Historian Niall Ferguson, the CEO of a water services company, and Boeing’s lead environmental executive reflect on the resource transition under way, where it could be headed, and what it means for leaders now.
The resource landscape is likely to evolve unevenly in the coming decades, creating a wide variety of opportunities and threats for different companies, sectors, countries, and regions. Featured here are three experts with diverse vantage points that highlight the scope and complexity of the changes on the horizon. Niall Ferguson, a historian at Harvard University, puts the recent commodity price boom in perspective and provides cause for cautious optimism. The CEO of Veolia Water Americas, Laurent Auguste, explains the risks posed by dwindling water availability and how the public and private sectors can respond. And the environmental chief of aviation giant Boeing, Mary Armstrong, shares insights into how the global company is seeking to reduce its resource footprint while still meeting the needs of customers.
Click on the interactive video to view those videos, or read them in the edited text format below.
Voices on the resource revolution
A historian and two executives offer their perspectives on the resource transition and its implications.
is the Laurence A. Tisch Professor of History at Harvard University, a senior fellow at the Hoover Institution at Stanford University, and a senior research fellow at Jesus College, Oxford. He is the author of ten books, most recently Civilization: The West and the Rest (Penguin Press, November 2011).
Part of my job as a historian is to point out what’s not new. What’s clearly not new is that with rapidly growing demand and relatively slow-growing supply, there is a risk of conflict over scarce natural resources. The interplay between the supply of and the demand for natural resources is one of the great themes of human history. For most of history, the scarce resource is just fertile land; then gradually, human beings developed an appetite for things they can’t eat, such as precious metal.
What’s also not new is that competition can lead to technological innovation. We’re not a static species. When we hit a bottleneck and the price signals are screaming that there’s not enough of this stuff, we do tend to innovate. But there are big lags, and sometimes bottlenecks can persist for much longer than one would imagine. It’s in the nature of scientific discovery that it isn’t especially elastic in the face of certain constraints.
If you start from the trough of the financial crisis, what you find is a spike that affects nearly all commodities. The only ones that have gone down in price since early 2009 are natural gas, chicken, prawns, wood, and olive oil. I used to joke that this was great news if you were planning a surf-and-turf barbecue, but if you had any other plan in mind that involved natural resources, you could be paying 100 or 200 percent more for your raw inputs than you were just two and a half years ago. That gives you a sense of the extraordinary time we live in.
The only previous periods I’m aware of when there have been correlated spikes in the prices of nearly all commodities are World War I and World War II. If you were on another planet observing Earth with the assistance of only a Bloomberg screen displaying commodity prices and you had a pretty long-run time series, you would conclude that World War III was in progress right now. You’d be quite wrong. But you would have spotted that something extraordinary was happening, and the explanation is that we’ve got demand-side activity that actually is comparable in its magnitude to a world war.
The growth of China’s economy and many emerging markets is so rapid—these are almost unprecedented growth rates in terms of long-run economic history—that it’s like the demand shock of a war. Here’s the way I think of it. If the rest of humanity consumed natural resources at half the lifetime rate of the average American, a really significant number of commodities would run out within a matter of 30 years. In some cases, rare earth metals for example, it would be within 10 years. Even copper, which we think of as a pretty plentiful base metal, would be gone within about 38 years. So the starting point for any discussion has to be that some of these things are in pretty finite supply and that the rapid growth of demand—as emerging economies explode into life and catch up with the United States—means that this is a burning issue for us now.
One or two surprising things have begun to emerge. The first is that we should be less worried about peak oil than some have argued for years, because it turns out that we can access oil in North America more easily than we had thought. Whether it’s tar sands, tidal deposits, or the use of fracking, it means that North America potentially could get back to self-sufficiency in energy over the next 20 years. I think you need to be keeping an eye on technological innovation. It’s probably a mistake to bet against it, and to bet on static technology.
The second thing to keep an eye on is a geopolitical story that is potentially game changing. In my view, the aftermath of the American empire is bound to be a time of great instability. The trend already is for the United States to reduce its military and other commitments in the greater Middle East. Fiscal constraints mean the United States can’t afford not to do this. It’s clear that the defense budget is going to be the biggest casualty of rising interest payments on the rapidly growing federal debt. If you spend time in the Middle East, you sense that the regional players—Turkey, Iran, the Saudis—recognize a new post-American order is coming and are really jockeying for position. The unknown quantity is China. As China relies more and more on the Middle East for its oil and is disappointed in alternative sources, we may find ourselves in a new mid-21st-century world in which it’s Beijing rather than Washington that starts to be an external player in the greater Middle Eastern drama.
As the United States retreats from its hegemonic position in the greater Middle East, I do expect trouble. I think this is a pretty obvious historical danger zone. It’s got all the ingredients for conflict: You’ve got very youthful populations. You’ve got this retreating empire, so there are opportunities to contest the postimperial order. You’ve got tremendous ethnic division, which is often a source of great violence. And you’ve been subjecting the region to terrific economic volatility. It wouldn’t be hard for even a small war to generate a huge upward movement in oil prices.
So I would say, keep an eye on the good news from technology and don’t underestimate the capacity of research and development to produce some big wins. But remember, there is this big downside risk in a very strategically sensitive part of the world, particularly from the point of view of energy commodities.
is president and CEO of Veolia Water Americas, part of Veolia Water, the world’s largest water services company.
Industries and businesses should understand that water will become one of the critical elements responsible for ensuring the reliability of their operations. Put simply, if you don’t have reliable access to water, you cannot run any business; and if you are unsure about the reliability of your access to water, then you’ve got a challenge in terms of making investment. Water will ultimately impact the decision-making processes of investors and companies as they decide where to locate their facilities.
And the challenges associated with water are growing: there’s research that says by 2030 the gap between availability and need will be about 40 percent. Veolia recently conducted research with the International Food Policy Research Institute (IFPRI) that shows that today about 20 percent of the world’s GDP is produced in water-scarce areas. By 2050, if we go on with business as usual it will be 45 percent. This means that businesses and communities will be increasingly exposed to challenges associated with a lack of water. With smarter management of water resources, we could reduce this economic exposure to only about 30 percent.
To avoid being surprised, companies should make water part of their strategic planning and risk assessment. Some companies understand this and are already ahead of the game—starting with the food and beverage industry and companies such as Coca-Cola, Pepsi, and SABMiller. Obviously, water is a key ingredient of their products.
Other companies are probably behind, and they should consider what the future looks like to avoid exposure to operational or reputational risk—particularly in cases where there might be competition between a company and the local community having access to an important part of the water resource. There was a case recently in India where a large steel company wanted to establish itself in a particular location but faced challenges from farmers. It was really a trade-off between giving the steel mill access to the water resource versus having enough water for farming.
These types of challenges are likely to increase as we move toward having a larger concentration of people in cities. Today, 50 percent of the world’s population lives in large cities; we are moving toward 70 percent. The greater density in certain cities will most certainly put more pressure on water resources.
The landscape is changing, and there’s a greater need to raise awareness— because a resource that used to be considered infinite is under pressure. We need to manage that resource in a smarter way.
The municipal challenge
The main challenge with water is that there’s a lack of good management of water resources. Cities typically are in charge of water, for example, but a watershed is usually much larger than a city. So a mayor will make decisions about water management without necessarily having the big picture.
Awareness is also a very big issue. People in the developed world definitely take water for granted. In some large US cities such as Chicago, for example, most homes don’t even have meters, and many residents pay water bills based on the width and height of their buildings, so people basically don’t have to be concerned about their consumption of water and have no incentive to reduce it. And rates across the country are pretty low—often lower than what people pay for their monthly telephone bill.
Even for mayors whose cities require substantial investment in water infrastructure, it’s difficult to consider raising rates because people consider water essential, so therefore it should be basically free. But what is free has no perceived value. The challenge is to find the right balance, recognize the real value of water, and set rates accordingly. This doesn’t mean we shouldn’t be creative in terms of rate structures to make sure water is affordable, but first we need to find the right balance.
Another challenge with water is that it is local. And since it is local, people manage it in isolation—in silos—without necessarily understanding the level of performance that’s possible, or without seeing the good ideas developed in other parts of the world.
Part of what we do at Veolia, therefore, is to work with our industry colleagues, scientists, academics, and NGOs to share these stories and make available the data, relevant case studies, and best practices so that decision makers can better understand their situations and begin to find solutions.
One of the nice things with water is that, unlike oil, you can reuse it a number of times. Indeed, water is too precious to use only one time. So at Veolia, we like to speak of wastewater treatment plants as bio refineries. Whether it comes from a municipal or industrial activity, we should think of wastewater as a resource for energy or for recovering raw materials. This is something I believe we’ll see more and more of in the future.
There are new technologies that allow us to produce energy from wastewater treatment, and also to separate what’s in wastewater to recover some of these resources. We are, for instance, focusing on phosphate these days. Phosphate is an essential resource for fertilizer (and therefore food), but as a global resource, phosphate is limited, concentrated in countries such as Morocco. Being able to recover phosphate from wastewater and prevent it from reaching the sea and being wasted is a good strategy. More and more, I think we’ll see companies use wastewater as a resource.
Consol Energy, for example, is a large mining company that operates in West Virginia. They’ve been under a consent decree from the US Environmental Protection Agency to have better treatment of their wastewater, and so they are putting in place a very advanced solution to do this. But they also see it as a potential business opportunity. Because they are in the shale gas area and there’s a growing need to treat the “frac” water that these mines produce, the company recognizes that sharing their facility might help them get more business in the future. By addressing one challenge, they are potentially creating a business opportunity for themselves.
Another interesting example of turning a water challenge into an opportunity is Singapore. Singapore has been buying water from outside the country, and this is something they consider a risk. So what they’ve done in response is develop a wastewater treatment plant that enables the reuse of wastewater for industrial purposes. This treated water—which they’ve branded “NEWater”—is brought to the level of “pure” water, which is necessary for production in the semiconductor and electronics industries. This is obviously very attractive to businesses because they don’t have to treat the water themselves, and it has supported the development of an industry cluster.
Finally, there’s the recent example of the cosmetics company L’Oréal, which is moving to reduce both the carbon footprint and water footprint of its facilities around the world. With Veolia’s support, they’ve begun in Suzhou, China, by reviewing processes to minimize their water consumption, increase reuse, and even turn their wastewater into energy. I believe this will be critical for L’Oréal for both their public image and also in terms of reducing their operational risk. Such moves will be increasingly important in China and other countries where challenges of water availability are a concern.
has been Boeing’s vice president of environment, health, and safety since 2007.
The business imperative
Driving environmental strategy into our business strategy is a real imperative. Aviation is responsible for 2 percent of man-made CO2 globally, and air travel is growing at about 5 percent per year. Energy and fuel are our biggest focus areas because that’s where our biggest environmental footprint is across the life cycles of our products. Over the last 40 years, we’ve improved fuel efficiency and therefore CO2 emissions by 70 percent. Our latest airplane platforms, which include the 787, are a 20 percent improvement over the airplanes that the 787 will replace in the fleet. That’s where our biggest impact is. We’ve got to continue to drive environmental efficiency into those airplanes.
We are trying to drive the commercialization of a sustainable aviation biofuel industry. We’ve worked with the agriculture industry, university researchers, some of our customers, and airports: how will you drive the right feedstocks—which will depend on the region of the world you’re in—such that we can get a biofuel that competes with aviation fuel but is sustainable? Camelina is a crop that might work. Eventually, we’d like to see algae. We think that’s very promising; algae grows all over.
We also continue to look at the opportunity for fuel cells. We even have an unmanned airplane that is solar powered. Those are all things that we’re pursuing, and innovation will get us there eventually. But it’ll be a long time before we can electrify an airplane, and we can’t wait that long.
Meeting the management challenge
When I was asked to take this role, our CEO, Jim McNerney, said, “I want you to drive environmental thought and capability across how we operate the Boeing Company.” I thought to myself, “This is going to be interesting because one little group at the corporate headquarters is certainly not going to be capable of doing that well.”
One of the first things we did was to establish an environment, health, and policy council at the corporate level, led by Jim. That policy council meets twice a year; driving environmental thought into how we run the business comes directly from the CEO. This was always a “we” conversation. This was never “corporate” telling us, “We’ve got to go do this among all the other millions of things we’re doing.” It was, “This is a big risk to our business. And this is something that our CEO considers very important.” We put together a one-page strategy and brought it back to the policy council and said, “This is what we think you’re asking us to do.” Once we had a strategy together, then everybody owned it.
One of the things Jim was most interested in is how you work across the company and really drive this into how we operate. We brought folks together; many times we were just connecting the dots, introducing parts of the company to one another. I would sit in the back of the room and listen. For example, we had the commercial side of our business all excited about sustainable biofuels, and we had the defense side kind of wondering why they were there. Then all of a sudden our Department of Defense customers, like the Navy and the Air Force, started asking about biofuels. The gratification is really, really high when you can bring these folks together and they say afterward, “I had no idea that I could get so much from listening and applying some of those ideas to how we’d solve problems.”
We looked across the enterprise and invested in building systems and in energy improvements in lighting systems. Early on, we determined that any major building renovation, and any brand-new building, would meet the LEED silver standards. We built that into our building standards across our company because, as we looked at the life cycles of these buildings, that was a good business decision.
In Charleston, South Carolina, we’ve just finished our big final-assembly facility. As we built it, we said, “We’re going to be building the most energy-efficient airplane in the world, the 787; we want a facility that represents that energy efficiency.” So, we committed to 100 percent renewable energy out of that site. Twenty percent of that is coming from solar-photovoltaic generating capacity on the top of the final-assembly building—a big, ten-acre building. South Carolina Electric & Gas supplies the other 80 percent of the power that we need through a renewable-power contract.
Several years ago, Boeing helped start the AFRA, which is the Aircraft Fleet Recycling Association. The goal, eventually, is to be able to take an airplane at the end of its useful life and move it right back into the cradle, if you will, of raw materials for new airplanes. There are a lot of good business opportunities here. We’re looking at carpets. In a 777, you might replace the carpet 20 times across the life of an airplane. We’re working with a company in the southeastern part of the US; they’ve come up with a process where they can recycle airplane carpets back to airplane carpets. That’s really what this environmental strategy is about: it’s about delivering new, innovative solutions that not only drive environmental improvements but also drive business improvements.
Working with suppliers
The supply base has a much larger environmental footprint than we do inside our four walls. We have more than 16,000 suppliers. Moving into the supply base requires a different approach. You’ve got to come in on cost targets. You’ve got to have high quality, no defects. You’ve got to deliver on time. And now you also have to provide a strong environmental program. All four of those things are required.
I can remember being on the agenda for our supplier conference. It was just remarkable because the whole room was interested in how to participate, what they could do. In many cases, the suppliers knew more than we did. The suppliers recognize that if they can reduce their environmental footprint, it’s going to save them money. And if we can figure out how we work together—where Boeing might change what we require because it would allow a supplier to, for instance, use recyclable packaging or containers—then we all win.
We’re also working in other ways to improve the efficiency of the aerospace supply chain, such as recently helping form the International Aerospace Environmental Group (IAEG). Although its initial focus is on creating an industry approach to meeting governmental requirements for chemical usage and reporting, there’s also a major emphasis on reducing supply chain waste—for example, identifying priority chemicals for conservation, and developing a standardized reporting method for greenhouse gas emissions.