Monday, September 29, 2008
I think that this concept of “Energy Geopolitics” is extremely broad and complex. As a result, it’s necessary to take a systems-thinking approach, addressing the issues of complexity and feedback loops head-on. My goal here is, in only 10 slides, to start with the sources of geopolitical conflict and tie them up into a coherent model of a system of geopolitical disruption to energy and resource supplies.
1. The first source of conflict is the result of simple economic processes. Here, rational extraction sets the stage for increasing geopolitical problems. It’s well understood that we pursue the geologically “easy oil” first, and are now left with the more geologically and net-energy challenging oil reserves. This same process also operates in the realm of geopolitics. Just as we exploited the geologically easy oil first, we also exploited the geopolitically easy oil first. Now, what is left is increasingly geopolitically challenging.
So, geologically, we exploit the East Texas field before we go to Tupi or the Arctic. By the same process, but applied to geopolitics, we go to Pennsylvania before we go to Nigeria.
While such simple and linear explanations are useful, we need to move beyond exclusively linear models and recognize that geopolitics form complex, non-linear systems. So, BOTH of the following are true (and they aren’t the same thing): 1) oil is increasingly in geopolitical trouble spots, and 2) there is increasingly geopolitical trouble where there is oil.
2. The character of our energy demand also exacerbates geopolitical problems. As we pass peak oil, reduction in oil consumption will increase the inelasticity of remaining demand as we choose to cut the most elastic demand first. This tightens the system: all actors will take increasingly extreme measures to ensure supplies to meet their increasingly inelastic demand.
3. There are a number of catalysts to geopolitical conflict. First, there is the division between State and Nation. Where, especially in post-colonial and globally networked environments, the demands of the Nation and the desires of the State don’t line up, there is conflict. Likewise, there is conflict where there is disparity between the demands of State and Non-State groups such as religious sects, or ideological or affinity groups. There is also conflict between the “Legal” owners of a resource and those who claim “Moral” ownership. Consider, for example, an Ijaw villager in the Niger Delta region. He sees that his land, and the land that his people have occupied as long as anyone can remember, is now being exploited by a foreign oil company. He feels that he has moral ownership to this land and this oil. He isn’t concerned that, because the British amalgamated 250+ distinct ethnic groups into the colonial construct of the Nigerian state over 100 years ago, there is a legal structure in place that gives ownership to a distant government that is then leased to an IOC. Instead, this disparity between moral and legal ownership drives conflict.
All of these sources of conflict fall under the general heading of “Mutually Exclusive Overlap.” When the minimum demands of groups A and B can’t be simultaneously met, this situation perpetuates conflict, causes sides to dig in, escalate the conflict, and choose to use violent means to forcibly meet their minimum demands. We certainly see this today in regions such as Iraq and Nigeria.
4. Additionally, in a world of dwindling resource supply, actors must make tough choices: do they accept reduced supply or fight to maintain current levels of consumption? Generally, actors will seek to secure their slice of a shrinking pie.
This creates a resource insecurity issue, and harkens back to the old (but increasingly new again) economic philosophy of Mercantilism. These mercantilist tendencies manifest in a number of ways. One is pipeline mercantilism. There is this tendency to accept without qualification the assertion that oil and natural gas are globally fungible commodities, but in reality there is a certain element of fixedness of resource flows introduced by the sunk cost in energy infrastructure. Actors seek to ensure that this infrastructure, these pipelines, direct resource flows toward their markets. Another mechanism of mercantilism is the long-term, bi-lateral supply contract coupled with aid deals. This is a favorite of China and India of late. And finally, if these fail, there is always military adventurism. This is something that we already see in the headlines: Iraq and the Georgian conflict just to cite two obvious examples. However, this has the potential to spread to many more areas: the Spratly Islands, Ethiopia’s Ogaden province, North Africa (with increasing Russian influence), and the dark horse, the Arctic.
5. In a sense, the Nation-State conflict and the mercantilism/resource insecurity issues both become issues of a changing military landscape: a shift in power relationships and a democratization of the state’s traditional monopoly of the use of violence (at least in theory). This evolution in military tactics is exacerbating the geopolitical threat to energy supplies (spreading understanding of targeting methodology that leads to selecting energy infrastructure targets as critical nodes capable of inducing cascading failures, recognition of the increasing ROI of energy targets as energy becomes increasingly scarce, network-innovation advantage held by decentralized adversaries, innovations in modern “swarming” and “guerilla” tactics, etc.).
So, simultaneously you have a situation where disenfranchised groups of all stripes have an improved ability to challenge established power structures militarily AND a situation where the increasingly preferred and effective means of doing so is to directly disrupt energy supplies.
These tactical developments certainly aren’t new—the graphic above shows a swarming span style="font-size:100%;">situation encountered by Alexander the Great over two millennia ago, but it is resurgent.These military developments really close the circle, taking discrete causes of geopolitical tensions and wrapping them up into a system of geopolitical feedback loops disrupting resource supply.
6. All of these developments act as positive feedback loops (they are driven by the scarcity and value of energy, and by taking energy supplies off the market they increase that scarcity). These phenomena form a system of positive feedback loops—a system that will only grow more intense as we pass peak oil and peak energy.
7. So here’s the dramatic graphic. The right side of civilization’s oil supply curve will not look like the left. Peak oil is dramatic enough in suggesting that the right side might look as bad as the left, but my argument is that geopolitics will actually make it look significantly worse.
Is this an over-dramatization? My answer: IF peak oil is a problem, then geopolitical feedback loops will make it worse. If we find a suitable energy substitute to continue fueling global economic and population growth indefinitely, then neither peak oil nor geopolitical feedback loops will pose a real challenge to humanity. The danger presented by geopolitical feedback loops is that, while we may understand the geological and economic nature of peak oil, we may persist in underestimating the problem if we fail to understand that geopolitics are not a separable set of phenomena, but rather are the inextricable result of geologically-driven scarcity.
So where are we now on this graph? As we’re all well aware, there is legitimate debate about the exact timing of peak oil. There’s debate about not just the timing but also the very existence of peak energy. But geopolitical feedback loops aren’t driven by the date of peak. Rather, they’re driven by the transition point from accelerating supply growth to decelerating supply growth, and there can be little doubt that we’ve passed that point.
What about the sharp cliff at the end of the geopolitical curve? Shouldn’t geopolitically determined supply mirror the gradual tail-off of the classic peak oil production curve? Not necessarily. While we’ll never run out of oil, it is certainly possible that we run out of the necessary geopolitically-permissible environment and level of economic complexity necessary to produce, export, or import oil in any substantial quantity.
8. I think it’s tempting to think of these phenomena as a bunch of conceptually and geographically separable problems. However, my argument is that this is a global feedback system (conflict in Nigeria increases scarcity which, in turn, drives energy targeting choices in Mexico, which further invigorates the conflict in Nigeria). As long as there is increasing global scarcity, there will be increasing catalyst for localized geopolitical problems even in regions that have not yet peaked.
This is a critical concept because events in regions that are clearly out of control—like Nigeria—are substantially impacting the geopolitical environment in formerly very stable areas like Scotland and Canada. Just a few years ago that might draw laughs, and I’m certainly not suggesting that we’ll soon see hoards of Picts and Scots wielding bucklers and swords advancing on York. But what I think is not questionable is that increased scarcity due to events in Nigeria are exacerbating the very real tensions around resource nationalism that already exist in places like Scotland.
9. There’s also a temptation to think of geopolitical troubles as a group of discrete, “solvable” problems that just need a good does of “good governance” or a bit more “democracy.” This may be true, to a degree, in an environment of decreasing scarcity, but in an environment of increasing scarcity of energy and resources it is not.
Instead, attempts to solve one geopolitical symptom often leads to an alternative negative outcomes. Nigeria’s corruption and failure to distribute oil wealth effectively to its people inflames existing conflicts between state and ethnic groups. However, it also keeps Nigeria’s people in abject poverty. If we “solve” the problem of Nigerian governance and properly distribute oil revenues to the people, we may close the door on one problem (ethnic insurgency) and open the door to another (rising domestic consumption). If the objective is good governance and supporting human rights, then the choice is clear. If the objective is to alleviate global energy woes, both outcomes make the situation worse.
10. “Solving” the geopolitical threat to energy requires far more radical restructuring than many assume. A global economy predicated on the notion of perpetual growth is fundamentally incompatible with reliance on a scarce and dwindling resource. Radical decentralization of energy sources, transition to truly renewable energy sources, reliance on vernacular modes and levels of consumption, and moving away from growth-generating hierarchal structures MAY be able to truly solve the problem. However, this “solution” would require such a radical restructuring of human affairs that it is highly unrealistic as a proactive choice. Individuals, communities, even regions may be able to pursue such a radical agenda to insulate themselves from the grinding effects of these geopolitical feedback loops but, in my opinion, the most pragmatic approach to these geopolitical phenomena is to treat them much like we treat geology: an immutable force of nature.
Regardless of whether you think that the problem of geopolitics can be “solved” or not, here is the key take-away:
Our energy future is not controlled solely by the comparatively straight-forward issues of geology, economics, and technology, but also by the much less concrete limiting factor of geopolitics. Oil supply under geopolitical reality will always be less than what is geologically, economically, and technologically possible. How much less? I don’t know—but I think it will be a significant and ever increasing difference. If you aren’t planning for this kind of uncertainty beyond the issues presented by economics and geology, then you aren’t prepared.
Saturday, September 20, 2008
Monday, September 15, 2008
GFL1: "Nation"/State Conflict
Explanation: Who owns the oil, the state or its constituent nation(s)? Throughout the 20th Century, the international order was defined by the Nation-State system that developed out of the Peace of Westphalia. As Philip Bobbitt explained in his seminal work, The Shield of Achilles, the constitutional basis of the modern Nation-State is that the State provides for its constituent Nation. For this system to work, there must be close overlap between the State and the Nation.
This, of course, has always been a fiction to some degree as States have generally cobbled together numerous national and affinity groups with less than total exclusivity and attempted to mold a "national character" out of them that is contiguous with the boundaries of the State. Today, for a variety of reasons, this order is rapidly falling apart. As a result, nations and states are increasingly in conflict over self-determination and, critically, resource control.
When a Nation (or any other non-state group such as a religion, issue group, or affinity group--I am using the broad term "Nation" here only for simplicity) has a dispute with a controlling state over control or use of a resource such as oil, gas, etc., the importance and motivation to escalate to violence in pursuit of resource control is, at least partially, a function of the value of the resource in dispute. Because these conflicts have the tendency to increase the scarcity, and therefore value, of the resource, this type of conflict forms a positive feedback loop. In addition to this positive feedback nature, this process also expands in scope as it intensifies: resource ownership that was minimally relevant a few decades ago (e.g the Arctic, or Canada's tar sands) is now becoming an important source of conflict (this tendency towards scope-expansion also runs though many of the feedback loops identified below).
In the interest of brevity, for a more in-depth look at the fundamentals behind this feedback loop see my paper The New Map. I list this feedback loop first because I think it may be the least understood, and has the potential to mushroom into one of the largest sources of supply disruption within a decade or two. It serves as the foundation of the concept of resource ownership disputes illustrated in the headline graphic. As with all the opposing pairs illustrated above, when the two overlap perfectly (e.g. "nation" and "state" or "legal owner" and "moral owner") there is no problem, but as these opposing notions begin to diverge the foundation for sustained conflict is created.
Examples (Oil & Gas): Nigeria (Ijaw/Igbo/etc.), Iraq (Kurd, Shia, Sunni), Canada (First Nations), Iran (Awhaz, Baloch), Angola (Cabinda), Mexico (Zapatistas/EPR), Saudi Arabia (Islamists), Yemen (al-Qa'ida, tribes), Sudan/Chad (SLA, Darfur), Ethiopia (Ogaden), UK (Scotland). Other resources: Morocco (Sahrawi Rebels - Rock Phosphate), Indonesia (Iriyan Jaya - various metals), Democratic Republic of Congo (LRA - diamonds & other minerals), Israel/Palestine (aquifers & surface water), American West (surface water compacts).
GFL2: Production Conservation
Explanation: Who has moral ownership of oil and other resources, today's population, or posterity? Among oil exporting countries, the realization that oil supplies (and quite possibly overall energy supplies) will soon peak and begin to decline forces them to weigh maximizing production (and, generally, also revenue) today against maximizing revenue over the long term by consciously producing at less than maximum capacity. There are numerous political, economic, and social considerations involved here, but in general this is a positive feedback loop because reducing production now increases scarcity and price today, which in turn increases revenue from the remaining production and makes it more politically viable today for the same nation, and other nations, to reduce production today in order to maximize long-term revenue. If Saudi Arabia can make $800 million exporting 8 million barrels of $100 oil per day, and a billion dollars exporting 7 million barrels of $150 oil each day, it isn't a very difficult political choice to both make more money now AND save more oil for future generations.
GFL3: The "New Mercantilism"
Explanation: Before the era of globalization and "free trade," the dominant global economic paradigm was mercantilism--the belief that the size of the global wealth pie was effectively fixed, and the only way to increase one's share was to take some away from someone else. In an environment where it is increasingly clear that production of energy and many other resources are severely constrained, mercantilism is making a comeback. Under a mercantilist paradigm, if China decides that it needs 10 million barrels of oil per day to improve the standard of living of its population, it needs to take the additional 2.5 million barrels per day from someone else. This is done by developing long term relationships with exporting countries facilitating long-term bilateral supply contracts, by fixing infrastructure (such as pipelines) to deliver oil to one consumer over another, etc. Mercantilism raises this question: if "my" share is to grow, whose share will I take?
Mercantilism becomes a positive feedback loop for at least two reasons: first, because one country engaging in mercantilist practices pressures others to follow suit to protect their share of the pie or lose out; second, because mercantilism is a less optimal allocation of energy resources than market allocation, effectively removing oil from the open export marketplace, thereby increasing the price on that market and further pressuring countries (and firms, and individuals) to resort to mercantilism to lock in their share of the energy pie. Additionally, as the energy pie shrinks, these forces will increasingly intensify.
Explanation: Does the "legal" ownership of the rich few or the self-defined "moral" ownership of the impovershed masses (or justification as such by greedy criminals) control? High oil prices increases the incentive to bunker oil, to extort oil producers, and to otherwise leverage violence or the threat of violence against oil producers for personal gain. This forms a positive feedback loop for two reasons. First, privateering physically shuts in some oil production, as it may take an example attack to demonstrate capability, and kidnappings often remove critical personnel from a project resulting in delays or production shut downs. Second, whether producers pay off privateers or pay security to protect themselves from privateers, privateers impose a significant cost on production operations. In both cases the result is greater scarcity and higher prices, both of which create more motivation for new or expanded privateering operations.
Example: Nigeria seems to be the only clear cut example of the privateering feedback loop currently in place with regard to oil. Arguably it is also in place in Colombia and possibly Ecuador where the militas that attack oil infrastructure are often as motivated by profit and extortion as they are by ideology. Privateering is also commonplace in the broader resources sector (e.g. organized copper theft rings).
GFL5: Resource Insecurity Driving Military Adventurism
Explanation: Why is the oil we "need" under their sand? As the price of energy and resources increase, many nations realize that their dependence on once cheap imports is a strategic Achilles heel. As this problem grows worse, they are increasingly willing to embark on military adventurism to secure their energy and resource needs. This can manifest itself in strategic partnerships where importing nations sell arms to energy exporters, or it can go to the extreme of invading a resource rich country to improve future control of resource flows. Either way, these actions increase resource insecurity, may increase scarcity (such as the lengthy drop in production following the US invasion of Iraq), and form a positive feedback loop as they increase the motivation for other resource-insecure countries to take drastic steps to improve their own strategic situation.
GFL6: Corrupt Governance
Explanation: If someone else can get rich of this oil, why not me? High oil and resource prices increase the incentive for everything from low-level graft and corruption to a military coup with the intent of expropriating as much personal wealth as possible from the country's resources. Corruption and rotating dictatorships reduce oil production for several reasons: they present a less efficient and more costly business environment, they undermine property rights protections that often facilitate resource production, and they are likely to spawn armed conflicts, civil wars, etc. that are likely to destroy infrastructure or shut in production capacity. This, in turn, increases the scarcity and value of the oil in dispute and forms a positive feedback loop.
GFL7: Targeting by ROI
Explanation: I've listed this feedback loop second to last as it doesn't really fit within the "ownership dispute" framework of the above feedback loops. Scarce energy, and more expensive energy, increase the return on investment for an attack on energy infrastructure. An attack that effectively shuts in 100,000 barrels of oil per day has roughly double the financial impact when oil costs $100/barrel compared to when oil costs $50/barrel. Therefore, when targets are being selected (whether by state actors such as Russia targeting the Georgian port of Poti or rebels in Mexico, etc.), higher energy costs make energy targets more rewarding, and more likely to be selected. When energy infrastructure is successfully attacked, it increases the scarcity of oil, increases the price of oil, and makes this a positive feedback loop by further increasing the attractiveness of energy infrastructure targets.
GFL8: Export Land Model (ELM)
Explanation: Rising oil prices increase revenues for oil exporting countries. These rising revenues generally drive consumption in exporting countries (e.g. more wealth means more people can drive larger cars, more food security means rising populations, etc.), which in turn reduces exports. In some circumstances (generally where the exporter is a major player such as Saudi Arabia or Russia) declining exports may increase price enough to keep net export revenues rising--in these situations this forms a positive feedback loop. In other cases, where rising consumption results in lower overall export revenues, a negative feedback loop is created. Westexas, Khebab, and others have already done outstanding work on this topic--I have included this feedback loop at the end of this list not because it is least important (it is probably most important, at least in the near term), but because it has been most exhaustively covered previously.
Example: Real world examples of ELM in action include Indonesia, Egypt, Malaysia, and Mexico. In the near future, its impact in major exporting states like Saudi Arabia and Russia may be most significant. Here is a graphic of this process in action in Indonesia:
The EIA estimates that, as of April 2007, Nigeria had 587,000 barrles per day of production shut in by violence--primarily the Nation/State, Priavateering, Corruption, and Targeting/ROI feedback loops. However, the EIA also estimates that Nigeria has 3.2 million barrels per day of production capacity. A single attack has shut in as much as 345,000 barrels per day for a brief period, and the amount shut in at any given time is highly variable. Recently, Nigerian production has been hovering just below 2 million barrels per day, and has even dropped briefly below 1 million barrels per day, suggesting the actual shut-in figure is far higher.
In Iraq, oil production is just now nearing pre-war production levels of 2.6+ mbpd. While some officials claim Iraq could surpass 3 mbpd in 2008, critical political compromises splitting resource ownership between the federal governments and Iraq's three main ethnic/sectarian groups have not been reached. The oil shut in since the invasion (and the oil that future violence may shut in) can be attributed to various feedback loops: military adventurism driven by resource insecurity, nation/state violence, corruption, and targeting/ROI.
Here, I've listed the examples that I can think of for each feedback loop. If readers have additions, changes, etc., please add these in the comments. The links are not intended to be definitive sources of information about each feedback loop in action, but rather a jumping-off point for research and discussion.
The next and final post in this series will discuss the interrelationships between these feedback loops and prospects for solving, or at least mitigating, their impact.
Monday, September 08, 2008
Here's an example of the tendency to centralize control structures into a hierarchal mode of organization, from my post on Rhizome & Central Place Theory.
Here's an alternate mode of organization--a networked "grid," "lattice," or "peer-to-peer" structure of small, minimally self-sufficient villages, or "rhizome" as proposed in my article The Hamlet Economy.
The Xingu settlement structure seems to consicously model itself in the latter pattern. Heckenberger even notes that each village was surrounded by a buffer zone of "managed parkland," exactly the kind of fall-back, resiliency-enhancing production zone that I recommended for rhizome. Here's a link to a satellite image of one section fo Xingu settlement.
Did this Xingu civilization really develop a dense, ecologically sustainable civilization without hierarchal structure? Or did they simply find a new way to impose hierarchy without developing the signatures of "central places"? Was this a conscious reaction to prior abuses of hierarchy, or simply an expedient to survival in the dense forrests and poor agricultural soils of the Amazon? We don't know the answers to these questions at this time, but the research of Heckenberger and his colleagues suggests that there is still a great deal for us to learn from the past about how we can best live in the future...
Monday, September 01, 2008
The prey-predator dynamic has been mentioned in the context of peak oil occasionally on The Oil Drum (1 and 2), but usually in the context of human population and carrying capacity. Both oil price and demand destruction can be modeled, at least in theory, as a predator-prey system. Here, I would like to look specifically at the relationship between demand destruction, marginal production, and price through the predator-prey lens.
Classic predator-prey system
The simplest predator-prey dynamic is described by the Lotka-Volterra system of differential equations. The exact values obtained by this system of equations is predicated on several assumptions--such as exponential growth of a prey population when a predator is absent and that predators can consume infinite quantities of prey. I don't propose that these assumptions apply to oil, nor that the Lotka-Volterra equations can accurately predict either oil price or production. Instead, I propose that the relationship dynamic is analogous between the general predator-prey model and the behavior of oil price, demand destruction, marginal production, and energy policy choices.
Seeing Oil as a Predator-Prey System
When oil price rises, there is an increasing incentive to 1) reduce elastic demand, 2) produce more oil, and 3) make public policy choices that mitigate the impact of high oil prices (or at least use it as a lever to pander to a voting population or enrich oneself). Likewise, to the extent that each of these three results bears out, it exerts downward pressure on oil price due to relatively greater production and relatively lower demand. Lower prices, in turn, remove the incentive to reduce demand and to produce more oil--especially where the lower price impacts the economic viability of marginal production.
Since there is an uncertain lag time between rising prices and reducing demand/increasing marginal production, it seems likely to me that the sequential corrections in price and demand/production will overshoot and create oscillations similar to the Lotka-Volterra predator prey model. This may not be the case if oil production potential and cost was a constant (as well as human population, economic growth, etc.), but the uncertainty created by a background environment of peak oil will make it very difficult for these oscillations to eventually settle at an equilibrium.
To some extent, we are seeing exactly this effect in America today. As prices rose steadily from $110/barrel to $147/barrel in early Summer, national attention zeroed in on "America's Oil Crisis," as a perpetual counter on CNBC labeled it. The stage for much of today's Presidential contest was set during this period. As oil prices dropped, and CNBC's "Oil Crisis" ticker unceremoniously disappeared, I've actually heard more than one person comment that "I guess I don't have to sell the SUV." While the macroeconomic situation adds a complicating wrinkle to the simplified predator-prey chart above, we may have already entered the phase where ramped up production plans are being scrapped, efficiency measures postponed, and political will to enact bold energy policy measures fade.
Figure 2: The predator-prey oscillations of price increases and demand destruction/production increases superimposed on top of a geological depletion scenario--note how the volatility fo the predator-prey dynamic works to conceal the underlying geological and geopolitical trends.
At the end of the day, this is a very crude model. It is not intended to predict actual price or production, but rather to illustrate how production and price may interact similarly to predator and prey populations in an ecosystem. The importance of this analogy is that it may help us to avoid certain policy mistakes (or at least be aware of them). When the oscillations of price and demand/production are superimposed on top of geological depletion and geopolitical feedback loops, the resulting volatility effectively masks the underlying fundamentals (see Figure 2, above). This presents several problems, each of which may be more avoidable if the medium-term fluctuations in price, production, and demand are seen as oscillations on top of a very worrying underlying trend of peak oil.
At the risk of invoking the problematic "awareness" issue, the problem of peak oil cannot be effectively mitigated through political or economic choices until it is understood. (how effective this mitigation can be, even if the problem is fully understood, is debatable, but at least some mitigation is possible.) Awareness of the underlying problem, in turn, is being masked by the oscillations of the price/demand/production "predator-prey" dynamic. If individual consumers realize that price drops (at least relative to purchasing power) are temporary in an environment of geological depletion, and if policy makers learn to effectively communicate this point, then we will be positioned to best mitigate the effects of peak oil on a personal, regional, and global scale.
If, on the other hand, we do not see through the fog of these predator-prey oscillations, then we may miss our best opportunity to adapt to the long-term energy reality. Technophiles may be right--efficiency gains and high-tech substitutes may allow us to continue "business as usual" indefinitely. While I don't share their optimism, my overriding concern is that the lure of their sales pitch--especially in an environment like today's where prices are dropping and production is (arguably) rising--will convince us not to make the difficult choices about changing "business as usual" now and force us to make much more difficult choices later.