Term paper Business environment Pestle analysis of oil and petroleum industry Submitted to:-
Submitted by:-
Ms.Impreet kaur
Shikhar Verma A-26 M.B.A(1st sem) 10904683
2009-11
ACKNOWLEDGEMENT
No serious and lasting achievement or success one ever achieves without the friendly guidance and co-operation of so many people involved in work. Foremost of all, I express my gratitude to the Almighty for his blessings and for vesting wisdom in all my wishes. I am also thankful to my Subject Teacher Ms.Impreet kaur , who has helped me a lot each and every time when I had some difficulty. Words are not sufficient to register my sincere regards to my loving parents for their deep affection and unabated inspiration that really kept me going. They were and unending source of strength and perseverance during the course of the study. I place my thanks to all those who spared their time and made it convenient for me to complete the research. I deeply acknowledge their concern for my research. Last but not the least, I also wish to red cord my gratitude for any person(s), my memory has failed to recall, who rendered his/her/their support and services.
Yours faithfully Shikhar verma
Introduction PEST analysis stands for "Political, Economic, Social, and Technological analysis" and describes a framework of macro-environmental factors used in the environmental scanning component of strategic management. Some analysts added Legal and rearranged the mnemonic to SLEPT; inserting Environmental factors expanded it to PESTEL or PESTLE, which is popular in the UK. The model has recently been further extended to STEEPLE and STEEPLED, adding education and demographic factors. It is a part of the external analysis when conducting a strategic analysis or doing market research, and gives an overview of the different macro environmental factors that the company has to take into consideration. It is a useful strategic tool for understanding market growth or decline, business position, potential and direction for operations. The growing importance of environmental or ecological factors in the first decade of the 21st century have given rise to green business and encouraged widespread use of an updated version of the PEST framework. STEER analysis systematically considers Socio-cultural, Technological, Economic, Ecological, and Regulatory factors. Political factors, are how and to what degree a government intervenes in the economy. Specifically, political factors include areas such as tax policy, labour law, environmental law, trade restrictions, tariffs, and political stability. Political factors may also include goods and services which the government wants to provide or be provided (merit goods) and those that the government does not want to be provided (demerit goods or merit bads). Furthermore, governments have great influence on the health, education, and infrastructure of a nation.
Economic factors include economic growth, interest rates, exchange rates and the inflation rate. These factors have major impacts on how businesses operate and make decisions. For example, interest rates affect a firm's cost of capital and therefore to what extent a business grows and expands. Exchange rates affect the costs of exporting goods and the supply and price of imported goods in an economy
Social factors include the cultural aspects and include health consciousness, population growth rate, age distribution, career attitudes and emphasis on safety. Trends in social factors affect the demand for a company's products and how that company operates. For example, an ageing population may imply a smaller and less-willing workforce (thus increasing the cost of labor). Furthermore, companies may change various management strategies to adapt to these social trends (such as recruiting older workers).
Technological factors include ecological and environmental aspects, such as R&D activity, automation, technology incentives and the rate of technological change. They can determine barriers to entry, minimum efficient production level and influence outsourcing decisions. Furthermore, technological shifts can affect costs, quality, and lead to innovation.
Environmental factors include weather, climate, and climate change, which may especially affect industries such as tourism, farming, and insurance.Furthermore, growing awareness to climate change is affecting how companies operate and the products they offer--it is both creating new markets and diminishing or destroying existing ones.
Legal factors include discrimination law, consumer law, antitrust law, employment law, and health and safety law. These factors can affect how a company operates, its costs, and the demand for its products.
The model's factors will vary in importance to a given company based on its industry and the goods it produces. For example, consumer and B2B companies tend to be more affected by the social factors, while a global defense contractor would tend to be more affected by political factors. Additionally, factors that are more likely to change in the future or more relevant to a given company will carry greater importance. For example, a company who has borrowed heavily will need to focus more on the economic factors (especially interest rates).
Furthermore, conglomerate companies who produce a wide range of products (such as Sony, Disney, or BP) may find it more useful to analyze one department of its company at a time with the PESTEL model, thus focusing on the specific factors relevant to that one department. A company
may also wish to divide factors into geographical relevance, such as local, national, and global (also known as LoNGPESTEL).
Political factors Crude oil is one of the most necessitated worldwide required commodity. Any slightest fluctuation in crude oil prices can have both direct and indirect influence on the economy of the countries. The volatility of crude oil prices drove many companies away. Therefore, prices have been regularly and closely monitored by economists. Now a days prices have shoot up to record levels of USD 125 per bbl. This is an increase of nearly 70% from that of the previous year. The consumption level of oil is projected to be rise by 1.2 million bbl/d in the year 2008. The consumption of China is presumed to be rise by 0.4 million bbl/d in current year, as it has already registered an increase of 0.8 million bbl/d in march. Crude oil prices act like any other product cost with more variation taken place during shortage and excess supply. Studies have conducted to analyze the impact of rise in crude oil price to the economic growth in the OPEC (Organization of Petroleum Exporting Countries) countries. It has been observed that $10 in the
crude oil price means decrease in the economic growth of the OPEC countries by 0.5%. This rise in prices account to have more influence on the economic condition of developing countries. Any massive increase or decrease in crude oil has its impact on the condition of stock markets in throughout the world. The stock exchanges of every country keep a close eye on any up and downward movement of the crude oil price. India fulfills its major crude oil requirements by importing it from oil producing nations. India meets more than 80% of its requirement by importing process. Therefore, any upward and downward motion of prices are closely tracked in the domestic marketplace. Many times it has been recorded that prices of essential products like crude also acts as a prime driver in becoming reason of up and down movement of price. Keeping in view the conditional status of present scenario, most of the observers at the international arena is much more interested in knowing the current oil price and the outcome of this price burst. These has become a hot bound question in all over world. There tend to be exist two schools of thought. One side argues that high prices are cyclical and arise due to the coincidence occurrence of potentially reversible factors which all are going in the same direction. But the other school of thoughts opine that there is a fundamental structural change in the oil market which is pointing towards the shortage of investment from a decade. Both the thoughts are important. As if the prices are cyclic in nature, there result will not exist forever but if they are structural then they will tend to be stay for a longer time period. Any fluctuation in crude oil affects the other industrial segments also. Higher crude oil price implies to the higher price of energy, which in turns negatively affects other trading practices that are directly or indirectly depends on it. Crude Oil has been traded in throughout the world and there prices are behaving like any other commodity as swinging more during shortage and excessiveness. In the short term, price of crude oil is influenced by many factors like socio and political events, status of financial markets, whereas from medium to long run it is influenced by the fundamentals of demand and supply which thus results into self price correction mechanism. This sustained movement in the northern side underlines some of the fundamental changes in the marketplace. On the demand supply, where in the past the more and more consumption was come from the OPEC countries, especially the US but in
today's date much of the incremental demand flow is from emerging economies. Particularly China and India which have recorded more than 40% contribution in the incremental global consumption during the time period of 2000-06. International price of crude oil is projected to shoot up to 100 million barrels per day by 2015. While demand may touch to a great height, supply will juggle to keep up the pace. The production from existing sources has been reduced by 4% per annum, which implies that around 3 million barrels per day of new capacity is required to be added in every year for offsetting this declination. There are innumerable factors which influence the price movement of crude oil in throughout the world. Like methods and technology using for increase the oil production, storing up of crude oil by rich and prosperous countries, changes introduced in tax policy, social and political issues etc. In recent years many factors have emerged as the key figures in influencing the price index of crude oil in throughout the world. The crude oil prices have been buffeted by many factors, which are summarized as below •
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Production: The OPEC nations are the major producer of world's crude oil. Therefore, every policy made by such countries related to the crude oil prices have their influence on crude oil prices. Any decision taken by OPEC nations for increasing or decreasing production of crude oil impacts the price level of crude oil in international commodity markets. Natural Causes: In recent years, global community have witnessed many events which in turns have volatility effects on the price level of crude oil. Like hurricane katrina and other type of tropical cyclone have hit the major portion of globe, which as a result driven the crude oil prices to reach at its peak. Inventory: In throughout the world, oil producers and consumers get stock their crude oil for their future requirements. This gives rise to speculation on price expectations and sale/arbitrage chances in case any unexpected thing cracks during supply and demand equations. Any upward or downward movement in inventory level shoots up volatility in price index of crude oil, which generates lot of changing movement in sensex. Demand: With a sharp rise in economic demand, requirement of crude oil is increasing to manifold in context to the limited supply. The high demand economies of crude oil is putting undue pressure on the available fixed
resources. The major gap created between demand and supply of crude oil is forcing the price curve of crude oil to rise in upward direction. The price structure of crude oil is also influenced by the cyclical pattern. It has been observed that requirement of crude oil got increased during summer season in comparative to the winter season. As any dip in the seasonal temperature increases the consumption of energy for heating purpose in many cold nations. Demand shoots up and thus generates the requirement of tapping the inventories. Similarly, in summer, supply exceeds the demand and petroleum inventories are build up for storage purpose. Henceforth, crude oil prices drop.
Economic factors paper is about the Indian petroleum refining industry. But this industry is extremely open; trade flows are large compared to production. And there is considerable overlap between oil production and refining internationally, and to some extent in India. So we begin with a brief discussion of the international petroleum industry and its components – refining being one of them. Petroleum is extracted from underground reserves; then it is cracked or “refined” into end products for various uses. The petroleum industry thus has two parts: an oil exploration and production industry upstream and a refinery industry downstream. Most oil producers also own refineries. But the reverse is not true; a high proportion of oil is sold to refinery companies that do not produce crude oil. Sedimentary rocks in which hydrocarbons are trapped often hold gas, sometimes in association with crude oil and sometimes alone. It consists mostly of methane, which is lighter than air and toxic. It therefore requires airtight tanks for storage and similarly leak-proof pipes or trucks for transport, which raise its capital costs. Associated gas was flared in early years of the industry; it is still flared at remote or minor wells where the cost of its collection and transport would be high, or often reinjected into the oilfield to maintain pressure which forces oil up to the surface. But where the quantities are large enough, natural gas is mined and traded. It is mainly used as an industrial, domestic and vehicular fuel. Motor vehicles run almost exclusively on petrol and high-speed diesel oil, both fuels derived from mineral oil – although they can be modified to run on certain biofuels. Vehicles are so widely dispersed that they require an extensive distribution system for these two refinery products. As motor vehicle use has spread across the world, it has brought along with it petrol pumps, logistics,
storage and supply of fuels. There is thus a third part of the petroleum industry downstream from refineries which distributes the products. It is owned by refineries in most countries. But this is not inevitable. Some countries have distribution chains that are independent of producers and refiners; and in countries which do not have refineries, distribution is undertaken by either local or foreign oil companies. Oil has collected in pools and seeps for thousands of years. The Chinese are recorded as having extracted oil from wells 800 feet deep through bamboo pipes in 347; they used it to evaporate brine and make salt. American Indians used to put it to medicinal uses. Persians, Macedonians and Egyptians used tars to waterproof ships. Babylonians used asphalt in the eighth century to construct the city’s walls, towers and roads. But the easily available oil was not put to any mass use because the crude itself was not a good fuel; it gave out much soot and smoke. A distillation process using a retort was invented by Rhazes (Muhammad ibn Zakariya Razi) in Persia in the 9th century; liquid heated in it vapourized, passed through a curved spout and condensed in another container. The process could be used to make kerosene; but it was more often used to make alcohol and essence of flowers for perfume. It was a batch process, its fuel consumption was high, and it was not equally efficient at distilling kerosene from all crudes. A more efficient and reliable distillation process came out of a series of inventions after 1846. The last invention was the invention of oil fractionation in 1854 by Benjamin Silliman, a professor of science in Yale. It used a vertical column which separated components more efficiently, and which could be used continuously. Oil was first produced in Titusville, Pennsylvania (USA) in 1859 by one Edwin L Drake, who refined it into kerosene, which was then used as an illuminant. Electricity did not emerge as an illuminant till the Edison Electric Light Company was founded in 1878. Well into the 20th century, kerosene, gas and electricity continued to compete as illuminants. Whilst the use of gas as an illuminant has virtually disappeared, a large population, especially in India, continues to use kerosene as illuminant. The invention of the motor car by Karl Friedrich Benz in 1885 created a market for petrol, a new refined product (petrol is called Benzin in Germany, but is not named after Karl Benz). In 1898, Rudolf Diesel invented an engine in which oil was ignited by compression; the diesel engine he invented came to power larger vehicles, principally trucks and buses. Diesel engines used a different fuel, which was named diesel oil. After this, the production and use of motor vehicles spread rapidly in the United States, especially after 1908 when Henry Ford began mass manufacture of his Model T; and petroleum and diesel oil became the most important refined products, first in the US and progressively across the world.
However, only a certain proportion of crude oil can be converted into motor fuels. The demand for kerosene, the original distillate extracted from crude oil, has gone down with the spread of electricity. So other refined products have been developed, and non-vehicular uses developed for them. Some of the products differ little from motor fuels; for instance, naphtha, extensively used to make nitrogenous fertilizers and chemicals, is little different from petrol; and jet fuel is very similar to kerosene. Thus, refineries find markets for their products in many industries other than motor transport . The Industry in India India imports three-quarters of the crude it refines. It exports refinery products ; its net exports are roughly ten per cent of production. The government operates an elaborate set of cross-subsidies to insulate domestic from international prices; such cross-subsidies have serious effects on the finances of the Indian companies involved, and influence competition amongst them. The oil companies, both public and private, are so large a part of the economy that the cross-subsidy regime cannot be sustained in all circumstances; sooner or later, the government has to bring domestic prices closer to international prices. Hence the state of competition in the international market and international prices are important for the domestic market. I give an introduction to refinery technology, products, and the markets they serve. In ,briefly describe the global exploration, production and refining industries. In, we describe the Indian market structure in terms of the companies operating in it, their products and markets. In outline the market structure in exploration and production, user industries, refining and gas respectively. In, turn to the major barriers to competition and to the steps that need to be taken if greater India’s economic growth is contingent upon the growth of the Indian steel industry. Consumption of steel is taken to be an indicator of economic development. While steel continues to have a stronghold in traditional sectors such as construction, housing and ground transportation, special steels are increasingly used in engineering industries such as power generation, petrochemicals and fertilisers. India occupies a central position on the global steel map, with the establishment of new state-of-the-art steel mills, acquisition of global scale capacities by players, continuous modernisation and upgradation of older plants, improving energy efficiency and backward integration into global raw material sources. Steel production in India has increased by a compounded annual growth rate (CAGR) of 8 percent over the period 2002-03 to 2006-07. Going forward, growth in India is projected to be higher than the world average, as the per capita consumption of steel in India, at around 46 kg, is well below the world average
(150 kg) and that of developed countries (400 kg). Indian demand is projected to rise to 200 million tonnes by 2015. Given the strong demand scenario, most global steel players are into a massive capacity expansion mode, either through brownfield or greenfield route. By 2012, the steel production capacity in India is expected to touch 124 million tonnes and 275 million tonnes by 2020. While greenfield projects are slated to add 28.7 million tonnes, brownfield expansions are estimated to add 40.5 million tonnes to the existing capacity of 55 million tonnes. Steel is manufactured as a globally tradable product with no major trade barriers across national boundaries to be seen currently. There is also no inherent resource related constraints which may significantly affect production of the same or its capacity creation to respond to demand increases in the global market. Even the government policy restrictions have been negligible worldwide and even if there are any the same to respond to specific conditions in the market and have always been temporary. Therefore, the industry in general and at a global level is unlikely to throw up substantive competition issues in any national policy framework. Further, there are no natural monopoly characteristics in steel. Therefore, one may not expect complex competition issues as those witnessed in industries like telecom, electricity, natural gas, oil, etc. This, however, does not mean that there is no relevant or serious competition issue in the steel industry. The growing consolidation in the steel industry worldwide through mergers and acquisitions has already thrown up several significant concerns. The fact that internationally steel has always been an oligopolistic industry, sometimes has raised concerns about the anti-competitive behavious of large firms that dominate this industry. On the other hand the set of large firms that characterize the industry has been changing over time. Trade and other government policies have significant bearing on competition issues. Matters of subsidies, non-tariff barriers to trade, discriminatory customs duty (on exports and imports) etc. may bring in significant distortions in the domestic market and in the process alter the competitive positioning of individual players in the market. The specific role of the state in creating market distortion and thereby the competitive conditions in the market is a well-known issue in this country. This report proceeds as follows. Section 2 of the report provides a brief over view of the performance and structure of the Indian steel industry by analysing published secondary time series data on certain key indicators. Market structure is analyzed using indicators such as number of players and their respective shares in total production, share of public and private players in the total production/sales, production capacity of major players, etc. Given the heterogeneous nature of the product this analysis is done for the various segments of steel that constitute the “relevant market”. This analysis is
a precursor in identifying segments where competition may be an issue of concern to allow for a pointed analysis. The report documents policy and institutional structure governing the steel industry in India and the role played by the Government in the development of this industry. The report examines issues of competition of steel industry in India, by identifying the structurally inherent and the market determined positions of various steel firms specifically to see their market power, vis-à-vis both their final consumers as also those within the steel industry. The issues emerging out of the size and market shares, specifically taking into consideration the investment aspects are also discussed in this section. The other issue of significant importance in the context of competition is the command over natural resources that a few players possess and that enable a significant cost advantage over the rest in the market. These are the result of government policies of the past, to support growth of a particular industry. These preferential policies and their impact on competition are also analysed in this section. Concludes with a discussion on state of the competition in the Indian steel sector pointing to a few key recommendations for the Competition Commission of India. Provide data on the sector, and briefly discuss international conditions, and provide an historical overview. In Brief This study finds little evidence of any cartelization or joint pricing behaviour on the part of the incumbents. It finds that government intervention, and slow responsiveness to changing conditions has contributed to shortages in the past, which in turn leads to action by the incumbents that look like, but is not, anticompetitive behaviour. Unequal access to raw material, as well as export/import curbs, are the key issues affecting the creation of a level playing field. It is the last two as well as ready availability of information on costs and prices across the value
Technological effects Timely, hands-on guide to environmental issues and regulatory standards for the petroleum industry Environmental analysis and testing methods are an integral part of any current and future refining activities. Today's petroleum refining industry must be prepared to meet a growing number of challenges, both environmental and regulatory. Environmental Analysis and Technology for the Refining Industry focuses on the
analytical issues inherent in any environmental monitoring or cleanup program as they apply to today's petroleum industry, not only during the refining process, but also during recovery operations, transport, storage, and utilization. Designed to help today's industry professionals identify test methods for monitoring and cleanup of petroleum-based pollutants, the book provides examples of the application of environmental regulations to petroleum refining and petroleum products, as well as current and proposed methods for the mitigation of environmental effects and waste management. petroleum technology, refining, and products, and reviews the nomenclature used by refiners, environmental scientists, and engineers. environmental technology and analysis, and provides information on environmental regulation and the impact of refining. Coverage includes: * In-depth descriptions of analyses related to gaseous emissions, liquid effluents, and solid waste * A checklist of relevant environmental regulations * Numerous real-world examples of the application of environmental regulations to petroleum refining and petroleum products * An analysis of current and proposed methods of environmental protection and waste management Efficient reliable and competitively priced energy supplies are prerequisite for accelerating economic growth. India is currently world’s fifth largest consumer of energy accounting for 3.9% of world’s annual energy consumption. USA, China, Russian federation and Japan are the top four consumers. India’s import dependence on crude oil and petroleum products is more than 70%. Realization of high economic growth aspirations by the country in the coming decades, calls for rapid development of energy market. The India Hydrocarbon Vision-2025 report, which encapsulates Government’s long-term policy for this sector enunciate therein the long-term policy covering exploration, refining, marketing infrastructure, gas and all other related matters in the hydrocarbon sector. The national endeavor is to bridge the ever-increasing gap between demand and supply of petroleum products in India by intensifying exploratory efforts for oil and gas in the Indian sedimentary basins and abroad supported by other alternative sources of energy like Coal Bed Methane (CBM), Gas Hydrates, Coal Liquefaction, Ethanol and Bio-diesel etc.
New Exploration Licensing Policy (NELP), over the last 6 years there has been a significant growth in E&P activities in India. There have been several successes. These finds will require state of the art technologies to extract the hydrocarbons as well as highly skilled and competent professionals to manage the industry. The E&P industry today is using cutting-edge technologies to locate hydrocarbons and optimize efficiency in production. These technologies include the use of complex reservoir modeling and simulation, nuclear magnetism, sonic & ultra-sonic technologies, magnetic resonance, advanced chemical engineering, fluid mechanics, telecommunication, process engineering etc. As “easy oil” has become a thing of the past, the industry is moving towards frontier areas to increase production. The high value of the end product has led to significant technological developments to tap resources in offshore environs of deep and ultra deep water (from 300-3500 meter water depth).Heavy oil consists of over 40% of the hydrocarbon resources in the world. This oil does not flow at surface conditions. Optimizing the recovery of hydrocarbons from existing producing fields (called “brown fields”) remains an existing challenge. Current recovery rates in India need considerable enhancement. These are just some examples of the E&P challenges that are found in India and an opportunity for the use of state of the art technologies and developing manpower for meeting these challenges. II.
Industry – Academia Interaction:
2.1 All the above endeavor require highly skilled and competent professions. PetroFed projected a need by 2012 for 8000 additional skilled professionals annually in the Indian E&P sector, the current capacity for new graduates in Petroleum Related Geo-sciences is about 450. 2.2 In March, 2005 and January, 2006 brainstorming sessions were held to identify gap in demand and supply of petroleum personnel in India. Accordingly, Petrofed was authorized to conduct a study in this regard. Petrofed engaged the services of Price Waterhouse Coopers (PwC). The study conducted by PwC recommended action points for Government organizations and education sector along with suggestions for the way forward. 2.2.1. Action points for Government: (i) Increase number of talents available to the E&P sector. (ii) MOP&NG may implement a plan to communicate the attractiveness of the industry say a “Go Explore” campaign where students right ,
hear and understand about career opportunities in the E&P sector. (iii) MOP&NG and M/o HRD may set up a joint committee to monitor and address the talent requirements of the industry – Course and curriculum may be reviewed and infrastructure may be planned to provide higher quality of education. Action points for Organizations: (i) A higher degree of collaboration between the industry and educational institutions. (ii) Joint committee to take up manpower planning issues and Institute Industry – Academia Interface. (iii) Plan sector specific programmes like workshops, seminars, technical contests etc. (iv) A communication campaign aiming to draw young talent to the E&P sector. (v) Utilization of retired/retiring professionals as mentors/trainers to enable transfer of knowledge. (vi) Adoption of college going students at entry level to nurture their growth and readiness for the industry. Action points for the Education Sector: (i) Expansion of training programmes to address immediate and emerging skills shortage. (ii) Orientation of students to prepare prospective employees for careers in the oil and gas industry. (iii) Expansion of current initiatives to achieve an appropriate level of applied research programmes. (iv) Expansion of current intake in E&P related courses as well as set up new courses. (v) Increasing the level of common industry standards for vocational training across India. (vi) Establishing feedback mechanism for infrastructure, curriculum and faculty. (vii) Indian Institutes may plan catering to the global opportunities.
The way forward: •
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The Central Government has set up Rajiv Gandhi Institute of Petroleum Technology (RGIPT), a center of excellence, catering to the needs of Oil & Gas Industry with effect from Academic Session, 2008-09. State owned Gujarat State Petroleum Corporation has promoted the Gujarat Energy Research & Management Institute (GERMI). These will start contributing to the industry over the next 3-5 years. University of Petroleum and Energy Studies, Dehradun, can provide additional tailor made programs for Oil & Gas Industry. MOP&NG has also decided to review the steps and initiatives undertaken by the industry to address the talent scenario by bringing it under the purview of QPR (Quarterly Performance Reviews) with effect from April, 2007. Build the attractiveness of the E&P Sector to assure inflow of quality talent. “Go Explore” and other brand building campaigns for Oil & Gas Sector. Set-up and institutionalize the industry – academia interface. HR Systems (such as training, career planning, compensation and retention) in Oil & Gas Companies need to be made more effective and monitored on an ongoing basis.
Social effects The carrying capacity is the number of individuals that an area can support without sustaining damage. Carrying capacity is exceeded if so many individuals use an area that their activities cause deterioration in the very systems that support them. Exceeding the carrying capacity sometimes harms an environment so severely that the new number who can be supported is smaller than the original equilibrium population. The carrying capacity would then have declined, perhaps permanently. Any number of elements or systems can be hurt by overuse. A field can be grazed down until the root systems of grasses are damaged; or so much game can be hunted off that food species are effectively extirpated. Now, the foragers that ate the grass or the predators that killed the game have lost a food source. In effect, the carrying capacity has been exceeded so that the population dependent on the area's productive systems is worse off than it was originally.
Animal populations that destroy their niche come and go. If not too many examples come to mind, it is because they rather quickly go. The miniature ponies on Assateague Island illustrate a point on the continuum. They would overgraze their island, seriously depleting their future food supply, except for the fact that a portion of each year's colt crop is removed. Without human intervention (there are no predators and apparently no reservoir of infectious disease), the pony population would explode. Probably it happened in the past. Their very small size today is a vestigial effect of starvation, when only the tiniest, for whom the least blades of grass were lifesaving, survived. A population cannot be stable if, by its size or behavior, it destroys the very lifesupport systems on which it depends. Sooner or later, degradation of the environment is felt in inadequacies of the food or water supply, shelter, or havens where individuals can be safe and the young can develop. Sustainability requires human or animal populations to stay at or below the carrying capacity of their physical environment. PHYSICAL AND CULTURAL CARRYING CAPACITY Humans are a little different because of wanting more than bare subsistence. Humans value their aesthetic, intellectual, cultural, and political creations. People want more than a loaf of bread and processed grape juice. For humans, then, carrying capacity refers to the number who can be supported without degrading the physical, ecological, cultural, and social environments. Carrying capacity relates to the desired quality of life. The carrying capacity of the United States depends upon standard-of-living targets, including high-quality recreational opportunities, coexistence with an abundance and diversity of wild species, tolerable work-to-home commuting conditions, favorable conditions for childrearing, and safe neighborhoods. Where population size detracts from the capacity to provide these amenities, overpopulation exists. RECOGNIZING STRESS One may discern overpopulation quite apart from large systems and specific resources. Overpopulation shows up in quality of life and cost of living. Repeatedly one sees least those who wish to, will see that more people mean more problems from pollution, crowding, and resource scarcity because even conservationists pollute and consume. The costs of adjusting (i.e., decently accommodating more and more people in the same amount of space and with the
same fund of natural resources) are monetized. Garbage is the topic of the hour. In just a few years, dumping fees in U.S. cities have skyrocketed, from $5 or $10 a ton to an average of over $150. Burning questions are whether to incinerate or not, how to recycle, and how to make money from one's ash heap. The rising cost of water in areas that are not naturally arid makes the same point. Even if the quantity of water is sufficient, purity tends to suffer when population density grows. It costs money to keep clean or clean up. A 1992 Wall Street Journal account (Poor Pay, 1992) states that "Boston water and sewer bills have risen 39% in the past two years as the costs of cleaning up Boston Harbor have been phased into rates." In 1991, the average household paid $500 a year in water and sewer bills, and "water shutoffs as a result of nonpayment of water bills… tripled." Demands on the public sector also increase as population grows. Taxes invariably rise to meet the higher demand for education, social services, health care, law enforcement, infrastructure such as schools, hospitals, prisons, systems for human transportation, and disposal of sewage and other wastes. Concurrently, systems are often left to deteriorate, an attractive option because taxpayers and users may not see meaningful gains even with higher spending. Infrastructure is decaying nationwide, but goes unnoticed until a bridge collapses, sewers leak, or tunnels cave in. The disappearance of natural capital is equally silent, but it is continuing at a great rate and is compromising future production. Iowa has lost 50 percent of its topsoil since the advent of farming in the nineteenth century. The drawdown of U.S. aquifers is also proceeding quickly and, so far, has led to abandonment of over 300,000 formerly irrigated acres in Arizona alone. Seventy-five percent of irrigation is threatened in Nebraska. Good air, land, water, and energy are the nuts and jolts of carrying capacity. It is not trivial for the sustainability of our society that, as summarized by Carrying Capacity Network (1991), the United States is "currently losing topsoil 18 times faster than [it is being replaced; or that] groundwater,…much of which we stored during the Ice Age and is nonrenewable, is currently being pumped out of the ground 25 percent faster than it is being replenished." Substitution for very basic inputs such as soil and fresh water will be difficult. Moreover, there may be an interactive effect: Up to now, irrigation and petroleumbased fertilizers have compensated for deterioration in the innate productivity of the land. But even a temporary rise in the price of petroleum, if it led to cutbacks
on fertilizer use, could unmask the hidden cost of topsoil loss. When farmers recognize that their long-term income stream is jeopardized by present farming practices, they are likely to shift toward a more sustainable process. Holding farmers' capital their soil intact will have the immediate result of lowering production to below what can be realized by current, soil depleting agricultural methods. Recognition of true costs and adoption of alternate (sustainable) agricultural technologies could come suddenly, wiping out food surpluses in just a few growing seasons. Some farmers already forgo maximizing the size of crops in order to preserve soil. But a prudent farmer might not switch all his acreage at one time. He knows that prices will not rise to compensate him for the decreased size of his crop until virtually all farmers make the transition. Changes will come when the cost of production on depleted soils rises, that is, ever-larger fertilizer and pesticide requirements and/or higher-priced petroleum force a reduction in production targets. This paradigmatic shift in agricultural accounting will be a cultural as much as an economic phenomenon. The price of food might rise if the crop got smaller, but that effect would be limited by market mechanisms. Demand falls when prices rise, keeping downward pressure on prices of even the most essential commodities. This constitutes price elasticity, and it implies a question: Can people afford to buy? Commodity prices are an unreliable indicator of scarcity, in fact, because workers in rapidly growing populations command less and less for their labor and thus have little to spend. Poor people do not buy much. They exert negligible effective demand. They go without. Thus, rapid population growth causes very little pull on most commodity prices. The price of food might not go up even if the crop were small and the number of hungry people, large. Most of the world's 5.5 billion people are becoming poorer as they compete against each other for jobs. Most lose purchasing power on a yearly basis. Increasing numbers drop out of the consumer market altogether, exerting no effective demand. Thus; it was a fact that December, 1990, oat and wheat prices sank to their lowest levels since 1972 while more people than before starved or lived on the edge of famine. The multitudes do not bid up prices. Quality of life and environmental health, not commodity prices, are clues that the carrying capacity is being exceeded.
ENERGY AND CARRYING CAPACITY Energy security is a key element of America's long-run, sustainable carrying capacity. Estimates of the carrying capacity assume a particular standard of living. The focus on energy recommends itself because, except for amenities provided by nature and our communities, per capita energy use is a good proxy for standard of living. The eighty years between 1890 and 1970 were marked by the fastest rise in the standard of living that a whole country has ever seen; indeed, the first threequarters of the twentieth century saw real disposable personal income rise at an average rate of 2.2 percent per year. This same period, according to energy specialist John Holdren (1991) of the University of California (Berkeley), saw a record 7 kW per capita increase in use of energy (from about 4 kW to over 11 kW). That works out to about 1.75 kW per twenty-year period, which is important for comparison with the latest twenty years: From 1970 to 1990, per capita energy use increased just 0.18 kW. Growth in inflation-adjusted after-tax income also stalled, averaging about 0.5 percent per year from 1973 to 1990. The link between energy use per capita and standard of living is clear enough in concrete terms: Energy in the form of petroleum is the base for fertilizer, pesticides, on-farm mechanization, and much food processing and distribution. Energy lets us live somewhat distant from our place of work. Energy is the basis for heating, cooling, lighting, much communication, and most laborsaving devices in the home. Without plentiful energy, would your job exist? To judge if we are within the carrying capacity of the United States, given the present standard of living, ask if our rate of energy use is sustainable. The related policy question is: Does the United States enjoy energy security? Geologists, computer modelers, petroleum industry analysts, and life scientists largely concur in projecting a bleak future. A 1986 book, Beyond Oil The Threat to Food and Fuel in Coming Decades by John Gever et al., develops the concept of "energy/profit ratio": How much usable energy comes out for every unit of energy put in? That is, how much energy does one get for the energy used to find, produce, refine, and distribute energy? Long before all petroleum is used up, the best and easiest to recover deposits will be gone. Thus, the cost in energy associated with recovering petrochemical energy
(oil and natural gas) will rise so that the profit ratio becomes less and less favorable. This ratio will be reflected partly in higher prices and partly in lower use of oil-based products.
