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Friday, February 24, 2006

Of Motorways and Mayan Temples

What do motorway bypasses and Mayan temples have in common? Both are the manifestations of a highly developed culture, but they are also a symbol of the inherent weakness of two very different societies.

The city states of the Maya people flourished in central America between 250 AD and 900 AD. They were not the first nor were they the last civilisation to rise and fall in the region, but they have left us some of the most elaborate and puzzling ruins.

From the moment the first Europeans set eyes on the huge pyramidal temples deep in the jungles of Mexico and Guatemala mystery has surrounded the decline of Maya society. But, over the years, archaeologists, historians and other academics have slowly pieced together the factors that led to entire cities being abandoned to the forces of nature.

Mayan cities centralised power on vast temple complexes that kept subjects in their thrall with elaborate and grisly rituals. The land surrounding these temple cities was cleared of the jungle and intensively cultivated. Trade between cities took place and at the height of their power the Mayan cities supported population densities comparable to any other part of the globe at the time.

But the removal of jungle from the land removed the key input of fertility to the soil. As time went on the area of land under cultivation increased and the control of the temples and kings continued to grow.

In years when the region was affected by drought, the land, already precariously depleted of nutrients, would support only fractions of the crops needed to feed the population. Before long even in normal years the yield of agriculture was barely adequate to support the populations. And yet temples were still being built. It seems as though as the countryside became depopulated the temple centres became suicidally powerful, insisting that only more bloodletting would placate the gods. And so sometimes in the space of only three generations many of the Mayan cities had gone from the apex of their power to being completely abandoned.

The crumbling temples are a lasting reminder of the inadequacies of the Mayan response to their deteriorating environment. It is questionable whether there was any way that they could at the time avoid the limitations placed on them by nature, but the effort expended on temple construction would almost certainly have been better employed elsewhere.

And the same goes for motorway bypasses. Here in New Zealand, just as in much of the western world, the amount of traffic on our roads continues to increase every year. People now find that it is increasingly difficult to live in western society without a car. Everything from going to work to taking the kids to sports on the weekend relies ever more on the use of cars. Cities now often sport rings of ex-urbs, like necklaces of pearls, which are almost totally reliant on cars to function.

So what we need of course is more roads – more and bigger roads. More big roads virtually everywhere. And the roads we have need to be improved and maintained. And of course we are going to have to pay for all of this somehow.

The problem now is that the cost of roading projects has increased in recent years with the cost of fuel rising. Arguments rage over how we are going to pay for all of these projects, and which ones are going to get priority.

Behind all of this angst and recrimination is a completely unexamined assumption: the number of cars on the road will continue to increase indefinitely. The alternative is so challenging to capitalist economies that it is literally never discussed. Studies and strategy documents are not produced discussing how we should plan our road spending based on an expected decrease in the use of private motor vehicles.

With the advent of peak oil the situation for private motor vehicles in their current incarnation is extremely insecure. As liquid fuels become less readily available cars are going to be the frontline of a battle to reform our energy use. And this doesn’t mean simply changing to hybrid cars, or biodiesel. These remedies are almost certainly going to be unable to mitigate the adverse effects of irreversible decline in oil production.

Unless we take steps now to halt spending time and energy on projects that will one day be like vine covered Mayan temples, then we will have no one to blame but ourselves, and what’s more, our descendents will curse us for our prodigality.

We need to focus on what kind of policy and infrastructure will allow us to engineer the softest landing possible in a post peak oil world. We have no excuse for making the same kind of mistakes the Mayans made – the knowledge is out there to change the way we live for the better. But we need to make the hard choices now, rather than having options taken from us through inaction.

Here are three suggestions for ways that we can begin to address the problems that confront us.

1. An end to population growth.

This is the most important and most difficult aim to achieve. No good can come in the long run of an increasing population. It may serve people’s ends in the short or medium term, but there is no way that this planet can allow an ever increasing number of humans to live comfortably. All other solutions are subordinate to this. Let’s not allow nature to control our population for us – that’s sure to get ugly.

2. Relocalise living arrangements.

An existence based around increasing use of fossil fuels is in fact even more unsustainable than increasingly intensive land use. Land renews, fossil fuels do not. The solution is to reverse the trends that have led to people living remote from the source of the food that they eat, and remote even from their workplace. This is a model that is destined to fail.

3. Begin decentralising electricity grids.

If private transport is to continue in the future it will undoubtedly rely not on liquid fuels, but on electricity, either directly or in the form of hydrogen. If the world’s electricity grids are to deal with this then they will need to move to what is known as a smart grid – distributed generation by renewable methods. When each household can be as much of a generator of energy as it is a consumer then we will be closer to a sustainable model for habitation and transportation.

These are not in and of themselves solutions to the problems we face, but they are starting points. One thing can be reasonably certain – an unwillingness to look deeply at the problems that confront us will leave us just as vulnerable to a descent into chaos as the Mayans of the tenth century were.

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Saturday, October 29, 2005

The significance of Saudi Arabia

The vast empty desert of Arabia has played a surprisingly pivotal role in history. The unforgiving aridity and heat, the almost total lack of productive land and its geographic isolation might have suggested that the desert would remain a little travelled backwater, supporting only scattered tribes of nomads.

But from this desert have come two crucial developments that have shaped history irrevocably. The first of these is Islam. The revelation of the Qu’ran to the Prophet Muhammad in the Arabian trading town of Mecca was the beginning of what became one of the world’s principal religions. Within a century of the Prophet’s death an Islamic Arab empire had spread across the Middle East and North Africa. This empire would continue to grow, and to schism, for the next 800 years.

By the time European nations were setting out to explore the globe in the fifteenth century, the Islamic world had been a dominant military and political force for centuries. But this pre-eminence was not to last.

Superior command of the sea, constantly improving military technology and tactics, and, finally, the industrial revolution propelled the Christian west ahead of the Islamic world in the seventeenth and eighteenth centuries. The innovations of Arab scholars had been absorbed by western mathematicians, scientists and philosophers and by the end of the nineteenth century much of the Middle East was languishing in relative poverty. Transport by sea had made the land routes across Eurasia increasingly irrelevant and life in Arabia was much as it had been for countless generations –intensely tribal and largely nomadic.

But the twentieth century brought another great change to the importance and fortunes of the peoples of the Arabian Desert. The Saud dynasty, began in 1744, had been slowly consolidating power on the peninsula for nearly two hundred years. This ascendancy owed much to the conservative strain of Islam known as Wahhabism, after Muhammad Abd Al-Wahhab, a reformer who had joined forces with Muhammad bin Saud in forming the dynasty. After a long struggle, the Saud family finally triumphed and, in 1932, the Kingdom of Saudi Arabia was founded. Diplomatic relations between the United States and the kingdom were established in 1933 and in that same year Standard Oil was given a concession to explore for oil.

The Arab American Oil Company (Aramco), as the partnership between the Saudis and Standard was called, struck oil in the eastern provinces of Saudi Arabia in 1938. This find was the first of many. Oil became the second great transforming development to occur in the Arabian Desert. Its impact on life in Arabia (and beyond) was felt just as rapidly as the irruption of Islam.

The Saudi oil reserves were of such enormous magnitude (they are the largest in the world by some considerable margin) that their strategic value was immediately obvious. President Franklin Roosevelt declared the defence of Saudi Arabia of vital importance in 1943, and in 1951 the US began military co-operation with the kingdom.

But the relationship between the increasingly oil hungry US and the Saudi ruling family has not always been an easy one. In 1960 the Organization of Petroleum Exporting Countries was formed. OPEC member states agreed to co-operate on production and pricing of crude oil. The cartel didn’t take any immediate action, but an embargo on oil exports in protest at support for Israel during the Yom Kippur war of 1973 gave the first indication of the growing power OPEC and its member states, particularly Saudi Arabia, wielded. This embargo led to the first of the oil shocks of the seventies, with prices nearly tripling.

Throughout the seventies and early eighties Saudi Arabia experienced an economic boom on an unprecedented scale. The circulation of petrodollars as a result of high oil prices helped pay for extensive construction throughout the Kingdom, including the construction of Mosques and Islamic schools known as Madrassas. In addition to infrastructure the monarchy was able to lavish generous social support programs on the citizenry, including bringing many western professionals to work in the Kingdom.

Then, in the mid eighties, the price of oil fell. OPEC member states were constrained by production quotas set by the cartel, which were in turn based on the size of oil reserves. In the face of declining revenue the Arab OPEC countries, one by one, began reporting much larger reserves than previously claimed. These upward revisions - sometimes in the realm of 100% - allowed countries the freedom to increase production largely at will.

What has become apparent, though never made explicit by the national oil companies, is that since the time of these revisions countries like Saudi Arabia, Iraq, UAE and Kuwait have been reporting the total amount of oil ever found, not the amount remaining. The figures reported have continued to slowly rise, or at least remain static despite the fact that little new discovery has been reported and production has largely risen.

Between the collapse of oil prices in the mid eighties and the end of the century, Saudi income from oil exports declined precipitously. The country also experienced high birth rates and consequent population growth which strained the ability of the ruling family to provide the social support they had enacted at the height of the petrodollar boom. Gross domestic product per capita declined from US$ 25,000 to US$8,000 in a little under two decades.

This difficult period was contemporaneous with the growth of a dangerous strain of militant Islam. Figures like Osama Bin Laden, a wealthy Saudi who had fought in Afghanistan, inspired a growing number of young men to question the governing arrangement of the Kingdom and the support of the United States for much reviled Israel. This was particularly so after the Sauds allowed American troops to be based in the Kingdom during and after the first Gulf War. As well as more marginalised figures many establishment religious figures were critical of the monarchy over perceived backsliding and apostasy. The monarchy has introduced limited reform in response, but has continued to experience sporadic terrorism and criticism from both conservative and liberal Saudis.

Much of the strength of the new militancy flowed from the deep sense of injustice felt by many Muslims at the eclipse of Islamic power by the west, particularly the perceived subjugation of Palestinians by Israel. The conservative brand of Islam that had helped propel the Sauds to power contributed to the radicalizing of a growing number of disaffected men who saw it as their duty to resist ‘crusaders’ and ‘zionists’. This message was being preached not only in militant training camps, but also in Mosques and Madrassas across the Islamic world.

As the reach of terrorist organisations grew in the late nineties and into the early twenty first century, the importance of oil was once again becoming a matter of serious strategic consideration in the West. The United States, and many other nations, are increasingly reliant on imports of oil to power their economies. US oil production had been declining since the early seventies and with the election of George W. Bush and Dick Cheney, both ex-oil men, it was apparent that security of energy supplies was going to become an even more crucial pillar of US foreign policy.

Amidst growing tension on both sides, serious questions were finally being asked about the validity of quoted Saudi Arabian oil reserves. In light of declining oil production in countries like the UK, Norway and Indonesia, the size and quality of the reserves in the Arabian Desert are now of vital interest.

So a debate has been going on both in industry publications and increasingly in the mainstream media over the expectation that Saudi Arabia will be able to significantly increase their production of oil to satisfy demand that is now growing more strongly than it has for several decades. Geologists like Colin Campbell and Jean Laherrere have been joined by people like Matthew Simmons, an investment banker and energy adviser to Dick Cheney, in openly suggesting that Saudi production is likely to decline rather than increase in the near term.

Saudi Aramco officials have been vociferous in denying the charge that they are headed for production declines, citing increased recovery rates from improved technology. They have also again reported large increases in their reserves. But westerners who have worked in the Kingdom are now questioning the quoted figures. Edward O. Price Jr., a former head of exploration for Saudi Aramco, is reported in the New York Times as being very sceptical of any projected increase in Saudi production. Price says that he was told by Saudi Aramco that they based their projections on estimates from US Geological Service, which are extrapolations of the effect new technology had on Texas oil production to the Saudi Arabian context.

Unfortunately, industry figure point out, the technology used in Texas is already in use in Saudi Arabia and it seems unlikely that any similarly effective innovations will be forthcoming. In fact, countries like the UK and Oman that have been using methods like horizontal drilling and water injection have experienced very sharp downturns in production after reaching their maximum production. The doubts about future Saudi production have been reflected in assessments prepared for the US Department of Energy and by the National Intelligence Council.

In addition to the risk of long term decline of oil production in Saudi Arabia, militants and terrorists have actively been targeting the oil industry, particularly foreigners working in the kingdom. In September 2005 a gun battle with terrorists in Ad Damman resulted in Saudi armed forces recovering forged passes to important oil installations and plans for attacks. The group involved in this incident are undoubtedly not alone in considering oil installations prime targets. The concentrated nature of the oil infrastructure in places like Ras Tanura mean that carefully planned attacks could cripple the export of oil and petroleum products.

The world has a great stake in the future of Saudi oil production. The global economy is still reliant on oil for everything from transport to chemical manufacture. A disruption of Saudi supply would have a crippling effect on trade and commerce. So it is with great care that the world’s governments must approach the dual problems of Saudi oil depletion and terrorism. It is imperative that the risks of both are widely understood. To this end, governments should be applying pressure to allow thorough analysis of the reserves of countries that guard such data as state secrets. But, in the case of Saudi Arabia a great deal of sensitivity is required in dealing with a country that has undeniable religious significance for so many people worldwide. The outright exercise of power in the birthplace of Islam is the surest way to engender more ill feeling and to recruit more potential terrorists.

Oil importing countries, and the United States in particular, find themselves in an unenviable position. In such a politically and religiously charged country as Saudi Arabia the combination of terrorism born of the perceived injustice of western hegemony and enormous oil reserves are an explosive combination. The world must handle these powerful forces with care.

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Sunday, October 16, 2005

Reserve Bank Governor: Look out Below!

Amidst increasing speculation about the form of the next government, Dr Alan Bollard, the Governor of the Reserve Bank, cautioned both the New Zealand consumer and the incoming Government about their big spending.

In a speech to the Credit and Finance institute Dr Bollard said that the upward trend in house prices would not be sustained and that an outright fall in prices was likely. He strongly hinted that interest rates would rise in the near term and that he expected the exchange rate for the New Zealand dollar to fall, occasioning more expensive imports.

He also cautioned that a more expansionary fiscal policy from the government would "increase the work of monetary policy", meaning that the more the government spends, the more likely interest rates are to rise.

The warnings come a few days out from the release of figures that are expected to show that the Consumer Price Index, the main measure of inflation, has exceeded the 3% upper threshold the Reserve Bank is mandated to maintain.

In response to the suggestion that a correction is likely in the housing market, Real Estate Institute president Howard Morley told home owners and buyers to "pay as little attention as possible" to the warnings. He went on to characterise those predicting a housing crash as constituting "a thriving but ultimatley pointless little industry."

Figures released recently show that the New Zealand consumer spends $1.12 for every dollar earned, the worst record in the OECD. This difference has seen the total value of mortgage debt expand by 67% in the last 4 years and consumer debt by 35%.

In addition to the increasing indebtedness of home owners, New Zealand is experiencing a slow down in the rate of migration, a key driver of the housing market.

Economists from the major banks have described the message as serious and the implications as clear, but have also wondered aloud whether a hike in the official cash rate may be too damaging to the economy.

Firms have almost universally indicated that they expect their trading conditions to worsen in the near term as costs rise and a shortage of skilled workers continues, but very few have indicated that they intend passing on the costs, opting instead for diminished profits.

It seems likely that the New Zealand economy is going to correct in the near term. However there are, I believe, two scenarios that will result in a painful rather than a measured correction. The first is a significant upward movement in the price of oil. Much of the increased cost being absorbed by business is the result of higher oil costs. An increase towards three figures in the price of a barrel of crude would force the hands of many businesses.

The second scenario that would spell doom for the economy is the outbreak of a global pandemic. This would cripple the economy for as long as borders remiained shut, and in the long term would affect migration and tourism.

Both scenarios are much more than remote possibilities at the moment and presage disaster for the average New Zealander.

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Tuesday, September 13, 2005

Energy and Financial Instability

In 2002, in The Listener, a popular NZ magazine, a letter to the editor was published that said as plainly as it could: "Oil is going to decline soon." It bade readers to take heed. Those that followed the directions to www.dieoff.org were in for a short sharp shock. Skeptics may have brushed it all off and put their faith in human ingenuity, but events over the intervening years have decisively brought the topic of peak oil to the fore.

At about that time a book was being written by Richard Duncan, formerly a consultant to the IMF and employee of the World Bank. Duncan, an economics and literature graduate with years of professional experience behind him, including a close study of the Asian crisis of the late nineties, provocatively titled his book "Dollar Crisis". Again, many would have given his analysis scant regard. But time has been kind to his conclusions as well.

Day by day these two subjects are more and more entwined. Energy and financial instability are joined at the hip, marching into a tumultuous future.

Since 2003, when Dollar Crisis was published, it has become more and more evident that Duncan's central thesis was correct. He held that the expansion of credit throughout the nineties had created imbalances in the global economy that could only be rectified by a correction in the value of the US dollar, much like he had observed first hand while working for the IMF in Thailand. It was also clear at the time that he was writing that the efforts of the Federal Reserve to inject credit into the flagging equity market after the 2001 bust would only increase the hazard.

This has become almost received wisdom. In fact being a US dolar bear has become rather au fait. The Economist magazine ran a cover touting the endangered status of the greenback, Steven Roach from Morgan Stanley has preached from his Wall Street pulpit on the imbalances and the threat of financial cataclysm, and countless goldbugs, peakniks and assorted analysts have watched on with interest. If you are unconvinced by this choir of dissenters, try the General Manager of the Bank of International Settlements.

But Duncan was very clear as to when he thought correection would come:

"When the US property bubble pops. In 2002 the global economy is being supported by an American shopping spree that is being financed by a bubble in the U.S. property market." (Duncan, Dollar Crisis, pp.189)

It has of late become very difficult to avoid the words 'housing bubble'. From being labeled just unfounded pessimism as little as a year ago, it is now widley accepted that property price rises have become unsustainable.

So it was not surprising to see this graph that came out of US housing data recently:

THere is no saying whether this is the beginning of a real bust for house prices, but it does look pretty nasty at first glance. Volumes are still up, but it is the price that will obviously determine how easily people will be able to refinance and continue spending.

Over to the energy sector. The long term effect of Hurricaine Katrina on energy markets is still unclear. What is clear is that two very important things have happened. A sizable amount of oil and particularly natural gas production are going to be off line for months. Also a significant percentage of refinery capacity will be out for a similar time. Having refinieries out, and with the US and EU governments opening their petroleum reserves, crude prices have fallen. But this is not going to help refined products. Gasoline and heating oil are going to be problematically expensive for some time, as is natural gas.

So as winter begins we will likely find consumers being pinched by energy costs and by a deteriorating property market. That will not be a pleasent outlook for retailers in the run up to Christmas, which will not please manufacturers, transport firms and so on. This article is an interesting look at how this sort of thing begins in your home town and ends up affecting the whole country, and then of course the rest of the world...

Where does that leave us? Another autumn bust in the markets? Perhaps this article might be instructive. It concerns the work of an MIT finance professor and hedge fund manager, Andrew W Lo, who has been studying the economics of the hedge fund market. He has concluded that hedge funds that are invested in illiquid assets such as real estate and interest rate swaps (are there any that aren't!?) are prone to very sudden and catastrophic losses. Ominously he found that these corrections are often preceded by a period of mediocre performance, exactly as hedge funds are experiencing right now. Lo states that the hedge fund industry (for lack of a better word) is more illiquid than it has been for 20 years. Yikes!

So with a big bite taken out of the US energy sector and finacial imbalances abounding, are we heading for a crisis? It's far from certain when a shakeout of the economic system might occur, but it is getting too late in the day to say the night won't come.


Sunday, September 04, 2005

Signposts on the Back Slope

Well, things really are speeding up on our trip down the back slope. I hesitate to use such worn out phrases as 'tipping point' and 'paradigm shift', but it is hard to avoid the sense of a discontinuity having occurred

Katrina has already been the catalyst for a sobering dose of the absolutely indispensable nature of oil in our lives. From the rocketing prices at the pump for gasoline to the mushrooming gas lines in the US, it is clear that the immediate effect of Katrina is going to be significant. But the reality of our changed situation will only emerge with time. Here are a few of the signposts on the slope:

1. Along with oil and gasoline, there has been a bitterly steep rise in the price of natural gas in the US, and along with it the price of electricity. Remember, of course, that there is no equivalent of the SPR for natural gas, and the lost production from the Gulf will take a long time to restore. Moreover, there is little or no chance of making up for lost production by importing gas from foriegners. This brings to mind Richard Duncan's Olduvai Theory with his insistence that the real difficulty comes when the lights go out, which is becoming a distinct possiblity for the US.

2. The sheer monetary cost of the disaster and the effect this is likely to have on some of the large insurers and re-insurers is at the moment still very unclear, but when one hears numbers like 100 billion dollars being bandied about, it certainly gives pause for thought.

3. The last few days have seen a steep drop in the US dollar index. Some of this could be chalked up to rumours that the fed will put their rate hikes on hold, thereby dissuading buyers at the margin. However, this comes not long after a report about the inherent instability of the forex market and the possibility of a run on the dollar. To add fuel to the fire there is this report about the possibilty that Saudi Arabia would look to switch out of their peg to the US dollar.

4. While petrol is the big concern at the moment, and I think we can safely say that significant price rises will spread a lot further than the shores of the US, there is still the pressing issue of will the supply of crude hold up. Disturbingly, there were reports yesterday that explosions in Iran and Iraq have closed production facilities in both countries. It is hardly worth mentioning that this would be very opportune time for terrorists to strike at the West's achilles heel by bombing oil facilities.

5. An e-mail is circulating around the world at the moment, in many different national guises, urging people not to buy oil on the 5th of September, in order to "Stick it to the oil companies". While the whole thing is patently very poorly conceived and will not only acheive nothing, it is focussing on the wrong thing. People should be avoiding buying petrol, but they should be doing this by cutting down on the amount they use their cars, not simply waiting a day before filling up. This sort of thing is probably going to develop into more strident protests about the profiteering of the oil companies and the gouging of consumers as the shockwaves from Katrina bounce through the market. The anger is totally understandable and it certainly does raise the question, should we not be considering some kind of windfall-profit tax? But it is also delusional about the ultimate cause of high prices. After all, if we were all neatly constructed economic rational actors we would respond to high prices by reducing our demand, right?

6. The words "peak oil" were uttered at 7.30pm Sunday on the most popular free-to-air channel here in New Zealand. They were carefully linked to the word "doomsayers" to ensure the viewing public could be clear what they should think of such notions as the inevitable decline of oil production, but nonetheless they made it onto the airwaves. The piece was a reasonably informative one, talking about what measures the government might take in the event of an oil crisis (carless days, etc) and wasn't too inflammatory.

7. Bush admitted (to all intents) that they went to Iraq for the oil! The scales have fallen from my eyes. All is clear now. Sheesh!

It's going to be a hell of a bumpy ride. Keep watching the skies.


Saturday, September 03, 2005

None so blind as those that won't see

As the price of oil increases more and more attention is paid to the reasons for this rise. This has meant that the words ‘peak oil’ have started to appear ever more frequently in print and other media. With this new found recognition has come the inevitable refutations and disputations.

An article by Peter Maas has drawn fire from Stephen Levitt, author of the best selling Freakonomics. James Howard Kunstler’s book The Long Emergency has had several hostile reviews. Matt Savinar, over at life after the oil crash, has been the target of a serial denunciator writing in a peak oil forum.

As Matt points out in his rebuttal, as oil prices rose it was entirely predictable that there would be a raft of people who would appear to try to refute peak oil. What is surprising is that the people that do this are often very intelligent, some of them leaders in their fields. But no matter their credentials, a blindness to the fundamental nature of energy resources is a common feature of people from all walks of life.

This is almost uncomfortably illustrated by Steven Pinker in his 2002 book ‘The Blank Slate’. Pinker, who’s books have done more to popularise evolutionary psychology and the modern science of the human mind than anyone I can think of, is an exceptionally lucid writer with a penetrating intelligence. His ‘How the Mind Works’ is a peerless exposition of the current state of knowledge in a wide range of fields. He spares no holy cows in explaining the origin of our passions, prejudices and pastimes.

But in ‘The Blank Slate’, in a chapter appropriately titled ‘Out of Our Depths’ he offers the folowing:
“The immediate problem with Malthusian prophecies is that they underestimate the effects of technological change in increasing the resources that support a comfortable life…[In the twentieth century] reserves of oil and minerals increased, rather than decreased, because engineers could find more of them and figure out new ways to get at them… Many people are reluctant to grant technology this seemingly miraculous role… But recently the economist Paul Romer has invoked the combinatorial nature of cognitive information processing to show how the circle might be squared after all. He begins by pointing out that human material existence is limited by ideas, not by stuff. People don’t need coal or copper wire or paper per se; They need ways to heat their homes, communicate with other people, and store information. Those needs don’t need to be satisfied by increasing the availability of physical resources. They can be satisfied by using new ideas - recipes, designs, or techniques – to rearrange existing resources to yield more of what we want. For example, petroleum used to be just a contaminant of water wells; then it became a source of fuel, replacing the declining supply of whale oil.” (The Blank Slate, Pinker, pp 237-8)

Does Pinker really believe that human existence is limited only by ideas!? Does he suppose that if I think that I can run my car on sand it will happen. To suggest that we don’t need resources per se, just better ways to use them, is tantamount to saying that we can use any resource to do any job, or any amount of any resource to do a specific job. This is so patently untrue as to be laughable.

What Pinker is missing is that technological change invariably engenders an increase in the use of resources, particularly energy resources. His last point, that oil has gone from a contaminant to a fuel, actually demonstrates this fact. But it seems that he is saying is; when we have used up oil, just as we did with whales, something else that was once undesirable will step into the breach. If he has an inside running on what this is maybe he should tell someone.

The industrial era, with its ever-expanding energy budget has lulled people like Pinker into treating resources as largely irrelevant. In an age of plenty it certainly does seem like if you think it, then it will come to pass. But this is a temporary delusion. As we transition from using what is undoubtedly the best energy resource the planet was ever endowed with, to other more diffuse sources, all of the resources we have taken for granted will be more difficult to acquire.

Technology doesn’t increase the resources that are available for us to use. It changes the rate at which we can extract them, and it changes which resources are accessible at any point in time. But, like it or not, the amount of any fossil fuel or mineral resource is a fixed quantity. It is irresponsible to continue the myth that technology will only increase the amount of ‘stuff' available to us. In fact, technology hastens the day when we will have used all of the stuff up.

Pinker goes on to invoke the unlimited power of discrete combinatorial systems to come up with new ideas. The human mind is a remarkable organ and not to be taken lightly, but we shouldn’t confuse our ability to think up new ideas with an ability to defy the physical laws of the universe.

The arguments that are put forward so uncritically in this passage are, unsurprisingly, those of an economist. We see exactly the same arguments from Levitt in his commentary on Peter Maas' article for the NY Times. Would it be too much to expect that economists might actually shift their gaze from the market to the physical realities of resource use? Do they not actually talk to people that work in the fields they so happily prognosticate on?

Maybe the final judgment should go to Pinker himself:
"Self Deception is among the deepest roots of human strife and folly. It implies that the faculties that ought to allow us to settle our differences - seeking the truth and discussing it rationally - are miscalibrated so that all parties see themselves as wiser, abler and nobler than they really are." (The Blank Slate, Pinker, pp.265)


Tuesday, August 16, 2005

Will Peak Oil be Ignored in a Crisis?

Oil set new record prices every day last week, in both London and New York. It has settled back a little today, but most analysts see it continuing to rally. Commentators have pointed to the resumption of nuclear processing in Iran and the consequent sabre rattling as a key driver of the price

While tensions over Iran are an obvious threat to a tight market for crude oil (their production represents about 5% of the world’s output) there is a lot more going on besides. A graph published by the IEA tells a story all of its own. As we can see, demand is represented as exceeding supply.

There is an argument going on at econbrowser (when is there not, one wonders) about whether it makes sense to talk about demand exceeding supply. If we assume that living standards are to be kept as they are at present (Thgat is to say, no restrictions on fuel use by imposition) then it is perfectly possible to talk about demand, or need, being in excess of supply.

It’s a bit like saying that in the desert your demand for water exceeds the supply. In both cases demand must be brought to meet supply: In the desert you will eventually die of thirst and supply will actually exceed demand; in the oil market economies will atrophy until an equilibria is met, at a certain price.

But the oil market is very prone to sudden increases in price. While it might seem reasonable to assume that the orderly rise of prices will slowly whittle away demand until they match, all the evidence suggests that we are much more likely to experience periodic crises that result in very large increases in price.

The current run up in price, I believe, heralds the arrival of peak oil. Known rates of depletion, expected decline and the details of future projects all tend to suggest that we may never produce more oil than we do this year.

This will be doubly true if we experience serious political disturbances in one of the large exporters. The risks continue multiplying; Iraq, Iran, Saudi Arabia, Nigeria, the Caspian Basin. All teeter precariously close to chaos.

Here in New Zealand the Ministry of Economic Development released a report today about how to conserve oil in a hurry. It followed on from a report issued by the IEA to member countries on the same subject last year. They were quick to point out that the recommendations were contingency plans and that they didn’t in fact see any looming crises. That’s like acknowledging there’s an elephant in the living room, but denying that he is about to wreck up the place!

In any case, when the public hear the words ‘petrol rationing’ and ‘carless days’ on the radio before breakfast it seems likely that many would think the possibility not at all comforting.

So while we are experiencing demand that is not in fact being met by supply, it will likely be a non-linear, politically precipitated incident that pushes the market to begin demand destruction in earnest.

I think there is a real risk in this for those of us that have and will continue to publicise the concepts behind peak oil.

In the midst of an oil crisis the factors that are going to concern people are not going to be geological realities. People and governments are going to be fixated on what they can do to restore oil supplies. An insistence that we need to face up to oil depletion is not going to go down well. Don’t preach to the addict who's short of his fix. No one will thank you for pointing out that oil was going to run out whatever we do.

And, moreover, we may in fact find that oil depletion follows a path of periodic economic crises punctuated by mild recoveries. It is during these recoveries that the peak oil community will need to steel its resolve.

Peak oil will be the most important point in the long run down the back slope of Hubbert's curve, but we need to be prepared for a bumpy ride, in every sense. An understanding of oil depletion is vital for individuals and groups wishing to navigate the future, but don’t be surprised if the message is lost in the noise.

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Friday, August 12, 2005

Genetics, Disease and Peak Oil: The Race to the Bottom

Does modern medical science encourage the spread of weaknesses in the human population?

It is no secret that modern medicine has allowed many people to survive diseases and conditions that might otherwise have killed them. Does this mean that the genes for these conditions, like diabetes for example, are spreading in the population?

If the genes for potentially lethal conditions have persisted in the human species up to this point, then that indicates that they aren’t totally reliant on medical science. For example, any gene that produces a condition after the prime reproductive age is unlikely to be restrained in any significant way. So the genes for cancers of different types, for example, are prevalent in humans.

But there are many commonplace conditions, carried as recessive alleles, which would, in a less beneficent age, have done away with people before they were able to breed. Allowing those that inherit two copies of a destructive allele to survive only marginally adds to the reproductive success of that particular gene.

Many expectant parents in the western world carry out genetic screening to determine whether their offspring carry genes that will potentially require lifelong treatment, so that they can decide whether to terminate the pregnancy, so you could argue that medical science is helping to eliminate the transmission of certain undesirable genes.

But are any genes being actively reinforced? In other words, what are the selection pressures on the human species that are driving our evolution? We can say one thing for sure – life in much of the world today is less physically demanding than it was in our species’ early history. We do not have to chase down our prey, we do not necessarily have to have good eyesight, and many of us have such ready access to food that we are at risk of killing ourselves by overeating rather than starving.

Are we getting smarter then? It would be extremely difficult to find evidence that intelligent people are more reproductively successful. In fact, you could argue that an intelligent person might look at the state of life on earth and wonder whether it is a good idea to reproduce.

We are adapting to our environment, but that environment is not one of relentless competition, but rather one of comparative ease. We are living in the heyday of an energy glut, the like of which will never be seen again. We have adapted to this by developing technologies and techniques that support more and more of us through the use of fossil fuel derivatives to grow food, produce medicines and allow transportation.

And this ever burgeoning population does support a larger proportion of people with congenital defects that would have killed them in days gone by, but these may in fact be immaterial in the short run.

Rather than being flung into a situation where we are again tracking antelope on the steppes, we are more likely to face a threat that has always menaced human populations. Microbes.

As I write H5N1 has been found in another Asian country. It is by no means certain that this particular virus will cross the species barrier completely and begin human-to-human transmission. But if it doesn’t, eventually a virus will evolve that does.

In today’s hyper-connected world a virus with the right characteristics of lethality, mode of transmission and incubation period could easily engulf the world, leaving a huge numbers of deaths in its wake.

Viruses have a much more terrifying potential for the human species than the quirks of genetic variability, which would be weeded out by a more strenuous environment. We live under the pretence that we are immune to the ravages of the plague cycle. But nothing could be further from the truth. If anything we have become more susceptible.

One caveat does obtain to this argument however. If we fall off the cliff of energy decline, then we may in fact avoid being caught up in a worldwide pandemic. It is probably more likely that as medicines become less available, air travel less common and people more malnourished, that less widespread but more locally devastating epidemics will predominate.

Look out below! The race to the bottom has started!

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Wednesday, August 10, 2005

Iran and nuclear power

Does Iran really want to build a Nuclear bomb? As with many of the thornier questions of international politics, it depends who you ask.

Iran, not surprisingly, say they don't, that they only wish to enrich uranium for purposes of constructing electric power plants, something not forbidden to them by international treaties.

The US intelligence agencies think that Iran is 10 years away from building the bomb. The Israelis think they are 3 years away. Far be it from me to criticise the track record of the US intelligence community when it comes to sniffing out illegal weaponry. And the less said about Mossad the better.

The IAEA has found no evidence that Iran is in fact manufacturing weapons-grade fissile material, and the EU3 (Britatin, France and Germany) have stepped into mediate between the Iranians and the Americans. It hasn't been going particularly well.

The crux of the issue is that Iran is determined that they will continue to pursue the peaceful use of nuclear power, and that the EU3 and the Americans are just too suspicious to let them do this.

A terrible strategic risk is being taken here. It is entirely reasonable to expect countries to abide by the nuclear non-proliferation treaty, which Iran is a signatory to, but it is also counterproductive to deny a country a method of producing energy. Not only that, but it is hypocritical of both the US and Israel to criticise countres over nuclear weapons in light of the augmentation of both of their arsenals, declared and undeclared. It is double standards like this that lead to crises.

And what are they really going to do? Any sanctions that may be mooted at the security council would be vetoed by Russia and or China. And why on earth would you attack a country that supplies a large amount of oil to the world market, in a time when the oil market is incredibly tight (although I suppoese that didn't halt an attack on Iraq).

There seems so little honour and logic in this slowly evolving crisis that it suggests that there really is more going on thatn we may be led to believe. Perhaps Iran really does have nuclear weapons? Maybe the US is trying to wag the dog over some other issue?

What if, and this seems most plausible, the whole charade is a game of brinksmanship that is being stoked by gnawing fear about the impending peak in oil. If one more domino falls in the middle east, well pardner, I'ma goin' for ma gun!

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Sunday, August 07, 2005

The Saudi Two-Step

With the passsing of King Fahd, the spotlight is on those two long term dance partners, Saudi Arabia and the good ole US of A.

Abdullah, seen here having the ticks removed from his moustache by some flunky, has effectively been running the country since 1995, when Fahd was laid low by a stroke. He took over on the old king's death and his brother Sultan has taken the role of Crown Prince.

Also of note in Saudi politics has been the removal of Prince Bandar from the US ambassadorship (remember him? He was the one who smoked cigars on the white house balcony and was generally regarded as one of the most consumate political fixers of modern times.) He has been replaced by his uncle, Prince Turki bin Faisal, who used to run the Saudi intelligence service and was recently the ambassador to the UK.

So, what can we expect from the reign of Abdullah. Much of the same seems to be the consensus. But is that just wishful thinking? Let's examine the pressures on the mystery kingdom.

Saudi Arabia is going through what is euphimistically referred to as demographic transition. This is code for a steep population increase engendered by falling death rates and high birth rates. Their are huge numbers of young Saudis under the age of 21 (half the population in fact), and more every year. This contrasts sharply with the current rulers. Abdullah is a spritely 82 (don't let the dyed facial hair fool you) and the next two likely successors are of a similar vintage.

The abundance of disenfranchised, disillusioned young men has swelled the ranks of extremist groups in the kingdom and throughout the world. Much of the religious framework that supports these firebrands is funded by the royal family or other wealthy Saudis. For years, money has been given to men like Sheikh Osama to fight the good fight for ultra-conservative Islam in places like Afghanistan, and now Iraq.

But the Saudis have had their hands bitten by the monster they created. Since the invasion of Iraq there have been a number of high profile terrorist attacks inside the kingdom, targetting foreigners and the oil industry. There have been accusations that the security forces are sympathetic to the cause of extremists. In some ways it would be more surprising if they weren't.

And, as we all know (I would hope), the oil markets are in a bit of a state at the moment. For the last thirty years Saudi Arabia has been the go-to player in the oil market. They have long held the ace of a significant amount of spare production capacity. But for the last two years, despite rising prices, Saudi Aramco have incremented their production by only a fraction. OPEC announcements of upwards revisions of quotas are now barely even acknowledged by the market.

Investment banker Matthew Simmons has just published a book alleging (and has been telling anyone who will listen for several years now, including Dick Cheney) that the Saudi fields are not in the great shape they had always said they were. His argument has been met with stern rebuffs from Saudi officials, but the debates about Saudi and world oil peak are now hitting the pages of major dailies.

It has become uncomfortably obvious that the United States is cravenly beholden to one of the most repressive and undemocratic regimes in the world. Realpolitik and an insuperable addiction to oil has left America in a terrible strategic position. They are bound to prop up the aging leaders and their corrupt families while trying to gently bring about meaningful change that may lessen the grip of extremist ideologies.

If Simmons is correct and Saudi oil production does soon reach its historical maximum, only to start declining, then this dance will surely become a death grip.

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