The High Cost of Low Prices

David S. Jacoby

• Publisher: Business Expert Press
• Year: 2017
• Print ISBN: 9781631578274
• eBook ISBN: 9781631578281
• Topic: Business
• Subtopic: Operations
• Index: Business

Based on his experience consulting on hundreds of industrial mega-projects, Jacoby reveals dark secrets of international supply chains for familiar products such as coffee, bottled water, gasoline, and electronic devices, and explains how government policies and business norms around the world have evolved to allow practices that can deplete natural resources, blight native landscapes, and tolerate inhumane working conditions. The book directly addresses controversial issues like climate change, carbon taxes, fracking, offshoring, urban sprawl, globalization, income inequality, regulation, corruption, compliance and enforcement, providing an informed basis for mapping the way forward. Rich in facts and deep with first-hand experiences from around the world, Jacoby challenges embedded thinking about growth and progress, convenience, comfort, and quality of life. The book proposes a bold and realistic new policy framework that is groundbreaking and achievable for industry, government, and consumers, and supports the plan with achievable metrics, targets, and accountabilities. While his first book promoted global supply chain optimization based on industry "best practices" and his second book fine-tuned the techniques for oil, gas, and power companies, Jacoby takes a holistic perspective in this third book, acknowledging and proposing solutions for the problems caused in part by these "optimized" global supply chains.

CHAPTER 1

Why Is this Happening?

What are the underlying causes of the natural resource tensions, landscape blight, and social malaise characterized in the introduction?

Our continuously growing need for energy (oil, gas, and power) and products, with the resulting social and environmental consequences, is largely being driven by increasingly comfortable lifestyles; population growth, development, and consumerism; inefficient energy production; unclean manufacturing; careless disposal of harmful chemicals; and aggressive marketing and product distribution.

Comfort and Convenience

Most of us have become accustomed to temperature control at all times. When I was young, air-conditioning was a special treat. We used fans in the summer and we wore sweaters in the winter. For many people, especially in developed countries, this is no longer necessary.

In the energy sector, power generation for electricity and heat is the largest contributor to Greenhouse House Gas (GHG) emissions [1]. The majority of power usage (about 80 percent), and also GHG production and growth, stems from electricity and heat production. In 2011, the U.S. power sector contributed 41 percent of all U.S. emission of carbon dioxide, the leading pollutant driving global warming. The 500 most polluting U.S. power plants emit more than 6 percent of the world’s energy-related carbon dioxide, and GHG pollution from Chinese power plants is almost 90 percent higher than U.S. levels—9,700 MMT (million metric tons) versus 5,200 MMT CO₂—due mostly to China’s dependence on coal as a fuel for its power plants. India, Russia, Japan, and Germany are the next largest contributors [2].

The increased use of automobiles for convenience and lifestyle has also polluted the environment, not only with particulate emissions, but also with heat. Standing anywhere near the back of a running automobile in the heat of a Middle Eastern summer is so hot it hurts.

Consumption Patterns and Consumerism Population growth spawned an era of consumerism defined by massive consumption. Between the 1950s and 2000, world trade grew at 5 to 6 percent per year. This accelerated to 8 to 9 percent per year between 1990 and 2000, and to 17 to 18 percent between 2000 and 2008 [3]. This increase in consumption and trade corresponded with an increase in pollution. About half of CO₂ emissions from 1750 to 2010 have occurred in the last 40 years. Increases in GDP per capita account for about 65 percent of the increase in GHG emissions between 2000 and 2010 [4]. Behavior, lifestyle, and culture significantly drive energy consumption and the associated emissions [5].

Consumer product companies catalyzed the rise in consumerism by rhythmically putting out new products—fall fashion different from spring fashion, new automobile models coming out every year, and so on, supported by active marketing and designing products so they can be quickly manufactured and cheaply transported. Product Lifecycle Management (PLM) has contributed to “the story of stuff,”[6] particularly in its presumption of planned obsolescence. PLM, which originated as an organized way to downcycle when a product has run its course, has accelerated consumerism by preadvertising and prepromoting new products, which has aggravated air and water pollution, mineral depletion, deforestation, and to some degree unfair or inhumane working conditions.

Construction, Development, and Power

Rapid increase in construction and consumption in developing Asian economies over the last 40 years has driven much of the increase in industrial production. The single largest root cause of the rise of industrialization and the consequent side effects is population growth.

It took hundreds of thousands of years for the world population to grow to 1 billion—then in just another 200 years or so, it grew sevenfold. In 2011, the global population reached the 7 billion mark, and today, it stands at about 7.3 billion [7].

Increase in population accounted for about 30 percent of the increase in GHG between 2000 and 2010. Most of that population growth has been in Asia. Asian countries’ GHG emissions increased 1,600 percent, from 0.42 to 7.06 Gt (Gigatons) during 1990 and 2010 [8], compared to 31 percent for the Organization for Economic Cooperation and Development (OECD) countries, where GHG emissions increased from 3.26 to 5.26 Gt CO₂ [9]. Asia’s GHG emission from Industry grew from 15 percent of the world total in 1970 to 52 percent of the world total in 2010, and accounted for virtually all of the increase in industrial GHG emissions during that period.

In 2010, China was the single-largest contributor to the world’s GHG emissions [10].

China’s power plants are still mostly fueled by coal, and China is heavily dependent on oil imports. Before 1999, five times more coal was used than oil (in exajoules of energy usage), and five times more oil was used than gas. There was negligible energy trade. Between 1996 and 2006, coal production doubled, oil production doubled, and industrial electricity use tripled. From 2006 through 2012, oil imports increased and exceeded domestic supply, industrial electricity use doubled, and direct industrial use of coal continued to increase by about a third. Gas consumption is still negligible compared to that of coal and oil [11].

Myanmar, most of whose citizens lack access to electricity, is actively seeking investors to build an extensive network of power plants, offshore gas production facilities, and at least one refinery [12]. Almost all developing countries have similar plans. The whole world is hungry for power and energy independence. It is palpable: Millions of people hunt for development, make their living out of it, and invest in education and career pathing that will make them successful through industrial development of oil, gas, and power infrastructure.

From a distance, the power generation industry has always appeared cleaner than the oil & gas industry, because power plants are usually separate from the mining and production of whatever fossil fuel is burned in them; however, the pollutants that result from the burning of oil, gas & coal are more damaging to the environment than the mining that provides these fuels. Power plants collectively account for 24 percent of all pollutants from the burning of fuels. The energy loss in the production of electric power is astounding. Indirect emissions from the production of heat and power make up over 5 Gt CO₂ eq/year—roughly the same as indirect emissions from Chemicals, Metals, Cement, Waste, and Waste-water Treatment combined.

Using Energy to Make Energy

The businesses of producing oil, gas, and power are frightfully inefficient.

In power generation, 64 percent of the energy used to produce heat and electricity is lost in the conversion process, globally [13]. Combined cycle technology is the most efficient power generation technology that exists today, and at best it reaches 62 percent efficiency with the use of the newest, state-of-the-art gas turbines, which are only now starting to be sold. This means that 62 percent of the thermal energy stored in the fuel and the subsequent vapor that runs in the steam turbine can be converted into electricity [14]. After conversion, 6 to 10 percent of the power that is transmitted in overhead or underground power lines is lost due to “line loss,” which increases with distance, and electricity theft [15]. Add to those inefficiencies an inefficient coal supply: in the United States alone, 20,000 power plants railed in coal in dedicated unit trains of over 100 railcars each, often from thousands of miles away, to fuel their boilers, day after day. By comparison, refineries for oil, gas, and petrochemical products have much lower conversion losses than power plants [16].

In oil and gas, wildcat drilling methods were used for almost a century to drill holes in the hopes of hitting pay dirt once in a while, and as long as the price of oil was high, that approach generally paid off. These methods flared gas rather than capture it, wasting hydrocarbons and destroying ozone at the same time.

Industrial factories of other kinds vary in efficiency, and it is hard to generalize as the technologies vary widely by manufacturing technology and product type. However, manufacturers typically produced to fill inventories, which were never the right level, so they made excess products to fill their inventories; then they had to purge obsolete products and discount prices to sell the rest.

Refineries, power plants, and industrial factories are often disconnected from social and commercial areas, and transport links are only by car. While European countries and China plan “new towns” based on a concept of integrated residential, commercial, and industrial activity zones, zoning and industrial planning in many countries has been more limited. For example, in Saudi Arabia, many people commute four hours per day for a round-trip from Al Khobar to Jubail, and there are no public transport links in most of the country. For shopping, banking, and any conveniences, a car is needed. Similar situations exist all over the world—in Egypt, Vietnam, Thailand, and elsewhere.

Dirty (and Wasteful) Manufacturing Processes

Dirty manufacturing processes and failure to manage waste have exacerbated the demand created by comfort, convenience, consumption, and construction. It has taken us a long time to notice what was happening. Environmentalism did not become a part of the social conscience until the 1970s. The book Silent Spring, often used as a milestone marking the beginning of the environmental “movement,” was published in 1962. The EPA was formed in 1970. Since that period, it has taken decades for the many facets of industrialization to adopt a more environmentally respectful paradigm. The period has been characterized by inefficient manufacturing, careless waste disposal, and inhumane working conditions and employment arrangements.

Careless Management of Toxic Chemicals and Waste Disposal

Due to activities of the power industry, acid rain is poisoning birds and increasing extinction rate of endangered species. Bird migration patterns are changing in response to changes in climate and habitat worldwide. And acid rain from Midwestern power plants is killing birds in Massachusetts.

In agricultural industries, unregulated commercial fishing in Asia is draining stocks of sharks and other fish, which are often caught in whole or in part (e.g., shark fins) for trading rather than eating [17]. In Africa, rhinoceros, tiger, and other wildlife are still hunted as prize, for lack of enforcement of antipoaching laws.

Industrial effluents have caused a dangerous drop in water quality. Effects of mining activity are equally worrying. Puerto Maldonado...

Table of contents

• Cover
• Half-title Page
• Title Page
• Copyright
• Abstract
• Contents
• Acknowledgments
• Introduction: The Price of Modern Development
• Chapter 1 Why Is this Happening?
• Chapter 2 Quantifying the Resource, Environmental, and Social Impact
• Chapter 3 The European Model
• Chapter 4 The American Model
• Chapter 5 Asian Approaches
• Chapter 6 African and Middle Eastern Approaches
• Chapter 7 Roadmap for the Future: The Agenda for Change
• Chapter 8 Industry Knows How to Adapt and Will Remain Competitive
• Chapter 9 Conclusion
• Appendix 1: Greenhouse Gas Emissions Index by Country
• Appendix 2: Environmental Performance Index by Country
• Appendix 3: Social Progress Index by Country
• Appendix 4: D-Factor for a Bottle of Water
• Appendix 5: D-Factor for a Cup of Coffee
• Appendix 6: D-Factor for a Tank of Fuel
• Appendix 7: D-Factor for a Smartphone
• Appendix 8: D-Factor for a Transatlantic Flight
• Glossary
• About the Author
• Index
• Backcover