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The New Old Economy - 01.01

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From the archives:

"Beyond the Information Revolution," by Peter F. Drucker (October 1999)
The author uses history to gauge the significance of e-commerce -- "a totally unexpected development" -- and to throw light on the future of "the knowledge worker," his own coinage.

"Building Wealth," by Lester Thurow (June 1999)
The new rules for individuals, companies, and nations.

"The NEXT Industrial Revolution," by William McDonough and Michael Braungart (October 1998)
"Eco-efficiency," the current industrial buzzword, will neither save the environment nor foster ingenuity and productivity, the authors say. They propose a new approach that aims to solve rather than alleviate the problems that industry makes.

"Mideast Oil Forever?," by Joseph J. Romm and Charles B. Curtis (April 1996)
Congressional budget-cutters threaten to end America's leadership in new energy technologies that could generate hundreds of thousands of high-wage jobs, reduce damage to the environment, and limit our costly, dangerous dependency on oil from the unstable Persian Gulf region.

"The Age of Social Transformation," by Peter F. Drucker (November 1994)
A survey of the epoch that began early in this century, and an analysis of its latest manifestations: an economic order in which knowledge, not labor or raw material or capital, is the key resource; a social order in which inequality based on knowledge is a major challenge; and a polity in which government cannot be looked to for solving social and economic problems.

Elsewhere on the Web
Links to related material on other Web sites.

American Association of Petroleum Geologists
An organization for professional petroleum geologists. The Web site offers industry news, organization membership information, event and conference listings, papers, and more.

Oil News
An online news source offering updates on political, financial, and scientific aspects of the oil industry.

Oil Online
A Web site offering "the latest-breaking industry news affecting the upstream oil and gas industry."

Pompano and various other platforms in the neighborhood are served by a little heliport in the marshy town of Venice, on Louisiana's southeastern tip. When drilling activity is intense, as it was in July, dozens of roughnecks gather at the heliport each morning for flights that scatter them around the Gulf. Leafing through the flight manifests, I noticed that the roughnecks were nearly all in their twenties or thirties and averaged not much below 200 pounds (all were men). One man sitting near me had lost the tip of his left middle finger. At the heliport there were no skinny forearms, apart from mine. The flight to Pompano took about half an hour. At first I saw nothing but water and hazy sky; then someone pointed toward the horizon, and I made out a cork surmounted by a toothpick, and all at once the helicopter was descending on a compressed industrial city, jagged and gray and solitary in a desert of sea.

We piled off the helicopter, and I squinted in the sunshine and tried to take my bearings. To my inexperienced eye the platform was chaotic, a Cubist's fantasy of tanks and trailers and pipes and cranes and control panels and unidentifiable machinery. On the west side a flare boom extended far out over the water; to the east rose a high yellow crane. The helicopter pad was on the south end, above the living quarters and the offices. At the center, overwhelming everything else, was the derrick. Its base was elevated two stories above the deck, and its crown disappeared somewhere in the sunlight above me. I glanced at the drill floor and noticed that the people there were moving but the machinery was not -- possibly a bad sign. Then I was rushed away from the helicopter and to a stairway, which, like most of the stairways on an oil platform, was cantilevered over the edge of the platform, high above the open water and thus away from heavy equipment and from the danger, ever present around oil and gas, of fire or fumes. Newcomers have been known to look down through the grillwork, see nothing but ocean below, and freeze up with dizziness. I did all right on the stairs, but I felt better toward the center of the platform.

Photograph by John Acurso An oil platform like Pompano drills new wells some of the time, but it produces oil from existing wells all of the time. Pompano thus conjoins two worlds, one atop the other. Below, always in shadow, is the production deck, which collects and processes 40,000 barrels a day: enough to power America for about three minutes. Twenty-six wellheads pour roaring streams of oil and gas, at pressures as high as 1,300 pounds per square inch, through intestinal tangles of pipes and manifolds and on into a series of tanks and processors that remove water for reinjection into the ground, clean up the oil, and dry the gas. When the hydrocarbons have passed through this digestive system, they are pumped into a subsea pipeline for the journey to refineries back on shore. Pompano processes oil constantly and, as it were, in its sleep, with a production crew of about a dozen. Barring the odd mechanical failure or hurricane, one day in the control room is much like another. All eyes, typically, are on the upper deck, where the drillers work.

Drilling awakens Pompano. The place becomes a swarm of roustabouts and floor hands and mud loggers and perforating teams and completion engineers and geologists and galley hands and medics -- at times as many as a hundred people on a surface measuring 230 by 128 feet. They work and sleep in tiny offices and tinier bunks in a prefabricated building where air-conditioning, television, foosball, and a bench press more or less exhaust the amenities. Lunch was beans, rice, cabbage, and sweet potatoes. The office windows, I noticed, looked not outward to the sea but inward, toward the objects of everyone's attention: the drill floor and the derrick.

It must be said that an oil derrick is one of the more majestic artifacts of industrial capitalism. The earliest ones were wooden, but today they are steel lattices that look like the frames of unfinished skyscrapers. Pompano's rises 170 feet above the drill floor. On the monkey board, high in the derrick, a roustabout maneuvers each new 100-foot section of pipe into position below the traveling block and the top drive; floor hands screw this section to its predecessor; and then the driller sets the top drive spinning, engages the draw works, and commences to stuff the rotating pipe into the earth. Drilling out here costs $100,000 a day, and the work goes on around the clock. On a good day the pipe descends continuously.

This was not a good day. The drillers had hoped to reach their objective that morning, but something downhole had chewed up two mud motors in succession, and now a seal just above the blowout preventer had sprung a leak. On the drill floor seven roustabouts and the driller were using wrenches and sledgehammers to loosen heavy bolts on the diverter housing. I had no trouble seeing how a roustabout might lose a fingertip. It was a bright, hot afternoon, and the derrick offered no shade; the men on the drill floor were soaked with sweat and spattered with drilling mud. I was standing off to one side, in shade behind the driller's cage, not lifting a finger, and I felt a stream of sweat under my hard hat become a small river behind my right ear. Just about then I heard myself thinking, Silicon Valley this ain't.

Yet, in some respects, Silicon Valley this is. The Pompano crews were drilling a well named Margarita, and Margarita was a computer's brainchild. Geologists could not have found this prospect with the computer technology available even four or five years ago, and drillers could not have drilled it as efficiently with the technology available then. Margarita's objective lies under salt, as does much of the oil in the Gulf of Mexico. People in the oil business have been striving to master the salt for years. Learn to see through salt, and then to drill through it quickly and accurately, and you open new reserves, potentially large ones.

"There's salt in the North Sea, there's salt off Africa, there's salt off Brazil," Doug Stauber told me as we left Pompano later that day. Stauber is one of BP's geologists, and Margarita is his project. The series of mechanical failures meant it would be at least another few days before he knew whether Margarita would succeed. But Stauber betrayed no anxiety. In general, geologists lack the natural demonstrativeness of, say, tax accountants and insurance adjusters, and Stauber's only emotional display had been when he went down to the production deck to give affectionate pats to two of his favorite wellheads -- "my good wells," he called them. In his fifteen years in the oil business Stauber had worked on fifty or so wells, including many of the wells at Pompano. I ventured that Margarita must seem routine. Oh, no, he said. "It's got all my attention."

The New Old Economy

N a speech last May, Treasury Secretary Lawrence H. Summers, who is an economist of distinction, reflected on what people are calling the New Economy. The notion is "both palpable and amorphous -- more often declared than defined," he said. "But if there is one fundamental change at its heart, it must be the move from an economy based on the production of physical goods to an economy based on the production and application of knowledge."

The New Economy, Summers said, seems to behave differently from the old industrial and agrarian models. "Consider the classic Smithian model of wheat: when prices rise, farmers produce more, consumers buy less, and equilibrium is restored at a lower level of demand." This, Summers said, is a "negative-feedback" economy -- one that is bounded by near-term constraints of supply and demand. An analogy, he suggested, might be a thermostat, which will shut down the furnace when your house overheats.

Photograph by John Acurso "By contrast," Summers said, "the information economy will increasingly be a positive-feedback economy." In the traditional economy new technologies and products start out expensive and rare, and only gradually become cheap and common; think of refrigeration, the automobile, the long-distance call. In the New Economy additional capacity seems to become available so quickly and inexpensively (think of the microchip) that traditional supply constraints are almost trivial. "In such a world," Summers said, "the avalanche, rather than the thermostat, becomes the more attractive metaphor for economic policy."

If there is a New Economy, its effect might logically be to increase the country's capacity to produce goods without running up against shortages and thereby triggering inflationary pressures. In effect, the economy's speed limits would be raised. Sure enough, the economy produced higher growth in real output per worker, as well as lower unemployment, in the 1990s than in the 1970s or the 1980s, while keeping inflation at a substantially lower rate. That is cause for celebration, but it is also puzzling.

Economists agree that to the extent the economy has changed, "information technology" -- the computer and its many offshoots -- must have a good deal to do with it. In the three decades since 1970 the power of microprocessors increased by a factor of 7,000. Computing chores that took a week in the early 1970s now take a minute. According to the Federal Reserve Bank of Dallas, the cost of storing one megabit of information, or enough for a 320-page book, fell from more than $5,000 in 1975 to seventeen cents in 1999. All well and good. But the computer revolution has been going on for years, whereas the economy's turbocharge came only in the second half of the 1990s. Why?

The Internet might seem to be a reasonable answer, and no doubt it has helped. However, according to Robert E. Litan, the director of economic studies at the Brookings Institution, in Washington, D.C., the Internet is still much too small a factor in America's $10 trillion economy to account for the productivity surge. Nor, economists say (though this point is disputed), is the New Economy proper -- the software, hardware, and dot-com sectors -- large enough to have brought about more than part of the surge. Something else is at work, but what? It is not crazy to suspect what I think of as the New Old Economy.

Although at this point no one can prove anything, a story that seems plausible to many economists and business executives goes like this: In the 1980s Old Economy businesses tended to waste much of what they spent on computers and software. Companies in traditional industries would drop a PC on every desk and declare themselves computerized; they would buy spreadsheet programs and word-processing software and networking equipment that as often as not just substituted new frustrations for old ones. This began to change, however, as software and hardware grew in power, and as companies began learning how to use them not just as conveniences or crutches but to change the nature of the job. At first the impact, like a misty drizzle, was too small to show up in the national economic statistics. However, each innovation enabled other innovations, none of them revolutionary but all of them combining in an accelerating cascade. By the second half of the 1990s the aggregate effect on productivity became large enough to register in the national accounts, and the line between the New Economy and the Old Economy began to blur. That is the story of the New Old Economy.

As I say, nothing can be proved, at least not yet. But oil is about as old as modern industries come. If John D. Rockefeller, who lived from 1839 to 1937, rose from the dead today, he would probably need to struggle to get his mind around the Internet. But if you flew him out to Pompano and let him squint up at the derrick, he would know immediately what was going on. Finding and producing oil is still about poking holes in the ground and bottling what comes out, and in most people's minds it has long epitomized dirty industry and the reality of limits to growth. In a number of respects, however, the oil business has begun to behave more like the New Economy than the Old. It is in the midst of the sort of technological change that Summers compared to an avalanche; and the bang that started the avalanche came not from the oil fields but from Silicon Valley.

Continued...

(The online version of this article appears in three parts. Click here to go to part two or part three.)

Jonathan Rauch is a senior writer and columnist for National Journal and a writer-in-residence at The Brookings Institution. His most recent book is Government's End: Why Washington Stopped Working (1999).

Photographs by John Acurso.