Externally Induced Innovation in the Oil Industry

Argosy University/Twin Cities

Innovation, as a term, is commonly thrown about without much thought as to what innovations are, how they come to be, and how they grow in intensity and popularity. The origins and rise of innovations makes more sense when put into explanations that put aside all of the complicated jargon and simply present the facts. One of the preeminent theorists in the field of innovation, and more precisely the proliferation of innovation is Everett Rogers, an American economist and business theorist who, in the mid-1990s, developed a theory of Innovation Diffusion, which explains that new ideas are spread literally around the world in many cases through the use of communication channels, with varying speeds and over varying time periods (Bryson, 2006). This is not to say that all innovations are for the betterment of society, or even popular. What it does mean, however, is that the lightning-fast methods of communication and collaboration that exist in the modern world make it possible for Rogers’ theory to prove itself over and over again. Therefore, it is important to realize that innovation, in its most basic form, is contagious, for good or bad.

With a better understanding of the somewhat contagious nature of innovation as a result of social forces, as professed by Rogers and others, it is much easier to realize exactly how the innovations in energy on a global scale would in turn have a similar “ripple effect” on government, international relations and business. It is this type of externally induced innovation which is the focus of this research. Energy, particularly oil, is the basis of many actions and decisions the American government, and, indeed, individual Americans make. Many have argued that the war in Iraq is about oil, as have some claimed the seemingly endless war in Lebanon. Whether one realizes it or not, the quest for available oil is literally the main lubricant in the international business system. For example, business theories by Bryson and others have proven in recent years that because of the fact that the world’s oil supply is for the most part controlled by a limited number of nations and interests, both supply and demand for oil influences the overall strategic planning of an endless number of different businesses, and of course has led to much bloodshed over the years (Smith, 2005). The use of energy over the years has been a cause for concern to the world’s population, as sources of energy are limited while the international demand has continued to grow. The consequences of the use and misuse of energy can be highly negative and even disastrous (Ginosar, 2007).

The daily news reports from around the world show the obvious warfare, terrorism and shattered lives that lie in the wake of the misuse of energy which leads to an endless international thirst for oil and other energy sources. Harder to see, but just as deadly, are the damages to the environment that occur when energy is not used properly and wasted, as is the rampant greed of huge energy companies which exploit customers who have no choice but to pay the inflated rates imposed by the energy companies, opening up yet another chronic need for innovation in the oil industry itself.

In the last two centuries oil has brought dramatic advancement in the economies of many countries and lifestyles of their citizens. The massive development allowed by the use of oil cannot be diminished by rapidly skyrocketing oil prices, the wholesale destruction of human life in the many terrorist actions and wars which are fought over oil, or any other happening (Youngquist and Eugene, 1998). This has rendered many modern societies completely dependent on oil for their well-being.

A critical consideration, however, is the finite and limited nature of oil as an energy source. The debate among geologists concerning the world’s oil supply remains unresolved ambiguous one. According to the U.S. Geological Survey, a report published by CNN (2000) says the world’s oil reserve is 20% greater than initially thought, this putting peak production around the year 2040. Some are not as optimistic as the Geological Survey and they argue the world will start declining in oil production in the next 10-20 years. The appropriate question, however, is not for how long oil will be available, but at which point the amount of daily oil production will reach its peak. Once daily oil production reaches its limit, international markets will suffer a shortage as its ever-increasing demand for fuel grows (Youngquist and Eugene, 1998).

Western societies have been governed by economic desires and wants by their individual citizens. Most individuals continue to prefer comfort and lavishness over manual work, and technological advances have facilitated and ensured such a lifestyle. Without any doubt, this desire to attain ease and luxury demands huge amounts of energy everyday. Additionally, the application of easily accessible and economic energy has allowed many countries to achieve overwhelming economic growth over the past one hundred years (Ginosar, 2007).

In this context, it is nearly impossible to imagine a life of comfort and modern technology without the existence and utilization of energy. The consequence for this immense use of energy is a reliance on external suppliers for energy, coupled with a fierce struggle among nations to control the maximum amount of energy.

Moreover, waste products as a result of energy use are rapidly destroying the environment (Ginosar, 2007). These concerns have led the American government to invest in alternative fuel, particularly ethanol.

According to reports published by the, U.S. Department of Energy (DOE) announced its intent to invest $385 million over the next four years in six bio refinery projects which will have the capacity to produce more than 130 million gallons of cellulosic ethanol per year. These bio refineries play an important and cost-effective role in producing energy and bringing it to the market, according to the Department of Energy. If the cellulosic ethanol is made available at affordable rates, it can very easily be a substitute for oil, which will not only ensure the economic security of a country but will add to that country’s energy sources (Mongabay, 2007).

Experimentation with other substitutes for oil and alcohol such as biomass fuel have proven to be energy negative; that is, the necessary process of converting corn or other crops consumes 71% more energy than is obtained from ethanol, creating no net production of energy. And since crops of grains, such as corn, are required for other more traditional agricultural applications; we cannot rely on crops for energy (Mongabay, 2007).

Farmland that is used to produce energy is also likely to rapidly deteriorate. Corn production leads to erosion of soil 20 times faster than it can form in the United States. Ethanol provides a lower amount of energy per unit volume as compared to gasoline, so more gasoline needs to be acquired to make up the shortfall. It is also believed that ethanol is not environmentally friendly as it emits carbon monoxide and nitrous oxides which are dangerous pollutants (Mongabay, 2007).

The production of ethanol also leads to the harmful release of cancer-causing aldehydes and alcohol into the environment. Moreover, when production of ethanol was inspected, the chemicals and gases released into the atmosphere were found to be quite detrimental to the environment (Pimentel, 1998). As even the plowing, planting, cultivation and transportation of corn requires the use of petroleum energy, ethanol can not be considered to be a safe or non-polluting alternate energy source. (Youngquist and Eugene, 1998)

Despite research concluding that the large scale production of bio fuel cannot be considered to replace the use of oil (Giampietro and others 1997), the American government is pursuing the use of ethanol as alternative fuel quite vigorously, placing oil companies in a dilemma. Change and innovation must be the cornerstone of oil companies’ strategic principals if they are to avert the competitive threat presented by alternative energy sources. This paper attempts to highlight the phenomenon of innovation and attempts to enlighten the oil industry about the use of innovation, since oil companies have become subject to increasing scrutiny and inquiry by the public and the government.

Analyzing industry environment through innovative business management

Strategic management, one of the primary concerns and tasks of general managers, includes setting the direction and goals of an oil company and allocating resources efficiently so that unwanted costs are avoided and the targets achieved (Chandler, 1963; Mintzberg & Waters, 1985). The general managers of oil companies are required to be far-sighted so that threats and opportunities for the business can be identified and its operations adjusted for these external events while putting strategies into practice. Other