An economist on profitability, materials efficiency, and building sustainable commodity markets through hard economic reality

Arrowhead Economics is an analytics-driven firm operating across global energy and commodity markets, providing deterministic and probabilistic economic, market, and environmental analysis. Dr Dale Nesbitt is President of the company and also lectures at Stanford University, combining academic insight with real-world market application.

In this interview, Dr Nesbitt discusses how data analytics shapes sustainable investment decisions, why profitability is inseparable from sustainability, the risks and opportunities across energy and materials markets, and how capacity, efficiency, and materials science will define the next phase of the energy transition.

Please introduce yourself to our readers and tell us a bit about your role at Arrowhead Economics and your work across commodity markets.

I am the president of ArrowHead. I do the leadership, technical, business, and business development tasks for the company.

I have codesigned and cowritten much of the SaaS products we offer. The company was founded in the early 2010s to perform economic, market, and environmental analysis, both deterministically and probabilistically, throughout the energy and commodity space.

Our clients want to know the profitability of certain investments, the impact on the price of certain investments, and the price impact on certain investments. They cannot make good investment decisions, sustainable or otherwise, lacking that.

They cannot make good investment decisions, sustainable or otherwise, lacking that.

How can data analytics and probability-based forecasting help organizations make more sustainable decisions in volatile commodity markets?

Sustainability is one of those words whose concept is different from person to person, organization to organization, and philosophy to philosophy. I begin by reiterating the proper and consistent notion of sustainability at the outset of any assignment, not for me to learn it but for me to learn what THEY mean by it.

I need a bright line that distinguishes sustainable from non-sustainable. Is a solar farm sustainable if it disrupts aquifers, moves vast amounts of earth, and generates tailings? Many say yes, but those assumptions have to be made explicit. I think sustainability entails using fewer materials per unit of product.

Secondly, sustainable investments will not be made unless they are profitable. Investors must know they will receive both a return on and a return of their capital, or they will not proceed. Sustainability must therefore be driven by improved processes that reduce material usage and cost.

We must remember that the perfect is the enemy of the good. There is no fully sustainable product or service. Everything relies on materials extracted from the earth, so sustainability analysis exists to do much better, not to chase ideological perfection.

As an economist, I see efficiency as the core of sustainability. When power plants improve heat rates from 11,000 Btu per kWh to about 7,000 Btu per kWh, every megawatt-hour requires far less material input. That reduction in material intensity is sustainability on its face.

Sustainable investments will not be made unless they are profitable.

Across sectors such as electric power, oil and gas, mining, and green energy, which market drivers currently pose the greatest sustainability risks and opportunities?

We talk about the energy transition, but I think of it as a shift from a combustion economy to a materials science economy. We understand hydrocarbons well after centuries of use, but now we must master batteries, photovoltaics, supercapacitors, supermagnets, and fissile materials.

The hope is that materials-based systems will require far lower volumes than combustion-based fuels. Power generation, however, remains one of the least sustainable links in the commodity chain, with poor efficiency, intermittency, and storage challenges.

Electric generation and transmission are the weak link. Without revolutionary technological improvement in these areas, we cannot realistically leave behind the combustion economy.

I think of it as a shift from a combustion economy to a materials science economy.

What role does capacity analysis play in avoiding resource bottlenecks, price shocks, or unintended environmental consequences?

The rarest and most valuable aspect of sustainability is the development of capacity in green sectors. Capacity requires large upfront capital investments, and those dollars must be attracted through profitability.

Regulatory intervention in capacity markets, particularly electricity, has distorted price signals and obscured the true value of capacity. As a result, clean energy has not been built at scale, while coal has persisted, which is neither economically nor environmentally sound.

Capacity analysis is central to sustainability. Without sustainable productive capacity and sustainable downstream fabrication, sustainability does not occur. It must exist across the entire supply chain.

If you do not have sustainable productive capacity, you do not get sustainability.

How should business leaders interpret long-term commodity trends when planning investments aligned with energy transition and sustainability goals?

Business leaders must clearly understand what the goals are and what the capital and operating costs will be to achieve them. Those goals must be achievable, economic, and profitable, or the investments will not be made.

Idealism has to exit the sustainability equation. Hard economic reality is what drives lower-cost, lower-material-intensity techniques. Leaders must build economic supply chain models that show how materials and process changes actually reduce emissions and prices.

Idealism is gone from the sustainability equation and hard, cold economic reality is driving decisions.

What exciting plans and goals do you have for the next few years?

I want to see lower-cost mining and processing of critical materials and real progress toward making the materials science economy economically competitive with the combustion economy. High grades and efficient processes reduce the magnitude of nonsustainable activity.

We need less government involvement, less ideology, and more focus on profit. Materials-based processes inherently use less material, which means less intrusion into the earth’s crust and lower cost. That leads to higher profitability and faster adoption.

Permitting systems must be overhauled, because sustainability cannot scale under current permitting regimes. We also need new materials science products that use fewer atoms for equal or better performance. Moving and using fewer atoms is intrinsically sustainable.

Moving and using fewer atoms is intrinsically sustainable.

Visit their website at ArrowHead Economics.