Monday, April 28, 2008

Giving Up the Car

I just finished reading Noel Perrin's "Giving Up the Gun: Japan's Reversion to the Sword, 1543-1879" for the second time. The first time I read it was for a dinner party/discussion group with noted military history professor Dennis Showalter in 1998 while attending the US Air Force Academy. This book is very important for a number of reasons...

First, let's not pull any punches: Perrin's historiographical method is poor. Perrin didn't speak Japanese, and largely fails to discuss one key to Japan's successful "giving up the gun" was that Tokugawa had unified the country and eliminated the impetus for warfare that existed prior to the Shogunate.

That said, the book is really an in-depth exploration of the ability of society to effectively "turn back the clock," to set aside an available and known technology due to a cultural preference. In the end, Japanese society consciously chose to set aside the gun in favor of a less "efficient" form of military killing that better suited their desire to maintain the class and cultural status quo. Specifically, samurai found that their heroic stature on the battlefield, their cultural significance, and their place in Japan's feudal hierarchy were endangered by a weapon such as the gun that effectively leveled the playing field and allowed plebeian marksmen to mow them down at will. Because of their leverage within the Shogunate, and because of the prevailing desire to maintain cultural "harmony" by the elites, the gun was effectively marginalized.

Even when I first discussed this book in 1998, it was in the context of the ability of human society to set aside a technological possibility for the long term benefit to humanity of not pursuing the short-term gain promised by that technology. Then, the specific focus was nuclear armaments. I re-read the book for the same reason, but today my interest was in the ability of human society to set aside our energy-intensive culture for our own long-term benefit--whether that comes in the form of climate change, preparation for peaking of fossil fuel production, or simply maintaining a level of information processing and hierarchy that is compatible with the human genome. I still think that Perrin's book has valuable insight to offer on this question--a question that I think is increasingly critical for the future of humanity.

Unfortunately, after re-reading Perrin, I am more pessimistic about the ability of modern society to set aside our current reliance on cheap and polluting energy in favor of some more sustainable economic basis for society. Perrin's analysis of Tokugawa Japan highlights (in part due to his historiographical failings) one key feature that facilitated Japan's "giving up the gun" but that is not present in modern society: economic, political, and military power all unified within a shared cultural framework. In Japan, the feudal economic and military system was composed of individual who were also the key to the contemporary military order, who shared a common cultural ethos, and who uniformly benefited themselves by supporting the Shogun's efforts to maintain that system by marginalizing guns. Modern society does not enjoy this kind of "unified command" of political, military, and social elements. Rather, and especially in comparison to modern industrial society, Japan in the Shogunate was hegemonic and could effectively move in unity in a single direction provided that the class of power-brokers uniformly benefited. Today, if the US were to effectively transition to a sustainable economic footing, India and China would most likely just pick up any slack in the system, and would likely even leverage the short-term benefit they would enjoy in both economic AND military advantage. Similarly, if one corporation or one individual were to make such a transition to sustainability, others would likely exploit their short-term inefficiency (or failure to maximally exploit the environment) to their own advantage. It is a new twist on a classic "tragedy of the commons" scenario: the global commons in energy consumption and environmental degradation requires that all players maximize their near-term consumption and pollution or lose out in power to those who do, without actually preserving energy or the environment through their own sacrifice.

It's a poor analogue, but "giving up the car" may be the close to the modern equivalent of giving up the gun. Absent a modern Shogunate to impose upon the masses what may (ultimately) be in our own best interest--preserving our environment, embarking on some form of oil depletion protocol, minimizing impact on climate--we likely won't choose to do so on our own. And even if we could muster the political will to do so in America, or in Europe, someone else will recognize this for what it is--an opportunity--and their resultant increase in consumption/pollution will eliminate any positive effect of our sacrifice. Which leads me to Vail's 10th Law (I'm still working on the first 9): any "solution" that requires people or government to behave better than they have in the past is doomed at the outset to failure. Or at least doomed to working as well as that strategy has worked in the past...

If I had to boil down my thinking into a meta-theory, it is that the trajectory of human society is a result of the structure of that society, and not of the individual wills at work within it. Change requires changing that structure, not producing some "great man" to lead the pliant masses. Right now our structure doesn't allow us to "give up the gun," or to give up the car either. At least not voluntarily. We may be able to, as individuals, see that it would be the wisest long-term course of action, but that is a very different thing than taking that path, collectively, as human society...

Monday, April 21, 2008

Thoughts on Demand Destruction

Oil is currently well over $100/barrel. Demand is effectively holding steady in the US despite this recent run-up in price. There are some measures that suggest a decrease in demand, and the press has seized upon these to “prove” that high oil prices are causing people to drive less. I think this is cherry-picking of statistics: one commonly watched demand indicator, the one-week domestic gasoline demand figure as published by the Energy Information Agency in This Week in Petroleum actually shows a 91,000 barrel per day increase in gasoline demand for the week ending April 11, 2008 over the week ending April 13, 2007 (9.338 mbpd in ’08 vs. 9.247 mbpd in ’07). That’s a 0.98% increase year on year—so where’s the demand destruction??

This flies flat in the face of repeated statements recently in the press and blogosphere that gasoline demand is going down, so let’s look at it a bit more carefully. Here are the EIA’s full historical tables for gasoline demand, both week ending and 4-week average. Using the smoother 4-week average, the 2008 demand has been consistently lower than in 2007, but not by much. However, using the finer-resolution one week data, 2008 demand was higher than 2007 for the weeks ending 4/11/08, 3/28/08, but lower the weeks ending 4/4/08 and 3/21/08. For two of the last four weeks, demand for gasoline has been higher in 2008 than in 2007. This is hardly conclusive evidence of demand destruction, and completely ignores that the most recent demand figure shows a year-on-year increase.

Will we see significant demand destruction in the future? There is no clear answer to that at this time, but I think one thing is clear: it’s time to take a deeper look at the mechanics behind how demand destruction will work, if and when we see it (or, if we already are).

Does a lack of demand destruction when oil is well over $100/barrel mean that prices must go even higher to destroy demand? How much higher? Or is it enough that prices hold at this level for long enough to cause people to gradually make long-term purchases with this price in mind, and thereby destroy demand? How long? Finally, how much of current US demand destruction (to whatever degree it exists—even if only as a decrease in growth of demand) is due to current economic conditions, and how much can be attributed to price alone?

Figure 1: No significant demand destruction based on EIA’s gasoline demand chart… the most that can be stated definitively is that the past year has not shown appreciable US gasoline demand GROWTH over 2007.

Time-Lag in Demand Destruction: Major Purchases Drive Energy Consumption

One way that demand destruction occurs is that, when making major energy-consuming purchases such as a car or a house, people make more energy efficient choices based on the price of energy. These choices happen over time—everyone won’t (and couldn’t) rush out tomorrow to buy a more fuel efficient car, even if gas suddenly hit $10/gallon. How long is the time lag in these choices? Moody’s says that the average time between car purchases is 4.33 years. Even if we could figure out a magic number at which every consumer will pick a new car based on improved fuel efficiency, it would take at least 4 years to affect this transition. In reality, however, no one knows what percent of people would change to a more efficient car, and how much more efficient that new car would be, based on a given price of gas.

What about houses? Americans move houses on average every 5 years. Well, at least they did when they were upwardly mobile in a growing economy and sub-prime credit was easy to come by. It is yet to be seen how the current economic situation will change this figure, but it seems likely that our rate of moving will slow. In theory, when we move homes, we could choose more energy-efficient homes (better insulated, better solar design), or, possibly more importantly, homes that require less driving to commute to work. However, the massive sunk-cost in suburbia must be taken into account. While these homes may go down in value because of the commuting difference, they will likely remain largely occupied because, while the cost of commuting may skyrocket, the cost of ownership in the suburbs may decline to even this out. After all, the average American home is about 30 years old, and despite the promise of “New Urbanism” or downtown condo living to reduce gas consumption via commuting, the turnover of America’s housing infrastructure will take time.

Return on Investment Driving Demand Destruction

Demand destruction happens in other ways than buying a more efficient car or moving to a house closer to work. It is also possible to reduce demand by choosing a less convenient, less pleasurable, or slower option over another that consumer more gasoline. Take carpooling, for example. The passenger-miles-per-gallon of any car immediately doubles when a single commuter adds another commuter as a passenger. Four adults in a Honda Civic hybrid would average about 200 passenger-miles-per-gallon. Even four adults in a Hummer would get respectable mileage per passenger! If this is so simple, then why don’t we all do this? Because carpooling costs time, both in the time required daily to pick-up and drop off the additional passenger, time required to set-up the carpool system, and time in the form of inconvenience of people unexpectedly needing to work late, not being ready for pick-up on time, etc. How do we value this? There are no statistics that I’m aware of that track % of people who commute with one or more commuting passenger, or that track something similar, nor do I have any statistics for average “inconvenience time” per additional carpool passenger. At some gasoline price level, it makes sense for any given person to arrange to carpool. At $4/gallon, however, my impression is that most Americans will still value the time saved more than cutting their gasoline bill in half. The calculations for riding the bus, light rail, walking, riding a bike, etc. are essentially the same—how do you balance the money saved on gas with value of added inconvenience and additional time? For some people the decision clearly makes sense—but those are the people most likely to already carpool, ride the bus, etc. New demand destruction doesn’t occur until the price of gasoline changes the calculus, where it didn’t make sense at $3/gallon, but does makes sense at $X/gallon. How high would gas prices have to be for it to “make sense” for 50% of suburban commuters to carpool or ride the bus?

Economic Cycles and Demand Destruction

Ultimately, the kind of calculus suggested above is inextricably linked to the health of the broader economy. Rich consumers with large and growing disposable incomes are likely to value their time and potential inconveniences at a much higher rate than those struggling to buy groceries (notably, those with high disposable income are also the most able to pay now to upgrade to more efficient homes or cars, but least incentivised to do so). Another point to consider in evaluating demand destruction is the cause of economic problems. If economic problems are caused by high energy prices, then it seems accurate to consider demand destruction attributable to these economic problems as demand destruction caused by high energy prices. However, to the extent that economic problems are the result of an economic cycle, and not due to high energy prices, then the energy demand destruction that results does not seem accurately attributable to high energy prices. Our current economic troubles seem to be a function of both issues, but in my opinion more a short-term cyclical issue (inaccurate pricing of risk and the resultant correction, as I argued a few weeks ago (LINK)). At least some of the decrease in US oil demand can be attributed to economic cycles, and not to high oil prices, but we probably cannot separate these causes and isolate the portion of demand destruction caused by economic cycles. Can we even say whether or not demand would actually continue increasing at $113/barrel IF the US was in an economic boom? Does a statistic like GDP/barrel of oil consumed allow us to see through this fog? It might if we had a very accurate measure of inflation, but the CPI certainly doesn’t qualify. For that reason, comparing the 2006 GDP/barrel consumed vs. the 2007 GDP/barrel consumed is also problematic. Furthermore, it does not necessarily follow that, in a cycle-driven recession, GDP will shift to more energy efficient paths.


With gasoline well over $3/gallon, and oil well over $100/barrel, there does not seem to be any significant demand destruction in the US. Reasonable people can argue that demand is up about 1% or down about 1% since this time last year, but I am defining this entire range as “minimally significant.” What is the boundary of “significant” demand destruction? By significant, I mean significant impact on the supply-demand equilibrium for oil. If a low-end estimate of the decline rate for oil production post-peak is something between 2% and 5% per year, then I think that is the boundary for “significant” demand destruction. Demand destruction of 1% per year on an ongoing basis, compared with oil production decline of 5% per year, won’t have a significant impact on the supply-demand equilibrium. Conversely, a year-on-year demand destruction of 5% compared with an oil production decline of 5% has a very significant impact on the supply-demand equilibrium because it negates the impact of the production decline rate—this is a form of what Heinberg suggests in his Oil Depletion Protocol.

If this analysis tells us anything, it is that there is no easy way to calculate exactly what price point will cause demand destruction of X%. I remember when many proclaimed that $3/gallon gasoline would cause huge demand destruction. Now many of these same people proclaim that demand destruction will explode at $4/gallon or $5/gallon gasoline. Europeans, though admittedly in a very different situation, don’t seem to be driving significantly less at $8/gallon. In the end, we simply cannot know how demand destruction will unfold, and I think that is highly significant for calculating the economic impacts of rising oil prices—we have no empirical basis to either prove or disprove propositions as opposite as 1) present prices, if maintained indefinitely, will cause sufficient demand destruction to keep prices from rising significantly higher, or 2) prices will be able to at least triple before demand destruction begins to keep pace with supply declines. I know that there are nearly endless opinions on this point, but the significance of this analysis is that we cannot prove either point of view to be right or wrong. We can only wait and see what happens…

It's also worth pointing out that this analysis only considers US gasoline demand. Even if there is an ongoing demand destruction of 1% per year in the US, two significant factors overwhelm this: global demand growth remains strong, and net exports are falling precipitously (by 150,000 barrels per day in March alone). More on these items in future posts...

Tuesday, April 15, 2008

Saved, again.

Sometimes I feel compelled to debunk the latest round of "new oil discovery saves the world" pronouncements. Our most recent savior comes in the form of a claimed 33 billion barrels of crude off the coast of Brazil.

Let's take a look at this claim:

The president of Brazil's National Petroleum Agency, Harold Lima, stated yesterday that Petrobras (the Brazilian National Oil Company) "may have discovered a huge petroleum field that could contain reserves large as 33 billion barrels." Petrobras immediately began to backtrack, but before we get into that, let's look at what happens if Lima was right, and there actually are 33 billion barrels of recoverable oil off in this exploration zone. 33 billion barrels, when actually pumped out of the ground and delivered to market, would fuel the world's present oil consumption for just about one year. Energy "analyst" Roger Read's statement that "[t]his would lay to rest some of the peak oil pronouncements that we were out of oil" seems to demonstrate nothing more than that he doesn't understand what peak oil is all about--it's a theory that we will shortly reach a peak in PRODUCTION, not that we will run out or never find any more. Let's look a bit more closely at this 33 billion barrel find...

To start with, this 33 billion barrels is an estimate of the most that this exploration region might contain. No figures were provided for a low-end estimate, nor for a median.

This "find" is not a single field, but the geologically-derived estimate for the potential for a massive exploration block off Brazil's Atlantic coast.

This "find" is not the result of a series of validated test wells, where the actual oil production from these wells is extrapolated to an entire zone. Rather, it's what geologists think is below a salt layer--a salt layer that 2,000 meters thick and lies very, very deep under the Atlantic, and that no well has actually yet pierced. This is essentially what Petrobras said in their early attempts to retract the claim of a discovery: "The salt layer of the second well drilled in block BMS-9 of the announced oil field has not even been reached yet, and the huge field, if it does exist, lies below the salt layer, the company said in a statement."

Finally, according to current estimates from Petrobras, it will take the better part of a decade before any of this oil reaches the market.

None of this is intended to discount the importance of potential oil reserves off the coast of Brazil--my intent is just to show that oil that might exist, that might make it to market starting in 8-10 years, that might be sufficient to fuel the global economy for one year, and that might be economical to produce at $100+/barrel has very little impact on the theory of Peak Oil.

Monday, April 14, 2008

Guided Emergence

John Robb recently posed an interesting question at his blog, Global Guerrillas: is it possible to leverage decentralized decision making (in order to get inside your opponent’s OODA-Loop) while keeping the organization as a whole responsive to direction from above? In other words, can you leverage the power of decentralized decision making without ceding control to the mob? I think the answer is “partially yes.” Here’s my notion of how this can be done—and its limitations—something that I call “guided emergence.”

First, what is an OODA-Loop? It’s a topic mentioned by Robb, and one that I’ve written about many times in the past (1 2).

It’s the decision making cycle within any organization as defined by the steps Observe – Orient – Decide – Act. This is how the military—and any organization—processes information. We observe events, orient our goals and intentions to the changes that these observations represent, decide what to do about it, and then act on those decisions. When two opposing groups are in direct competition with each other—whether military or otherwise—the group that can go through the OODA-Loop process both correctly AND more quickly than their opponent prevails (or at least gains the upper hand). Now consider two opposing groups with two different organizational structures both competing in this OODA-Loop game. Group one (US military) is a huge, hierarchal bureaucracy. Group two is a small, decentralized network (al-Qa’ida). Group one’s attempts to go through the OODA-Loop process is bogged down by the information processing burden of hierarchy (see my writings on this topic in these three posts, as well as in Chapter 9 of A Theory of Power).

So that’s the shape of the problem: the US military can’t get inside al-Qa’ida’s OODA-Loop because it’s hierarchal, top-down decision making structure prevents it from executing the loop more quickly than its decentralized opponent. So back to Robb’s question: if the US military (or any other hierarchal organization) wants to speed up its OODA-Loop, can it do so while maintaining control of the organization? Robb presents two options. First, the US military can try to get all the decentralized decision makers to share the same objectives, the same understanding of acceptable means to pursue those objectives, and the same background information, and hope that they make decisions that are aligned with what a hierarchal decision making process would decide—only faster. The second option—one that is a priori unacceptable—is to let the decentralized decision makers do what they want without any control at all. This will invariably result in an even faster OODA-Loop because there is no need to waste time or resources attempting to get all decision makers in harmony with senior leadership (an impossible task in any event). Therefore, for the US military, the answer is “no,” it is not possible to fully leverage decentralized decision making to speed up our OODA-Loop. The best option that is both acceptable and implementable is to loosen the reigns of control over lower-level decision makers and provide some kind of training in advance that aims at harmonizing their actions within the acceptable range of senior leaders. We’ve been doing this for a long time already: military academies are intended, for example, to harmonize junior leaders with senior leadership to exactly this end, but they largely fail at this task because of their equally important task of generating junior leaders who are willing to think outside the box, innovate, and question authority when necessary. I’ll offer myself as case in fact for this problem—the best “harmonization training” available didn’t work. Because harmonization isn’t a real solution—just a stop gap (kind of like forming a “tiger team” to address a problem isn’t the same as addressing the problem)—an adversary who is not constrained by the need to “harmonize” decentralized decision makers will continue to operate inside the OODA-Loop of the US military. Hierarchy demands centralized decision making, and is fundamentally, structurally incompatible with decentralization of decision making beyond some boundary. Because the location of that boundary sets hierarchy at a permanent disadvantage to decentralized networks when it comes to speed of innovation and decision making, there is no solution to getting a hierarchal structure inside a decentralized structure’s OODA-Loop.

My solution to the problem is not to fight these fundamentals, but rather to change the structure of the larger organization to a decentralized one—what I call “rhizome.” I recognize that the US military just isn’t going to accept this—I think that’s fine, and I think it serves as an example of how the era of the Nation-State is in decline (see The New Map). I also recognize that the world is never going to convert to a wholly decentralized structure, a perfect “rhizome.” Likewise, this is not how structures exist in nature—nature is a dynamic balance between hierarchal and rhizomatic structures (see Manuel de Landa’s 1000 Years of Non-Linear History). So this leads me to what I consider the really interesting question here: how to effectively balance hierarchal structures with decentralized, rhizome structures. My answer: guided emergence. Use a limited hierarchy to create, reinforce, and maintain institutions that generate a balanced, minimally self-sufficient, harmonized rhizome structure and then “let it go”—accept that you can’t affect the direction of such a structure, but that because a balanced structure is created in the first place, the emergent actions of that structure will remain “harmonious.”

That’s a lot of fancy-sounding theory that probably comes off as gibberish. Let me run through three examples of this in action: guided emergence in biology, for a terrorist organization, for a national military (notice I’m not calling it a “Nation-State” military), and for a local community.

Guided Emergence in Biology

Guided emergence already exists in nature. As one example, consider DNA. That molecule effectively guides the emergence of a vast diversity of life while simultaneously ensuring its own propagation. Perhaps an even more interesting example is that of mitochondria, specifically mDNA. mDNA maintains its basic structure quite consistently (though not statically) while facilitating its own propagation through the dynamic, innovative system of carbon-based life. Talk about getting inside the opponent’s OODA-Loop. Sure, this is a pretty theoretical example, but one that’s worth keeping in mind as we move on to a very concrete example in human society next…

Guided Emergence and the Terrorist Organization

Al-Qa’ida already implements the theory of guided emergence in its organizational structure. Currently, al-Qa’ida’s senior leadership acts as a “doctrine center” as well as sometimes provider of training, direction, and financing. Al-Qa’ida does not, however, exert direct, hierarchal command and control of its forces in the field. In fact, it’s really impossible to say who al-Qa’ida’s forces are—some openly pledge allegiance, such as al-Qa’ida in Iraq or al-Qa’ida in the land of the Islamic Maghreb, but many more, perhaps most, are only influenced to some degree by the core function of al-Qa’ida. In this sense, al-Qa’ida is an excellent example of guided emergence operating successfully. It is also an excellent example of the reasons why traditional hierarchal structures such as the US Military are so incapable of adapting this highly efficient, highly innovative structure: the requirement to cede ultimate control of actions. Al-Qa’ida is limited, in “guiding” the emergence of a global Islamic jihad, to arguing why this jihad should be prosecuted, how this should be done, and on occasion directly interjecting personnel or training into the emergent system. This is also its strength—it can act symbolically, and greatly leverage its available resources by persuading others to directly act on, or roughly on, its behalf. It also forces al-Qa’ida to directly confront a prerequisite to ultimate political victory that is normally only given lip service by Nation-States in their pursuit of political-military victory: winning the hearts and minds. The US military, as others before it, is often lulled into thinking that winning hearts and minds is of secondary concern because direct application of military force can control the situation in the absence of control of hearts and minds. This tends to work well in the short term and disastrously over any much longer time period (witness: the very notion of “blowback” arises from this problem). Al-Qa’ida, by virtue of the fact that it does not and cannot directly control the kind of military force required to be tricked into this short-term perspective is forced to take a long-term approach that requires addressing hearts and minds first, and then looking for a military solution. While this allows temporary military setbacks such as the one it suffered in Afghanistan in 2001-2002, it ultimately leads to victory against an opponent who thinks that hearts and minds are an unnecessary sideshow. Hearts and minds will always, ultimately, be most attracted to an organization that permits unfettered, bottom-up innovation, because that directly allows the actual interests of people (as opposed to the theoretical interests advanced on their behalf by world aid organizations and “benevolent” Nation-States’ international policy programs) to dictate the actions of the emergent entity. It is very hard for a Nation-State to win hearts and minds when those hearts and minds realize that the Nation-State is not organically arising FROM them, but rather is attempting only to leverage them toward its own goals. A bottom-up, emergent organization doesn’t suffer from this weakness. This makes attempts to guide the emergence of such a bottom-up system—ultimately nothing more than an argument for why it is in THEIR best interests to follow the proposed course—so much more successful because it is inherently persuasive rather than coercive.

Guided Emergence and a National Military

So, given the problems of adapting a bottom-up, emergent, decentralized structure to a Nation-State military, is there no application of this kind of theory in the world of modern military affairs? I think that there is a very direct application, but that we must first remove “State” from “Nation-State” before attempting to apply guided emergence. “State” is an inherently centralized, hierarchal edifice erected (in theory, though never precisely in practice) upon the exact boundaries of an ethnic, religious, or cultural “Nation.” I’ve written before about the impossibility of erecting a state with Cartesian boundaries upon the inherently non-Cartesian space occupied by a Nation. However, if we dispense of “State,” it is very possible to apply a decentralized, emergent, bottom-up decision structure on a Nation’s military defense system. As I’ve discussed in “Defending Pala,” it is probably not possible to adapt this to a Nation’s offensive interests, but, that by confining the power of a Nation’s military to actual (as opposed to politically “spun”) operationally defensive engagement, the very problem of “blowback” and the current “need” for the very notion of “offensive defense” may be reduced or eliminated.

Guided Emergence and a Local Community

I find it interesting that John Robb has recently been applying much of his “global guerrillas” theory to local communities. I have long found this to be the foundational element of our post-Nation-State future, and think that developing a theory of guided emergence for local communities will pay great dividends. Communities may be the most appropriate place for guided emergence of minimally self-sufficient but cooperating and interacting individuals, families, and family groups to come together in the absence of some centralized, hierarchal structure organizing them. These communities, just like Nations in the Nation-State context, can function in a “guided emergence” environment with or without exclusive boundaries (where, for example, everyone in a geographic town may or may not participate in the guided emergence “game”). Traditional, hierarchal, and centralized “government-run” communities generally cannot function in this way, and therefore greatly inhibit the amount of innovation available to a community to essentially the “one organizational structure per geographic area” maximum. Guided emergence could, on the other hand, support multiple competing organizational schemes within a single geographic area (what might today be the boundaries of one “town”) without conflict arising—if people are drawn from one scheme to another, then it grows, but there would not necessarily (key word here—exclusive religious notions, as with al-Qa’ida, make motivation for conflict possible) be motivation to out-compete or eliminate other schemes.

It may be clear by now that this notion of guided emergence as applied to local communities nests nicely with my outline for resilient and self-sufficient communities from The Problem of Growth. It may be a bit difficult to understand outside that context. But consider the ability to use guided emergence to persuade, rather than coerce, others to pursue the exact program outlined in Problem of Growth: establish minimal self-sufficiency in extended family nodes (along with regionally-appropriate means of doing that, best practices, etc.), establish mutually beneficial but optional interaction between these nodes, drive innovation in both of these areas, and serve to advocate for collective courses of action that may require temporary leadership or that work best with greater unity of effort.

This may be the key benefit to guided emergence: to the extent that guided emergence is only available to bottom-up, decentralized organizations, and that these kinds of organizations are capable of getting inside the OODA-Loop of their centralized/hierarchal competitors or opponents, there exists a structural trend in favor of just these decentralized and bottom-up entities. I think that decentralized and bottom-up entities are more likely to be compatible with human ontogeny, to be environmentally sustainable, and to allow for resilience and diversity of practice within human society without oppression. Any theory that helps speed along the erosion of centralization and hierarchy and the rise of a decentralized replacement seems welcome in that context.

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Sunday, April 13, 2008

Interesting Times for Saudi Oil Production

Two interesting developments in Saudi Arabia this week. First, sources tell us that their oil production has decreased from9.2 million barrels per day to 9.0 million barrels per day. Second, and more interesting, the Saudi king is now publicly stating that they are delaying the development of some new oil finds because "our children need it."

While this may seem fairly innocuous, a bit of analysis leads to some very interesting possible motivations.

Let's look first at the decrease in oil production. A 200,000 bpd decline is pretty significant. The source quoted by Gulf Daily News claims that this decline in production "reflects the demand from our customers." Well, maybe at $110/barrel. But compare this to President Bush's recent request to the Saudi king to ease prices by increasing demand. It's a bit disingenuous to say that you're pumping 200k bpd less because that reflects demand at $110+/barrel, when putting an additional 200k barrels on the market each day would invariably decrease prices and increase that demand. If they offered those 200k barrels each day at $80/barrel, I'm pretty sure there would be buyers! So it seems apparent, at least to me, that IF the Saudis are voluntarily cutting back production, it is because they want to increase prices, or at least they want to keep prices at present levels, not because they can't find buyers.

This begs the question, of course, of whether this cut-back in production is voluntary. Consider the interesting timing with the claimed start of production from their Khursaniyah field. Saudi Arabia claims that production from that field will reach 300k barrels per day within a month, and eventually 500k barrels per day. In combination with the planned addition of an additional 250k bpd from Shaybah field set to come online later this year, the timing of the current production decline is odd. Some possibilities:

1. They're shutting in more expensive production (e.g. very high and increasing water cut) to make way for Khursaniyah without driving down oil prices.
2. They're shutting in quickly depleting fields, or fields at risk of advancing water flood stranding oil pockets, in favor of the more technically sound Khursaniyah and Shaybah.
3. The timing of Khursaniyah is a ploy--the field has "been coming on line soon" for years now, yet hasn't produced any significant oil to date, and this latest round of Khursaniyah press releases provides cover for them to either a) cut production to continue to increase oil prices, or b) cover the decline from aging fields (as in "we still have 2mbpd of spare production potential, but we didn't anticipate this latest round of Khursaniyah delays, so we're temporarily behind...").

We simply don't know which--if any--of these motivations led to the cut of 200k bpd of production.

Now consider the statement by the Saudi king that they are also intentionally holding back on the development of new oil production capacity. No details are provided about which fields, which discoveries have been mothballed to provide for posterity. Instead, it sounds to me like a PR move to explain why they can't ramp up production right now to bring down oil prices, despite their claim that they have plenty of spare production capacity. It's one thing to ask them to put on line more production to ease oil prices and help America out of economic troubles. It's an entirely less reasonable request to ask them to sacrifice their children's future to help us now! More troubling, to me, is that this is exactly the kind of PR move that would also precede a voluntary reduction intended to maximize near-term revenue, or to conceal the near-term onset of oil production declines. After all, if the Saudi king really cared so much about posterity, he would be well advised to reduce current spectacular levels of conspicuous consumption by the royalty and consider addressing the kingdom's population explosion that is creating a demographic tidal wave that will soon overwhelm their economy--even IF oil production remains steady.

The revenue curve for oil production for a producer like Saudi Arabia is an unusual animal. Because of the current tight global markets, and the high inelasticity of demand for oil, cutting production probably increases prices enough to maintain stable total revenue. There is probably some sweet spot where a cut in production will actually increase revenue. Either way, these are certainly interesting times for Saudi oil production. We simply don't have enough reliable information to know whether this is the onset of irreversible oil production declines, whether this is a new phase of self-interested revenue maximization, whether this is a natural part of the transition from aging fields to new production coming on line, or some combination. Maybe we will get sufficient information in the next few months to better understand where Saudi production is going. The greatest problem is that the Saudis have no motivation to be forthright with their disclosures, and attempts (like this one) to read between the lines will almost invariably result in the conclusions that "it's some combination of factors." Most likely we won't have a definitive answer until it is provided by a clear historical record. The problem with this is that it will be much more difficult to sell the necessary economic adaptations necessary to compensate for a significant decline in Saudi production AFTER that decline has already happened. The Saudis are possibly the only people who could, with a unified shift in policy, quickly convince the majority of skeptics that the world is facing an ongoing 5%-10% annual decline in oil production beginning very soon. They also appear to be one of the last groups that will come out and say this...

Tuesday, April 08, 2008

The Face of the Problem

The Chevy Tahoe "Hybrid." In so many ways, this encapsulates the intractable nature of the problems facing us at present. It gets 21 MPG, but look at how green that forest background is!

Monday, April 07, 2008

Timing: The Credit Crunch & Peak Oil

Those with a more apocalyptic bent seem to see the onset of a world peak in oil production and the current economic “credit crunch” as a sure sign that the end is nigh. I disagree—I think we’re in the midst of a “slow crash” that will unfold over the next several decades. That doesn’t, however, mean that I think the timing of the credit crunch won’t have a serious effect on peak oil…

I think that our economy is fundamentally strong, both in America and world wide. Yes, I predicted there would be no recession in the US in 2008, and I still think that there isn’t a “real” recession in those parts of the economy grounded in reality. There certainly isn’t a recession where I live, judging by the job market, by the lines at drive-through Starbucks, etc. I'm sure that can all change very quickly, but the booming energy economy in the Denver area seems to be compensating for the weakness in housing. I think the “recession” in America is just the evaporation of the foam of the fantasy-financial instrument economy from the top of the beer. Despite all the problems of the (quasi?) free-market capitalist system for the environment, for human rights, for fulfilling human ontogeny, it is remarkably resilient. Right now we’re going through a bit of a correction, but we’ve been through them in the past (some, admittedly, more serious than others), and we’ll “get through” this one just fine. Housing values were overstated due to easy credit, and the broader market for credit derivatives (derived from everything from home mortgages to corporate debt) led to a bit of a bubble across the board. This bubble is deflating, but it won’t bring down the world with it (sorry). What it will do is restore a more reality-based relationship between assets and their values, and this will, in the end, make the expanding global economy even more robust and resilient. Nothing in the "credit-crunch" changes the most fundamental building blocks of the modern economy: when two people specialize in each producing one item, rather than both producing both items, if the transactions costs for exchange of the two items are less than the savings by specializing, wealth is created. The credit crunch is only temporary friction in that system of exchange, not the fundamental shift to a world where transaction costs exceed benefits of specialization. At some scarcity of energy, on the other hand, transaction costs do begin to exceed the benefit of exchange.

This increase in transaction costs of our specialization-driven economy is the real problem, and it is driven by peak oil—actually peak primary energy. Right now, our global economy is fundamentally based on the easy energy surpluses available to us, primarily from crude oil, high-quality coal reserves, and natural gas. Evidence suggests that global production of crude oil has peaked, and that natural gas and then coal are not particularly far behind. But, while the peak may be here now (or very soon), significant decline in production has not yet arrived. This is highly significant for two reasons: 1) significant decline isn’t far off, and 2) these energy sources (oil, coal, natural gas) represent our society’s primary energy sources. By primary energy source I’m not pointing to the fact that they represent the largest share, but rather that they produce energy with such a high Energy Return on Energy Invested (EROEI) that they can fuel the economic energy of our society. This high EROEI keeps the benefit from exchange, especially the very complex and long-distance specialization and exchange in a modern industrial economy, providing benefits in excess of transaction costs. No “alternative” energy source can make this claim—not photovoltaics, not wind, not biofuels, and probably not nuclear (which, at least with current technology, is also subject to a peak in uranium production). I think that solar thermal power has the best chance of proving me wrong here, but no one has yet performed sufficiently inclusive analysis of an operational solar thermal plant to convince me that it can be our salvation. Some alternative energy advocates make outlandish claims about the EROEI of new sources, but when the totality of energy inputs is accounted for these claims fall flat, as I’ve argued many times. Here's one recent example of how the cost for wind generation--one of the "EROEI darlings" of the renewable power world--is (surprise) experiencing dramatic cost increases as an associated phenomena raises its ugly head, what I've called "boot-strap EROEI." That is, while renewables may produce an apparent 5:1 EROEI when they can leverage inputs and infrastructure that was build on 100:1 EROEI "easy oil," the EROEI of these renewables begins to drop precipitously when new or replacement supporting infrastructure, ores, transport, etc. must now be provided with 20:1 or even 10:1 EROEI oil. This drives home the criticality of primary energy to the functioning of our society.

It’s important to point out that we don’t know that these alternatives won’t, at some point in the future, become truly viable primary energy sources to fuel society (though this only raises the Problem of Growth, which I’ve covered previously). And I could certainly be wrong in my EROEI calculations—we could currently have technology sitting in some R&D lab that can power the world. But there is a fundamental difference between developing a new, sustainable primary energy source in a laboratory that *could* power society and actually building out the full panoply of energy generation facilities and accompanying infrastructure necessary to actually continue society as we know it. This is where the timing of the credit crunch and the onset of significant declines in global oil production due to peak oil becomes vitally important: the current economic slowdown due to the credit crunch is masking the price signals that will warn of the significant declines to come, and is postponing the political viability of any kind of crash-program to adapt our present society to one that is based on a sustainable energy source.

If the recovery from the credit crunch lingers on through 2008 and resolves in the middle of 2009, as I think seems likely, then America’s growth engine (and, to a lesser degree, the world’s) will get its feet under it again just about the time that global oil production will likely begin to experience significant declines, either from simple geologically driven declines, or from the addition of a more geopolitically-driven phenomena such as the Export-Land Model (LINK). Either way, the current “undulating plateau” of global oil production represents a vital, and probably fairly short-lived opportunity to seriously transition our economy to a sustainable energy source. It’s my opinion that, with the benefit of historical hindsight, it will be understood that the greatest significance of the credit crunch is that it caused us to squander 2+ years of our oil production plateau that could have been used to fuel an adaptation program. Just look at the political platforms of ALL the US presidential candidates—the near-term recovery of the economy is put first, and there is no mention of sacrifice now to save the future. You can only sell sacrifice when things are going very well, and even then it is very, very difficult to sell anything more than the appearance of sacrifice. From a practicality standpoint, it is probably only realistic to sell "sacrifice" in a reduction in the future *increase* in standard of living.

By the time it becomes obvious that we must transition to a sustainable energy source, the huge “down payment” of primary energy required to affect that transition seems unlikely to be available. And there won’t be any “sub-prime lender” of primary energy willing to give us 125% of equity on our economy! Judging by both US political time-frames and election cycles and by projections for the onset of serious oil production declines, the awareness of this energy shortfall seems likely to hit about 2012. By then I think it will be too late to make the switch, even assuming we do develop the necessary sustainable primary energy source in the mean time.