Energy Industry Shows How Infotech Can Boost Productivity

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America’s oil and gas boom has been one of the biggest economic stories of the past decade. The doubling of daily US oil output and the 50 percent increase in natural gas production have transformed energy markets and are altering the geostrategic landscape. Russia, for example, is desperately lashing out, while Saudi Arabia is showing signs of an ambitious political, economic, and cultural modernization.

The US energy boom is interesting for another reason. It’s a demonstration of how the physical industries, which too often underperform their innovative potential, can boost productivity through creative use of information.

The energy industry had known about petroleum soaked shale formations for 100 years. What it lacked was a cost-effective way to pinpoint the formations and unleash and extract the oil and gas from the rock. Horizontal drilling and hydraulic fracturing were of course the key to unlocking the shale resources.

These mechanical innovations, however, were themselves made possible and perfected by infotech, such as 3D seismic modeling, cloud computing, and big data. Pinpointing the formations and the very best places to crack them took massive computer power. Guiding the drills many miles under — and then horizontally across — the earth’s surface took precision guidance systems. The data generated from the models and experiences were then refined to constantly improve the process. In so doing, oil and gas drilling today looks more like an advanced manufacturing process than the hit-and-hope, drill-and-pump process of the past.

The data show how US oil and gas went from a laggard in infotech usage to a leader (at least among the physical industries). The physical industries spend just 3.7 percent of their total spending, excluding capital investments, on information technologies. In contrast, the digital industries spend 17 percent on technology. But in the space of a decade, oil and gas firms boosted technology spending from just around 1 percent to 5.6 percent.

In so doing, the US energy industry massively improved its productivity — by more than 50 percent over a decade. In addition to the ways in which information technologies enabled the exploration and precision drilling processes, the industry learned to use information to radically improve its operations. Energy markets are famously volatile, with price swings far larger than many other industries. But a better understanding of a process that looks more like just-in-time manufacturing allowed energy firms to better manage the price cycle and to turn many fixed costs into variable ones.

The energy example is one reason to believe that more aggressively applying information tools to many other industries can help improve productivity growth across the economy.

This post originally appeared at the AEIdeas blog – Energy Industry Shows How Infotech Can Boost Productivity.