Jeremy Warner's Outlook: Quit worrying about the economic cycle. The internet and climate change will matter more

BP: institutions demand answers
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The Independent Online

The most important challenge facing a modern chief executive is perhaps that of keeping on top of events and trends. This may sound like no more than common sense, yet it is a company's response to changing patterns of behaviour, public policy and commercial development which today more than anything else marks the difference between success and failure.

This dates me, I know, but when I first came into financial journalism in the late 1970s the biggest worry for companies was the economic cycle, which followed a well worn and largely predictable pattern of boom and bust.

Faced by rising demand and inflation, governments would march interest rates up to the top of the hill, only to march them all the way down again amid plunging demand and lengthening dole queues. This cycle of despair was not without its challenges for business but, in broad terms, the task was simply that of managing capacity to meet fluctuating demand.

I'm not about to argue that the economic cycle is now dead. This I somehow doubt. But its peaks and troughs have become less extreme, and the stop/go policies of governments, which used to be a large part of the problem, less pronounced.

History teaches us absolutely nothing about the future, beyond knowing that even the most prolonged periods of economic expansion and prosperity eventually come to an end. Yet what causes this to happen is rarely evident until after the event. Whatever. For the time being, we remain in largely benign conditions, and long may they last.

As this new economic stability gains traction, other very different challenges for business are coming to the fore. You'd have to be newly arrived from the planet Zog not to have noticed what the two biggest of these are. One is modern communications, or the internet. The other is climate change. The first is a market-driven and, properly handled, hugely positive force for business and economic development.

The second has much more negative implications, for the response will largely be driven by centrally directed public policy. However the politicians choose to tackle it, or even if they do nothing about it at all, the implications for business are massive.

OK, so we've known about both these things for an awfully long time now, so what's the big deal? Are they not already just part of the natural evolution of business? Perhaps, but unfortunately it is a very human characteristic to ignore the self evident, to put off difficult decisions for another day or sweep them under the carpet. Business leaders do so at their peril. Long-term trends, if left unaddressed, have a nasty habit of rising up and biting you on the ankle. For many established businesses, these two big defining challenges of the future are beginning to do just that.

Both these issues have been in the news a lot this week. Like the melting of the polar ice caps, what started out as a steady drip has turned into a torrent, a cacophony of noisy confusion and wall-to-wall publicity. All the excitement that surrounded the internet in the late 1990s is at last beginning to justify itself. Many of the starry-eyed predictions made about the internet but dashed by the bust are finally coming true.

From the 4,000 job losses announced this week by Norwich Union - many of them to be outsourced courtesy of modern communications to India, others simply disintermediated by a growing propensity to transact, process and execute business online - to Rupert Murdoch's acquisition of the Crazy Frog ringtones company, the communications revolution is coming of age.

The effect on employment and buying habits promises to be as seismic as the industrial revolution. Yet we are still only at the beginning of the process. Rapid rollout of mass broadband means that the critical mass necessary to make the internet fire on all cylinders is at last being achieved. The best is yet to come. Chinese and Indian development, itself in part the result of the communications revolution, will further accelerate the transformational process.

From the excitement of the internet to the gloom of climate change. This is a challenge likely to prove perhaps even more demanding than that of the internet. Most of our economic progress over the past century has been based on oil. The shift from a carbon-based economy to a carbon-free, or near-free, one is therefore likely to prove a costly, difficult and traumatic one.

The most recent science suggests that if the planet is to be saved from the possibly calamitous consequences of climate change, carbon reduction may need to happen much more quickly and completely than previously thought. There is still no absolute certainty that a failure to control and reduce emissions will result in these consequences. No one really knows. But the now undisputed fact that man-made gases have caused the climate to warm suggests strongly that, absent of action, temperatures will carry on rising to a point where large parts of the planet become uninhabitable and there is a mass extinction of species.

Climate change is perhaps the best example there is of what economists call market failure. If the market produces an undesirable outcome, it will normally self-correct the problem, so that, for instance, if there are so many cars on the roads that traffic grinds to a standstill, either more roads will get built or people will abandon their cars and take the train instead.

Yet because consumers are selfish, buy on price, and are generally not prepared to pay the extra for protecting the environment, the system breaks down. This is particularly the case with climate change; the adverse consequences of global warming won't, for most people, become apparent until it is too late to do anything about it. The upshot is that a solution which may or may not be necessary must be imposed.

In any case, a global consensus is building around the need for action. The big constraint on the future of economic development used to be thought of as the finite size of world oil and gas reserves. There is now every possibility that the world will be forced to become carbon free well before those reserves run dry. This is a huge change that business is going to have to come to terms with over the next 10 to 20 years. Plan for it, or be damned.

BP: institutions demand answers

Like the striking of the grandfather clock, City investors seem finally to have woken up and noticed that all is not entirely well at BP. Morley and others are demanding a meeting with the chief executive.

Gong. Blimey, what was that explosion at the Texas City oil refinery? Gong. Does the fact that BP is the subject of two anti-trust investigations in the US actually mean anything? Gong. Alaska is a long way away, but apparently they've got a corroding pipes problem up at a place called Prudhoe Bay. Gong. Didn't we read somewhere that the chairman and chief executive have been going at it hammer and tongs over whether Lord Browne should be forced to retire on his 60th birthday?

Gong. Oh dear. Something seems to have gone wrong. Best give those nice people on the Financial Times a call and tell them we are on the case.

Yes, indeed. BP, for so long the goodie, Goodie Two-shoes of the London Stock market, has a problem. It must be bad because even the institutions have begun to notice. Whether this series of mishaps is symptomatic of wider management failure is not yet clear, but to me it remains rather hard to believe. Without in any way belittling the seriousness of the charges BP faces in the US, the problem is in large measure one of politics and public relations.

The present spike in the oil price, which gas-guzzling America feels like no other, coincides with the mid-term elections. Accident prone, foreign and swimming in profits, BP makes an easy target for vote-hungry politicians.

Not that the no-doubt passing nature of BP's difficulty particularly helps Lord Browne. He did himself few favours with his highly public campaign to win a later retirement date at BP. Those internally who would like to see an acceleration of change at the top have had their hand strengthened. Lord Browne cannot afford another upset.