Monday, June 30, 2008

Preparing the Battlefield: Iran

In light of Seymour Hersh's latest article, "Preparing the Battlefield," about stepped-up US involvement in Iran, here's post I wrote over 2 years ago on the topic:

Keep an Eye on Khuzestan

And a graphic of the oil resources and ethnic makeup of the region worth a thousand words:

Rhizome Platform Design

In the world of technology and sustainability, there is a certain “buzz” surrounding the topics of personal manufacturing and platform design. Can we get away from the hierarchal model of centralized manufacture and distribution, and replace it with a world where design emerges from open-source collaboration and is manufactured at the point of use by 3-D printers and community manufacturing centers? Can a focus on meeting community needs, rather than selling communities products that create dependence, allow for improved localized self-sufficiency by way of platform design and localized manufacture? Maybe. There are many projects and theorists already working on these notions—the intent of this article is to suggest that these efforts operate within the framework of rhizome theory, and more importantly, that these efforts recognize their inherent weaknesses that rhizome theory was developed to overcome.

One example of this trend toward community manufacturing and platform design is the LifeTrac open source tractor project. There, an online collaborative called OpenFarmTech is trying to leverage engineers, users, and innovators around the world to develop a design for an inexpensive, low-maintenance tractor that can be manufactured, used, and repaired by third-world communities. I think this is a fascinating project, and one that John Robb has highlighted as an example of the potential for community fabrication. However, it’s also an example of the potential pitfalls of thinking that platform design or personal/community manufacturing per se will advance local resilience and self-sufficiency. The LifeTrac tractor, for example, still relies on an internal combustion engine, metal-based hydraulics, and rubber tires, just to name a few components that most certainly won’t be manufactured at the community level, or derived from raw materials available at the community level. While the LifeTrac project may free rural communities from dependence on specific, for-profit tractor manufacturers, it will not free them from dependency (and the associated side effects) on distant manufactures of engines, smelters of metals, or producers of tires. While this may be an improvement, it’s a Pyrrhic victory at best, as it will only transfer to locus of their dependency-derived problems, and will not actually bolster their resiliency to external shock or their ability to extract themselves from the growth-related problems that come from lack of localized self-sufficiency.

LifeTrac embodies the problems inherent in the promise of 3-D printers, extreme-personalization, and other examples of technology-first platform design. But these problems are not inherent in the notion of platform design itself. It is possible to properly yoke the technology of platform design to the needs and objectives of creating a resilient, minimally self-sufficient community. As an example of such a rhizome approach to platform design, let’s consider mud bricks…

Like the LifeTrac’s focus on meeting community agricultural needs, mud brick technology could play a critical role in community development in many environments—leverage a global knowledge base to create buildings with low heating and cooling energy requirements, safe from earthquakes, resistant to erosion, capable of impressive structural feats, etc. Unlike LifeTrac, however, an open-source platform for use of mud brick technology need not create or continue dependencies on external sources of raw materials, external manufacturing, etc. In fact, it has the potential to significantly reduce the dependence of most developing rural communities on imported cement, and it has the potential to provide the benefits of cement (and beyond) to those minimally-developing communities that can’t afford or source cement at present. This may become in increasingly important issue in the near future as global cement production (and the energy it consumes) skyrockets. Sure, an open source platform to develop mud brick technology isn’t very sexy (unlike a tractor!), but goals like producing high R-value adobe with excellent structural properties could produce amazing results.

When considering the architectural and infrastructure issues that advanced mud brick could address, many scientists, engineers, and corporations will completely ignore the potential for using vernacular materials, instead seeing a general materials engineering problem, or an infrastructure design problem. They’ll say something like:

“Well, concrete can be effectively adapted to meet the shelter needs of people in community X. We can create an inexpensive insulated concrete form that combines the high-mass concrete with a polyurethane foam insulation to provide both high R-value, high thermal mass, and excellent structural strength.”

That works fine if the goal is to enhance dependency on non-local manufacturing, or non-local extraction of raw materials, etc. However, if the goal is to increase localized resiliency and self-sufficiency, then projects must always be pursued with that in mind. In the same example, these engineers might instead say:

“Well, concrete is out as most communities don’t have access to the raw materials, or to the energy necessary to process it. Sure, we’ll still use concrete for some applications, but where possible we will use some kind of locally-produced product. Most communities have ready access to the requirements for mud-bricks, so let’s instead find a way to use those materials to achieve the same end as an insulated concrete form.”

And then those same engineers could embark on an open-source development program that will produce flexible technologies that can be adapted by individual communities to meet their needs with locally available tools, materials, and production. How exactly will they do this? I have no idea—that’s exactly the point: when the goal of the design process is to support, not defeat, local resiliency and self-sufficiency, then that is exactly what the design process will produce. That’s the potential for combining rhizome with platform design and personal manufacturing...

One example of rhizome platform design already in action is the Cinva Ram (hat tip to BrianT). The Cinva Ram is a low-tech, low cost, but highly effective manual press for creating mud bricks out of a variety of locally-sourced materials. A team of four people can make as many as 500 bricks a day with this device, and it can be easily assembled at the community level using open-source plans. Other examples, just in the building materials arena, include advances in rammed earth construction, experiments in papercrete construction, etc.

How far can this go? Many people immediately point to modern medicine (e.g. an MRI machine) or to the internet (microprocessors) as examples of things that simply can’t be solved I this manner. They may be right. If your goal is to produce an MRI machine using only locally sourced raw materials and local manufacture, I’m pretty sure you’ll fail. However, if the goal is to produce a system of medicine that effectively serves a local community, I think there is a great deal of potential to address the problem in a truly local fashion if we can just get our goals in the right order. MRI machines are developed to make money, and they do that to the extent that they can improve health within a for-profit system. That works decently well for most people in an environment of surplus energy and amidst a solid political and economic foundation like currently exists in America or Europe. It’s a bankrupt business model in today’s third world, and quite possibly in tomorrow’s first world. While a resilient, self-sufficient community may never be able to produce its own MRI machine, I see no reason why it can’t produce an effective health-care system if it keeps that, along with local self-sufficiency, as the primary goals, and leverages a global (or even merely local) knowledge base to that end.

Monday, June 23, 2008

Nigeria - Significance of the Bonga Attack

NOTE: An updated version of this post is now available at The Oil Drum.

Militant attacks have shut in as much as 345,000 barrels per day of Nigerian oil production in the past few days. One of the attacks was against a facility 120 km offshore, demonstrating a significant new militant naval capability. This may prove to be an extremely important development: 1.25 million barrels per day of new offshore production is scheduled to come online in Nigeria over the next 6 years, and all of it was previously believed to be beyond the reach of militants.

Shell's offshore Bonga fpso off the coast of Nigeria

Shell’s $3.6 billion “Bonga” Floating Production, Storage, and Offloading vessel (FPSO), 120km from shore in 1000m deep water, was recently attacked by MEND militants.

Overnight on June 19th, militants from the Movement for the Emancipation of the Niger Delta (MEND) struck Shell’s offshore Bonga facility, resulting in Shell declaring force majeure for deliveries of 225,000 barrels per day in June and July. Bonga, the first and largest Nigerian offshore facility, is 120km offshore. Then, on June 20th, militants destroyed a key Chevron pipeline near Escravos, Nigeria, forcing Chevron to shut-in and declare force majeure on 120,000 barrels per day. This article will analyze the significance of the Bonga attack in light of Nigeria's efforts to grow its offshore oil production.

What is at Stake?

This recent attack is particularly troubling in Nigeria, where a February, 2006 Citigroup report noted that "clearly most of the (oil production) growth near-term looks to be in the Nigerian deepwater and as such should be less subject to current disruptions." While offshore production currently only accounts for 16% of Nigeria’s oil production, it is expected to account for 90% of future growth. MEND has already demonstrated its capability to shut in significant portions of Nigeria’s onshore oil production, and now it is threatening to re-attack offshore facilities, urging expatriate workers to abandon them immediately. Significantly, Nigeria’s onshore production is already mature, and government hopes of raising total production to 4 million barrels per day are entirely dependent on the success of the offshore sector. If MEND can continue to interrupt offshore production, the prospects for any increase in production from Nigeria look dim. The situation in Nigeria is particularly important as Nigeria is one of the few states with the potential to significantly increase both production and exports. The megaproject list on WikiPedia shows 345,000 bpd of offshore production set to come online in 2008 (Agbami field, Oso field); 220,000 bpd of offshore production in 2009 (Akpo field, Oyo field); 220,000 bpd of offshore production in 2010 (Bonga North, Bonga Ullage fields); 285,000 bpd of offshore production in 2011 (Bosi, Ukot, Usan fields); 250,000 pbd of offshore production in 2012 (Bonga SW, Nsiko fields); and 150,000 bpd of offshore production in 2013 (Egina field).

That’s 1.25 million barrels per day of new offshore production planned in the next 6 years. None of it was previously considered vulnerable to attack. Now it all appears to be within the demonstrated reach of MEND.

MEND: Potential for Innovation & Improved Capabilities

This most recent offshore attack also highlights significant development in MEND’s capabilities. Comments as early as 2006 noted that MEND’s offshore capabilities are continuously improving, and that facilities as far as 50-60 km offshore may be at risk. Bonga is twice that far offshore, at 120km.

I predicted a year ago that MEND would increasingly focus on Nigeria’s offshore facilities for two reasons: to differentiate their ideologically-grounded struggle from the privateers and criminal bunkering that is also interrupting Nigerian production; and as a result of the innovation that naturally results from their decentralized structure. While this most recent attack demonstrates MEND’s ability to operate in the deepwater environment, it also shows significant room for improvement. MEND’s press release stated that their goal was to gain access to and destroy the facility's main control room, but that they were unable to do so. Their failure, however, most likely provided MEND with the specifics of what capabilities, training, and equipment they will need to succeed in the future, suggesting that the improvements in capability demonstrated in this attack are part of a larger cycle of capability improvements (an OODA Loop).

The recent attack demonstrates three significant and separate advances by MEND: targeting, naval equipment, and training. By targeting far-offshore infrastructure that was previously considered to be beyond their reach, and by targeting projects that are key to the Nigerian government’s revenue plans, MEND has accurately identified a very high return on investment target. This demonstrates an advancement in their ability to pursue “effects-based targeting”—that is, the ability to carefully select targets for their ability to produce the desired effect. For MEND, the desired effect is to force the Nigerian government to better meet the needs of the Delta peoples. Previous tactics of kidnapping and attacking pipelines were poor choices for several reasons: they spawned criminal activity within the Delta, they increased pollution in the already polluted Delta region, and they did not effectively compel the desired action on the part of the Nigerian government. While it is yet to be seen if the current targeting choices will be more successful, in my opinion they are an advancement in targeting skill on the part of MEND.

The Bonga attack also demonstrates a significant advance in MEND’s ability to operate far offshore. While MEND has always been noted for their riverine naval capability, their demonstration of offshore capability suggests an improvement in naval equipment. No information is available on what types of watercraft were used by MEND in the recent Bonga attack, but at a minimum they have demonstrated that their boats have 120km range.

Additionally, MEND demonstrated a fairly advanced set of navigation skills. Standing in a rigid inflatable boat, at 1.7 meters above the water, the visible horizon is only 5km away. Even if Shell’s Bonga facility flares at 100m above the surface, the flare is still below the horizon at 40km. Reports that the attack commenced at 1 a.m. suggest that MEND has developed fairly advanced offshore and nighttime navigation skills, that Nigeria’s naval presence in the region is not currently capable of protecting offshore facilities, and that all major Nigerian offshore facilities are within MEND’s reach.

Conclusion: Geopolitical Feedback Loops in Action

The recent attacks in Nigeria should be viewed as a product of geopolitical feedback loops. I’ve written previously about these feedback loops in operation in Nigeria, and will begin to reassess and update them in upcoming posts. These geopolitical feedback loops are significantly undermining Nigeria’s ability to deliver on their potential to increase oil production and exports. While it may be tempting to view these geopolitical feedback loops as separate from the geological phenomenon of Peak Oil, it is more accurate to view the geopolitical factors as a direct result of geological peaking—-but for geological factors, disruptions in Nigeria would simply cause oil exploration and production to move to other, equally fertile grounds. Instead, the geological reality that there are very few “geologically fertile grounds for increasing oil supply” forces companies to accept the high costs of doing business in Nigeria.

**Note: for those hoping for a rhizome post this week, I apologize... world events are conspiring against my efforts to write on a non-oil topic. Next week! Maybe...

Monday, June 16, 2008

Eliminating Subsidies Won't Solve the Oil Demand Problem

This week's post is an article that I wrote for The Oil Drum. Also, several new links on the side column this week. Starting next week, I hope to move away from discussing oil for a few weeks and turn to discussion of rhizome as an open source platform for developing personal and community self-sufficiency, something of a "rhizome toolkit."

Cheap gas and diesel due to government fuel subsidies has become one of the favored whipping boys of late—a convenient way to blame high oil prices on the actions of some other government or faraway people (See 1 2 3 4 5 6 7 8). But how much can subsidies really be blamed for present oil demand? Would cutting a 30% gasoline subsidy reduce demand by 30%? Why not? I’ll stake out and defend a somewhat extreme position: reducing, or even eliminating fuel subsidies will not cause a significant, long-term reduction in demand and may even cause demand to increase more quickly than with subsidies in place. More importantly, we must not fall prey to claims that cutting fuel subsidies is an easy solution to our energy problems.

A Hummer dealership in Caracas, Venezuela, where consumers pay only pennies for a gallon of gasoline as reported by the New York Times

Fuel subsidies are currently in place for nearly half the world’s population. Fuel subsidies around the world have previously been covered at The Oil Drum in Fun With Subsidies and Taxes, as well as numerous articles in the media on the topic in the past few weeks (links above). Additionally, most OECD states indirectly subsidize fuel consumption in a variety of ways. I won’t rehash this existing coverage, though I do need to point out that every article* I’ve been able to locate has argued that cutting subsidies will have a significant effect on demand, and will help to lower oil prices (*only one analyst, Benoit de Vitry of Barclay Capital, seem to agree with me). To me, this wave of media coverage of subsidies is just like the waves of media coverage past on speculators, big oil conspiracies, and the promise of oil shale: a source of false hope that a magical solution exists to our energy problems. For that reason, my intent here is to argue that the long-term effect of cutting fuel subsidies is, contrary to the reports in the media, not of much significance.

Demand Elasticity is a Marginal Matter

The first reason that cutting subsidies won't have a dramatic impact on demand is that the fuel demand elasticity of a country is the aggregate of the marginal demand elasticity of each of its consumers. For that reason, the elimination of a 30% subsidy for fuel will not result in a proportional drop in demand of 30%. For some users, price increase will completely price them out of the market, and their marginal demand will be completely eliminated. For others, either because of wealth or the value of liquid fuels to their economic activity, the elimination of the subsidy will result in no decline in consumption. The vast majority of consumers will lie somewhere in between. Therefore, right at the outset, we can say that the elimination of a 30% subsidy will not result in a 30% drop in demand. I’d love to be more precise on this point, but neither the data nor methodology currently exists to project with any confidence exactly how much demand reduction would result from the elimination of subsidies—all we can say with any certainty is that it will be smaller than the size of the subsidy eliminated.

Evaluating the Energy Intensity of the Opportunity Cost to Subsidy Expenditures

The next question—and perhaps the most important—is to evaluate the opportunity cost of a government’s expenditures on fuel subsidies. If a government does’t spend $X billion on fuel subsidies, what will it spend the money on? What is the energy intensity of that expenditure compared to the amount of demand reduced through cutting the subsidy?

Take India, for example. In India, the total cost of fuel subsidies could be as high as 2-3% of GDP. What happens to that spending if it doesn’t subsidize fuel use? There are two theories here, both of which create at least some fuel consumption that didn’t exist before. One theory is that it will be spent in a way that results in lower fuel consumption—but almost certainly not in a way that results in NO fuel consumption. The argument in favor of this position is that, because fuel subsidies distort economic calculations in favor of consuming fuel, a neutral use of the same amount of funds should result in less fuel consumption. However, there is an opposing position: because subsidies are, according to market theory, a sub-optimal allocation of resources when compared to free-market allocation, the elimination of subsidies will result in stronger economic growth (or less economic decline) than with the subsidies. This is especially true if the money saved from subsidies isn’t spent at all, but rather reduces the tax burden or lowers the rate of inflation. It remains potentially true to a lesser degree even if the money is merely spent elsewhere, since neutral spending is likely to have a less distorting effect on economic activity. Therefore, according to this theory, elimination of a fuel subsidy may actually result in greater fuel demand over the long term—and that demand may be even more inelastic because it stems from a more efficient allocation of resources. This is the argument of Benoit de Vitry of Barclay’s Capital. In the end, it may come down to this question: What’s worse (from the admittedly very skewed perspective of demand management): 100 million Indian middle class paying 40% under market for diesel with a GDP growth rate of 5%, or 200 million Indian middle class paying market for diesel with a GDP growth rate of 7%?

Cutting Subsidies Won’t Slow the “Export-Land” Effect

Finally, cutting fuel subsidies in exporting nations won’t significantly slow the grinding effect of the Export Land Model, whereby rising revenues of fuel exporting countries lead to increasing domestic consumption and declining net exports. What happens if subsidies are suddenly cut, and citizens of Venezuela or Saudi Arabia have to pay the market rate for oil? The extra money they spend on oil goes to their own government, rather than to some other nation. And that money can then be spent on other projects or programs—the opportunity cost issue noted above. However, to make the cuts in subsidies viable, they are likely to be offset by progressive spending plans that disproportionately benefit the poor. This is exactly what is currently happening in Malaysia. The result may actually increase demand: the rich, who are not the beneficiaries of these offsetting handouts, are also the least likely to reduce their demand due to price rises. The poor, who may otherwise reduce their demand, are the most directly benefited by the handouts. And, because it may be possible to prevent any demand destruction by simply handing out 1/2 or 2/3 of the money previously spent on subsidies to the poorest consumers, there is likely to be money left over to be spent elsewhere (or not taxed in the first place), which brings us right back to the previous discussion on the energy intensity of that alternative spending.

To conclude, I’m certainly not advocating the maintenance or increase of existing fuel subsidies. They are an inefficient allocation of resources, resulting in less economic activity for every barrel of oil consumed. Rather, my intent here is only to dispel the notion—increasingly popular of late—that eliminating fuel subsidies is some kind of magic bullet to derail the demand train. At best, I think the elimination of fuel subsidies will result in a minor and short-term decrease in the rate of demand growth in developing nations. It will not significantly alter the energy crisis facing humanity. Either way, the elimination of subsidies may not be politically practicable—where they have been cut there have been riots (1 2), and there are numerous movements attempting to actually increase fuel subsidies (1 2 3 4 5).

Tuesday, June 10, 2008

Recession or Reallocation?

I've been fairly outspoken on my opinion that the US is not in, and likely will not enter, a recession this year or next. I'll argue for that point again today, in light of oil at $137/barrel, but first I want to address an important issue in psychology. Other people (not me!) are susceptible to getting so invested in a belief that they begin to view new information that tends to either confirm or disprove that belief with what psychologists call "confirmation bias"--that is, they discount information that goes against their belief as either insignificant or biased, and see information supporting their belief as credible and weighty. Since, to the best of my ability to investigate, I seem to also be similarly wired as a human who evolved the ability to think rationally on top of (primate/human brain, mostly prefrontal cortex), not in substitute for, my ability to think reflexively (reptilian/fish brain), it seems that I may be susceptible to the same hard-wired tendency to engage in faulty reasoning! Fortunately, thanks to my awareness of my own limitations, I'm trying to review my opinions here with extra care to identify exactly that kind of bias. Take it for what you will--I think I'm presenting this information as objectively as I am capable, which may or may not be very objectively objective. Fortunately, I seem to have been modestly but consistently right with regards to my predictions to date (2006 2007 2008), but, again, I need to remind myself that correlation between my predictions and reality does not necessarily prove that I am anything more than a highly biased and highly lucky person :)

So, given my attempt to look at the situation without confirmation bias, how can I still think that we're not in for a near-term recession when so many economists are worried about the impact of high energy prices, when so many pundits think that the economy simply can't survive on $5 gas (or $6 gas or $10 gas)? First, I think that our current media/pundit complex is very, very biased--much more so than me (confirmation bias?). Second, I can remember strikingly similar calls that the economy would collapse at $3 gas, at $4 gas, at $60 oil, and at $80 oil (and even that $40 oil would have serious negative effects). The key to discounting these renewed calls is in following the money. What happens when we pay $5/gallon for gas? Where does the money go?

Well, as a net-importer of oil, much of that money goes overseas. Where it is spent. Generating economic activity. The portion of that money that goes to domestic oil producers stays in the US, where it is spent. Generating economic activity. This is the key: high energy prices alone do not lead to recession, but rather to reallocation. While the two may feel the same if you're one of the people who's money is being reallocated out of your pocket and into the hands of Exxon or ARAMCO, they're very different animals. Recession is an aggregate decrease in economic activity. It means less opportunity overall. Reallocation, on the other hand, is not an aggregate decrease, but rather a shifting of who gets the benefit and who gets burned. It means the same--or even greater--opportunity, but in different places and in different manner than in the past.

Therefore, this is my working theory: the US, along with the global economy, is not facing a recession, but rather a reallocation. I don't think that actual economic activity will decline until actual energy availability declines (something that might not be too far off). Until that begins to happen--when we're just facing increasing prices, but not yet declining availability--we will instead see reallocation. Take a look at this graph from the latest edition of BusinessWeek:

Overall, the US economy grew at an annual rate of 0.9% in the first quarter of 2008 (yes, you can legitimately dispute those numbers due to inflation, etc.--I certainly do--but I'm looking at the official numbers so that I can compare apples to apples). Excluding autos and housing--two areas on the losing side of economic reallocation--the economy grew at nearly 4%, which is higher than the optimist's expected long-term growth rate for the US.

What to do in the face of reallocation? Reallocation hurts the most those who are not expecting it. Expect it to continue, and to intensify. Don't follow the moronic investment advice offered over at CNN Money, but rather try to tease out where the money will be reallocated to, and put yourself in position to take advantage of those new opportunities ("get yourself to the non-discretionary side of the economy," get linked to the energy economy, the local food economy, etc.). Reduce your exposure to having costs reallocated to you (e.g. by reducing commute times or transport modes, by establishing partial food self-sufficiency, by generating your own electricity/growing your own woodlot, etc.). Reallocation is change, but it is not necessarily "bad." If you're assuming that you can keep driving your F250 to work 20 miles away at the Ford plant, reallocation will feel--quite convincingly--like a recession. But that won't make the pundits who proclaim that we're already in a recession correct. It will just mean that they, like you, have fallen prey to confirmation bias and are mistaking reallocation for recession. Well, at least that's my opinion, subject to all the standard disclaimers of human thought processes.

Monday, June 09, 2008

Crash Course

This week I'll be reviewing the book "Crash Course: Preparing for Peak Oil" by Zachary Nowak. The book has a concise introduction to the concept of Peak Oil, followed by what I see as the strength of the book: an interesting discussion on scenario planning, rounded out by an extensive guide to the skills and knowledge that will be necessary to make the best of a less-than-ideal future.

Scenario planning is something that I think is vitally important for everyone to perform on an ongoing basis. I wrote about the concept last week, but in reality it's something that we should all be doing continuously for all manner of life decisions. In "Crash Course," Nowak outlines four separate future scenarios for planning purposes (setting aside "Status Quo" and "Total Armageddon" as either too remote or pointless to plan for): The New Green Revolution (most optimistic), Powerdown USA, the Great Energy Depression, and The Crash (most pessimistic).

He then discusses the merits of planning for the future via a "refuge" or through fostering "community." He discusses the merits of these various approaches, and suggests that alternatives such as the rhizome model for communities that I've suggested may offer a viable compromise between the two. I increasingly think that the our future plans must be seen as a continuum--resilient community is the goal but cannot be just set up like a lego set; personal refuges are immediately implementable for many because they are under individual control but are not desirable long term solutions; the answer seems to lie in planting seeds of personal refuges that, from the outset, are intended to anchor the networks of sustainable community, knowledge sharing, and local solution development that will one day grow into resilient local communities. While certainly an imperfect historical parallel, I think that the monasteries of Dark Age Europe serve as a valuable example of how "refuges" can survive tough times, carry knowledge forward from past civilizations, develop newly appropriate skills and techniques, and later serve as the physical and intellectual framework for the construction of a new society. Nowak points out exactly this--that refuge and community are not mutually exclusive paths--but I would like to see this point developed in more depth. That might be asking too much, however--it's something I'd like to do, as well, but have not been able to put together satisfactory principles and rules for how it can be best accomplished. Perhaps this is because the transition plan between refuge and community is necessarily one customized to a cultural set, to a geographic area, and to an unknown future.

Nowak then discusses "the house." He goes through a variety of alternative techniques and discusses several books on the topic. Some, such as "Shelter" by Lloyd Khan are outstanding, and I second the recommendation. Others, such as Earthships, are not among my favorites (I think the Earthship design places too much emphasis on aesthetic homogeneity, and does a poor job balancing insulation and thermal mass for all but a few climactic zones--a proper mix of insulation (e.g straw bale) and thermal mass inside the insulating barrier (e.g. adobe, cob, etc.) seems like a better rule of thumb). Nowak also covers rainwater harvesting and greywater (I like his recommendations) and discusses passive annual heat storage concepts that I think are critical (though I prefer Don Steven's take to the recommendation Nowak provides, and I'm currently working to adapt these same principles to create a passive annual solar COOLING system...). I've also heard of the rocket stoves that Nowak discusses for home heating, but his recommendation made me finally purchase Ianto Evans' book on the topic. I also appreciate that Nowak points out that the "back to the land" movement of the '60s and '70s did not fail, per se, but rather helped to perpetuate knowledge of old sustainability techniques and develop new ones so they will be available when the current generation actually NEEDS them (I'd say one cause for the failure of the prior movement was it wasn't immediately necessary, in the minds of many, and lost out to the allure of moving back to the suburbs and living during the last decades of the economic "good life" in America).

Next, Nowak discusses food production and storage. Nowak points out--rightly I think--that 1) it isn't that easy to garden, and 2) that even if you're a great gardener and have a large garden, it's not always possible to count on only your own garden to meet all your food requirements due to drought, pestilence, etc. One solution to this is to diversify beyond mere raised bed gardening into perennials vegetables and forest gardens (I heartily concur with his recommendation to read Eric Toensmeir's "Perennial Vegetables" as well as David Jacke and Toensmeier's "Edible Forest Gardens."). I've discussed this very topic in "Creating Resiliency in Horticulture." I like that Nowak discusses the need to augment the yields of a garden with wild harvest from surrounding fields, woods, etc. I think this is a critical component of any resilient scheme--both skills and the access to suitable environments to ensure that when garden yields fail, natural yields pick up the slack. This is an integral part of my own planning--the need to acquire land not only sufficient to grow an intensive garden and less intensive forest garden, but sufficient to create a natural buffer (lightly "guided" with planing, rainwater harvesting earthworks, etc.) that will serve as a back up. In fact, my choice of location is largely driven by the ready availability of forageable foods--especially those that are consistent in times of drought and not readily recognized as food by most people (for me, mesquite trees). Nowak also deals with the essential skill of preserving foods--no matter how well planned and successful one's garden harvest, it's unlikely that the right food will always be available for the picking!

If I could point to one weakness in Nowak's book, it is that the book consists largely of a series of book reviews. That is also one of its greatest strengths. Any book that proclaims to provide all the knowledge that you'll need to deal effectively with Peak Oil should be dismissed as bunk at the outset. Instead, what most people (myself included) really need is a pathway to gain the knowledge necessary to succeed in a variety of future scenarios--both topical knowledge AND the analytical framework for future scenario planning to apply that knowledge. In that respect, "Crash Course: Preparing for Peak Oil" excels. "Crash Course" is like a knowledge map, outlining a concise path through the myriad of useless, incorrect, or irrelevant books, and taking you directly to those books that really should be on your shelf. I highly recommend the book for those interested in learning how to better prepare self and family for whatever future scenario you envision.

Monday, June 02, 2008

Is the Falling Dollar behind Oil Price Rises?

It's difficult to turn on CNBC, read any newspaper article on oil prices, or listen to other discussions of the topic of oil prices without hearing this theory: really, it's the decline in the dollar that's responsible for the rise in oil prices. "They" advance two reasons for this: first, dollar-denominated oil traded on the NYMEX must go up equal to the amount that the dollar goes down, or it's actually losing value. Second, the belief that the dollar is losing its footing as the world's reserve currency is causing a flight from dollars to commodities and other hedges against a falling dollar. Lots of words, but very little data is usually provided to back this up. I decided to put together a little graph that cuts right to the heart of the matter:

Figure 1: US Dollar Index (Bottom) and NYMEX Crude Oil (Top) contracts concurrent price charts

So, let's look at two periods: before about March 10, 2008, and after about March 10, 2008.

Before March 10, 2008, there was a general (though not very convincing) correlation between dollar movement and oil price movement. We need to remember that correlation does not necessarily equal causation here, even if there are rational explanations for a potential causal mechanism. This correlation extends back into 2007 (not shown--chart begins about Jan. 1st, 2008).

After March 10, 2008, there is not a correlation between dollar movement and oil price movement. The dollar has remained relatively steady and constrained within a relatively narrow trading channel. During this same time period the price of oil experienced one of the most dramatic increases in history.

Problem: How can we infer causation from the rough correlation from 2007 to March 10th, 2008 between dollar decline and oil increase if the two data sets become uncorrelated between March 10th and the present? There are possible answers to this question--possibly because there's a lag time between dollar decline and the move to oil and other commodities, possibly because there was some new countermanding force propping up the dollar since March 10th, or something else entirely. The point isn't that there's no explanation for this--the point is that the break in correlation itself defeats any rational use of correlation as the sole basis for asserting causality. At a minimum, we'd need to perform a three-factor analysis here and see if, then, we can derive a continuing correlation--say between an identifiable fed action data set, the dollar index, and crude oil. To my knowledge, no one in the media who has been bandying about the dollar-oil theory has done that. That seriously undercuts the argument that oil price rises are due to dollar decline, in whole or in part. As with any scientific experiment to determine causality, the non-correlation between March 10th and the present must be explained or the entire dollar-oil theory falls apart. I realize that it might be beyond the attention span/sound-bite requirement for most media to discuss this, but it certainly could be addressed in a newspaper or magazine article. I have seen neither. I'll keep thinking about it, but if there are any theories that people would like put to the test, please comment!

Future Scenarios

Two points for discussion tonight: David Holmgren's new Future Scenarios site and the recent Economist coverage of Peak Oil.

First, Adam Grubb of tipped me off to the launch of David Holmgren's new site, Holmgren, co-founder of the permaculture concept and still a critical proponent working to advance that field, has done an excellent job of placing the permaculture analytical framework and toolkit into the world of peak oil scenario planning. The site is still in its infancy, but is well laid out and does an excellent job of framing both peak oil and climate change in a "how can permaculture affect these problems" sense.

I think that the notion of scenario planning is a truly critical area of inquiry. This stems from the fundamental proposition that we don't know what the future will hold. I think that, with careful inquiry and investigation, we can gain a good feeling for future probabilities, but anyone who tells you that "the future WILL contain X" is most likely acting largely on faith, not reason. The closest that we can come to a "truth" is that we don't know what the future holds, but that we may be able to discern probabilities for different scenarios. In light of this probability, we must plan our course of action in light of 1) our goals and 2) the solution space of possible future scenarios.

I don't want to get bogged down in a discussion of goals, beyond the notion that it seems that we tend to get stuck on derivative goals (like increasing GDP or decreasing poverty) when these are in fact just means to achieving our actual goals--call them happiness, stability, fulfillment, etc. It's my opinion that we'd be best served by building our goals around our genetically determined requirements--in other words, to reach for fulfilled ontogeny. Once we've carefully identified our actual goals--not mere intermediary means to achieve those goals--then we can begin to approach how to achieve these goals in an unknown but probably probabilistically determinable future environment.

So what is that future solution space? Let's frame it, for the purpose of this analysis, along only one axis--future energy availability. Let's call one end of the axis "catastrophic energy cliff due to peak oil and other primary energy sources with no substantial mitigation" and the other end of the axis "unrestrained and continuing growth in energy consumption due to new reserve discoveries or the development of adequate substitutes." Or, if those labels are too lengthy, "doomer" and "cornucopian." I contend that anyone who says we "know" which way the future will go is taking an irrational, faith-based approach. Therefore, I argue that the only rational approach is to say that both scenarios (and all points in between) are possible. We can still, of course, argue about the probabilities of the various scenarios coming to pass. I think that both extreme scenarios are sufficiently possible that we must seriously plan for them, but I think that something in the general direction of the "doomer" scenario is significantly more likely over the medium to long term. This is an area that fundamentally demands individual determination, but assuming that you accept my evaluation, what is to be done about it? This is where scenario planning comes in, and it's a topic that I've discussed in the past in future planning: hedging the solution space. The basic notion--especially where it differs from conventional wisdom on planning for the future--is to evaluate options based on their composite ability to succeed in any possible future. That is, don't just pick what you think the most likely future scenario is and plan for that alone, but rather plan a solution that addresses all possible future scenarios simultaneously, prioritizing in order of probability. In particular, I think that today's conventional wisdom focuses entirely too much on how to hedge within what conventional wisdom considers to be very probable future scenarios (though I dispute their assumptions) without placing any concern on the ability of these plans to deal with outlying scenarios (such as Peak Oil, which I actually see as "probable," but which hasn't yet been fully accepted by the mainstream--more on this below).

I think that scenario planning, such as the more limited solution space proposed by Holmgren in, is a very important start in this direction. One point that Holmgren does an excellent job of addressing is the need to address this solution space on different levels. IF we could count on our national and global means of governance addressing our problems, then that could potentially be the best way to deal with the problems facing humanity. However, because human organization at that level seems unlikely to actually address our problems in any serious way due to temporary political demands and our inability to deal effectively with inherent uncertainty, it is important that Holmgren points out how it is also possible for communities and individuals to address our path into the future solution space. I take this even further--it is my opinion that we must begin to address the future solution space at the individual level, and that only once we have established a foundation of individual, resilient self-sufficiency in light of future uncertainty can we begin to build a community and then a global solution to our problems. This is because any attempt to solve problems without first addressing security at the individual level seems to leave humanity open to the lure of populist but illusory programs. Much more about this notion in The Problem of Growth.


I'd also like to briefly address the coverage of Peak Oil in the latest edition of The Economist. The Economist asks whether current high oil prices are caused by speculators or peak oil, and concludes that the answer is "neither." Addressing speculators, The Economist concludes rightly that the theory is "plain wrong." They provide an excellent and concise explanation of why, as I've explained here previously (essentially, that oil is a deliverable commodity and prices must ultimately be set by the consumer's willingness to pay a given amount). Next, they claim that "[t]here is little evidence to support the doctrine of "peak oil" in its extreme form." This, in itself, is an important qualification from previous statements by The Economist (and most others in the mainstream) that "peak oil" is flatly wrong. Instead, they only discount the "extreme form" of the theory (conveniently, without ever defining what differentiates "extreme" peak oil from "conventional" peak oil). Of course, they then proceed to offer up two completely unfounded arguments in support of their already unclear position. First, they claim that supply should rise in the near future due to current high prices (which is much different than showing significant extant increases), and second, they discount the "above ground" factors of increasing cost of production and resource nationalism as somehow divorced from peak oil, something that I've repeatedly (and I think convincingly) linked as a direct result of peak oil. I would like to see a more rigorous analysis from The Economist, but I guess this is what I should expect from a paper with such an ideological ax to grind. That said, I still enjoy reading The Economist because at least their ideological spin is so transparent that it is always easy to adjust for.