver his sixth State of the Union address on Tuesday. He's been on something of a publicity tour, unveiling policies he plans to promote in that speech. Thursday's stop: Baltimore, where the president talked about paid sick leave, and the fact that some forty million workers in this country don't have it.

The president is calling on Congress, as well as states and cities, to make it possible for workers to earn up to seven paid sick days a year. So how much would that cost businesses? One study of a law in Connecticut found that nearly two-thirds of business owners said they saw little or no increase in costs. Eleven percent said their payroll costs increased by 3 percent or more.

"Three percent is terrible in this environment," says Bill Dunkelberg, chief economist of the National Federation of Independent Business.

Advocates of paid leave say it reduces turnover and makes for happier, healthier workers. 

"You end up with a more loyal employee base," says Amanda Rotschild, co-owner of Charmington's, a cafe in Baltimore that offers paid sick leave to its workers. "Your employees really want to work for you."

 

 

Inside an alternative universe of currencies

Thu, 2015-01-15 10:54

Satirists Sam Weiner and Daniel Kibblesmith tell us all about the hippest new currencies. They are the authors of the book "How to Win At Everything."

Using the boring old U.S. dollar has never been more passe! Here's a look at the cool, new alternative currencies that will soon be lining your wallet.

Bitcoin
This hip, crypto-currency is a modern, all-digital legal tender, free from the manipulative tampering and full faith and credit of the U.S. government. It's the exciting new way to pay for online transactions like pizza, downloadable video games and ... several other things that aren't illegal drugs or child soldiers.

Gold bullion
These coins will always retain their value, and unlike paper money, they'll really sting when you whip them at a Starbucks employee who insists they only take "real" money.

Camel cash
Sure, fewer people than ever are smoking, but that constrained supply only makes Camel cash more valuable! Start searching your sketchy uncle's coat pockets for a potential fortune in this thriving cartoon currency.

Natural currency
As for animal lovers, you might want to invest in a natural currency like elephant ivory, tiger pelts or priceless gorilla skeletons.

HBO GO passwords
The oldest currency in the world.

Yes, no matter which one these alternative currencies you turn to, you can feel secure that they'll stay refreshingly unregulated, impossible to insure, and easily made worthless by the unknowable whims of a lawless marketplace. Happy spending!

How to win at alternative currencies

Thu, 2015-01-15 10:54

Satirists Sam Weiner and Daniel Kibblesmith tell us all about the hippest new currencies. They are the authors of the book "How to Win At Everything."

Using the boring old U.S. dollar has never been more passe! Here's a look at the cool, new alternative currencies that will soon be lining your wallet.

Bitcoin
This hip, crypto-currency is a modern, all-digital legal tender, free from the manipulative tampering and full faith and credit of the U.S. government. It's the exciting new way to pay for online transactions like pizza, downloadable video games and ... several other things that aren't illegal drugs or child soldiers.

Gold bullion
These coins will always retain their value, and unlike paper money, they'll really sting when you whip them at a Starbucks employee who insists they only take "real" money.

Camel cash
Sure, fewer people than ever are smoking, but that constrained supply only makes Camel cash more valuable! Start searching your sketchy uncle's coat pockets for a potential fortune in this thriving cartoon currency.

Natural currency
As for animal lovers, you might want to invest in a natural currency like elephant ivory, tiger pelts or priceless gorilla skeletons.

HBO GO passwords
The oldest currency in the world.

Yes, no matter which one these alternative currencies you turn to, you can feel secure that they'll stay refreshingly unregulated, impossible to insure, and easily made worthless by the unknowable whims of a lawless marketplace. Happy spending!

When falling bank profits can be a good thing

Thu, 2015-01-15 10:34

Big banks are reporting disappointing earnings this week, in large part because of falling revenue from bond trading. That’s bad news for banks and their investors, but might not be so bad for the rest of us, some economists say. It could be a sign that regulations are reducing risk, as long as falling profits don’t encourage banks to seek higher returns elsewhere. 

 

The race to build the car of the future

Thu, 2015-01-15 10:15

The North American International Auto Show is in full swing, and author Levi Tillemann makes a telling observation:  “It seemed like every automaker had an electric vehicle on the floor.”

Tillemann covers the drive to build the car of the future in his book, "The Great Race: The Global Quest for the Car of the Future."

But what does that car look like?  "It's almost inevitable that the car of the future is going to be electric, and it's going to drive itself," Tillemann says.

There's a shock absorber built into the electric-vehicle market. California has regulatory authority to mandate that automakers make a specific type of vehicle, but there is also the option to buy and sell credits instead.

"Auto companies have to sell a certain percentage of their vehicles as electric cars. If for some reason, they’re not fulfilling California’s mandate, then the price of the credits that you get for selling an electric vehicle goes up," Tillemann says. "And that gives you an incentive to drop the price of your electric vehicle and sell more. Because if you don’t get those credits from selling the car yourself, you’re going to have to buy them from someone else."

“When you put oil into the equation, then there’s something else that comes into the mix, which is geopolitics, because oil is what some people have called a 'strategic commodity,'” he says.

One of the benefits of electric vehicles is that electricity can be made out of any energy source. This changes the geopolitics surrounding cars and the economics of how they are manufactured.

“When I talked about the great race to build the car of the future, what I’m really talking about is a race to dominate international markets," Tillemann says. "And a race for countries like Japan, China and the United States to build, sell and export the car of the future.”

These three major markets are the focus of "The Great Race," but Tillemann points out China has fallen behind. In the mid-2000s, China made a bold move to surpass the West in automotive technology by bypassing the era of the internal combustion engine and going straight to electric vehicles. The effort failed because the Chinese didn’t have the right technology needed to produce consumer electronic vehicles. Now, a number of regulations make it difficult for foreign manufacturers to sell electric vehicles in China.

Tillemann's book is available for pre-order. Read an excerpt below.

1: The New Emperor and Wan Gang’s Eco-Wonderland

It was something between a cotillion ball and a ritual war dance. Like the Beijing Olympics two years earlier, the Shanghai World Expo was a coming-out party for China’s communist leadership. Over the summer of 2010, 72 million visitors flooded the Expo. The government spent more than $4 billion preparing for the fair—not including new rail lines, roads, landscaping, and other improvements to the city.

China’s pavilion was a massive crown-shaped pagoda, which cost over $200 million to build and was packed with cultural treasures. The building loomed like a sovereign over the Expo’s international guests, and countries from around the world paid tribute in diverse currencies. The Swiss built a chairlift that suspended visitors on an aerial journey over Shanghai’s sprawling metropolis, and in the Expo’s French quarter priceless Impressionist paintings hung on display. Elsewhere, corporate sponsors showcased the future of clean energy and “K-pop” megastars squealed, crooned, and gyrated for the new emperor.

To anyone with the faintest sense of context, the Chinese government was sending a clear message: the Middle Kingdom was rising; it was to be respected and shown deference; it was building a new world order and a sustainable empire.

The Expo also represented a symbolic victory for one man, an engineer named Wan Gang, China’s enigmatic minister of science and technology. The entire fairground was a canvas for his life’s masterwork: securing Chinese dominance in the global auto industry. China was about to become the world’s largest auto market, and Wan Gang’s obsession was to make its national champions internationally competitive.

Over the preceding decade Wan had enjoyed an improbable rise to power. Rather than joining the Communist Youth League as a young man or ascending the ranks through family connections, Wan had left China to study engineering in Germany, and made a career as an executive with Audi. After returning he had penetrated China’s highest circles on the strength of his conviction that one day soon China could lead the industrial future. China, said Wan, could dominate the twenty-first-century market for electric vehicles (EVs). All this would have been impressive in its own right, but the fact that Wan was not even a member of the Chinese Communist Party made it truly exceptional.

Behind Wan’s enigmatic smile—and he almost always seemed to be smiling—was an iron determination to break a century of dependence on foreign oil and Western technology. The ultimate goal was to leapfrog over Japan and the United States so that the world’s other big markets for automobiles would import cars and factories from China rather than the other way around. To a nation just emerging from a self-declared “century of humiliation,” the prospect was irresistible. The 2010 Expo was a powerful declaration of intent: China was in the race, and they intended to win.

Against this backdrop, the EV quickly became a national hero—and a focal point of China’s technology ambitions. The Shanghai Expo was the culmination of a decade of engineering and Imagineering under Wan’s research program at Shanghai’s Tongji University. Two years earlier, Tongji’s Beijing rival, Qinghua, had led a similar effort for the Olympics. But the demonstration in Shanghai was more than twice as big and vastly more technologically complex. There were electric cars, fuel cell–powered buggies, and buses that ran on fast-charging “ultracapacitors.” Almost all of these were pre-commercial—meaning they were more science project than store shelf product. But for now, China did not need to work out the messy details of building the industry—the consumer technology, economics, and business plans that would help it grow. Wan Gang and the others seemed to believe that with enough money and political pressure, those would come. What China needed for the Expo was a declaration of its ultimate potential—a road map and a compelling story.

General Motors and the Shanghai Automotive Industrial Corporation (SAIC, GM’s Chinese partner) were responsible for exploring the farthest reaches of this futuristic vision. As the country’s largest automakers and prominent corporate citizens of the host city they were under intense pressure to perform. They delivered. The pair presented an ornate, dizzying, transformational spectacle. China’s future cars would be smaller, smarter, faster, cleaner, safer, and sexier than anything that had previously existed.

Inside the SAIC-GM pavilion was the show to top all others. Visitors strapped into five-point harnesses as an IMAX-sized movie with computer-generated imagery flew them through a bright, crisp virtual reality. Electric pods raced through the streets at breakneck speeds. Stoplights, traffic jams, and even drivers were gone. By 2030, GM and SAIC promised, China would be animated by a living network of safe, efficient, zero-emission vehicles in constant communication with each other and the environment.

In this bold new world, a blind girl could race through the canyons of Shanghai in perfect comfort and safety, secure in her personal mobility pod. Rather than drive to work, the conductor of Shanghai’s symphony reviewed his scores and made last-minute preparations for the day’s performance. A pregnant mother made it to the hospital just in time thanks to a speedy autonomous ambulance. This was a machine as big as a city and intricate as a Swiss watch. After the ride, a curtain rose to reveal real-life EVs — which looked exactly like those onscreen —wheeling autonomously around the building. It was quite a show.

For Expo attendees, this vision of 2030 was tantalizingly real—at least until they reemerged into the exhaust-laden smog swamps of Shanghai. Inside, skies were blue and the air was fresh. Futuristic robots rocketed silently down highways lined by space-age wind turbines. But outside, the air was chewy with soot and skies were gray. The phalanx of electric cars and buses commissioned for the Expo stopped at a chain-linked frontier demarcating the boundaries of Wan Gang’s eco-wonderland and China 2010. Real life meant navigating manic waves of oil-burning SAICs, VWs, Audis, and Buicks. Indeed, the 100 million automobiles on China’s roads had become a distinctly mixed blessing. China’s megacities were stifled by putrid smog and gridlocked.

No doubt, this is why in 2009 China’s government announced ambitious plans to leapfrog the West in developing and deploying electric vehicles. In two short years, Wan Gang promised that China would deploy 500,000 domestically produced EVs.

But even in 2010, there were signs that this vision was faltering. Few analysts were ready to say that the emperor—or perhaps the debutante—had no clothes, but half a decade later, the contours of this failure were stark. Despite an intense government push to electrify China’s cars, the country’s industrial giants had fallen far short. China was the largest automobile market in the world, but its domestic EVs were a blush-inducing afterthought. China, with its doubledigit economic growth rates, its 1.3 billion brains, and its $3.4 trillion in U.S. foreign exchange reserves, had aimed to “leapfrog” into the vanguard of automotive technology and dominate the race to build the electric car of the future. Instead, it struggled to keep pace.

Leapfrogging Leviathans

Part of the allure of leapfrogging was the difficulty of simply catching up. The complexity of today’s auto industry should not be underestimated. The modern automobile is one of the most sophisticated pieces of technology in the world. At the turn of the twentieth century, motorized cars were a novelty—they were finicky, dangerous, and there was a reasonable argument that the horse was a better piece of hard-ware. But within a decade or two this had changed. After World War II, the level of industrial specialization required to integrate ever more advanced automotive systems grew exponentially. The British futurist Arthur C. Clarke once famously wrote that “any sufficiently advanced technology is indistinguishable from magic.” And by the beginning\ of the twenty-first century, the complexity of an automobile had far outstripped the understanding of the common man.

Making an automobile that was strong, safe, durable, clean, and efficient enough to be globally competitive required legions of engineers, physicists, specialists in areas like fluid dynamics, harmonics, kinematics, materials science, and an increasingly large number of electrical engineers and computer scientists. A typical car had around 30,000 individual parts, and computing specialists were involved in everything from writing the software for the car’s new onboard computers, to building robots for factory automation, to honing the advanced computer-assisted design (CAD) tools that took the painstaking job of component design out of the physical hands of draftsmen and moved it onto digital screens. About 40 percent of the cost of a luxury vehicle was for electronics, computers, and software. A billion dollars might be spent on writing code before a single car left the factory floor.

Building a modern automobile required ever-greater levels of precision. Sizing for pieces like fuel injectors and various control mechanisms had to be calibrated to the level of microns—about one-fiftieth the diameter of a human hair. What’s more, all these precision elements had to be designed to withstand enormous abuse, and integrated seamlessly into a package that could be shaken, rattled, crashed, frozen, and scalded for decades at a time over hundreds of thousands of miles. If one of these systems failed, the result could be fatal.

Although China had sent millions of students to the United States and flooded the American academy with aspiring engineers, programmers, and scientists, the country’s leadership knew it might take decades to reach global standards. Anyway, that race was already decided. Why try to redo the past? Why not instead spend that effort on the car of the future—an electric vehicle?

The “leapfrog narrative” was powerful, sensual, and compelling. But it was also hollow—like the futuristic concept cars often displayed at auto shows. Underneath a Ferrari exterior, it had no guts.

Today, China is the world’s auto behemoth. But it still lacks the expertise to be an industrial superpower. It is losing the technology race to smaller, better-organized, and more nimble rivals. Japan and America lead the world in developing the cars of tomorrow—a new generation of electric and autonomous vehicles. But that is only half the story, because China is not really losing to Washington or Tokyo. It is losing to tiny groups of strategically minded technologists and regulators in Sacramento and Kanagawa. In California—a state whose entire population is smaller than commonly accepted rounding errors for China’s citizenry—a clutch of indefatigable policy activists and techies have spent two decades grappling with Detroit, trying to force this revolution. And their efforts are finally paying off. In 2012, Tesla Motors’ Model S—conceived and built in California by the pugnacious visionary Elon Musk—was anointed “car of the year” by Motor Trend magazine. Consumer Reports called the “S” the best car it had ever driven. The all-American Chevy Volt has been is similarly acclaimed as Consumer Reports’ highest consumer satisfaction vehicle and repeatedly topped J. D. Power’s consumer appeal survey.

On the other side of the world, in Japan, this revolution was sparked by a different sort of iconoclast: a nuclear engineer at the sprawling Tokyo Electric Power Company (TEPCO) named Takafumi Anegawa. It was Anegawa who laid plans for the world’s first mass-produced consumer EVs. While Tesla has taken the crown for the world’s coolest car, Japan has raced ahead in building and deploying a people’s EV. In 2012 Japan manufactured almost three-quarters of the electric vehicles sold worldwide. By 2013, an American could lease a Japanese

EV for less than $200 a month and fuel that car for a small fraction of the cost of a gasoline- or diesel-powered vehicle.

Today in Japan and America, the futuristic world of transportation portrayed by Shanghai’s GM-SAIC Expo is actually much closer than most realize. Not only electric but “driverless” autonomous vehicles are within sight. The transition to electric and driverless cars will usher a step change in both quality of life and economic productivity and potentially be the most transformational social development since the World Wide Web. It will change the way we live and many of the fundamentals of the global economy. That’s why America, China, and Japan are in a white-hot race for the future of transportation. Indeed, the petroleum-free EV and what Forbes called the “Trillion-Dollar Driverless Car”—those autonomous mobility pods from the SAIC-GM Expo—are just around the proverbial corner.

Of course, there will be winners and losers. Some countries and companies will inevitably move faster than others. And part of this will depend on the sophistication of a country’s car, battery, and technology companies—it certainly does not hurt to have a giant like Google or Nissan as a national champion. The leadership of individual innovators, activists, inventors, and dreamers is also key—and a focus of this story. But success also depends on the role that governments take in strategic planning, and their competence in executing policies to encourage investors, banks, entrepreneurs, and businessmen to build the economy of the future and invest in sunrise industries like EVs.

A Brief History of the Global Automobile

Few technologies have been as economically important and transformative as the automobile. Cars first appeared around the turn of the twentieth century, assembled from extra bits of the bicycle and carriage industries. These wheels were mated with electric motors, tube framing, and steam or spark ignition engines. For the first half decade or so, electric vehicles were actually produced in larger numbers than those powered by internal combustion engines. Electric taxi fleets trolled the streets of major cities across the United States.2 These taxi companies witnessed speculative run-ups in valuation that looked like something out of the dot-com bubble. Thomas Edison was also in on the game. He—and many of his contemporaries—poured a decade’s effort and piles of money into developing a competitive EV. But by

1910 Ford had won. The advantages of liquid fuels had overwhelmed the battery, and for a century the history of the automobile was the history of oil and internal combustion. Oil and its derivatives, such as gasoline or diesel, could hold much more energy for a given volume or weight than could any contemporary battery. Additionally, gasolinepowered cars could be refueled quickly, and that fuel was fairly easy to transport—though it was certainly dangerous.

By the 1910 model year, Ford was producing nearly 20,000 Model T’s annually.3 By 1927 that number had skyrocketed so that there was one car for every five Americans, and more than 50 percent of American families owned an automobile.4 Even during the depths of the Great Depression, automotive sales fluctuated between about one and three million units a year.5 With growth came consolidation, and by the 1930s the international auto industry was dominated by three giants: Ford, General Motors, and Chrysler.

Each of these companies ensured global ascendancy by harnessing the powers of oil, internal combustion, and economies of scale. Because their method of manufacturing was basically Henry Ford’s concept, it was often called “Fordism.” The strategy was to build one product in one color that was cheap, durable, and appealed to as wide an audience as possible. The momentum of this process came in the form of an “assembly line,” which moved chassis along an escalating series of workstations—where employees would attach a fender or fasten a headlamp—until the final product was complete.

That approach allowed Ford to achieve what one scholar called “low prices, which kept falling”—in other words, economies of scale through mass production.6 Ford’s prices were so low that the company sold not only to poor rural American farmers, but to exotic markets like Tokyo and Shanghai, all at very competitive prices.

Ford’s great rival, General Motors (GM), also practiced mass production. However, GM did not do so with the same single-minded zeal as Ford. GM was originally the amalgamation of many smaller automotive nameplates, which led it toward diversified mass production,\ product differentiation, and eventually planned obsolescence. This strategy was dubbed “Sloanism” after the company’s managerial genius, Alfred P. Sloan Jr.

Like oil, autos became militarily important. In World War I, new weapons like the “cistern” (eventually known as the tank), motorized troop transports, and other weaponized vehicles proved decisive to victory. Three decades later, during World War II, America was clearly dominating the race for motorized wheels. Through this lens Japan and Germany’s decision to declare war on the United States is almost unfathomable: the Allies industrial hegemony was absolute. Combined, Japan, Germany, and Italy produced about 437,000 vehicles in 1938, while the United Kingdom alone produced 445,000. At the same time, the United States was producing 3.5 million automobiles.

After Pearl Harbor, the U.S. automotive industry became the beating heart of the “arsenal of democracy.” So vital were the auto companies to the war effort that federal agents occupied their headquarters—leading the aging and, by this point, slightly deranged Henry Ford to believe they were trying to kill him.

Chrysler was the largest tank producer of the war, and together Ford and Willys-Overland produced 2.5 million military trucks and 660,000 of their iconic “jeeps.” In total, the auto industry built some 4,131,000 engines (including 450,000 aircraft engines and 170,000 marine engines), 5.9 million guns, and 27,000 aircraft for the war effort—crushing the Axis against the anvil of U.S. industrial might and establishing the military prerequisites for a new Pax Americana during the latter half of the twentieth century.

After World War II, the market for automobiles roared and it fueled the astounding growth of America’s suburbs. But in 1965, Ralph Nader put the brakes on this unfettered expansion when he published the book Unsafe at Any Speed, which caused a sensation in its treatment of the dangers of modern cars. This as much as anything symbolized the beginning of an arms race between auto producers and regulators—in safety, efficiency, emissions, and quality—that continues to this day. Fixing the problems outlined in Nader’s book would not be easy.

From an environmental perspective, the most serious problem was emissions. For a long time, engineers did not really understand the alchemy of internal combustion that dictated how emissions were formed. Since it was impossible to see—or even measure—certain aspects of internal combustion, the process was two parts science, one part artistry, and a dash of luck. From the 1970s on, government regulations forced carmakers to apply new rigor to this issue of emissions. Enormous progress was made in controlling toxic exhausts, dramatically improving air quality and human health across America and much of the industrialized world. New standards set by the Environmental Protection Agency (EPA) were so strict that engine specialists said EPA stood for the “Employment Protection Agency”—their work would never end. In California, the effects of pollution were particularly severe. In fact they were so severe that the state set a goal to end this incremental tweaking of the internal combustion engine by eliminating it completely. The heart of their strategy was electrification. In other words, California wanted to reexamine the battery and its potential.

Over the past eighty years, batteries had changed. But most were still based on the same chemistry Edison’s competitors used in electric cars before World War I—lead acid. The first electric vehicles from California were almost entirely powered by a new generation of lead acid batteries. However, by the mid-1990s, a more power-dense chemistry called nickel metal hydride (NiMH) came to market. This chemistry had a relatively long history, but from a commercialization standpoint, its fundamental breakthrough came in the 1990s from a Michigan-based entrepreneur named Stanford Ovshinsky and his company, ECD Ovonics.

Born in Ohio to immigrant Jewish parents in 1922, Ovshinsky was a consummate outsider. His father was a Lithuanian-born scrap metal dealer, and as a young man Ovshinsky himself had started his career as a lathe operator. Ovshinsky’s formal education went only as far as high school, but the public libraries were a fitful schoolroom for such a subversive genius. His self-directed study nurtured a deep streak of intellectual independence.

Long before the oil shocks of the 1970s, Ovshinsky understood the environmental and geopolitical dangers of relying too much on oil to fuel an economy and set out to find alternatives. Together with his wife, Iris, he set up a “storefront lab” that eventually grew into the publicly traded company ECD Ovonics. At Ovonics, Ovshinsky invented a new family of semiconductors, hydrogen fuel cells, and thin-film solar cells. The Economist magazine called him the “Edison of our age.”

In the automotive space, his most lasting contribution was in batteries. 10 Ovshinsky received funding from the U.S. Department of Energy (DOE) to develop his company’s NiMH technology. The Ovonics battery held significantly more energy than its competitors—it was “power dense”—and could dispense that energy quickly. In other words, it was “high power.” In many ways, it was a game changer and served as the basis for every hybrid electric of the late 1990s and early 2000s.

At the same time, a few manufacturers (such as Mitsubishi) were also beginning to experiment with lithium-ion batteries—which were originally developed in Exxon’s labs, and first commercialized in portable electronics by Sony. But that chemistry still had safety and performance issues to work out. It was subject to what one industry executive called “the old 80/20 rule, the last 20 percent of the progress takes 80 percent of the work.”11 They did not come to dominate the EV market until the mid- to late 2000s. By that point lithium-ion batteries had already become integral to laptop computers, cell phones, recorders, and other electrified mobile devices.

This new generation of batteries was a game changer for EVs. There were diverse lithium chemistries: lithium magnese–oxide, lithium cobalt–oxide, lithium iron phosphate, etc. While these were expensive and still lacked the energy density of petroleum, with a strong policy boost, some additional research, and mass production they held out the prospect of servicing 90 percent of the day-to-day transportation needs of the global public. With mass production, these batteries might also be economical in the future—especially if costly petroleum was pitted against cheap electricity.

Another boost to EVs came from the hybrid electric vehicle. The concept of a superefficient hybrid electric vehicle—a car that recaptured energy, stored it in a battery, and recycled it to the drive train—had been around since at least the 1890s. In 1977, Earth Day founder Denis Hayes wrote that “[t]he physicist’s conception of the efficient vehicle is one that operates without friction. At a steady speed on a level road, it would consume no energy. Energy used for acceleration would be recovered during braking; energy used for climbing hills would be recovered when descending . . . car manufacturers could approximate the physicist’s ideal much more closely than they do.”

However, it took a politician, not a scientist, to get the hybrid car off the blackboard and into the labs of the major automotive manufacturers. A Clinton administration effort sought to marry cutting-edge research from the Department of Energy’s National Labs system with the practical needs of Detroit. The Partnership for a New Generation of Vehicles (PNGV), aimed to build an 80-mpg family sedan by combining high-efficiency diesel engines with hybrid systems.13 Spooked, Japanese automakers took a leap of faith over the hybrid abyss.

Toyota’s Prius and Honda’s hybridized Insight both provided valuable technological learnings. But it was the Prius that truly took flight. In addition to technical knowledge, the cars also generated a potent “halo effect”—convincing American consumers that Japanese automakers cared more about the environment than America’s domestic manufacturers. In Japan, the effect was no less pronounced. For the first time, new college graduates ranked Toyota as Japan’s most desirable company to work for.15 By 2010, the Prius was Japan’s bestselling car, and by 2012 Toyota had introduced an entire line of hybrids branded under the Prius nameplate. The car’s success familiarized Toyota with the basic elements of EV drive systems and normalized the idea of battery electric vehicles for the international consumer. For Toyota’s competitors—American, European, and Japanese—the Prius became the “big green monster.” It was an industry standard against which they could not hope to compete and it nurtured an inescapable inferiority complex. By the mid-2000s Toyota’s dominance had compelled others toward a strategy of aggressive innovation to bypass the era of hybrid vehicles—and the internal combustion engine.

Henry Ford built his first “Quadricycle” in a tiny garage. But by the end of the twentieth century, the days of garage bench manufacturing were long gone. Building a world-class automobile was now among the most complex industrial endeavors of the global economy; building just an engine manufacturing line might cost $2 billion. Sophisticated automotive companies had two armies of engineers: one devoted to designing the cars themselves, and another entirely focused on optimizing the thousand-legged manufacturing machine synonymous with automotive production. For new pretenders to the field, such as China, breaking in would be a challenge. For all car companies, the technology leap toward electrification was daunting.

Winning the Race

The world is building a new energy economy. In the future, much of the investment and capital that would have gone to fossil fuels extraction and imports will be redirected toward manufacturing and services. It is not too much to say we are running a race for the future of the global economy.

Today America confronts serious challenges in securing its place among a fiercely competitive field—one that will likely be dominated by rising Asian giants. But too much of America’s private sector rises and falls on the basis of quarterly profit reports, and many companies have abandoned the basic R&D that begets long-term innovations. The U.S. government is not doing much better. It is hamstrung by slow-moving institutions and contentious politics.

To dominate a twenty-first-century economy, to win this race, America will have to change—and to some significant degree that change will have to be political. America must learn to be goal-oriented, tactically flexible, and driven by long-term macroeconomic trends rather than short-term political or financial interests. In many ways such a philosophy is nothing new, but represents a return to the mode of operation that supported America’s economic greatness over most of the twentieth century. With smart, strategic leadership, the United States can again tap into unparalleled forces of entrepreneurship, innovation, and creativity. America is not out. It still has the potential to lead the world today and for decades to come—and it sometimes draws strength from unexpected places.

The race to build the car of the future

Thu, 2015-01-15 10:15

The North American International Auto Show is in full swing, and author Levi Tillemann went to check it out.

“It seemed like every auto maker had an electric vehicle on the floor,” he says.

Tillemann covers the drive to build the car of the future in his book, "The Great Race: The Global Quest for the Car of the Future."

But what does that car look like? Tillemann says, "it's almost inevitable that the car of the future is going to be electric and it's going to drive itself."

There's a shock absorber built into the electric vehicle market. California has a regulatory authority to mandate that automakers make a specific type of vehicle, but there is also the option to buy and sell credits instead.

"Auto companies have to sell a certain percentage of their vehicles as electric cars. If for some reason, they’re not fulfilling California’s mandate, then the price of that credits that you get for selling an electric vehicle goes up," Tillemann says. "And that gives you an incentive to drop the price of your electric vehicle and sell more. Because if you don’t get those credits from selling the car yourself, you’re going to have to buy them from someone else."

“When you put oil into the equation, then there’s something else that comes into the mix which is geopolitics, because oil is what some people have called a strategic commodity,” he says.

One of the benefits of electric vehicles is that electricity can be made out of any energy source. This changes the geopolitics surrounding cars and the economics of how they are manufactured.

“When I talked about the great race to build the car of the future, what I’m really talking about is a race to dominate international markets," Tillemann says. "And a race for countries like Japan, China and the United States to build, sell and export the car of the future.”

These three major markets are the focus of "The Great Race," but Tillemann points out China has fallen behind. In the mid-2000s, China made a bold goal to surpass the West in automotive technology by bypassing the era of the internal combustion engine and going straight to electric vehicles. But that effort failed because the Chinese didn’t have the kind of technology needed to produce consumer electronic vehicles. Now, a number of regulations make it difficult for foreign manufacturers to sell electric vehicles in China.

Tillemann's book is available for pre-order now.

Will work – if they can find child care

Thu, 2015-01-15 06:53

Adrienne Caldwell's child care situation just got a little trickier. She's a doula and massage therapist who also teaches her craft at a college in Minneapolis. When she would get in a child care bind, she used to bring her young children with her to night class. But after her 3-year-old got a little too chatty with students, she decided she shouldn't do that again.

“He just climbed up on one of the older ladies' laps and said, 'I like pirates. Do you like pirates?’ '’ Caldwell says. "It's cute but not very productive."

Her husband also pulls evening shifts as a musician and retail salesman. Few day cares in their area can accommodate their schedules, so they often struggle to line up help from babysitters, family and friends, she says.

Research out of the University of Maryland suggests about one-fifth of the American workforce does most of its work outside the traditional 9-to-5 hours. And it can can be a struggle for day care centers to accommodate them.

"As soon as you start to expand out the hours of operation, it becomes even harder to make the ends meet and to make it a profitable venture,” says Heidi Hagel-Braid, a regional director at First Children's Finance, which offers loans and consulting help to daycare businesses in four Midwestern states.

Round-the-clock day care staffing can be expensive. Many in-home day care providers have their own families, making it difficult for them to operate 24/7, Hagel-Braid says.

Demand for 24-hour daycare also might only exist in pockets of the economy, so some of the most successful round-the-clock day cares target those pockets, she says.

“Maybe there is a large Latino population working at a processing plant,” she says. “Or there is a Somali community employed in the same type of work that is shift work or extended hours for employment.”

Nonprofits also stand a better chance of operating  24/7 because they can tap outside funding sources, like grants, to survive.

The nonprofit Legacy Family Center plans to open round-the-clock daycare in a Minneapolis suburb later this year. Board member Victoria Karpeh, a social worker, has a personal reason for trying to help families find reliable care. When her boys were younger, she often worked the graveyard shift and struggled to find day care when her husband's work schedule would change unexpectedly.

As many as 40 percent of young, hourly employees receive their work schedules a week or less in advance, according to Julia Henly, an associate professor at the University of Chicago School of Social Service Administration. She points out that parents’ overnight or unpredictable work schedules are hard for day care businesses to plan staffing around.

“They need to make sure that their child/teacher ratio stays within what is healthy and safe and good for kids,” she says.

That means some workers, like Caldwell, may never find a day care that fully meets their needs. As a doula, she never knows when she'll get a call from an expectant mother and have to scramble yet again to find someone to watch her own kids while she guides new ones into the world.

Quiz: Who needs original ideas?

Thu, 2015-01-15 04:45

President Obama made a splash with a proposal for free community college. But he wasn’t the first.

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Hint: we went there last year.

PODCAST: The Franc and the Euro

Thu, 2015-01-15 03:00

The giant retailer Target of Minneapolis said today it's closing down operations in Canada and has filed for bankruptcy protection to cover its North of the border operations. More on a move that could put more than 17,000 Canadians out of work. Plus, another major cross-border story developing today: Switzerland's currency surged 17 percent today, causing headaches for all sorts of Swiss exporters from wristwatches to cuckoo clocks. This after the Swiss Central Bank without warning gave up on trying to keep the euro-linked closer to the Swiss Franc. And at the big car and truck show going on in Detroit, the top honor in the car category went to Volkswagen's Golf, which comes in all sorts of flavors, from electric to diesel to muscle. But don't let that small car fool you.

Target to close its stores in Canada

Thu, 2015-01-15 03:00

Target Corp said on Thursday that it will cease operations in Canada and has filed for bankruptcy protection for its Canadian subsidiary.

Target has really struggled since its launch in Canada just a few years ago in 2013. The company said last November that it would review the future of its Canadian business after the holiday season.

Huge supply chain problems left Canadian stores thinly stocked, disappointing shoppers who had anticipated Target’s move into Canada where the discount retail space has been dominated by Walmart.

Target currently has 133 stores in Canada, employing 17,600 workers. 

According to a Target press release, if a court approves it, the company would create a trust fund of $59 million for its employees, giving them a minimum of 16 weeks of compensation. The company says its Canadian stores would remain open during liquidation.

In the U.S., Target is actually performing better than expected. The company said Thursday same-store sales at its U.S. locations increase by 3 percent in the fourth quarter, thanks to more online purchases and store visits than predicted.   

President Obama aims to pass the Healthy Families Act

Thu, 2015-01-15 02:00

President Barack Obama will outline a broad plan on Thursday to help states establish paid leave programs and to fund Labor Department feasibility studies on paid leave.

Obama is calling on Congress to pass the Healthy Families Act, which would allow workers to earn an hour of paid sick time for every 30 hours they work.

“This is not a partisan issue. This is a family issue and an economic issue,” says White House Senior Advisor Valerie Jarrett.  Jarrett announced the President’s intent on a conference call with reporters on Wednesday.

Currently, workers are granted up to 12 weeks leave under the Family Medical Leave Act.  However, Jarrett says most employers make that leave unpaid.  Meaning that many workers can’t afford to take leave when they need it.

“It means that more sick children are in school because no-one can afford to stay home with them, and it means that fewer parents are taking the necessary time to bond with new babies or care for their aging parents," says Jarrett.

Jarrett says the President will also ask Congress for a $2 billion incentive fund to help states to create their own paid leave programs.

But, James Sherk, a Senior Policy Analyst with the conservative-leaning Heritage Foundation says the President’s proposal would effectively cut workers’ pay.

“The way businesses respond when the government requires them to provide a benefit is, first they provide the benefit, but secondly they take the cost of that benefit out of workers’ pay.”

The President also plans to take executive action giving federal employees up to 6 weeks of paid leave for the birth, or adoption, of a child.  

Foreclosure crisis just about finished

Thu, 2015-01-15 02:00

RealtyTrac reports that the rate of foreclosure filings was down 18 percent in 2014 from the previous year, and are approaching the same level as in 2006, before the housing crisis hit.

RealtyTrac/Mitchell Hartman

Daren Blomquist, VP at RealtyTrac, said: “About 1 percent of all loans is the historic average that go into foreclosure, and I think we’ll probably end up below that for the next decade, as a reaction to what we’ve been through.”

Blomquist predicts fewer foreclosures than average because home prices have come down, homebuyers need very good credit to get a mortgage due to tighter underwriting standards, and many buyers are hedge funds and other investors with deep pockets.

RealtyTrac/Mitchell Hartman

Barcode license plates? Try mass traffic surveillance

Thu, 2015-01-15 02:00

Back to the Future Part II was a classic 80s movie in part because it was an escape.

From the harp plucking and the optimistic-sounding French horn in the first scene, it’s obvious that you’re going to get a picture of the future that is probably closer to Star Trek than Big Brother.

So when you’re watching the movie and you see that every car’s license plate is a barcode, it’s easy to think, “Sure, easy scanning. Very convenient.” It’s also easy to imagine why, in a movie released at the peak of one of the strongest periods of economic growth in the U.S., one of the most recognizable symbols of commerce—the Universal Product Code—was picked for plates.

Well, spoiler alert for those who haven’t looked closely at a car in 2015 yet: we don’t have barcode license plates. But the reality is in some ways more impressive and more concerning. Instead of codes that usually need to be scanned with the help of a laser, we’re using License Plate Recognition cameras all over the country to constantly record the passage of all traffic. And we’re often keeping all of that data for uses we haven’t yet realized.

The “haven’t yet realized” part is what has people like Kade Crockford worried. Crockford is the director of the Technology for Liberty project at the Massachusetts American Civil Liberties Union (she also writes the privacy matters blog). She says that in the last decade, the practice of collecting and storing traffic data has become widespread but mostly unregulated.

The barcode plates of “Back to the Future Part II” and the plate-scanning practices of the real world do have something in common: they’re both about making information machine readable. Barcodes were invented to make it easy to attach data to products that could be organized by computers. LPR technology, also called Automatic License Plate Recognition, does the same thing, either by reading a plate and attaching metadata in a matter of milliseconds, or sending a constant stream of photos to a server farm where the data is read and stored. These cameras usually capture not only the plates but an image of the car as well.

Technology now being used across the U.S. began as an invention of British law enforcement in the 1970s. It gained popularity there in the 1990s as a weapon against terrorism, following bombing attacks by the Irish Republican Army. LPR seems to have crossed the pond as computing power, storage, and camera technology became cheaper. By some estimates, LPR usage by police departments in the US has nearly quadrupled, going from 20 percent to 71 percent between 2007 and 2012.

The problem, says Crockford, is that there is very little oversight or even an understanding of how LPR technology is really being used. Private companies like Digital Recognition Network and Vigilant Solutions “Hoover up” billions of data sets, she says, and sell them to both law enforcement and private repo companies. Even though it’s been in America for over a decade, the first real federal scrutiny of the technology seems to have come only very recently, via a task force created by the Justice Department last May.

States are just starting to lay out rules about the collection and storage of data. In the last two years, around 30 pieces of legislation have been written, but only a handful have gone into effect. Of the few bills in place, those that endeavor to have police departments wipe data sets after a certain time, or try to prevent private companies from using LPR technology, are already being challenged in the courts.

Here’s one last bit that wasn’t imagined in "Back to the Future Part II" but could become a reality: The Center for Investigative Reporting recently found what it says are documents that suggest Vigilant wants to create a massive data collection system that combines LPR, public records, and facial recognition. Almost makes you wish for silly barcode license plates.  

Hey Google, name my website

Thu, 2015-01-15 02:00

Google has launched its own website naming service, Google Domains. It says it's aimed at small businesses, 55 percent of which its own research has found don't have their own website right now. 

Blake Newman, who runs a website design agency in Washington D.C., was one of the people invited to test out Google's domain name registration service before it went public. "It's relatively sparse," Newman says.

In other words, it's Google style. And that's the opposite of a lot of other domain name registration websites, Newman says, which can be complicated even for professionals like him.

But does that mean that other registrars like GoDaddy, E-nom and Network Solutions should be worried? No, says Phil Corwin, head of the Internet Commerce Association, a lobbying group for the domain name industry. Corwin was speaking from a domain name registrars' conference in Las Vegas, where he says Google wasn't even the main topic of conversation. 

"It's a competitive space," says Corwin. "And some of the smaller players, they're not going for a mass market. They're going for more of a niche market." But for those 55 percent of small businesses without websites, Google is banking on simplicity trumping niche.

Buy a house? What about an entire city?

Thu, 2015-01-15 01:30
18 percent

RealtyTrac's foreclosure report for December 2014 and the full year is out, and the outlook is positive. According to the report, foreclosure filings were down 18 percent in 2014 from the previous year and are approaching the same level as in 2006, before the housing crisis hit.

16

The number of trips Rand Paul and Ted Cruz have each taken in the past two years, outpacing all other potential candidates for president, according to U.S. News & World Report.

55 percent

That's the percentage of small businesses that don't have a website, according to Google research. It's why the tech giant is launching its own website-naming service, aimed at this small corner of the market.

11

The number of consecutive quarters RadioShack has seen losses, despite some aggressive and public re-branding. The electronics retailer is expected to declare bankruptcy as soon as next month. Quartz has nine charts showing the brand's gradual decline.

One-third

That's how far American manufacturing fell between 2000 and 2013, while Chinese manufacturing grew several times over. Now, more stable wages have some companies looking back to the U.S., the Wall Street Journal reported.

$9.6 million

That's how much a city has been put on the market for. Yes, a whole city. Bargylia, an ancient site in Turkey, to be exact. As the BBC reports, the city sits on the coast and dates to fifth century B.C. Although it's in a popular tourist spot, the eventual owners will be prevented from building on the site. They will, however, have access to what could be an archaeological treasure trove of historical artifacts.

Buying a house? What about an entire city?

Thu, 2015-01-15 01:30
18 percent

RealtyTrac's foreclosure report for December 2014 and full-year is out, and the outlook is positive. According to the report, foreclosure filings was down 18 percent in 2014 from the previous year, and are approaching the same level as in 2006, before the housing crisis hit.

16

The number of trips Rand Paul and Ted Cruz have each taken in the past two years, outpacing all other potential candidates for president, according to U.S. News & World Report.

55 percent

That's the percentage of small businesses that don't have a website, according to Google research. It's why the tech giant is launching its own website naming service, aimed at this small corner of the market.

11

The number of consecutive quarters Radioshack has seen losses lately, despite some aggressive and public rebranding. The electronics retailer will reportedly declare bankruptcy as soon as next month, and Quartz has nine charts showing the brand's gradual decline.

1/3

That's how far American manufacturing fell between 2000 and 2013, while Chinese manufacturing grew several times over. Now, more stable wages have some companies looking back to the U.S., the Wall Street Journal reported.

$9.6 million

That's how much it will cost you to buy a city. Yes, a whole city. Bargylia, an ancient site in Turkey, to be exact. As the BBC reports, the city sits on the north of the Bodrum peninsula, and dates back to the fifth century BC. Although it's located in a popular tourist spot, the eventual owners will be prevented from building on the site. They will, however, have access to what could be an archaeological treasure trove of historical artifacts.

GYTB 1/15

Wed, 2015-01-14 22:18

16

The number of trips Rand Paul and Ted Cruz have each taken in the past two years, outpacing all other potential candidates for president, according to U.S News & World Report.

11

The number of consecutive quarters Radioshack has seen losses lately, despite some aggressive and public rebranding. The electronics retailer will reportedly declare bankruptcy as soon as next month, and Quartz has nine charts showing the brand's gradual decline.

1/3

That's how far American manufacturing fell between 2000 and 2013, while Chinese manufacturing grew several times over. Now, more stable wages have some companies wlooking back to the U.S., the Wall Street Journal reported.

With oil prices down, small companies feel the squeeze

Wed, 2015-01-14 13:33

We’ve been hearing a lot about crashing oil prices lately. Crude oil is selling for $46 barrel today compared to over $90 a year ago. The price drop is great news for consumers and terrible for oil companies. But not all oil companies -- or oil fields -- are created equal. When oil prices drop, size and location matters.

McAndrew Rudisill knows this. He's the CEO of Emerald Oil, a small, Denver-based oil and gas company that only operates in the Bakken shale of North Dakota. He's got about 50 wells -- minuscule compared to giant oil companies like Continental Resources, with 1000 wells in the Bakken alone and more in places like Colorado and Oklahoma.

Small companies like Emerald are likely to feel the impact of dropping oil prices first, says Niles Hushka, CEO of KLJ, an engineering firm in Bismarck. It is harder for smaller firms to quickly get loans and additional financing. With fewer wells, they also have less money coming in to ride out tough times. Companies in the Bakken need a lot of money to keep drilling. New wells can cost up to $10 million each.

Another factor that makes smaller companies more vulnerable is a lack of geographic diversity. Larger companies, Hushka says, "will have resources that are spread throughout a number of oil plays and therefore they’re much better protected" than small companies who may only have wells in the Bakken.

North Dakota oil companies have to pay much higher transportation costs than companies in Texas or Oklahoma because they are farther from Gulf Coast refineries and must transport much of their oil by train, which is costlier than pipelines. The price per barrel doesn't reflect that cost, so when you hear that oil has dropped to $50 per barrel, oil companies in North Dakota are only getting about $37.

Geography within the Bakken matters, too, says Niles Hushka: "If you're in one of North Dakota’s hot spots, you’ve got a great big smile on your face."

That's because in the heart of the Bakken, like McKenzie or Dunn Counties, it's possible to drill new wells and still break even with prices in the low $30s. In fact, that’s where most of the drilling rigs have moved in recent months. But in the more marginal areas, like Divide County, where operating costs are higher and wells don't produce as much oil, it's harder to justify the cost of drilling a new well.

As a small company, Emerald Oil can't afford to drill a ton of new wells next year. That's because a lot of oil gets produced in a well's first two to six months, so Emerald needs that peak production to come when prices are higher, at least over $85 per barrel.

But they'll still drill a few new wells in order to hang onto their mineral leases In North Dakota, companies have three years to drill a well before their mineral lease expires, assuming their lease is with a private mineral rights owner and not the government.

But other small companies are stopping entirely. Butch Butler is president of a Colorado-based oil company called Resource Drilling that is even smaller than Emerald. Butler jokes that he is the company's landman, geologist, drilling engineer, operations engineer and whatever else needs to be done.

Butler has just one well in North Dakota, and a few months ago, the plan was to drill another two. When prices dropped, Butler put that plan on hold.

Butler's been in the business long enough to have acquired a gallows humor about oil prices. Both times I talked to him in the past two months, he joked that things were bad, but he wasn’t quote “slitting his wrists” yet.

"I’ve been in this business 38 years," he says, "and truly most of that time has been not so good."

He's come to expect dramatic swings and slides, so he doesn't seem too fazed by the recent price drop. It's a good attitude for an oilman to have.

This story was produced by Inside Energy, a public media collaboration focused on America's energy issues.

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