Wednesday, June 28, 2006

Storm Season?

Just a few brief comments... with the leisurely start to this year's Atlantic Hurricane Season, one could almost be forgiven for thinking that things are looking up. Iraqi oil exports reached a post-Saddam peak at 2.5 MMBPD, but scratch a bit below the surface and storm season really is just around the corner:

- Krazy Kim and his band of North Koreans are on the verge of launching a Taepo-dong 2 missile. You never can tell what Kim will do, and despite how fun (and easy) it is to hold up his antics as proof that Darwin was wrong (Kim Il-Sung, his father, was actually quite the historical "Great Man" in many ways), there is a cool rationality behind it. The imminent launch is significant because, if you listen to the Chosen Soren (NK 5th Column in Japan) propaganda, this won't be a "ballistic missile" test, but rather a launch of a "civilian" satellite. A Kim-Chee Sputnik, if you will--significant because a satellite launched into polar orbit is also a demonstration of a nation's ability to deliver a similar sized nuclear device ANYWHERE on Earth (not just "Alaska or Hawaii"), but with plausible "peaceful" deniability. It is, after all, party of that theory of sovereignity that nations have the right to peacefully explore and utilize space. North Korea is quite critical for two reasons: first, it is the rationale for US influence in South Korea, which is really what maintains a buffer between China and Japan and prevents an increasingly nationalistic Japan from re-arming. Kick the US out of the picture (which is exactly what the South will do if the US launches strikes against North Korea in retaliation for a missile launch) and suddenly Korea becomes a contest of Chinese and Japanese influence. Korea is also significant as it relates to Iran:

- The Iranians are playing a quite rational game of procrastination--they can't, of course, accept the EU3+3 (France, Britain, Germany, China, Russia, US) proposed package of incentives to abandon nuclear enrichment. The hard-liners who are currently in nominal charge of the situation can't turn away from nuclear weapon development at this point--they have galvanized their base around this very issue. And quite frankly, it makes perfect sense for them--given the surrounding circumstances--to pursue a nuclear weapon. So instead they will give it an "honest" consideration--with honest being "signaled" by way of a delay in responding until August or September. When, of course, they will say no, as they have already decided. Better yet, they will probably offer a quite reasoned and superficially reasonable counter-offer, which of course will be immedately rejected. Time is on their side, not on the side of the EU3+3. Can someone please come up with a better naming convention for groups of countries?? "Axis" and "Allies" just has so much nicer a ring to it. But in the mean time they will continue "secret" enrichment at their Esfahan facility. The only puzzle remaining is exactly how closely the actions of North Korea and Iran are coordinated at this point. There is clearly a coordination of brinksmanship and rhetoric here--after all, the US military's foundational strategy of "two major theater wars simultaneously" is somewhat hamstringed by the "one permanent major theater war" currently underway in Iraq. I guess the only real question, then, is 'to what degree is there conscious coordination, or is it just simultaneous and independent opportunism?'

- But amidst this backdrop of unsettled seas (not to mention the escalating crisis in Palestine, among other pots about to boil over) is some "real" news: Looks like Saudi Arabia really has peaked in Oil production. Down to steadily over the past year from 9.52 Million Barrels per Day in June '05 to 9.05 Million Barrels pe Day in May '06. And Russia, Norway, and Iran are all beginning to experience significant declines as well. Matt Simmons, who's predictions on Saudi production were largely ridiculed until quite recently (he was invited to address the Department of Defense "tiger team" on this topic last week) is now largely vindicated, and he is now predicting that oil production in the Middle East will decline by 50% within 12 years. Despite recent increases, he doesn't hold much hope that Iraq will make up for any significant portion of this shortfall.

So while there are no major hurricanes at the moment, don't despair--this is the kind of foreshadowing that is necessary in the opening pages of any great story...

Friday, June 16, 2006

Waiting for the lights to go out...

Considering that it was published in one of the more respected and conservative of papers, the London Times, this article is shockingly on-point, well written, and wide-ranging:

Waiting for the Lights to Go Out

Here's a short quote: "If Huebner and Jones are right, our problem goes way beyond Windows. For if innovation is the engine of economic progress — and almost everybody agrees it is — growth may be coming to an end. Since our entire financial order — interest rates, pension funds, insurance, stock markets — is predicated on growth, the social and economic consequences may be cataclysmic."

Not a new article (October, 2005), but I just noticed the link today at The Oil Drum. An excellent read--it may not cover much new ground, but it is a very accessible synopsis of the problems that humanity is facing. My only complaint is that it doesn't mention Joseph A. Tainter's "Collapse of Complex Societies," which if you haven't read, go buy a copy TODAY.

Saturday, June 10, 2006

More Notes

The Oil Drum has a great article about the natural gas field between Qatar and Iran (the Qatari portion is the "North Field" and the Iranian is "South Pars). Basically, this field is claimed to be huge, with about 1/4 of all natural gas in the world and more total energy than Saudi Arabia's famed Ghawar field. But--surprise, surprise--it looks like this field may be far smaller than the claims. Even though the field area is huge, the estimates are based on only two production platforms (Alpha and Bravo). The recent drilling efforts for Charlie platform--well within the prime "area" of the claimed field, came up dry. Now the Qatari government has suspended any further development attempts until they can further evaluate the field...

Also worth discussing is the recent killing of al-Qa'ida in Iraq leader Abu Musab al-Zarqawi. While much billed as a victory in the "War on Terror," it doesn't seem to me to be an event of much consequence. To evaluate the significance of this event, there are two questions that must be asked: Does this affect any of the underlying causes of the insurgency or support for radical Islamist causes? Does this in any way impact the ability of insurgents and Islamists to develop or implement an effective strategy?

On the first question, it seems clear to me that the killing of a leader does absolutely nothing to address the root causes of the insurgency and support for militant Islamists. Inequality, oppression, actions not in accordance with certain interpretations of Islam, etc.--none of these have changed with Zarqawi's death.

On the second question, I think that the death of Zarqawi may actually be counter-productive because it may facilitate both the development and implementation of an effective strategy. Zarqawi was a relatively successful innovator, particularly in the area of using the media and the internet to advance his cause. However, he also pushed his organization towards an increasingly rigid and hierarchal structure--one that limited innovation not initiated from the top, and that facilitated US intelligence collection on the organization. Finally, and perhaps most importantly, Zarqawi pursued a strategy of fomenting sectarian violence--at the opportunity cost of focusing on other strategies such as infrastructure targeting. The organization without Zarqawi may go in any of a number of directions, but one strong possibility is that it will devolve to a more rhizomatic, decentralized structure. Such a structure would likely exhibit more structural innovation as the many different and more independent cells would explore different tactical and strategic innovations--the result of such a change would be a more effective form of open-source insurgency. Additionally, such a devolution will be a major setback to US intelligence efforts--both killing off existing leads and making the total problem more complex. Most problematic is the enhanced probability that the reshaped organization will hit upon a more effective strategy--say infrastructure targeting combined with an effective campaign to highlight the abuses of US forces. If political concerns hadn't trumped all else, it is my opinion that the best course of action would have been to collect on Zarqawi, not to kill him. Just like the general rule that a lawyer should never ask a witness a question that he doesn't already know the answer to, a leader should never be killed without considering what will replace him.

So, in all, I think that the killing of Zarqawi is a negative development for the US. The press, carefully fed from various think-tanks and spokespeople, disagreed--they found this to be a cause for celebration. All this "good news" from Iraq immediately led to a significant drop in the price of oil--which brings me to a few thoughts on the so-called "risk premium."

The theory is that the price of oil is significantly elevated by a "risk premium"--the market's estimation of the risk of geopolitical instability causing future supply disruptions. There are two problems with this theory: First, it is not reflected by price movements over the medium or long term. Second, it is negated by the actions of the markets.

Take the Killing of Zarqawi. It caused a significant drop in oil prices immediately after its reporting Thursday morning, and this was widely reported by the Main Stream Media. However, by the end of the day prices actually closed higher than they were prior to news of Zarqawi's death--this was not reported. While I haven't conducted any kind of academically rigorous historical study, it seems like geopolitical events have significant impacts in the very short-term, but these gains (or losses) are negated by slightly more gradual corrections back to the equilibrium of supply and demand. These more gradual corrections don't get the same press--and don't have an easily attachable geopolitical explanation (the press doesn't like to speak of supply and demand), leading to the mistaken perception of a significant risk premium.

The second argument for this position is that any risk premium is negated by the markets themselves. The price of oil is determined by trading contracts for future delivery. Let's say one of these contracts expires August 1st. There is clearly a greater chance of some geopolitical event disrupting supply on July 1st--with 30 days before delivery is due--than on July 30th. So, on the surface, one would think that the price should be higher on July 1st , then declining as the expiration date nears and the chances of a geopolitical disturbance grow smaller. Such a phenomenon, however, is not reflected in actual contract prices. Right now, if we compare contracts that are 6 months apart (July '06 and December '06), the later contract is $3.08 / Barrel more expensive. A further 6 months (to July '07) only gains $0.37. This leads me to believe that there is a significant "Hurricane Premium" of about $3/barrel (because July - December spans the traditional hurricane season), but that there no significant "terror" or broader geopolitical risk premium that lasts more than a day or two after significant events. Whatever negligible geopolitical risk-premium that does exist, it is outweighed by the impacts of the time-value of money and the general expectation that long-term prices will drop (as reflected in the contract price of oil 5 years from now being $4.11 cheaper than the price of oil today).

Geopolitical factors and the risk of terrorism DO influence prices--so far as they impact the actual supply and demand. But any reactionary emotions among traders that create a temporary risk-premium bubble is quicly traded down by arbitrageurs who can protect against the short-term risks with opposing long-term covering contracts.

Now the recent Saudi admission that their existing fields are declining at 8% a year WILL have an impact on prices... but it might take a few months.

Tuesday, June 06, 2006


It takes a while to motivate myself after a return from vacation. Idyll and the ensuing mind-fog—or is it clarity?—crashes with silent fury into my attempts at reintegration. It strikes me that this reintegration—the re-establishment of basic routines following an experience defined by a pattern of routines shaped by desire, not necessity—is itself an opportunity. An opportunity to create routines that satisfy necessity while better conforming to desire, to consciously create patterns of elegant simplicity in one’s life, to bring one’s existence more into conformity with a guiding ethos. As I work to emphasize experience over consumption, I find that the meal-time routine affords the most immediate opportunity for practice: half a grapefruit, a soft-boiled egg with salt, and an espresso is a nice breakfast. But ten minutes to enjoy it slowly on my patio table while I talk with my wife or admire the slightly brighter color of new leaves is sublime.