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Demand Destruction & Brittle Systems

2008-08-25T01:11:00.000-06:00

I've seen a number of comments, both at The Oil Drum and elsewhere, suggesting that the US is now less susceptible to supply disruptions because we have reduced our demand for oil by several hundred thousand barrels per day over the past year. In general, I get the sense that people think we can insulate ourselves from supply disruptions, from our dependence on potentially unreliable foreign sources of oil, by improving our efficiency and eliminating "unnecessary" oil consumption. In my opinion, this is backward. In this post, I will argue that, because the demand that is destroyed first in a free market is the demand that is easiest to eliminate, the resulting consumptive system is more inelastic, more brittle, and more susceptible to systemic shock from supply disruption. I will approach this argument by outlining what makes a system either resilient or brittle and why market-driven demand destruction creates a more brittle system. I will conclude with a few thoughts on how we can increase the resiliency of our energy-driven economy in a future environment of declining energy supplies.

Figure 1: A hypothetical model of market-driven demand destruction illustrates the theory that the lowest elasticity demand is destroyed first. This results in the remaining demand being, in aggregate, more inelastic. "E" figures are meant only as relative measures of demand elasticity and are not meant as actual values for price elasticity of demand.

What Makes Systems Resilient or Brittle?

A system is brittle if it is unable to effectively absorb shock. Consider a plate glass window in comparison to a trampoline net. The plate glass window can take a significant shock without budging, but at some point it can no longer absorb an impact and fractures. It is brittle. The trampoline net, on the other hand, will be moved by even a minor impact, but because of its ability to deform and stretch, it will not fracture (or tear) until far greater stress is applied then is needed to break the glass window. The trampoline is resilient. These same qualities of "brittle" and "resilient" apply to economies and financial markets.

The Problem with Brittle Systems

When an economic or financial system is brittle, it is less able to absorb the impact of a shock or ongoing stress--say, a geopolitical disruption to oil supplies, or the ongoing, grinding problem of geological peak oil. When a system is resilient it tends to be able to absorb such impacts, giving the underlying system time to reorganize to eliminate or mitigate the stress event. When a system is brittle, however, it is more likely to shatter, after which point it can no longer bounce back to its original shape. When an economic system shatters, we call it "collapse"--the system enters a downward spiral into depression and dissolution. This is one of the "worst case scenarios" for the impact of peak oil--that it will overstress a brittle global economic system and act as the catalyst for economic, even societal collapse.

For this reason, it is important to understand what makes our economic system brittle or resilient, and how our personal economic choices and political/policy choices can influence the character of the system. In this post, I will look specifically at the how crude oil demand destruction changes the systemic elasticity of demand for oil, and how this makes our economic system more brittle.

Why Demand Destruction Makes a System More Brittle

The basic mechanism underlying this theory is that, when forced to eliminate consumption of oil, individuals, and the market in aggregate, will eliminate the most discretionary consumption first. As a result, the remaining consumption will be more valuable to the individual, firm, or economy in terms of GDP or quality of life produced per barrel of oil consumed. This remaining demand is more inelastic. When the oil demand--whether it is for a family, industry, or nation--becomes more inelastic there is greater exposure to supply disruptions.

For example, the US economy that consumed roughly 20 million barrels of oil per day in 2007 was less vulnerable to a theoretical geopolitical disruption removing 5 million barrels of oil per day from the world market (say, war with Iran) than a future US economy that only consumes 10 million barrels per day due to market-driven demand destruction. The reason is that, presumably, that future US economy cut the least valuable, most discretionary 10 million barrels per day of consumption, and the remaining 10 million barrels per day of demand is far more inelastic.

Is Market-Driven Demand Destruction an Example of a Market Failure?

The tendency of a free market to cut the most elastic demand first seems to be an example of market failure--that is, where the market action produces a long-term result that runs counter to the goals of the market mechanism. One of the classic causes of market failure is where the market acts to optimize short-term benefit, but in the process creates significant long-term problems that aren't adequately accounted for due to inability to incorporate these long term costs in the analysis of present decisions.

We saw exactly this in the rush to extend credit to increasingly low income home buyers resulting in today's "credit crunch," and I predict that we are currently seeing a similar market failure in the market's destruction of the most elastic demand first. The result will be an increasing vulnerability to future supply disruptions--unfortunately, this will come exactly as the likelihood of more severe supply disruptions increases, as I discussed in my recent article on Geopolitical Feedback Loops.

Measuring Inelasticity: Is it Purely a Price Issue?

The standard measure of demand elasticity is as a function of price. Unfortunately, this is not necessarily a good measure of the impact on systemic resiliency. Even if prices are going down, demand inelasticity can be increasing if the cause for the price drop is that high prices have caused an economic downturn that is eliminating the most elastic oil demand. There are indications that this is exactly what is happening at present--high prices are creating demand destruction, at least in the US, but the demand that is being eliminated appears to be the most elastic consumption. A better measure of the impact of demand inelasticity on systemic resiliency may be price as a percentage of median disposable income.

Comparing the Credit Default Swap system to Demand Destruction

It is useful to compare the process of increasing inelasticity of demand due to market-driven demand destruction with the systemic brittleness created by the mushrooming market for credit default swaps. I've written a brief explanation of this shadowy corner of the financial world in Financial Wizardry & Collapse. In brief, by spreading the risk of default on corporate bonds very thinly and widely, the global financial system becomes superficially more resilient as it is better able to absorb a handful of major failures. However, because the system is so interconnected, at some tipping point of numerous defaults, the entire system would crash at once. The result is a system that is actually far more brittle.

The credit default swap (CDS) system is in some ways useful in understanding how to reduce the brittleness caused by market-driven oil demand destruction. In the CDS system, individual corporations or issuers essentially bet on the viability of corporate bonds--they have the power to choose their level of exposure. Of course, in seeking to maximize profits, there is a trend to maximizing revenues by maximizing exposure to systemic default. Participants can, however, participate in the system while maintaining a safe, low level of overall exposure--a level where they could absorb the impact of simultaneous default of every position they hold. The lesson, roughly applied to energy demand inelasticity, seems to be to minimize the exposure to supply disruptions of the most inelastic sources of consumption.

For example, if winter heating by heating oil is a very "important" (and thereby inelastic), source of consumption, it would make sense to move that use to a more reliable source of energy (say, passive solar design and added insulation) before converting gas-powered commuter cars to plug-in electric. This also applies to electricity and natural gas use--for example, the electricity used to pump water out of aquifers for a farmhouse is likely a very inelastic source of demand; replacing this source of energy consumption with rainwater harvesting would improve the aggregate elasticity of demand.

This seems to run counter to what the market and non-market incentives (subsidies & R&D funding) are pushing for--one reason why I think this process demonstrates a market failure--and may be a good candidate for a centrally-planned policy push. This is just one example of how the US could actually increase systemic resiliency by substituting renewable, domestic, alternative energy sources and conservation measures for the most inelastic sources of oil demand (the red section of the Figure 1, above), while retaining the more elastic and discretionary sources of oil consumption to buffer supply shocks.

What About Efficiency?

Do improvements in efficiency have the same effect as involuntary, market-driven demand destruction? Maybe. If the pace of efficiency measures decreases the scarcity of oil, then the result will be a less brittle system. However, this tends to act as a negative feedback loop, as the exact stimulus that drives investment in efficiency (high prices & scarcity) will also be eliminated by efficiency gains rapid enough to decrease the overall scarcity of oil.

Conclusion

As a result of recent demand destruction, the US economy is becoming increasingly susceptible to shocks caused by supply disruptions. The global economy appears to be following suit to some degree, though the process of demand destruction in the growing economies of China, India, Russia, and elsewhere in the developing world is currently less clear than the picture in the US. It appears that the process of demand destruction in the US is a classic example of market failure--not that it is a failure to reduce apparently "unnecessary" or frivolous consumption, but rather that by relying on market signals alone we are increasing the inelasticity of remaining demand and setting ourselves up for catastrophic system failure. While anathema to the orthodoxy (though certainly not orthopraxy) of American capitalism, it is time to consider how we must use non-market mechanisms to plan for increasing our systemic resiliency.

While this may be unlikely to happen at a national level, the need to increase resiliency is scale-free: individuals, communities, bioregions, and nations can all benefit by the increase of resiliency at any level. I have previously addressed one way to increase resiliency--by addressing the Problem of Growth that tends to "eat up" systemic resiliency. In this post I also recommended policy programs that would first transition our most inelastic demand to reliable, domestic, and renewable sources of energy.

If there is a "so what?" point to this post, that is it: rather than work to create viable, stable, renewable substitutes to the more elastic components of oil demand, we would be better served by focusing subsidies and research grants on replacing our most inelastic demand first. Implement policy and subsidy as necessary to replace or eliminate the most inelastic sources of demand first--the exact opposite of what the market would do, but the best way to increase systemic resiliency.

This post also appears at The Oil Drum.

Geopolitical Disruptions: Building a Theory of Disruptions to Oil & Resource Supply

2008-08-18T01:06:00.001-06:00

The peak and gradual decline in world oil production is beginning to spawn a set of geopolitical positive-feedback-loops that seem likely to exacerbate depletion and accelerate the effective rate of decline of world oil production. Rather than isolated incidents, these geopolitical feedback loops are the direct result of geological peaking in oil production. Unlike geologically driven peaking, however, the effective rate of decline caused by geopolitical feedback loops has the potential to continually accelerate. This post will lay out a theory to better understand the impact of this system of geopolitical phenomena.

I've discussed the impact of various types of geopolitical disruptions to oil production previously at The Oil Drum. One of these geopolitical phenomena, the Export Land Model (ELM), has been well developed by TOD members Westexas and Khebab (see their Iron Triangle post and Wikipedia article). While I think that ELM is already proving to be the most significant of the geopolitical factors--especially in the earlier phases of peak oil--I think that it is important to place ELM into the context of a larger set of geopolitical pheonomena. In part, this is the case because of a similarity between the various geopolitical forces at work. In part, it is because these forces tend to act as alternatives to one another, and their full implications cannot be properly understood in isolation.

In this post, the first part in a series, I hope to lay the framework of a theory for better understanding these phenomena, for extrapolating trends, and for predicting their future impact. It is also important to place the problem of geopolitical disruptions in context, and to highlight the danger of dismissing these phenomena as isolated and separate "above ground factors." The next post in this series will review and update the set of geopolitical feedback loops currently in action, looking not only at disruptions to oil production, but also at the larger issue of resource production, including gas, coal, fertilizer, metals, etc. The final post will discuss the interrelationship between the various geopolitical forces at work as well as the potential approaches to "solve" this system of problems.

Building a Theory of Geopolitical Disruptions to Resource Supply

Since this theory is still very much in formation, I'll proceed by asking a series of questions, followed by my best answer at present. I hope that readers will help to both refine these answers, as well as propose additional questions that must be addressed:

1. Are Geology and Geopolitics Separate?

When considering peak oil, it is tempting to look at the issue as a purely a matter of depletion due to geology and production economics. While peak oil certainly begins with the study and understanding of geological depletion, it spawns a set of exacerbating geopolitical factors that are critical to understanding the ultimate scope and impact of peak oil.

Some commentators consider "above ground factors" to be separate, stand-alone phenomena that are neither related to nor driven by the geological peaking of oil production. This is a critical mistake. Rather than being merely isolated phenomena, these geopolitical forces are best viewed as phenomena that would not exist but for geological constraints. Without geological constraints on oil production--specifically without geographical constraints on where remaining viable oil reserves are located--oil producers would produce sufficient oil from geopolitically stable locations. In reality, resources are almost always subject to uneven geographical distribution.

For economic and political reasons, consuming nations tend to produce domestic supplies first. When consuming nations produce oil in foreign nations, regions with geopolitical stability and stable legal systems to protect property interests are favored, so oil from these countries tends to be produced first. As a result, when the world has produced roughly half of its reserves, and when world production approaches peaking, the majority of remaining reserves (especially the majority of economically viable reserves) tend to be located outside consuming countries in the least geopolitically and legally stable regions.

This, roughly, is why "our oil" is increasingly likely to be located "under their sand." As a result, today's increasing geopolitical problems in oil and resource production are a direct result of geological factors combined with picking the low hanging fruit first. If it had made more sense to produce oil from offshore Nigeria, Azerbaijan, or the Arctic first, and save Texas and Alaska oil for later, we would have done that. But because that wasn't what made sense, today's geopolitical problems are a direct result of geography when viewed from a macro perspective. Additionally, this process of explaining why geopolitical problems exist today also demonstrates that it is useful to view geopolitical problems as a global system of phenomena, not as isolated events.

2. Are Geopolitical Disruptions Feedback Loops?

It seems that geopolitical forces act as positive feedback loops. I'll detail the feedback inside and between various geopolitical forces in my next post, but for now I'll outline the general concept: 1) global scarcity of oil, energy, or other resources increases the likelihood of disruption to the supply of that resource (for various reasons that I've discussed before and will outline in more detail in the next post in this series); 2) when these disruptions occur, they further increase the global scarcity of the resource, increasing the effect noted in #1 and creating a positive feedback loop.* For that reason, I call this set of exacerbating factors "geopolitical feedback loops" as they are subject to positive feedback both from their own operation and from the rate of geologically-driven depletion. I think that term is appropriate, but admittedly a bit cumbersome--I'll shorten it to "GFL" for now.

*Some GFLs may not be positive feedback loops--the Export Land Model, for example, is probably a positive feedback loop to the extent that the drop in net exports from one exporter causes global prices to rise enough to make that exporter's export revenues increase despite the decline in net export volume. However, it would be a negative feedback loop if the rise in domestic consumption due to high export revenues (the system's output) has the result of decreasing export revenues (feeding the system's output back into the system in an inverted manner) and thereby causing a decrease in domestic consumption (acting to re-establish equilibrium).

3. How Does the "Rate" of Disruption from Geopolitics and Geology Compare?

There are also critical differences between the rate of geological depletion and the potential rate at which geopolitical disruptions cumulatively impact oil supply rates. Unlike depletion, whereby oil production from a given field or set of fields decreases rapidly after peaking before beginning to "tail off" and decrease more slowly (the black line in the graphic above), geopolitical forces may disrupt production catastrophically, or may disrupt production at a rapidly accelerating rate (the red line in the graphic above).

This is not to say that GFLs will have a greater impact than geology--while it is certainly possible that a single geopolitical disruption will dramatically outpace geological depletion over a short time period, geological factors will likely be the main determinant of oil production declines during the initial phases of peak oil. However, depending on our society's ability to mitigate Peak Oil with substitute energy sources and to adapt to a lower energy world, it also seems likely that geopolitical disruptions will eventually overtake depletion as the most significant problem. Because geopolitical disruptions will have a disproportionately greater impact in an environment of increasing oil scarcity, as well as due to factors involved in secondary and tertiary recovery methods, the right half of the global oil production curve will not look like the left--when the impact of GFLs are added to the rate of geological decline, the drop in global oil production may be much faster than generally expected.

4. Along What Timeline Will Geopolitical Disruptions Unfold?

Geological forces do not require an actual peak in global oil or energy production to begin to form positive feedback loops--rather, the catalyst for positive feedback is the onset of diminishing marginal returns in investment in energy, where energy begins to become more expensive in relative terms. While global oil and energy supplies may not have peaked, we have almost certainly crossed the threshold of more expensive energy. Also unlike depletion, geopolitical feedback loops may disrupt production in a region that is still far from geological peaking. For this reason, it is reasonable to expect GFLs to increasingly disrupt global oil production alongside an increase in the scarcity of oil, and before an actual peak in global production. Annecdotal evidence supports this view of the the timing of geopolitical disruptions: while some degree of scarcity of oil has coincided with geopolitical disruptions in the past, increasing scarcity over the past decade has coincided with easily observable increases in geopolitical disruptions. While I think the general issue of timing is obvious, one critical unanswered question remains: how fast will geopolitical disruptions impact overall production rates?

5. Will the Aggregate Effect of Geopolitical Disruptions be Smooth or Unpredictably "Bumpy"?

Unlike geological depletion, geopolitical disruption is uniquely susceptible to "black swan" events--things that simply cannot be predicted. This is problematic because, unlike geological depletion which can be understood as a slow but compounding process, geopolitical disruptions may appear non-existent, but then suddenly exert a huge toll on global production. This makes predictions of future oil production levels even more uncertain than predictions that account for only geological factors, and increased uncertainty in estimating future oil production makes selecting and mobilizing the necessary political will for various mitigation options more difficult.

Some GFLs, such as the Export Land Model, will likely produce fairly smooth and predictable effects. Others, like the increased motivation to target oil production infrastructure, will likely produce relatively smooth aggregate effects, but will be subject to significant and sudden disruptions--for example, if al-Qa'ida successfully destroys the export terminal at Ras Tanura, or if Iran blockaded the Strait of Hormuz. The critical unanswered question here is whether, in aggregate, the impact of GFLs will be predictably smooth (as assumed in the graphic at the top of this post) or unpredictably volatile.

6. Is the System of Geopolitical Feedback Loops Solvable?

Because individual geopolitical disruptions can be "solved", there is a tendency to think of them as separate from geological challenges (and thereby a convenient alternate explanation for those who don't like the implications of geological depletion). Additionally, there is a tendency to think that because individual problems are solvable, the system of geopolitical forces can also be solved as a whole (specifically, solved by the same tool-set of security, military force, etc.). In reality, while the occurrence of individual events and geopolitical disruption in individual regions is highly uncertain (and too complex to predict mathematically), the increasing scarcity of oil and other resources caused by geological factors creates an ever increasing catalyst to geopolitical disruption.

In the face of geological depletion, geopolitical disruption is not a question of if, but a question of where and how fast. If a single geopolitical disruption--say, a militant group attacking a pipeline--can be solved, why can't the larger system also be solved? In theory, it can, but there are systemic problems to solving the larger system. In general, this is because the "solutions" to the individual problems are actually to overwhelm and repress the root cause locally--something which will become increasingly difficult globally.

For example, the Nigerian rebels can, theoretically, be defeated by overwhelming government force, but this does not solve their grievance--that their ethnic group is being oppressed and resources that are rightfully theirs are being appropriated. Rather, it relies on overwhelming military force and expenditure to repress it (and, it should be noted, this "solutions" is being discussed theoretically, as the massive military force and expenditure by Nigeria's government at present is failing miserably to repress rebel attacks on oil infrastructure). It seems, at least to me, far more likely that the world can concentrate resources to temporarily repress geopolitical flare-ups regionally, especially in the earlier phases of peak oil. However, if global resources are spread thin, it is impossible to address every trouble spot simultaneously. Because of this, it seems unlikely that there would be enough pressure at individual points to repress disruptions across the entire system.

Finally, while many geopolitical problems can be repressed by favoring one side in a dispute as leverage against the other (the Exploitation Model), it is often not fundamentally possible to actually resolve the issue by making all parties happy (thereby eliminating the root cause of the geopolitical disturbance) because the minimum demands of opposing groups are often mutually exclusive. I've written about this problem of Mutually Exclusive Overlap before, and I think that it makes the global system of geopolitical feedback loops an inevitability. However, while I think that the broader system is not "solvable," I do think that it is possible to buffer their effect, a topic I will discuss in a later post.

7. Is Price the Sole Catalyst of Geopolitical Disruptions?

While demand destruction and economic troubles may grant a temporary reprieve from increasing geopolitical tensions (because they may temporarily reduce the underlying catalyst of scarcity), the steady march of resource depletion will eventually catch up and cause geopolitical tensions to escalate again unless a truly economical, scalable substitute for fossil fuels is built out sufficient to negate depletion and accommodate continued economic and population growth. In that sense, if peak oil is not a problem for humanity, neither will we suffer the exacerbating effects of geopolitical feedback loops. However, to the extent that peak oil presents a serious problem, it will be increasingly exacerbated by geopolitics.

Additionally, demand destruction is particularly inefficient at buffering these geopolitical feedback loops because the lowest value consumption tends to be "destroyed" first. In a demand destruction scenario, when consumers are forced to reduce consumption out of economic necessity, they will choose to first eliminate the consumption that is least necessary to the maintenance of their quality of life. As a result, as demand destruction gradually decreases consumption, the consumption that remains is, by process of elimination, increasingly inelastic. For this reason, demand destruction actually exacerbates the positive-feedback nature of these geopolitical phenomena.

A pipeline bombing, cartel action, or rise in domestic consumption that removes 500,000 barrels of oil per day from the international market exerts far more leverage on a future United States that consumes only 10 million barrels (due to demand destruction) per day of oil than it does on today's United States that consumes roughly 20 million barrels per day. However, if this same future United States only consumes 10 million barrels per day of oil due to the development of economically viable substitutes and voluntary efficiency measures, then this would not be the case. I'll address this point in more detail in my discussion on buffering GFLs in a later post. In general, if scarcity is the underlying catalyst to geopolitical disruptions, I think that price is not the best indicator of that scarcity--rather, price of a barrel of oil as a percentage of purchasing power parity may be more appropriate.

8. Are Geopolitical Feedback Loops "Scale Free"?

A scale free system (aka a fractal) is one that exhibits the same behavior at all levels. Do GFLs operate as a scale free system? Assuming that, at a point in the future where total oil production is rapidly declining, there would be a world wide catalyst for geopolitical disruption to oil supplies, would it also be true that a region where oil production is rapidly declining will see a regional catalyst before world supply begins to decline? The answer is still unclear. Mexico, for example, is already well beyond its peak in oil production--ahead of the global process of peaking. Does this mean that internal pressures in Mexico are greater than elsewhere, that the driving forces behind geopolitical feedback loops are greater than elsewhere, or that the attacks on Mexico's gas pipelines can be attributed to GFLs being more advanced in Mexico than elsewhere? We don't know.

In theory, it seems reasonable to suggest that a country experiencing the problems with its own early peak may experience greater geopolitical pressures than others, but it is far from clear that this is the case in Mexico where oil export revenues are still rising, and where there are ample alternative explanations for the gas pipeline attacks. Additionally, other countries where production peaked well before global production (e.g. the US, Norway, UK, though arguably not Indonesia) haven't experienced a localized rise in geopolitical tensions. There are many complicating factors (especially when viewing the US and UK and their position on the world stage), but this is a possibility to keep track of as some regions progress past peak before others.

9. How Should Quantitative Data be Integrated in this Model?

One criticism of this model of geopolitical feedback loops is, quite understandably, its lack of hard, quantitative data at its base. In one sense, the subject matter is fundamentally less suitable to quantitative, data-driven analysis than the core issue of geological depletion. Some exceptions stand out--the Export Land Model, mentioned above, is a prime example of a geopolitical feedback loop that is well suited to data-driven analysis.

Even ELM, however, presents problems for data-driven analysis. For example, when an exporting state that currently subsidizes domestic fuel prices decides to cut that subsidy when export revenues begin to decline, or if a state decides to buy domestic political support by using some of its export revenues to boost subsidies, how do we integrate the impact of this fundamentally political maneuver with the more pure analysis of net export declines? Similarly, it is quite challenging to gather accurate data of nationalist sentiment (and the degree to which this sentiment may lead to violence), the ability to mobilize political will to conserve resources for future generations, the degree to which resources motivated a military "adventure"--all of these demonstrate the challenge of bringing data-driven analysis to inherently "fuzzy" topics.

Perhaps the most important question is the degree of importance of data-driven analysis to this topic. Will the quest for mathematical analysis of these topics provide more predictive power for a given amount of effort, or will it create a misleading appearance of accuracy and predictive ability while actually creating faulty conclusions? If quantitative analysis is appropriate here, how, specifically, should it be carried out? This question, in particular, is one where I hope the many TOD readers with experience in this area will weigh in.

I plan to begin to introduce some quantitative data in the next post in this series by attempting to tally the amount of production currently shut-in or otherwise disrupted due to the various categories of GFLs around the world. I expect it will be difficult to accurately track this data over time (at least when compared with our ability to track actual oil production), but it seems like the best place to start with quantitative analysis, and may provide some insight into the rate and timing of geopolitical impacts on oil production.

10. Is the Potential for Financial Crash a Geopolitical Feedback Loop?

It's purely artificial to separate the financial impact of peak oil from the geopolitical impact--in fact, there are broad areas of overlap between the realm of finance or macroeconomics with geopolitics. How should these issues be integrated into this model, if at all? It is unclear to me whether financial markets are an exacerbating or mitigating factor in the context of broader geopolitical disruptions.

In one sense, the financial turmoil caused by high oil prices makes it more difficult to raise capital necessary to exploit new technologies, develop substitutes for oil, and to produce more economically challenging oil reserves. Likewise, price volatility and peak oil combine to exacerbate both financial and geopolitical issues. However, it can also be argued that financial turmoil mitigates the geopolitical problems of peak oil by destroying demand and reducing scarcity (though, as mentioned above, this is a double edged sword because it may increase inelasticity of the remaining demand).

I hope that readers can propose the best way to integrate models and predictions of financial turmoil (such as Gail the Actuary's recent financial market predictions) with this model of geopolitical feedback loops.

Conclusion

I've recently finished the book "We Think" by Charles Leadbeater. This book is an outstanding discussion of the advantages and pitfalls of collaborative innovation. I'm not proposing that the theoretical framework I'm setting forth in this and later posts is in any way gospel truth--it is an initial effort to tackle a very complex system of problems, and certainly needs further development. The Oil Drum is, in many ways, an ideal example of a "we-think" collaborative environment, and I hope that the amazing breadth and depth of knowledge of TOD readers will help to further develop this theory. Developing a better understanding of the impact of a system of geopolitical feedback loops in resource production is a critical first step in both improving our ability to predict future energy and resource supplies, and in understanding how to best act to mitigate resulting problems. Hopefully my answers to the above questions begin to lay out a foundation for a broad theory of geopolitical disruption to resource supply. In the next post I will look at several discrete geopolitical phenomena within this analytical framework, but for now my hope is to start a discussion of the overarching issues raised in this post.

This post also appears at The Oil Drum, where readers may be interested in following the comments (over 170 so far).

Georgia, the New Map, and Oil Pipelines

2008-08-11T09:11:00.004-06:00

I thought I would talk briefly about the current situation in Georgia/South Ossettia between Georgia and Russia. The news seems to be ignoring the critical aspect of this situation--that it is a symptom of the larger issue of the decline of the Nation-State.

In a recent diary entry, Jerome a Parils makes a good point that neither side here has any claim to a "moral high ground"--this isn't an issue of principle about supporting territorial integrity or supporting a national group, but rather an issue of realpolitik. It's also been building for quite some time. Stratfor has been screaming about the impending war in Georgia for years (they must be quite pleased to sound less like they've been crying wolf right now). I wrote about Georgia in the context of enveloping Central Asia's resources by the Shanghai Cooperation Organization back in 2006. The US has long maintained a sizable signals intelligence ground station in Georgia, and has been advising Georgia on fighting Islamist rebels in the Pankisi Gorge region. This is something to watch for--one angle the US may use to argue the moral high ground approach is that they need to ensure the "territorial integrity" of Georgia in order to deny a training ground to Islamist "terrorists" in the Pankisi Gorge (sound familiar?).

It's also important to ground what's happening in Georgia in the larger context of the decline of the Nation-State system. I wrote and presented a paper about this at the 2006 Yale Journal of International Law conference which some people may find worth reading, and highly recommend Philip Bobbitt's "Shield of Achilles" for an in-depth look at the topic. The basic issue is not that the "state" is going away, but that the constitutional basis of a "state" in providing for the welfare of a contiguous "nation" is increasingly invalid, leading to the rise of the "market-state" (where the constitutional basis for the state comes from its ability to provide market opportunity to those within its borders) and a growing conflict with disenfranchised and marginalized nations (and other non-state groups) that exist wholly or partially within the borders of the new market-state.

This "market-state"/"nation" conflict is the new lever of choice in the new "great game." Where it serves Russia's interest, they will support a non-state "national" group against the integrity of a "market-state" (Georgia). Where it is against their interest, they will support the "market state" (here, Russia) against separatist "national" groups (e.g. Chechnya, Dagestan, and a dozen other internal problems--Siberia, for example, has some serious separatist problems). Similarly, the US will support the "market-state" where it must (as in Georgia, Iraq, Pakistan, etc.) and will support non-state "national" groups where it serves its interest (Kosovo, the Ahwaz rebels in the Iranian province of Khuzestan where most of Iran's oil is, the Baluch rebels in the East of Iran, but not the same rebels in the SW of Pakistan, etc.). Where this "market-state"/"national" conflict overlaps with key resource production or exportation infrastructure, look for increasing problems, in part because the conflict between nations and state will intensify, and in part because growing resource scarcity will make resource infrastructure an increasingly popular and effective target within the context of these struggles...

Just for context, here is the route of the Baku-Tbilisi-Ceyhan pipeline that connects Caspian Sea oil with the West (it was also bombed, probably, last week by Kurdish separatists in Turkey, so is currently shut down):

Russia also bombed the trunk pipeline from the BTC and associated export port to Georgia's black sea coast, thereby requiring all Azerbaijani oil to transit Russia. Before this bombing, a portion of the oil carried by the BTC could have been re-directed via the Black Sea without transiting Russia:

Brazil to the Rescue

2008-08-04T08:10:00.003-06:00

Yet another in the series of "X to the Rescue." It's not news that there's been a lot of hype--some of it warranted--about recent oil discoveries off the coast of Brazil. My goal here is not to explain how challenging these oil finds are (as in how many thousands of feet of sea water, rock, and salt deposits lie on top of the oil), how speculative the reserve estimates are, or how long it will take to bring these fields (such as the headliner "Tupi" field) online. Rather, my goal is just to compare PetroBras (Brazilian state oil company) statements about Tupi with Brazilian internal consumption:

PetroBras plans to start production from their Tupi field in 2009. They plan to produce up to 30,000 barrels per day that year, increasing to 100,000 barrels per day in 2010. It plans to order 28 new drilling rigs between 2013 and 2017, so presumably it plans to increase output over that period.

In 2007, Brazil was a net importer of crude oil, importing 30,000 barrels per day. Between 2006 and 2007, Brazil's internal consumption rose 90,000 barrels per day. Brazil's car sales were up over 24% in the first half of 2008, so there is at least some reason to think that internal oil consumption will keep rising as fast or faster than in the past. If Brazil's rise in internal consumption keeps pace with last year for 2008, 2009, and 2010, they will more than consume all the new oil from Tupi and related fields internally, and place increasing demands on the world export market.

I have little doubt that Tupi and other new Brazilian fields will be good for Brazil, but I think it is a mistake to think that they will significantly impact the world oil market over the next decade.

Upcoming

2008-08-04T01:03:00.002-06:00

I'll be back to regular postings starting this week. Over the next few weeks I have a series on geopolitical feedback loops in oil production planned that will all feed in to my presentation on the topic at the Association of Peak Oil & Gas conference in Sacramento this September 21st. I'll be speaking in one of the Sunday panels, which all look like they will sell out based on early registration numbers. I also have planned a series on various aspects of demand destruction.

Re-Post: Hamlet Economy

2008-07-28T01:43:00.000-06:00

Here's the last re-post before (original here) I return to new content, one of my favorites from that past, and a good intro to the potential for what I call rhizome, others call "networked villages" or "resilient community."

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The goal of this post is to outline a concrete framework for establishing a new economy based on rhizome structure that provides negative feedback against encroaching hierarchy, that ensures environmental sustainability, and that maximizes its compatibility with human ontogeny. I will first outline my approach to the problem, then look at one historical example—how the lattice network of Tuscan hill towns created a topology that addressed its unique circumstances, then analyze the optimal theoretical topology of a modern rhizome economy, and finally discuss some real-world concerns for the conscious design and establishment of a new hamlet economy.

Part 1: Methodology

This post aims to take the theoretical structure of rhizome, and flesh-out how a real-world economy will be built upon that model. Rhizome, in short, is defined as a non-hierarchal network of self-sufficient but interacting nodes. Within the context of a hamlet-economy, defining the threshold of self-sufficiency is the key theoretical step. It would be unrealistic to suggest that each individual be totally self-sufficient—while perhaps possible, it would result in an unacceptably low standard of living, as well as lack the resiliency necessary to prevent the accretion of hierarchy. It would be equally unrealistic to place the threshold of self-sufficiency too high, for that would create uncontrollable dependencies internal to the economic structure that would trend, eventually, towards a kind of feudal hierarchy. The exact location of the threshold of self-sufficiency may vary, but it must be at the lowest level, under the circumstances, that can:

1) Leverage the de-facto division of labor without dividing the knowledge to perform that labor. This permits raising the potential standard of living above individualized self-sufficiency, without creating dependency on the knowledge of another that can lead to hierarchy and exploitation.

2) Provide adequate redundancy to absorb sufficient systemic shock. For example, if self-sufficiency is placed at a level of two-person groups, then in the face of a shock that incapacitates one person, the other must absorb the full shock. Similarly, because this model will be based partially on horticultural modes of production, it must have enough diversity that it can absorb failures of certain crops or resource production processes brought about by weather, disease, etc.

In this model, I have placed the threshold of self-sufficiency at the familial group level. This threshold leverages the existing, biological human tendencies toward kinship, and creates a basic rhizome node that consists of roughly 10-40 people, or about 4 extended, nuclear family units.

The mode of production for this model is a hybrid of horticulture, gathering and hunting, with emphasis on a highly diverse system of horticulture (based on permaculture, fukuoka, and forest-garden concepts) to maximize standard of living, but with continual maintenance of significant spare capacity (geographic space and knowledge) to both hunt and gather to act as an absorber of systemic shocks.

Finally, the issue of specialization and specialty production must be addressed, where each node, in addition to providing minimal self-sufficiency for themselves, also produces one or more specialized product to facilitate economic interaction with other nodes, as well as to leverage the communication and information processing capability of rhizome to organize economic interaction in a way that generates much higher standards of living than can each node on their own. This latticed economic interaction is the glue that holds together the rhizome structure, ultimately serving as the strongest defense against encroachment by hierarchy—a single node cannot likely hold out against expanding hierarchy, but a well connected rhizome society of nodes can.

Part 2: Topology Lessons from a Tuscan Hill Town

This discussion of nodes and lattice is all very theoretical—it can be difficult to envision how it would actually take shape in the “real world.” For that reason, an extant, historical model that illustrates many of these concepts is useful. Tuscan hill towns are an interesting example—certainly not a perfect example of rhizome, but they are a decent example of a networked economic topology that consisted of many relatively self-sufficient nodes. They are, as with all vernacular physical geography, a unique product of their circumstances: fertile terrain punctuated by rough forests and hills, Mediterranean climate, an ancestral fabric of small farms, and a disintegration of rule by outside powers that led to the many social, economic, and technical innovations of the Italian city-states. My personal favorite is Lucignano, a relatively small and insignificant hill town depicted below. I will use it as the model hill-town for purposes of this discussion, so take a moment to familiarize yourself:

Figure 1: Here’s a map of Lucignano. Note the defensive arrangement of the housing and the patchwork of small fields.

Figure 2: Here’s an artist’s sketch of Lucignano…both the map and the sketch below depict the town in its modern form, which as far as I could tell hadn’t changed much in several centuries.

Figure 3: A picture of Lucignano that I took from the Fortezza Medicea (see map above) where I stayed for a week in May of 2002.

I trust that you’ve enjoyed your brief virtual-tour of Lucignano…

It is interesting to note the impact of the continual wars between Florence, Siena, and other renaissance city-states in Italy on the architecture of the classic Italian hill town. Is this kind of inward-looking, defensive posture necessary in an envisioned future? Can a more open design, oriented to capture passive solar possibilities, be viable? What sizes of settlements are necessary—small familial farmhouse clusters, hamlet clusters of families oriented for convenience or defense, or trading or craft-industrial villages that produce local specialty products? In the case of Lucignano, many or most farmers lived within the defensive walls and walked to their fields each day. Additionally, the degree of hierarchy—resulting from the high-level threshold for self-sufficiency (which was located at the level of the hill town—in this case over a thousand people)—was certainly not optimal. The specific architecture and economic structure will vary by climate, resources, level of defensive need, etc., but the basic network structure of the hill towns remains instructive: the hundreds of hill towns that dot the map of Tuscany formed a powerful and resilient network of localized economic interaction. Today, this same region is demonstrating a resurgence of the very kind of sustainable, “fulfilled ontogeny” economy that is the goal of this model, even though it exists within a largely hierarchal and industrial society. The “Slow Food” movement was, in fact, initiated by the mayor of Greve-in-Chianti, one of the more famous hill towns of this region, and is now spreading around the world. Finally, and perhaps most importantly, the Tuscan hill town is an important symbol of the “good life” that may ultimately be achieved through this kind of rhizome economy—it is something that is desirable even within our modern culture, that can be readily understood, and that promises not “a return to the stone-age,” but a positive vision of “moving forward with an eye to the past” that is nearly universally preferable to the experiences of modernity. Since this can be such a difficult theoretical concept to sell, the ability to relate it to a well-known example is invaluable. There are certainly other examples, but within Western culture, this one may carry the most weight.

Part 3: The Optimal Topology of Rhizome and the Hamlet Economy

Rather than try to explain the optimal topology of a rhizome structure in words, I will try to more effectively illustrate this structure in the captions of the following graphics:

Figure 4: The above illustration is the theoretically optimal topology for a single rhizome node, representative here of a familial cluster. Close and strong connections exist within the node, representing the connectivity inside the extended familial group. Outside links are variously looser and weaker connections, the closer connections with the local hamlet, and the distant connections creating inter-hamlet ties, and creating the “small-worlds” situation where weak and distant connections greatly enhance the overall efficiency of connectivity. The green region denotes the geographic space required by the node to achieve minimal food self-sufficiency.

Figure 5: The above illustration shows a hamlet, or a cluster of familial nodes. The groupings in terms of 4:4:4 is not fixed, but merely a convenient way to convey a flexible structure. Close and strong connections exist within the hamlet, and variously looser and weaker connections reach outside, replicating in a fractal manner the same “small-worlds” theory as seen in individual nodes. The larger, lighter green region represents the geographic space required for “wildlife, hunting, and foraging,” or permaculture’s “Zone 5,” which is controlled “in trust” by the hamlet for their non-exclusive use, but available for their use as a reserve-bank should their horticultural scheme underperform.

Figure 6: The above illustration represents the broader landscape of a lattice-structure of clusters of rhizome nodes. It represents a theoretical distribution, and demonstrates that there are no “super-hamlets,” towns, or villages—the landscape is “flat” at the hamlet level, because any accretion to a higher order settlement would open the door to hierarchy. Instead, more complexly coordinated functions are facilitated by temporary groupings, as shown in the next illustration.

Figure 7: The above illustration denotes the ability of transient connection, fairs, festivals, etc. to affect longer-distance, weak connectivity that greatly enhances the overall efficiency of the lattice’s communication and information processing capability. Because more distant nodes are brought in contact with these occasional events (shown as dashed blue, red, or purple lines), the number of nodes that information or exchanges must transit to span large distances is greatly reduced (as illustrated by the black line transaction, where only two steps are necessary to bridge a distance that would otherwise require 8 steps in neighbor-to-neighbor transfer). These larger, weaker, and transient networks facilitate more complex activity and more specialized economic exchange without facilitating hierarchy. For example, even if only one node in 50 actually breeds goats or brews beer, all 50 nodes will have easy access to these products through seasonal fairs, transient markets, etc. In theory, there is no limit to the technological or industrial complexity that can be handled by such transient groupings of a still “flat” rhizome lattice. This format prevents more complex projects (defense, highly specialized goods like metal working or glass, social richness) from acting as a catalyst to the creation of hierarchy.

Figure 8: The orderly geometric lattice structure must, in reality, be draped over the natural geography, to include terrain, climate, resource distribution, etc.—as illustrated above with regards to a simple topographical map. While the theoretical and geometrically symmetrical lattice illustrated in Figure 6 provides easier initial conceptualization, the lattice illustrated in this figure is more realistic. In reality, several different “conceptual terrains” will each simultaneously impact the actual geospatial structure of the lattice. For example, physical terrain, difficulty of travel, resource concentrations, water availability, soil richness, etc. will all influence the layout.

Part 4: Reality, and the Implementation of a Hamlet Economy

Real-world implementation of this conceptual “hamlet-economy” requires efforts to guarantee resiliency, coping with the existing built landscape, and achieving coordination and standardization of this fractal pattern without a top-down hierarchy.

Rhizome lattice is great, in concept. However, if it does not demonstrate adequate resiliency, it will only last until the first major systemic shock—and systemic shocks have always and will continue to impact humanity, from weather, war, technology, famine, disease, etc. The hamlet-economy fosters resiliency by using long-time-horizon resource cultivation techniques, as well as planned redundancy in resource cultivation. For example, the forest garden concept is illustrative: while all horticultural and agricultural schemes vary in annual return, failure of a forest garden scheme one year does not propagate failure in future years. With a forest garden, after establishment, large quantities of resources are stored and available for harvest to make up for shortfalls in other areas. Similarly, maintenance of spare capacity in foraging and hunting, used only minimally in years where horticulture produces well, provides a safety net for years when horticulture produces poorly. This built-in redundancy is critical to maintain the viability of horticulture—along with its normal benefit of increased standard of living—through years when horticulture performs poorly.

It is also important to recognize that the implementation of this kind of hamlet-economy will, in most circumstances, require adaptation of an existing landscape—in most cases a landscape that is not sustainable, that is hierarchal, and that is not compatible with human ontogeny. This introduces an artificiality, in the sense that the theoretical structure may be impacted by existing hierarchal infrastructure (like towns and highways). Perhaps the best way to circumvent this is to begin to “plant the seeds” of a hamlet economy in existing rural areas, and then expand into prior towns and cities as they become non-viable.

Finally, it is important to address the issue of enforcing this structural pattern without utilizing top-down, hierarchal means. One key tool in this effort will be the use of open-source arguments to explain and justify the reasoning behind adapting this pattern—such as, hopefully, this post. Another will be the use—perhaps in modernized format—of the traditional norm enforcement tool of myth. Stories explaining the pitfalls of straying from this basic structure will help to keep the core principles intact. Finally, and I think most importantly, the success of this theoretical structure will depend on the ability of the pioneer implementers to demonstrate that it provides a better standard of living than other structures. If the average American could live the “good life” of living in a stereotypical Tuscan villa, and if they are shown how they, too, CAN have this lifestyle, then people will literally flock to this structure. Ultimately, this is a POSITIVE vision of the future—not a reversion to feudal serfdom, but a progression to a more egalitarian and human-compatible life…

Head Fakes, Demand Destruction, and Net Exports

2008-07-23T15:34:00.003-06:00

Oil is down to about $124/barrel. Apparently we're saved, as demand destruction is making gas cheap again. $124/barrel certainly wouldn't have felt like good news three months ago, but there you have it. Is this actually good news? Here are a few quick items to consider:

Head fakes are dangerous. Whether this price drop lasts a few weeks or a few years, it will have the tendency to lull the world economy into a dangerous sense of complacency. I guess we don't *really* need to address the energy problem, as oil is back down under $130/barrel (or under $100/barrel, or under $80/barrel). Then we continue to calcify our energy demand requirements as geological depletion marches ever onward. A price retracement increases the chance that we get caught unprepared facing the cliff on the far side of the undulating plateau of peak oil production.

Net exports continue to decline, down by another 90,000 barrels or so from May '08 to June '08.

Demand destruction keeps getting harder, while geological doesn't slow down. America still has lots of "low hanging fruit" to pick in the form of reduced consumption and energy efficiency, but each subsequent measure is more difficult, more inconvenient than the one before it (otherwise we would have chosen that one first).

Lower oil prices have the potential to boost a flagging consumer economy, and help America get through the "credit crunch." This might seem like a good thing at first--and in many ways it is. The credit crunch is a solvable problem--get rid of the irrational loans, stabilize the credit system, and there is no financial impediment to continued economic growth. BUT... continued economic growth means continued increase in ability to afford oil (even at current high prices), which will slow demand destruction and may ultimately exacerbate the problem. As counterintuitive as it seems, $200 oil by late this year probably makes $500 oil further away than $100 oil by late this year. I wrote about this in "Timing: The Credit Crunch & Peak Oil."

Finally, as I wrote last week, it really comes down to whether emerging markets can keep up their demand growth. If we accept a 5% rate of decline in production post-peak, the US can probably keep up that rate. It would be difficult for our economy and society to decline at a 5% rate year after year--the first few years would be easier, but it would get increasingly difficult--but it seems very possible by improving vehicle efficiency, increasing the use of electrified rail, etc. However, the US only uses 25% of the world's oil, so if we can match the 5% decline rate that doesn't get the world out of the woods. The rate of WORLD consumption must match the rate of world decline in production. As of now, there is no sign of demand destruction in India, China, Russia, or the third world in general--there are some signs of reduction in the rate of growth, but that is NOT the same thing. IF India, China, and others can hold non-US consumption flat (a big IF), then the US would have to decrease consumption at 20% per year to match a 5% global rate of production decline. That would be tremendously difficult--that equates to 4 million barrels per day less use the first year, 3.2 mbpd less the second, etc. until the US is only using 6.55 million barrels per day after 5 years--less than 1/3 our current use.

It will be interesting, to say the least, to see how things play out. I think that the best scenario is for a steady and slow increase in the price of oil. Unfortunately, what I think is more likely is a scenario where the only thing increasing more rapidly than the price of oil is price volatility. $200/barrel still won't surprise me this year, but neither will $75, or even one followed by the other in either order. Higher volatility makes it more difficult for consumers and voters to properly understand the nature of the problem that we face, and easier to blame some scapegoat. As I mentioned above, $3 gas by election day makes $10 gas likely to happen much sooner than if we have $5 gas by election day...

Algeria & Morocco: Natural Gas Cartels, Fertilizer Mercantilism, and Rising Tensions

2008-07-21T01:15:00.001-06:00

This originally appeared last week at The Oil Drum. I may have a brief, original post this week if time permits.

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Algeria is one of the world’s most important oil and gas exporters. Morocco has no significant oil and gas production, but has about 2/3 of the world’s rock phosphate reserves, a critical component in global fertilizer supply that increased 300% in price in the past year (.pdf) and may peak alongside global oil production. The two nations have historically been at odds, especially over the phosphate-rich territory of Western Sahara. Now, more than ever, their exports are critical to the energy and food supplies of the world. Alongside increasing importance, tensions between the two are on the rise as the US and Russia provoke the situation with massive opposing arms deals and bi-lateral trade agreements. This article will look at the forces behind these rising tensions and consider issues of fertilizer mercantilism, infrastructure vulnerability, and the potential formation of a natural gas cartel.

Will Demand for Gas & Fertilizer Bring New Conflict to Morocco & Algeria?
Country Briefs:

Algeria: Algeria is an important exporter of both oil and natural gas (background .ppt on NG supplies to Europe). Algeria is Europe’s third largest supplier of natural gas, providing 30+ bcm via pipelines and 20+ bcm via LNG tanker in 2007. Major projects are currently underway to expand pipeline infrastructure to Italy (via Tunisia) and to Spain (both direct undersea and via Morocco), and to expand LNG export capability. Algeria hopes to expand total natural gas exports to 85 bcm/year by 2010, making their production roughly the equivalent of Norway (Europe’s 2nd largest provider). Significantly, the potential to expand natural gas supplies to Europe enhances Algeria’s importance as an alternative supplier in light of current dependence on uncertain Russian gas supplies. Algeria also faces an active Islamist insurgency, a separate threat from the rising al-Qa'ida in the Land of the Islamic Maghreb, and serious demographic challenges in the form of a 1.22% population growth rate (graph) and sharp ethnic divisions (map).

Figure 1: Algeria's Place Among African Natural Gas Reserves

Morocco: Morocco's importance to the global economy is due to its control of at least 2/3 of the world's reserves of rock phosphate. The USGS has stated that there are no substitutes (.pdf) for rock phosphate in agriculture. With biofuel demand increasing steadily, and world food shortages hitting the headlines, rock phosphate is arguably as important to the world situation as oil supply. Importantly, Patrick Dery has performed a Hubbert Lineraization on world phosphorus production and estimates that we have already passed peak phosphorus (see graph below). While the importance of rock phosphate has been discussed here before, its impact on the situation between Morocco and Algeria has not. Additionally, fertilizer supplies are a critical component of many biofuel projects, creating an interrelationship between phosphate and energy supplies. Like Algeria, Morocco faces an internal Islamist insurgency (though currently less troublesome than in Algeria) and has significant demographic challenges with a population growth rate of 1.6% (graph) and sharp ethnic divides (map).

Figure 2: Peak Phosphorus? A Hubbert Lineraization of Global Phosphate Production

Tensions: The Sand War, Western Sahara, and Islamist Insurgencies

There are several sources of tension between Morocco and Algeria. The two states fought the Sand War from 1963-64 over a mineral-rich border territory. In 1975, when Morocco took control of Western Sahara, Algeria began overtly backing the Polisario Front in an ongoing insurgency that continued unchecked until a 1991 cease fire. Both states also suffer from internal Islamist insurgencies, exacerbated by increasing demographic problems. The situation in Algeria is most severe: after independence from France, the revolutionary National Liberation Front ruled the country until Islamists won the first free elections in 1991, prompting the military to immediately seize control. More than 160,000 people were killed in the ensuing civil war between 1992 and 2002. While the country is relatively peaceful today, factions of the Islamist rebels have remained, operating out of rural regions inside the Malian border and elsewhere in the Sahara, and have recently merged with al-Qa'ida to form AQIM (al-Qa'ida in the Land of the Islamic Maghreb). The group has recently carried out several attacks in Algeria, including the April 11 2007 Algiers Bombing, the December 11 2007 Algiers bombing, the 2007 Batna bombing, and the 2007 Dellys bombing, as well as being possibly involved in the 2007 Casablanca bombing in Morocco. The pace of attacks has not slowed, with at least five bombings in the last two months alone.

Infrastructure Targeting?

While Algerian Islamists have generally mirrored target selection of Islamist groups elsewhere, one attack in December, 2006, specifically targeted Haliburton workers in Algeria. This tactic, of targeting critical infrastructure and energy industries, has been increasing around the world as non-state groups everywhere realize that they can maximize their return on investment with these targets. With rising internal threats and state sponsored proxy conflicts, and the potential for direct state military attacks no longer too remote to consider, it is concerning that both Algeria and Morocco present some extremely high ROI energy and resource infrastructure targets:

- Morocco: The Fosbucraa Conveyor, the world’s longest conveyor belt, transporting phosphates from the world's largest phosphate mine at Bou Kra 100km to the port of el Aioun. The conveyor was successfully attacked several times by the Polisario Front. Here's a satellite image.

- Algerian pipelines & LNG infrastructure: Algeria is chock full of high-vulnerability, high-consequence targets. Algeria recently signed a 100 million euro contract with French defense firm Thales to secure oil and gas pipelines. With 16,200 km of major pipelines to protect in Algeria alone (and scheduled to increase to 21,000 km by 2010), the task is daunting. Additionally, two potential future infrastructure projects may represent appealing targets. The proposed Trans-Saharan natural gas pipeline, that would deliver Nigerian natural gas to Europe via a 4,550 km pipeline, would represent a lengthy and vulnerable target to multiple groups if it is ever built (construction is “penciled in” to start in 2015). Additionally, speculative plans (such as the Trans-Mediterranean Renewable Energy Cooperative, or TREC) to leverage high solar insolation in the Sahara to generate electricity for Europe would require huge transmission infrastructure that would be both highly vulnerable and highly attractive. Neither the Trans-Saharan pipeline nor TREC is in any danger of being built in the immediate future.

Thoughts on the Future: Proxy Wars & Proxy Mercantilism

Recently, the fragile 1991 cease fire agreement with the Western Saharan Polisario Front has become increasingly unstable. Complicating the situation with Western Sahara, French President Sarkozy announced his support to Morocco's decision to postpone indefinitely the self-determination referendum promised in the 1991 accord, along with increased Algerian support to Polisario leadership. All this comes against a backdrop of rising military tensions between Morocco and Algeria. In 2008, the US doubled military aide to Morocco and announced arms deals worth billions of dollars. At the same time, various sources confirmed that Russian concluded a $7.5 billion deal to provide advanced arms to Algeria.

Is there any deeper meaning behind these moves? At least two possibilities must be considered. The first is proxy-mercantilism by the United States to secure control of phosphate supplies. In 2004, the US entered into a bi-lateral free trade agreement with Morocco. This can be explained as a natural extension of the long history of economic and military cooperation between the US and Morocco, but in light of proposed biofuel programs, skyrocketing rock phosphate prices, potentially peaking phosphate production, and mercantilist moves by other great powers, the more nefarious possibilities must be considered. The second possibility is that Russia hopes to leverage increased influence with Algeria to exert greater influence in global natural gas markets. Because Algeria is one of Western Europe's few true alternatives to Russian natural gas supplies, especially given the prospect of sharp increases in Algerian natural gas exports, Algeria represents either a threat to Russian natural gas leverage, or a great enhancement of that leverage by entering a defacto gas cartel. At a minimum, we know that Russia and Algeria are actively engaged in talks on this topic. Also, a recent offer by Gazprom to buy all of Libya's additional oil and gas production supports this suggestions that Russia hopes to control Europe's alternative sources of natural gas.

Both notions of phosphate mercantilism and a gas cartel are merely informed speculation at this point, but the stakes are so high that these possibilities must be considered. While there may be no deeper motive behind recent moves with Morocco and Algeria, at a minimum the stakes and tensions are increasing. Because both Algeria and Morocco are fragile Nation-States, with active Islamist separatist movements, significant internal terrorist threats, and complicated ethnic/territorial problems, the potential for interruption in critical exports of phosphate, oil, and gas is increasing.

Demand Bifurcation Point

2008-07-15T10:53:00.003-06:00

The future of the global economy will, in my opinion, turn more on this question than any other:

Will demand destruction hit India and China, or will their oil consumption continue to rise?

The answer here will determine much of how peak oil plays out. It isn't a "tipping point" where we'll suddenly enter a post-peak world, or an energy-scarcity world. We're already there. Rather, this is a "bifurcation point"--a potential radical divergence in the impact that peak oil has on the global system.

If the Indian and Chinese economies are fragile--as many think--and can't continue to grow with $150 oil, then they will cut back on demand, and oil prices may stabilize as global oil demand stays in line with gradually declining global net oil exports. This will allow for a more gradual response to energy scarcity, a re-tooling toward renewable sources, new settlement patterns, etc. If, however, the Indian and Chinese economies are much more resilient than many think--as I think is the case--then Indian and Chinese oil demand will continue to rise rapidly, more than making up for any demand destruction in the more mature western economies. The result will be continued rapid price oil price increases, additional economic stress in the West, and greater turmoil in general. I think the answer to the question will largely turn on the vibrancy of internal consumer demand from the growing middle class in both states. It's simply too early to predict with confidence, but here's an indicator that suggests Indian and Chinese oil demand will continue growing:

China June Auto Sales up 15% Year-on-Year

That's 836,000 new cars in China in June alone. And, significantly, in China the majority of these new cars are the first car for an individual consumer--so these aren't replacing existing cars that were already on the road, but rather are new cars that weren't on the road before. In India, May auto sales were up 14% year-on-year to 110,000 cars--that shows how much room to grow India has just to catch up to China's level of automobile penetration in the populace! GM expects global auto sales to increase 4% in 2008, meaning 2.8 million more vehicles will be sold this year than last. Especially considering that sales in mature western economies are expected to stagnate or decline, the majority of these new sales will come in developing nations where they are disproportionately more likely to represent a new, additional car on the road, not a replacement car.

The prospects for global demand destruction are not looking good. Oil is a globally fungible commodity--demand destruction in the US may be rising very slowly, but this is irrelevant in the face of rising global demand. Personal investments in cars increase the inelasticity of demand--when people have sunk cost in a car, it skews their calculation on the value vs. cost of consuming gasoline. Unless the trend in global car sales turns around, it's hard to envision a long-term retreat in oil prices...

Vernacular Zen (re-post)

2008-07-14T01:52:00.000-06:00

I'll post new content next Monday with a cross-post of an article on Algeria & Morocco that will soon appear in The Oil Drum. In the interim, here's a re-post of one of my favorite posts from 2004, and a much needed dose of denial-free optimism for these troubled times:

Vernacular Zen: Glimpses of "The Original Affluent Society"

I am an advocate of localization, simplification, self-sufficiency and fulfilled ontogeny. Slow food. Tribalism. A thousand other catch-phrases that, above all else, raise a singular objection from friends and critics alike: isn't your idealized vision starkly juxtaposed to your professed enjoyment of the finer things in life?

My response: on the contrary, my good friend...these worlds are in fact one in the same, only separated by the disinformation of the consumer economy.

Povero o Rico?? Is this an image of a "poor" fishing village or one of the worlds most exclusive resort islands? Actually, it's both--a picture of the idyllic island of Panarea (just North of Sicily) taken by the author while sailing away aboard the 38' sailboat "Fandango."

I have spent, to be perfectly honest, more than my fair share of mornings slowly enjoying an espresso as the fog burns off the slopes of Mount Etna in the distance, the scent of blood orange blossoms mingling with the sharp aroma of coffee. This is the kind of perfect moment that embodies our cultural ethos: sacrifice enough of what you love now, and you'll make enough money that some day you'll be able to buy back those priceless experiences in the form of a luxury cruise, a meal at that new bistro or a beach house in Florida. The irony is that this perfect moment cost about 65 cents--that's less than 8 minutes wage for a cashier at McDonald's, and yet it's enough to make highly paid executives and professionals alike salivate. This should tell us something...

The finer things in life can generally be divided into two categories: material and experiential. Despite the relentless psychological barrage of advertising, most of us can readily admit that it is the experiential that is truly rewarding and fulfilling. Many even recognize their own predilection to fulfill their desire for the experiential by compensating with an excess of the material. Commercialism tells us that the experiential--that which requires time--is too costly, out of our reach. Our time, we are led to believe, must be sacrificed to meet the demands of the economy. But time is free for all of us. It is the great equalizer, something to which we all have equally random access. But in the modern economy, where average individuals cannot directly provide for themselves, they are duped into trading time for the basic necessities of life--necessities that are directly available to the poorest of the Earth. As this economic hierarchy has intensified over time, we continue to be duped into trading our time for material possessions--far beyond those required to survive. The memes of our economic culture have convinced us that the material is a fine substitute for the experiential. A nagging doubt, dissatisfaction with our own suburbanization, some unknown, unfulfilled yearning tells us that, despire the overtures of mass-media, even the materially rich among us still long for the experiential.

The sun on your face, playing with your children, staring at a fire until late into the night, sitting still in the forest listening to the wind rush through aspen leaves, talking with friends, laying on your back in a meadow and watching the clouds pass above you. All of these things are free--they require only time. Hunter-gatherers around the world spend, on average, less than 20 hours a week "working". The rest of their time was available for the experiential, the "finer things" in life. Perhaps this is why anthropologist Marshal Sahlins calls them "The Original Affluent Society", or why Paul Shepard says that humanity's time in the "hamlet economy" was the best it ever had.

The finer things in life are nothing more than a connection and a oneness with those things that modern culture insists remain separate or "sacred". This connection is available to all of us. Reconnecting to the finer things in life is not dependent on success within the modern commercial economy...on the contrary, my good friend, this reconnection requires that we take a new--or is it old?--approach to life. This is vernacular zen.

We-Think & Rhizome Design

2008-07-07T01:27:00.000-06:00

Limited posts for this Monday and the next two Mondays as I'm studying for the Bar exam on July 29th. As time allows (or the need for a study break dictates) I'll try to include something of substance.

This week, a follow-up on last week's post on rhizome platform design, I'm recommending the book "We Think" by Charles Leadbeater. The book, itself a product of open-source collaboration, details open-source design efforts around the world, from Wikipedia to the Grameen Bank (just for good measure, I'll link to Grameen Bank via Wikipedia...). Leadbeater is probably the world's leading thinker on the future of open-source collaboration, so, while he is not specifically focused on the core rhizome concepts of self-sufficiency, decentralization, and eliminating dependencies, his theories are potential sources of inspiration.

You can read the draft of his book free at his site, or watch his You Tube video on the topic. You can also buy it on Amazon, though I had to get my copy as a UK import--not sure when it will be available mass market in the US.

Preparing the Battlefield: Iran

2008-06-30T08:54:00.002-06:00

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

2008-06-30T01:38:00.003-06:00

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 LifeT rac 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.