The Prize by Daniel Yergin

To claim The Prize to be a book on the history of oil already by such definition limits the impact this commodity has had on the development of society over the last 150 years. What it really is is an analysis of global economic and military history over this time period framed within the context of oil.

The book begins by concentrating on the historic period before World War I when Winston Churchill, as civilian head of the Royal Navy, began to see the importance of replacing the coal fired fleets of the British navy with those using oil in order to gain in speed and agility. Yergin chooses this as his starting point, even though he then moves back 60 years to the true founding, because this was an important turning point in how oil was used. It was at this time when oil became a "disruptive technology" as it moved from an energy source mainly used for providing light to one that would become the standard form of fuel for all transportation.

After this introduction, The Prize returns to its chronological unfolding using as the starting point a key series of scientific discoveries regarding oil's potential uses and then later to the first wave of major U.S. discoveries. Though oil's history can be dated back long before this, the foundation of oil as an industry and major fuel source has an American heritage. .

In 1859 the Drake Well in central Pennsylvania was hit thus sparking the first wave of oil mania. This mania brought all types of people from expert scientists and geologists to green thumb enthusiasts with nothing to lose. The creation of boom towns in desolate parts of the U.S. became common. These towns would quickly be erected often to satisfy the needs of the fortune seekers (booze and prostitution). Means for distributing the oil would be hastily devised with a very short term approach to get the black liquid to far off markets. Once the source showed signs of reduced volumes or a bigger source was discovered elsewhere, the towns would quickly find their streets and brothels empty. The comparisons between the boom towns and the massive cookie cutter neighborhoods erected in the last five years in the States during our latest housing boom are strikingly similar.

The next part of the book explores how the fragmented industry, from finding the oil to distributing it, paved the way for on opportunity of massive levels of consolidation and vertical integration. It was seized and later exploited mainly by one man - John Rockefeller of Standard Oil. Rockefeller bought other oil companies both large and small, keeping the efficient ones and merely closing down the others to limit any potential threat of competition. Standard Oil was the first true monopoly in the U.S., controlling 90% of the oil derivative, kerosene. Its dominance led way to growing discontent of the American public who lacked alternatives to Standard Oil products and became more aware of the incredible fortune being amassed by Rockefeller as a result. In 1911 the Supreme Court ruled that Standard Oil be split into 32 different regional companies who would then compete with each other for customers and markets.

World War I was a very labor intensive struggle fought and won in the trenches with limited reliance on machinery. World War II, as painted by Yergin, was a war in which oil played a decisive role in the outcome. Both Japan and Germany lacked domestic sources of oil and were therefore dependent on other countries, namely Romania and Indonesia, to provide the oil needed to power their ships, planes and tanks. The lack of this crucial resource and the failure in certain cases to effectively distribute it to the divisions in need led to losses at key junctures in World War II events . An interesting example is how German troops, led by the brilliant Rommel, were unable to seize control North Africa to the extent desired because at key battles they were without fuel needed to power their panzer tanks.

The U.S. and Russia were instead at a particular advantage because they could rely on domestic fuel sources. An agreement between the U.S. and the U.K. also meant Britain, whose North Sea source would not be found until decades later, was also able to receive its needed share of American oil. However, having access domestically is only one part needed for success. How you manage your operations is another. Yergin's description of a floating fuel station comprised of numerous ships and tankers that were able to provide fuel to other ship fleets in the South Pacific was fascinating. Though the author dedicated several chapters explaining why Japan and Germany were greatly hindered by their lack of oil, I found the book thin on other examples of Allied success.

The post-World War II era led to the rise of what Yergin defines as the "the Hydrocarbon man", i.e. the individual consumer who developed an ever growing thirst for oil. It also was the period of the oil producing dominance of the Middle East region. The book is probably at its strongest here. It brilliantly explains how the major oil companies established themselves with marketing (downstream) channels in the consuming countries and favorable partnerships with Middle Eastern countries. By providing technical expertise in this region they were given a disproportionately large share of the revenue generated from each new barrel. Later Yergin clearly explains how OPEC was born and the economic significance it played in the market - essentially by controlling two levers - setting supply levels as well as prices per barrel.

The 800-page book is referred to as "the Bible" of oil history. The magnitude of this industry in terms of global scale and historical importance over the last 150 years means that in order to effectively write one, all-encompassing volume a certain high level approach and style is necessary. Yergin succeeds in incorporating the macro level history and economic connections oil has played over this time period. However, by taking such an approach it is inevitable that some other aspects regarding such an important subject will be less adequately addressed.

I respect the focus Yergin took in writing the book and his unrelenting ability not to defer from it. However, there were two main faults I found in doing so. The impression he gave when discussing the "hydrocarbon man" and his insatiable thirst for oil was that the oil companies were passively responding to the demand for their product that was being begged for by consumers. However it was never discussed how this demand was stimulated to such excessive levels. What was lacking in the text was an adequate explanation as to why consumption levels grew at such astounding rates over these years. What were the relationships like between the auto manufactures and the oil companies? Certainly these industries were strongly connected to the centers of power in Washington D.C. yet was never mentioned.

Hydrocarbon man became dependent on the automobile due to lack of alternatives. The classic example of the removal of all tram lines in Los Angeles certainly encouraged such behavior yet it, nor any other relevant example was even eluded to. And why were such large vehicles in such demand? Yergin refers to the adaption of the first fuel economy standards in 1975 of 27.5 mile per gallon within 10 years as revolutionary step which led to a drastic reduction in oil consumption. Though the book was published in 1990, a few years prior to the SUV boom, it is hard for his praise of such regulation not to ring hollow considering the impressive gas mileage of the Ford Expeditions and other "light trucks" exempt from these standards. Such SUVs went on to make up 50% of all vehicle sales in the U.S. The automakers gained on the higher profit margins of these vehicles as well as special deprecation status they were granted for business purposes. Oil companies also make more money the more often consumers need to fill up their cars. Such a thrust by automakers towards these types of vehicles certainly pushed hydrocarbon man's demand for oil. These type of factors were absent in his book.

The focus of The Prize as a work of economic history also meant that the small time victims of such a massive industry were ignored. As someone who is far from an expert on the industry, I am still aware of tragic stories such as the one of Ken Saro-Wiwa's, who fought against Shell and the Nigerian government because of the environmental damage the oil drilling was causing in the Niger delta. A reference, at least collectively, to the victims of the oil industry as well as the environmental impact it has made was something due in the book yet was nowhere to be found.

Regardless, The Prize is required reading for those on all sides of the debate as it provides the foundation to what has become the lubricant of our daily lives.

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Remix by Laurence Lessig

The subtitle is "making art and commerce thrive in the hybrid economy"

I do not want to start off this post by saying something cliche' like any working in ecommerce, new media, or Internet services should read this book though the temptation is there. Instead I will say that in my own line of work this book has already given me a new way to approach certain arguments and a new way to conceptualize how the Internet and its economic and sociological implications are developing at present time.

Remix is a comfortable, insightful and at times funny read. It is written by a Stanford law professor with a very strong background in Internet and commerce. He presents the book with simple language and clear examples which tend to favor a more business or political audience than one specialized in law.

The central argument of this book is that our copyright laws in the digital economy are outdated and ineffective - ineffective for both consumers of copyrighted content and the suppliers of it. It is a system that penalizes the small actors on stage but also complicates matters for big business who spend endless amounts of money policing those who abuse the current laws. There needs to be news ways to tax the revenue generated by the sale of artists' goods.

The copyright laws in place were developed in an analog world when sharing a record meant physically giving the copy to someone else thus taking the copy away from yourself. Later on with the advent of cassette, records and photocopy machines, it became possible to make lower quality copies of music or books while keeping the original. However, the situation has changed dramatically with digital technology. The "copy" has a new definition. Now an MP3 file copy is identical to the original. When a copy is made the original is not effected. The Internet and high-speed data networks make the dispersal of these copies simple and fast.

One argument that resonated with me is how outdated copyright laws are impeding the development of a new forms of culture and expression. The way users in the digital world paste a collage of photos, sample music or piece together multimedia presentations is something new that needs to be promoted as a new form of cultural expression. Copyright laws which make a DJ ask for permission to use a 10 second sample of someone else's music slowdown this development. Not only do they restrict the spawning of new culture they also punish these "aggregating artists" as well as other smaller businesses and entrepreneurs lacking the resources to battle the legal bureaucracy of copyright. It is essentially another way the US government is picking winners alla GM. Large record labels, for example, benefit at the expense of smaller players. By supporting these traditional, established players we risk missing out on the birth of new, unknown industries which would result from this cultural innovation.

Lessig's book was a bit thin on alternative ways artists could be properly paid for their work. One suggestion was to add a tax onto Internet access. This tax would then be divided among artists based on what percentage of the total volume of file sharing traffic their songs made up. However, the lack of alternatives does not hinder the book in my eyes.

What I appreciated most about Remix was how it attempted to address an issue we are facing now in modern society. It is a book for the business community that does not heap praise on past "heroes" but instead provides means to better conceptualize the digital economy and how it is developing before our eyes. It also reminds us of how such an economy is blurring the lines between business and society in a way that has not been seen for a long time.

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The Partnership - The Making of Goldman Sachs by Charles D. Ellis

There are two facets of our global economy which have an enormous impact on all levels of society - financial markets and oil. Both of these industries have experienced massive growth over the last half century that their impact has already played a role in shaping modern history. It is therefore important that I feel comfortable with my own understanding of these subjects even though it can be a tough go at times to read such material. There are plenty of other books I would prefer to be leisurely enjoying on my freetime.

The Partnership is a book about the history of Goldman Sachs - arguably the most successful investment bank in the market. Its rise from a modest American bank into a global superpower of finance is one of the greatest expressions of US-styled capitalism ever witnessed. It will forever make up a part of business history. Even more, several of its CEOs and partners have gone onto important public positions, thus meaning that GS' reach has effects on the political sphere as well.

Even in this time of resentment towards investment banks, there are certain positive traits that Goldman Sachs deserves to be commended for. Its belief in meritocracy, team results, and absence of politicking is commendable. There are lessons to be learned for any business manager in areas such as goal setting for employees, recruiting and running effective meetings.

To fully appreciate the book does require a certain level of financial understanding. I have a basic understanding of the subject and at times struggled to grasp certain concepts being discussed. This leads to another point: what level of understanding is required before you are justifiably allowed to bash the banking sector? Certainly there are plenty (millions) of people who, after having read a handful of articles on the industry since the crisis came into full swing, feel their insights are worthy of getting them on the short list for the Nobel Prize in economics.

I have read several books on the industry, taken a few courses and follow financial papers with regularity and I still do not feel adequate discussing the topic. However, I will make a small observation regarding The Partnership, which was published in 2008 before the crack of Lehman Brothers. Would Ellis have written this book in such a glowing light if he were publishing it in 2009? His praise for the firm rings much more hollow now after seeing how the events in finance have unfolded. Throughout the book he painted a picture of an institution that had made next to no mistakes. The last chapter was written just when first signs of the sub-prime crisis was emerging and he made it look as if Goldman Sachs had if anything profited from the situation. We now know this not to be true.

Goldman Sachs had to convert itself to a holding company so it could gain eligibility to the Federal Reserves emergency lending facilities. Yes, Goldman Sachs has already paid back the US government for lending it received but it did need government assistance to stave off collapse. Adding these points to an additional chapter would have not been enough for this book. It would really require a complete reexamination of the superior, worshiping tone that permeates throughout every page.

Goodbye Germany! For the next few weeks I will be heading to the sunny shores of Italy. In terms of the upcoming summer reads that will be making the journey with me are Bellow"s "Herzog" and Updike's "Couples". I look forward to writing about them when I am back.

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Nudge by R. Thaler and C.R. Sunstein

UPDATE: Sunstein has become the "legal czar" for the Obama administration.

Access to nearly endless choice is one of the defining elements of the capitalist world we live in, unless you are one of my North Korean or Cuban followers. Allow any firm the ability to offer their goods or services to the market. Those with the strongest offering will find success, while those not able sell their goods and make a profit will, in their own right, cease to exist. GM not included.

The premise of this book deals with how human beings make decisions in response to these choices and how they can be "nudged" into doing so as to better benefit themselves. For economists all decisions are rational while in reality we know this is not the case. Human instincts are very strong and are weighed down by various biases which prevent a rational decision making process.

A trip to the supermarket confirms that companies are well aware of this irrational decision making and they take all the steps to "nudge" you towards their product by paying more for eye-level shelf space, wafting the smell of baking bread throughout the store, and placing milk at the back of the store.

The gist of the book is built around the following - the placement of a certain, more expensive, yogurt may convince me to buy one I normally would not, but I have hundreds of future opportunities to correct this poorly made decision. However, certain decisions regarding investments, retirement plans, health care, and university are drastically limited. So much so that many of these decisions will be made perhaps only one time in your life. Better not screw it up, to say it mildly. Yet, just like the yogurts in the supermarket, the number of healthcare or pension plans has become endless. How do we nudge people to make the best decision regarding these important long term subjects?

One example of how to nudge effectively without restricting choice is by selecting, well-researched and balanced default options for people while always allowing them the choice to select a plan for themselves. With Medicare, this would mean by default that a selection of prescription medicine plans for the elderly would be made from one of the 60 available plans based on previous prescription records of the recipient. This seams logical enough. In reality, when the overhaul of Medicare took place in 2003, the default option for prescriptions medicine plans was in most cases "non-enrollment" or "random selection". To further complicate matters, the process for selecting the plan (from 60 of them!) was not very clear for various reasons explained in the book.

This is an entertaining and insightful read. It demonstrates how, namely, government and its associated bodies can direct the majority of its citizens, from school lunchrooms to organ donations, to mutually beneficial outcomes without imposing sweeping regulation.

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Barbarians at the Gate by Burrough & Helyar

I had to interrupt the book I was reading because the events occurring in the global financial markets dutifully called for such action. Instead of reading the daily news and agonizing over what was unfolding, I decided to turn back in time, not long ago, when new, creative financial instruments were allowing private equity firms to takeover companies by running up enormous debt. This process is known as a Leveraged Buyout (LBO) and it was rife on Wall Street in the Geckoesque period of the mid 1980's.

The creativity of our modern day financiers is amazing. Without launching into the populist calls for their heads that one could read in the newspapers these days (not me though), the fundamental truth remains that out capitalist system, with its constant evolution, require such magical tools of finance. They are required in order to maintain the same growth levels that investors of all types have become accustomed to. However, the Western world is no longer in a post-war boom phase. The conditions are much more mature in nature and we need to start considering how our societies should be shaped in the "post-modern economy". There are only so many financial spells to cast; cheap-labor arbitraging opportunities to exploit, and wars to start. However, lets not get to far ahead of ourselves.

"Barbarians" tells the story, over a six month period, of the takeover of RJR Nabisco, the maker of Ritz crackers, Oreo cookies and Doral cigarettes by KKR, a major private equity firm. We do not need to look as far back as the 1930's to draw similarities to today's dilemmas. Just as barely- employed recent graduates were snapping up two bedroom condos over the last year with ridiculous amount of leverage, i.e. no money down on a $300,000 condo, private equity firms, with the help of Wall Street investment bankers, were purchasing Main Street companies, either private or publicly held, using enormous leverage ratios (little cash and lots of junk bonds). In both situations, the problems began when repayment on the loan amounts was brought into question.

I can only imagine what is being said in the newspapers and online over the last month. Why were the bankers so greedy? Didn't they see it coming? Are profits never enough? The answers - yes, yes, no. My favorite metaphor in the book was told by one investment banker. If you have 11 beauty pageant contestants in a room and in walks a $100 prostitute, you still have 11 beauty pageant contestants and a hooker. But if a prostitute walks in and tells them she earns $1m, the room is immediately made up of 12 hookers. The investment banks, just like the friends of our condo-buying recent graduate, have a hard time resisting when others around them are making money. Equally, once you are making lots of money, you are not going to stop out of goodwill for mankind. Oil companies know their resources will one day finish and drilling next to the house of a cute polar bear is the wrong thing to do just as a guy slinging mortgages out of his guestroom making $25,000 a month knew that he was probably selling a mortgage or two too many to people who would have been better off renting. Finally, the rampant growth opportunities are simply going to be harder and harder to come by.

Every cloud has a silver lining. The true tragedy would be if we live through the difficult upcoming years without giving thought to the direction we are going. It is this "pioneering capitalism" which needs to be reevaluated. There need to be checks in place along the way. Government does not have to be the enemy of economic growth. In truth, it can and will need to be an enabler by improving infrastructure that allow for smoother business and by educating its people to be the most competitive in changing times. And, yes, it needs to remember that it is often the last line of defense for untethered economic pursuits whose long term costs for society often dwarf the short term profits of a few.

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