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| Stocks and Flows - System Dynamics basics |
A number of people have contacted me about the Global Exchange report on Chevron's Oil Operations around the World called
The True Cost of Chevron. There are two sides here: Chevron haters who want to make sure I see the report and then will salivate over what I blog, and Chevron itself who wants my view on the report because it's balanced.
It is so because when I was in Grad School at UC Berkeley in City and Regional Planning, what consistently angered me was how some third world countries failed to provide for the needs of their poorest citizens. Now, Chevron-haters fail to note the problems in those same countries that I paid attention to at Berkeley (and beyond to a degree.)
What's captured my interest on this for a while now is the pavlovian negative reaction of San Francisco Bay Area activists who work for non-profits or some alternative media types who know them to Chevron. It makes me wonder what trial lawyers, and I know a ton of them, are behind their work. It's so much of a one-sided view that one is compelled to look, and in this blogger's role as disrupter to just about any sacred cow, this issue is too juicy for this space to ignore. Especially considering the lack of a rigorous, System Dynamics perspective, which I will explain below.
First, I have to admit I love the comprehensive approach of the report. Done well, it could be used as a business plan for Chevron's future. But the problem is
The True Cost of Chevron leaves out facts to make a negative point about Chevron, thus losing its value as a guide to corporate improvement. Let's take the case of Richmond.
Very recently, just last week, the City of Richmond and Chevron settled a long battle over tax payments and Gayle The Mayor of Richmond really came out looking good on that score. Here's what was decided:
- Chevron will pay an additional $114 million to The City of Richmond over the next 14 years.
- The City of Richmond will stop its ballot measure to change the Utility Tax and Chevron will remove its proposal.
- The City of Richmond will drop its appeal of the Measure T Ballot measure, which was ruled unconstitutional.
- Chevron would wave $1.2 million it sought from the City related to Measure T.
- Chevron will make community contributions totaling $8 million.
Again, I have been critical of Richmond Mayor Gayle McLaughlin on this in the past, but frankly I like her as a person so I was waiting, looking, and hoping for this kind of news. It's with us. So we think that battle's over, right? On to the Richmond Refinery issue? Right?
Well, if you look at the Global Exchange report, and you should do so, it doesn't at all mention the agreement. In an Internet age, one would think an update, one paragraph or two, would be easy to add. Not there.
That's the rub with the Global Exchange report. It is a list of anecdotal stories and tales to paint one view of a firm.
What I would have done if I were Global Exchange is this:
1) Build a comprehensive System Dynamics model of Chevron and its operations around the World.
My expertise is in the area of System Dynamics and I've built almost 200 models over my time. The best example is my
Oakland Baseball Simworld sim which I built using the
Forio Business Simulations FML Programming Language, and where one can run the business of the Oakland Athletics over a 15 year period and make decisions that are realistic. The sims has over 2,000 variables grouped in 956 equation sets. You can run thousands of scenario permutations, and the sim is based on real legal systems, like Redevelopment, and fiscal methods like franchise valuation.
Another System Dynamics (or "SD") model I constructed was in 1994 and for
The East Bay Express and of The University of California at Berkeley's impact on The City of Berkeley.
The East Bay Express' editor John Raeside contacted me about building an "SD" model because he was convinced the University's decision to drop salary payments by five percent was going to harm the City of Berkeley.
For that, I created a 900 variable SD model, ran it several times, and concluded that the real economic issue wasn't the salary decrease, because the vast majority of UC Berkeley
employees lived outside of Berkeley. The real problem was rising Cal-Berkeley tuition costs, which choked-off student spending in Berkeley (remember about 60 percent of students lived in Berkeley at the time) and harmed Berkeley's sales tax revenue.
(You'd think Raeside would have been happy? No. He
wanted his view in SD form; I said I go with what the model runs showed and no changes for emotionalism. Period. End of story. We parted ways. The model was an honest representation of the socio-economic dynamics of Cal in Berkeley. I even predicted student demographic growth changes! Given what's happened with rising tuition today, that study is more relevant than ever. )
In Chevron's case, I want to know how the business is ran in terms of the process of A to Z: from planning and development to oil extraction and distribution and consumption. One of the reasons I became interested in System Dynamics was Royal Dutch Shell's work using "Scenario Planning," and that was how I came to know the Emeryville - based
Global Business Network. Peter Schwartz, who is one of the founders of GBN, used Scenario PLanning when he worked with Royal Dutch Shell in the 70s. (On a side note, one of the original members of GBN was Bob Klein, the owner of the now-famous Olivetto's Restaurant in Oakland.)
I'm not a fan of Scenario Planning without System Dynamics, because the outcome of any story is some kind of numerical picture. I tried to explain that to Schwartz a while back, but it didn't take with him. Not to be mean, just honest. It's important to understand the dynamics of a system and to do that, one must build a System Dynamics model. It's in the rigor of thinking about a system and then trying to build a representation of it that we understand it.
My Chevron System Dynamics Model would also include representations of government structure and country industry and demographics as they impact oil operations. Finally we would have to add concerns such as weather and earthquakes, and plant and investment rates over time, and local political, socio-economic, and criminal issues (like terrorism).
The end result would be a System Dynamics model that then allows one to test different corporate approaches. From that we can see their impact on firm's revenues and expenses and value. The uneducated will immediately jump to the idea that "it's all about money" but really having built so many of these models, I can explain that political issues always impact the bottom line.
From that I would write my report.
2 - Write An "Alternative Business Plan" For Chevron
The Chevron business plan would come from the conclusions after running the model. What's exciting about this approach is it allows us to actually see how the issues raised in the Global Exchange report impact Chevron and how different approaches and also improvements in the political problems of some of the countries where Chevron does business, impact the firm.
What's most valuable is the Chevron business plan can capture the attention of Chevron execs, shareholders, and activists. Online versions of the model would be open for anyone to run. It would change the nature of the debate about Chevron from its current, combative, at times idiotic, and really very anti-intellectual approach, to one that's reasoned, intelligent, and well-considered.
Global Exchange could very well be the organization that takes the steps I'm advocating. It would result in the most path-breaking effort since the Club of Rome's program that led to the World Models developed by Dennis Meadows and his team at MIT in 1971, and based on the paradigm of System Dynamics, created by Jay Forrester at MIT. (And which was updated in the book
Beyond The Limits which was based on a new model called World 3.)
Stay tuned because this cries for more on System Dynamics and Scenario Planning.
