Finn Howley

Just this month, Tesla revealed a prototype of their humanoid robot, Optimus. This latest project will have an AI-chip powered brain, cameras for eyes, microphones for ears, and the capacity to walk and carry 9 kilograms per hand, amongst other things.

This alongside other developments are proof of the mergence of artificial intelligence (AI) as one of the most exciting technological innovations in the world of business. Even now with its technology still in its relative infancy, AI is driving people around, delivering packages, trading securities, and translating languages. Its breath-taking abilities are starting to shape a lion’s share of industries. A hotly contested debate of late is how the relationship between human intelligence and Artificial Intelligence will play out as AI adoption grows. Will it be one of competition and conflict, or will we see eye-to-eye with our AI counterparts?

Intelligentia

The word intelligence derives from the Latin word intelligentia meaning “the action or faculty of understanding”. What does it mean to understand? Oscar Wilde wrote that “to define is to limit”, and hence I think we must interpret intelligence in a rather broad and fluid sense. Intelligence cannot be categorised as a single characteristic or competency and so we should recognise that the abilities and understanding possessed by humans and robots are different. When it comes to comparing AI and Humans, we must consider them differently too.

Talos, Turing & Siri

The concept of intelligent robots stems as far back as the presence of automatons like Talos and Pandora in Greek mythology. Talos was constructed by Hephaestus to help King Minos of Crete guard the island from invaders while Pandora was essentially an ‘all-gifted’ robot. Where philosophy would then mull the presence of artificial beings, science fiction would imagine and depict it with more colour and drama. But in 1950, Alan Turing began to bring the art to life when he discussed how to build intelligent machines and test this intelligence in his seminal paper ‘Computing Machinery and Intelligence.’ Five years later, the Dartmouth Summer Research Project on Artificial Intelligence catalysed AI research for the following decade.

However, in the 1970s, AI development entered its first winter in the 1970s where funding completely dried up, before a small boom in research and development occurred in the 1980s, followed by a second AI winter. IBM Deep Blue becoming the first computer to beat a world chess champion in 1997 was a critical point in the evolution of the technology. The same year, speech recognition software developed by Dragon Systems was implemented in Windows. In the mid-2000’s we saw widespread adoption and exploration of AI by Big Tech culminating in products like the Google search engine, Google Translate, Siri, facial recognition, and Alexa.

And now in 2022, we are in the golden era of AI with sophisticated Machine Learning imitating how humans learn, quantum computing attempting to dramatically increase the power and speed of computing, and the embedment of AI in the Augmented Reality enhancing the experience of the metaverse. With these developments on the precipice of reshaping industries, experts are predicting that using AI at a large scale will add as much as $15.7 trillion to the global economy by 2030. In 2021 Venture Capital (VC) funding for AI start-ups reached an eye-watering $89.2 billion as investors and entrepreneurs look to realise the power of robots. We might hope that amidst all the hype surrounding the adoption of AI, that we, like Minos did with Talos, can firmly place our faith in AI. However, sceptics warn of a scenario more akin to opening Pandora’s box and unleashing its evils.

What’s Inside Pandora’s Box?

It is no surprise that VCs globally have invested billions into AI start-ups in recent years. With the mammoth funding it requires, the range of possibilities are almost beyond the scope of our wildest imagination. Tech giants such as Alphabet and Meta have pumped over $50 billion into R&D to build this brave new world of automation. You’ll find it in the chatbox providing you with “excellent customer service”, helping you to turn on the lights in your kitchen and keeping your home clean, amongst an array of other things. AI is transforming processes in healthcare too with robots pumping out vaccine development and drug design, enhancing quality of life, and possibly saving lives that otherwise would not have been saved.

Here in Ireland, we have companies like Manna Drone Delivery incorporating some AI to autonomously deliver coffees and pastries to people’s homes. And then there is the leveraging of AI in ‘Web 3.0’ ‘s move to decentralisation where it is now enabling some blockchain and token-based transactions.

We couldn’t have a conversation about cutting edge technology like AI without mentioning the wide-eyed futurist that is Elon Musk. Alongside, the development of Optimus and Tesla’s self-driving cars, there is the incredibly frightening neurotechnology of Musk’s Neuralink which wants to create an implantable brain chip to record the activity of the brain and improve human intelligence. With all these technologies, AI’s intelligence derives from their potential to learn and make decisions based on the data they are fed.

On the other hand, humans rely on a different kind of intelligence that is certainly more expansive and intuitive. Humans rely on memory but more critically, possess an emotional intelligence (EQ) that enables us to relate, adapt, empathise, and understand. The significance of EQ in the workplace was underlined by a study of 2,662 U.S. hiring managers which found that a whopping 71% of employers value EQ over IQ. If we consider the work of a nurse, the ability to show empathy, sympathy and compassion is fundamental to their ability to do their work competently. The same can be said for the work of solicitors, actors, comedians, and many other fields where humans cannot be outsmarted due to the essential personal and emotional element. There are also question marks surrounding AI’s ability to maintain the ethical standards that the human ability to empathise enables us to maintain. There was shock and great disappointment when Microsoft’s automated Twitter account, Tay, was easily coaxed by a user to publish a flurry of anti-Semitic tweets in 2016.

‘Never send a human to do a machine’s job’, a quote from the iconic film The Matrix. But is the doom-ridden depiction of AI in contemporary science fiction correct?

AI is impeccable at carrying out repetitive tasks. It does not tire in the same way that the human mind or body might. Automating these types of tasks makes a great deal of sense and achieves cost savings for businesses. AI also provides a solution to the distorted effect of cognitive biases that affect the decisions of managers every day, a challenge that management theorists have contested and theorised about for over 50 years. However, the lack of EQ and perhaps an understanding of ethics is an enormous challenge faced by AI and ultimately signifies a limit to their abilities. Returning to the earlier point, do we really expect that the costs saved from automating something like nursing will be worth the loss of personal human touch? There is also the fact that while those in Big Tech and business talk very bullishly of the plethora of opportunities that AI will generate, its presence is not as highly-anticipated by the public who have fears about ethical dilemmas, surveillance, and data privacy. A study by Ipsos found that only 50% of people trust companies that use AI as much as they trust other companies. The public response to Mark Zuckerberg’s 1 hour 17-minute-long video describing his grand plans for the metaverse was one of partial ridicule but also unease. Some of the scepticism might be borne from headlines like the World Economic Forum’s prediction of AI wiping out some 85 million jobs by 2025. Although people should be cognisant of the fact that this loss of jobs will be offset by new jobs servicing AI. Harari, author of Sapiens, predicts that the job market of 2050 “may well be characterised by human-AI cooperation”.

A war of every robot against every man?

As we mentioned before, intelligence is not black-and-white so we cannot easily identify a winner and nor should we want to. It is counterproductive to address AI and human intelligence by pitting the two against each other in a fight to the death unless we want our lives to actually transform into something reminiscent of a dystopian sci-fi film. Yes, the future of work will resemble something very unrecognisable but in this world of new jobs, the relationship between humans and AI will be one of collaboration where AI will support human productivity.

Companies will benefit from optimizing collaboration between humans and Artificial Intelligence. What it will come down to is striking the optimal balance between how the human element and the AI element can interact and synergise processes. I refute the suggestion that AI will be the last invention humanity will ever have to make. The discovery of AI will enable humans to deliver the next great wave of industry-defining and ground-breaking innovations. But be warned, it is pivotal that as we integrate the technology we align its goals to our own. If we do not manage our AI, we may well find ourselves witnesses of Hawking’s stark prediction of the end of humanity at the hands of Artificial Intelligence.

Shore Oluborode

Introduction

There has been much ado made about the winners and losers of the global COVID-19 pandemic and the subsequent lockdowns. Cluttering the pages of the Financial Times and The Economist, have been tales of rising stars in the technology space such as Tesla Inc., who not only enjoyed a 650% increase in their stock price but also for the first time in its 19 year history turned a profit, who were lauded for their ingenuity and tenacity to weather the economic turbulence. Concurrently, others who were not so fortunate like Chinese property developer Evergrande (which saw its share value fall by 95%) were pitied for their financial imprudence and misfortune. Many would have also believed that the energy sector had garnered a similar sort of attention, especially considering the current role energy prices play in the record rate of inflation that we, globally, are facing. However, I contend that we, in our obsession with the outlandish, have ignored nuanced developments elsewhere along the energy supply chain, in particular, the oil refinery and oil tanker industries.

Ailing Refinery Industry

An oil refinery is an industrial plant that transforms or refines crude oil into usable products such as gasoline, diesel, and jet fuel. Like many others before, the year 2019 was a lacklustre year for the industry. The international benchmark Brent Crude Oil prices hovered around $64 a barrel throughout the year, remaining suppressed due to heightened US production for domestic consumption and significant Chinese economic slowdown leaving an excess of oil in the market languishing in refinery storage facilities across Singapore, Saudi Arabia, and Russia. So, when international lockdowns struck in early 2020, the refineries were not in the healthiest of positions to handle such a shock.

Over the course of nine months, beginning with one of the sharpest drops in global stock market history, the refinery industry faced a totalising exogenous demand shock in the form of international travel bans, curtailed social events and diminished road traffic.

This shock, oppressed demand with reductions of over 9%, tailing that trend, production experienced a 6.6% contraction, further glutting the oil markets, causing oil prices to fall as low as $9 a barrel but averaging $42 a barrel (a fall of over 34%) for the year. Market contractions are not good, but as the previous graph shows, refineries reduced production to nearly match demand, so why were oil prices so low and how is this different from other business cycle downturns?

Recall that by the end of 2019, storage facilities were already brimming with oil. So, despite production and consumption tracking one another there was an out-sized amount of oil sloshing around global markets intensifying the price plunge. This caused significant revenue reductions, for global and national refineries, and the lowest profit margins, industry-wide, in 20 years.

Another point to note: refining millions of barrels of oil a day can be an expensive enterprise, worsened still by the fact that a large portion of these costs are upfront capital expenditures. Such is the case that unless refineries are operating at minimum, 80% production capacity, it is simply unaffordable to operate them and most owners in that situation either convert the refinery into a storage facility or exit the market entirely, and that is exactly what happened. Of the top ten oil refining countries, who represent 62% of global production, three have closed a portion of their refining capability indefinitely with a further 9 countries, not in the top ten, permanently shutting down greater than 15% of their production capacity.

Invigorated Tanker Market

A product (or clean) oil tanker is a ship designed for the bulk transportation of oil products, from refinery stations to consumers. Similar to the refinery industry, the product oil tankers were not in great form in 2019. With lowered levels of international consumption, demand for transportation of oil products was found lacking in the form of reduced volume transportation. This only sustained the financial under-performance of clean tankers, in comparison to other sections of the energy sector, that has been characteristic of the industry since 2015.

What came as a surprise, however, was the reversal of fate for industry players in 2020. One would have envisioned that with halted demand for oil product transport, reflected in the respective fall of 11.3% and 8.3% in world imports and exports of oil products in 2020, that product tankers would have had to endure deepened financial difficulty, but that was not the case.

As the above graph shows, on the five major clean tanker routes transport prices were essentially unchanged or even increased with the Middle East to the Far East route displaying rises of 14.5%. So, how did this come about?

Contangos, or the situation where current (or spot) oil prices are lower than predicted future oil prices, are the main culprit for the improved favour that clean tankers basked in. With the cascading crude oil -and hence product oil- prices, traders in the industry anticipated that future prices would be higher. Additionally, onshore storage facilities at/near refineries, at the time, were already scarce. Armed with this knowledge, traders furiously began to charter product tankers as floating storage spaces; for as long as the cost of storing the oil was not greater than the expected margin between spot and future prices, these traders were content to just wait for prices to increase.

The use of product tankers as temporary storage facilities is not a new phenomenon and also prominently featured during the recession of the late 2000s. What makes this instance unique is how long it was sustained. For months, as opposed to a few weeks, product tankers, especially those who transported oil along the routes with less traffic, just had their tankers soaking up revenue which had doubled in a week. Consequently, the fall in tanker supply meant that whatever product oil was transported could be serviced by a shrinking pool of tankers, shoring up spot rates for tankers.

Important Implications

The reverberations of this fascinating dynamic that occurred in 2020 will be felt for years to come, in forms I’m sure we have yet to fully comprehend. Nevertheless, I will attempt to detail two such consequences of that strange period on our current day.

The limited refinery production capacity coupled with the increased cost to transporting oil has caused frictions in the current provision of oil products through a self-sustaining price inflation spiral. When demand for oil products returned to pre-pandemic levels in 2021, as production was slow to catch up, the price of oil shot up, increasing demand for (and price of) gas, a close substitute. As gas is also an input to the production for product oils, this only further delayed oil production sending both the price of oil and gas ever-higher fuelling food price inflation and threatening energy poverty across the globe.

An unanticipated result of this development is Russia has been able to secure considerable financing of its war against Ukraine through the sale of oil and gas to at first Europe, but now, India and China as the price of oil and gas remains elevated.

On a more positive note, the energy insecurity has brought the green energy transition to the forefront of policy discussions. Not because relying more on renewable sources of energy is better for the environment, but because it contributes to energy independence and reduces geopolitical risk. If nations are able, through the production of sustainable domestic energy, to temper their reliance on foreign sources of energy they’re better able to not just prevent dizzying energy price inflation but also confront belligerent governments in a robust manner.

Conclusion

The addition of the COVID-19 pandemic to the growing list of Black Swan events, whilst spurring on the decline of the oil refinery industry and gifting product oil traders the opportunity to buy a barrel of oil (containing 158 litres) for the price of a Boojum burrito, is something to remember, I think a lot of good will ultimately come from it.

Although currently, we are suffering under serious economic and business environment instability, the pandemic and I am not sure we have overcome much of the chaos that has come from its immediate consequences, the opportunity for the long term re-orientation of our economic and commercial practices to be more aligned with our vision of what the world should be like is a reason to be optimistic.

Cian Hennigan

This month, the CEO of US energy company Chevron, Mike Wirth, came out with a robust statement against the current pivot in energy production away from fossil fuels to renewable energy. He exclaimed that “The reality is, [fossil fuel] is what runs the world today. It’s going to run the world tomorrow and five years from now, 10 years from now, 20 years from now”. This view has been publicly shared by Jamie Dimon, CEO of JP Morgan Chase. He recently stated in a Congress testimony that his bank would not be uninvesting in fossil fuel companies, as doing so would be a “road to hell for America”. These views are motivated by the desire to increase fossil fuel supply to alleviate price pressures created by the current energy crisis. However, they are in conflict with the longer term climate issues facing energy companies. The traditional energy sector requires intricate investment and reform to change their business models from non-renewable to renewable, which places a major amount of responsibility on lending institutions to invest in a sustainable way. Governments are currently investing in renewable energy at an increased rate, in the hope of reaching climate goals set by international pacts such as the Paris Agreement. Although government investment is secure, the energy crisis provides the first significant test of the banking industry’s commitment to Environment, Social and Governance (ESG) practices. Early investment in renewable energy will likely lead to significant future profits for lenders due to the finite nature of our current energy system, and will help to alleviate some of their reputational downfalls in the last 15 years. Despite this, short-term deviance to fossil fuel investment is lucrative for banks and their shareholders if prices remain elevated. This dynamic will greatly impact the rate at which our societies can rely completely on renewable energy.

The current geopolitical tensions have come at a fragile time for a transitioning energy sector. The evaporation of Russian gas supplies to the European market has severely reduced energy supply. This has put direct upwards pressure on prices, fuelling the cost of living crisis. Over the past year, energy prices in the Euro Area have been the main driver of the increase in the Harmonized Index of Consumer Prices (HICP), which is the main measure of inflation for the Euro Area. The annual HICP specifically related to energy prices was measured at 38.3% in September, with overall inflation measured at just over 10%. Governments have directly responded to the increase in prices, such as Germany introducing a €200 billion energy aid programme which will place a cap on gas and electricity prices. An EU wide energy aid programme is currently being considered by the EU.

It is likely that energy costs will remain elevated into the future, with many warnings of a worse crisis in the winter of 2023. European natural gas storage is likely to be completely depleted by next spring, and the current uptake in Liquefied Natural Gas is not forecasted to be able to fully replace the loss in energy supply from Russian gas. Firms and households will have to prepare to reduce energy consumption by a considerable amount, which will have a severe impact on industrial production and growth in Europe. A rapid development in Europe’s renewable energy sources is key to reducing exposure to spikes in fossil fuel prices according to IMF researchers. This development will require a significant amount of investment, both from public and private sources. It is not understood what the investment balance will look like in an energy sector dominated by renewable sources, but it is intuitively likely that both will be important in financing the transition.

From a public angle, investment commitment is quite clear. National governments will look to make it convenient for energy companies to build renewable infrastructure such as wind turbines and solar panels. These policies will come in the form of both direct investment and polices that make it more financially lucrative for renewable energy infrastructure to be built. The switch away from fossil fuels will also allow governments to reduce their expenditure on energy caps on fossil fuels if geopolitical tensions persist and prices remain elevated. If fossil fuel prices begin to fall, it is necessary that governments continue to use carbon taxes to promote the continued transition to renewables. The REPowerEU initiative by the Commission also provides a much needed commitment of funds from the EU, along with an overarching strategy for the European response to a changing energy market.

The finance sector has begun to understand their ESG responsibility in recent years, with an industry led alliance called The Glasgow Finance Alliance to Net Zero (GFANZ) being created last year. This alliance looks to improve ESG standards and practices within the finance industry. GFANZ have also decided to collaborate with the UN under their Race to Zero agenda, to align GFANZ to the climate goals of the UN. There has been a strong uptake by banks to join GFANZ, and as a member they must set intermediate ESG targets and annually report on their progress to net-zero. These commitments include the clause that all operational and investment portfolios must be net zero by 2050. The energy crisis is the first real test of these commitments, and how seriously banks are taking sustainability. Various ‘greenwashing’ scandals have thwarted the impact of ESG efforts and shown the importance of the clear messaging surrounding sustainability practices. 

As part of the alliance, banks have agreed to help clients in carbon intensive sectors transition to a more sustainable business model. Oil and gas companies fall under this umbrella but have been earning windfall profits due to increased energy prices. The upsurge in profits has led to a 15% increase in lending to fossil fuel companies in the first nine months of the year, according to Bloomberg. There has also been some push back by GFANZ members against the implementation of legally binding ESG agreements, initially suggested by the UN. GFANZ stated that all members can follow their own governance structures, essentially ruling out this possibility. GFANZ is co-chaired by former Governor of the Bank of England, Mark Carney. According to Carney, the transition to renewable energy is a complex task that requires bold action by governments and financial institutions. He has expressed that “to limit warming to 1.5°C, projected clean energy investment must run at four times the rate of fossil fuel investment by the end of this decade. That will require a tripling of the current pace of clean energy investment”. Understanding the sluggish movement so far in the financial industry shows the glaring reality that banks will always act in a way that sustains profitability and satisfies shareholders. GFANZ is a fledging alliance, and the current crisis is the first major test of its stability and purpose.

In the short term, banks may use the excuse of protecting consumer prices to continue profitable investments in fossil fuel companies. That being said, it seems like an extremely risky long-term strategy for any financial institution to go against the macro trend of renewable energy investment. Transitioning energy companies is a suitable role for banks, but the finance industry has struggled in the past with understanding it’s responsibility to stakeholders other than their shareholders. The underlying uncertainty will yield tentative action by many banks until their peers proceed, but those who wait too long may diminish future earnings. The future of energy production lies in renewables, but the timeline and journey to that point is unclear. How quickly we move as a society will be directly related to the decision making of those with lending capabilities.