Restoring Balance (Now Subsidy Free!)

From time to time I have been told that I ramble on about the two opposing modes of organization: hierarchy and rhizome. One of the most common critiques I hear is that hierarchy isn't really so bad--after all, it exists in nature. Quite true, both hierarchy an rhizome DO exist in nature, an will continue to be important parts of life on Earth. The trouble with hierarchy is that it is presently grossly overrepresented. The organizational balance is far out of whack--more than eliminate hierarchy just for its own sake, we need to work to restore a dynamic balance between hierarchy and rhizome, between centralized and distributed organization. The problem with doing that is the institutionalized subsidy that civilization uses to underwrite its hierarchal foundations.

Rob Hopkins at Transition Culture has an outstanding post today entitled "Making Power-Down Electable: Who Will Vote for the Promise of Less?" This cuts right to the heart of the matter: there is no realistic alternative to perpetual growth, increase, and intensification of our hierarchal structures unless the subsidies that favor such a mode of organization are removed (as discussed in A Theory of Power, Chapter 7). If politicians are elected on the basis of promising the most to the voter, then who will vote for someone who campaigns for "less growth, but balance!"?? If corporations are legally required to maximize shareholder return, then when will they ever say "sure, we could do less environmental damage and undertake sustainable operations, but we will have to reduce our growth targets"?? If central bank monetary policy has an "inflation target" of about 3-4%, then who can possibly afford to invest in a static, sustainable solution?? If your money and assets aren't appreciating by MORE than 3-4%, then you're falling behind. Can't have that. If the Generally Accepted Accounting Principles don't require that all future costs of present actions are accounted for, then when will either government or corporations ever be concerned with the future impact of massive fossil fuel use or pollution? If the defense-budget subsidy artificially lowers the cost of producing and transporting oil and gas around the world, when will unsubsidized, renewable energy sources ever be competitive??

Decentralized, rhizomatic solutions ARE competitive if we would just stop subsidizing hierarchy. This would allow a return to the natural balance between hierarchy and rhizome that exists in nature. This doesn't get around the more basic problem of "who will vote for the promise of less." Unfortunately, the solution to this problem is more complicated, and requires that we frame the problem within the bounds of the human time-horizon (as discussed in A Theory of Power, Chapter 4). If the people can be convinced of the unsustainability of our current system, and that the impact of this unsustainability will lead to crisis within a time frame that matters to humans, then people will take action. There is a long record of humanity electing to sacrifice now for a better future, whether it is for the protection of our children, for a promised eternity in heaven, or just for the feeling of winning a grueling race. But in order for people to elect a present sacrifice, the problem must be suitably framed within our ontogeny.

Some recommendations for removing subsidies to hierarchy, implementable once the problem has been framed within the necessary time-horizon:

1. Central banks should have 0% inflation targets. Better yet, we should do away with central banks and have only commodity-backed currencies, because central banks, almost by definition, create inflation and debt. Otherwise we are institutionalizing a demand for perpetual growth. This alone will ripple powerfully through the financial markets, affecting everything from government borrowing to interest rates.

2. Take a suggestion from Austrian Economics and impose cost at the point of creation. This is the single most flagrant point of subsidy to hierarchy in modern economies. Want to buy some gas? Well, it now costs $5/gallon because we included the $300 billion a year the DoD spend to protect supply lines. Still want to buy gas? Now it costs $10/gallon because we also assess all future pollution-related costs at the pump (and put the money in a trust to improve and repair that damage). If you're really still in line at the pump, then the price is now up to $15/gallon because the costs of road construction, maintenance, and policing are now included (rather than being subsidized by payments out of income taxes). At $15/gallon--i.e. without a subsidy to driving--suddenly localization, condensed zoning, mass transportation, etc. would all be viable in the marketplace. That's a key point, because it's an uphill battle to convince people to spend more "because it's the right thing to do." But without the pervasive subsidies to wasteful, hierarchal systems, it would make the most market sense to adopt localized, sustainable solutions--and that is exactly the point that we must reach if we are to turn this ship around.

Is any of this actually realistic, or is it just pie-in-the-sky dreaming? Well, it certainly threatens many (most?) vested interests in our society. However, if the public is actually armed with this information, with an understanding of how our system works and why it will soon fail, then people may actually demand change. That part--awakening the masses--is certainly a challenge, but history has shown over and over that it can be done. As V so aptly pointed out, people shouldn't be afraid of their governments, governments should be afraid of their people...

Investing in Oil: Evaluating Several Options

Disclaimer: This post in no way constitutes investment advice. It is nothing more than a hypothetical evaluation of the potential returns for a variety of investment possibilities that are linked to the price of crude oil. All of the below scenarios carry considerable risk, and individuals should perform their own research before investing.

_____________________

There is a growing sentiment that the price of oil will increase—perhaps dramatically—in the next few years as global oil production peaks and begins to decline. There has been a concurrent and growing discussion about what investment vehicles make the most sense to take advantage of this expected increase. This post will look at five separate investment possibilities, explain their fundamentals, and evaluate their respective returns under several possible future-price-of-oil scenarios.

1. Oil-Related Equities: The most common advice, available for free across the internet and cable news channels, is that the best oil investment is in oil companies, oil-industry service companies, or oil-focused mutual funds. There are two opposing forces at work here. As the price of crude oil rises, the profit to be made from existing, developed reserves will increase proportionally. At the same time, as the ability of oil companies to produce oil decreases (or the cost of non-traditional production increases), their profit potential will decrease. Stock price is, theoretically, the total profit of a company for the rest of eternity discounted by the time-value of that profit. In reality it is a much more short-sighted phenomenon. However, at the point at which an oil company’s production, and hence profit, is widely expected to dramatically decline in the foreseeable future, then that company’s stock price will decrease well before their profits actually decrease. For this reason, if one accepts the basic Peak Oil premise, investing in oil companies is only profitable in the short term. Exactly where that crossover occurs will depend on the dynamics of oil production decline, but cannot be objectively evaluated at this time.

2. Oil ETF: This Monday, the AMEX will begin offering an oil “Exchange Traded Fund,” or ETF. This is basically a fund that will track the value of a barrel of crude oil, minus a 0.5% annual management fee. It is primarily an opportunity for smaller investors to add oil to their portfolios without the need to purchase a whole option or future (which start in the several thousand of dollars each), and without the high volatility of those vehicles. Anyone with who can buy and sell stocks on line (e.g. Ameritrade, eTrade, ScottTrade, etc.) will be able to purchase the oil ETF.

3. Oil Futures: An oil future is a contract to pay a certain price per barrel for 1000 barrels of oil at a defined time in the future, normally as far as 5 years out. A future contract has high potential return, but it is highly volatile and one can potentially lose significantly more money than was initially invested. Buying or selling a futures contract is more complicated than simply buying or selling stocks, mutual funds, or an ETF, but is not beyond the capacity of armchair investors.

4. Oil Options: An “option” is when someone pays to have the option to buy or sell a specified futures contract at a specified future price. For example, a call option on a December 2010 oil future at a strike price of $80/barrel means that the option owner has the choice—but not the obligation—to purchase 1000 barrels of oil for $80/barrel in December 2010. So if oil is less than $80 barrel at that date, the option expires worthless. If oil is at $200 dollars a barrel, however, then the option is worth ($200 - $80) x 1000, or $120,000. Options have unlimited potential profit, but you can never lose more than you initially invested. Buying or selling options is about as complicated as buying or selling futures.

5. Related Hedges: There are also a number of related investments that **should** increase in value along with the price of oil. One such related investment is gold, because rising oil prices are inflationary, and gold is a traditional hedge against inflation. However, there are a variety of scenarios where oil could increase and gold could decrease in value, so this is by no means guaranteed to be linked to the rise in oil.

SCENARIO EVALUATION: Below, the relative risk and profit on oil ETF, futures, and options are laid out for a variety of different prices of a barrel of oil in December, 2010. They are calculated using oil, future, and option prices as of 29 March, 2006 (click to enlarge):

A Note on Using Oil Vehicles as a Hedge:

Beyond “investing” in oil (which is, itself, a debatable label—more accurately it is “speculation”), it is also possible to use the above vehicles as a hedge against rising oil prices. Briefly, a hedge in oil will offset the increased cost incurred by each of us as oil prices rise. For example, if one personally plans to use $1000 in oil each of the next 5 years at current prices, then by investing $5000 in the oil ETF you will lock in that cost for the next 5 years. So if oil doubles in price, your cost to use the same amount of oil will also double, but you will recoup that added expense through profit on your oil ETF. Roughly, this is what Southwest Airlines has done (they are hedged through 2010), and is why they remain the only profitable airline. An oil option is the most efficient hedge mechanism because it requires tying up less money to hedge against a given quantity of oil usage, without incurring the risk of losing more than you paid for the option. Such a hedge is valid against several potential future problems: the decrease in suburban home values, the cost of commuting, the cost of home heating and electricity, potential losses in index mutual funds, possible hyper-inflation, potential downturn in the economy leading to unemployment, etc. However, calculating exactly how to hedge for each of our individualized risk-sets can be challenging and imprecise.

Running on M3

Well, this week the Fed will stop reporting M3 (see A Peak Behind the Curtain for a discussion of M3 and its significance). The Economist, not exactly a publication known as a hang out for tin-foil conspiracy hacks, has an excellent article in the March 25th edition (available to subscribers only online HERE, or see page 12 of the print edition). Their title tells us what they think about this move: "Running on M3." Funny, I wonder if they intended the Peak Oil connotations of their allusion to "Running on Empty"?? Although the Iranian Oil Bourse will not be opening as scheduled this month (probably delayed 6+ months), and there are other talks about a dollar-denominated Qatari bourse, there is still good reason to question the Fed's timing here. Despite the Fed's claim that M3 conveys no information not already embodied in M2, The Economist points out that M2 and M3 have grown at divergent rates twice in the recent past: once in the late '90s equity bubble, and in the past year when M3 growth was double that of M2. Bottom line, from The Economist, is that such loose monetary policy does not bode well for controlling inflation (see graph).

Oil Price Reporting

Perhaps you've noticed that oil prices continually "dip," "drop," or "plunge," but the price of oil really doesn't seem to be going dow over time. Funny. Sure, sometimes the news reports that prices "jump" on some unexpected news--say one of the rare attacks in Nigeria that actually gets reported. More often than not--in my opinion--the price rises don't get reported. So, I am announcing my plan to begin to track this interesting little phenomenon. In an attempt to make this an objective suvey, here is my proposed methodology:

I will check daily after the close of the NYMEX at a set list of internet news sites, and I will record whether each site runs a lead story (defined as "above the fold" on my browser) that mentions in the headline that oil prices either rose or fell (not "how much," but just "yes" or "no"). Then I will record the actual NYMEX price change for that day. I will post my results regularly in the form of some kind of snappy graph. Here are the sites (all US for now) that I will check daily, feel free to follow along:

http://www.msnbc.msn.com/id/3033676/
http://money.cnn.com/news/specials/gasprices/
http://www.foxnews.com/business/personalfinance/energy/index.html

My hypothesis: the news agencies are selectively ignoring the effect of overnight trading on the oil markets. Yesterday's NYMEX pit close is not the price at which today's NYMEX pit opens--instead, the markets trade electronically all night, and the close of the electronic market 1/2 hour before the pit opens is the new opening price. I think that when there are significant gains in electronic trading, but a minor fall in prices during the pit session, the news agencies report that oil prices decline. For that reason I will calculate day on day change in pit session closing price, rather than just the change during the pit session, as this reflects more accurately what the price of oil is doing. For example, today (March 22, which I am not counting in my experiment), the day-on-day pit close was up because of price gains in overnight trading, but the price fell slightly during the pit session. MSN and CNN both reported that the price dropped (Fox had no mention), but neither had any metion about the overnight gains. We'll see what happens...

When Will Peak Oil Tip? (from Backwardation to Contango)

No, I didn't just make up those words. As you probably know (but I just recently learned), Backwardation and Contango are two terms used to describe trends in the prices of a futures contract over time. Contango is the norm, and it is where the price of a commodity farther in the future is higher than the price of that commodity nearer in the future. Backwardation is the reverse, where the cost of a commodity in the more distant future is less than it is in the near future. Backwardation is not normal, and is suggestive of supply insufficiency. Funny, for quite some time now crude oil has been in backwardation:




"CLZ" in the above graph represents the December NYMEX WTI Crude Oil future, and the number after CLZ represents the delivery year. Prices are in US dollars, current as of market close on March 21.

Let's examine a bit of the mechanics--and the psychology--behind contango and backwardation. Basically, for any non-perishable commodity, contango is the norm because of arbitrage: the price of a commodity one year from now should be today's price plus the "cost of carry," that is, the cost to store that commodity from now until the future delivery date, including the relevant time-value of money. If the future cost rises any above that, then arbitrageurs can simply buy the commodity today, sell the future contract for the same commodity, and store it until that future is due--locking in a profit. Of course to do so also locks up the arbitrageurs funds for that period--which could be used in some other investment--so the time-value of that money must also be included. Backwardation, the reverse of contango, is indicative of supply shortages in today's spot market because if there is ANY spare capacity for production it would be used to take advantage of today's higher prices, resulting in those prices declining. It doesn't make sense--under backwardation--to reserve any available supply because future prices are lower than today.

Of course, when we factor in the phenomenon of Peak Oil into this equation, it becomes clear that backwardation and contango are largely based on psychology and the standard free-market assumption that higher prices will increase supply. It is my theory that backwardation and contango are THE CRITICAL INDICATORS to determine when the phenomenon of Peak Oil has "tipped" (in the Malcolm Gladwell sense) in the perception of the market. Backwardation--accepted wisdom tells us--is indicative of current supply shortages, but ALSO of the ASSUMPTION that these shortages are only a short term market inefficiency and will eventually be corrected. However, should the crude oil market switch from backwardation to contago without a significant decline in current prices (suggesting that current supply problems have not been solved), that will suggest that the "market" has accepted the Peak Oil hypothesis that oil supplies will increasingly decline in the future, and hence that the commodity will get increasingly expensive. For this reason, I believe that the switch from backwardation to contango will be the market indicator that the peak in crude oil production is not only here, but perhaps more importantly that it is accepted by the broader financial community...

Interestingly, while it is too early to make any definitive conclusions, it looks like that transition may already be happening--Compare the graph below (from Bank of England, showing February '06 backwardation) to the graph above (showing late March '06 backwardation):



I don't, unfortunately, have sufficient historical data to make a convincing case--yet, but there certainly appears to be a significant shift towards contango in the '09 - '10 time-frame, DESPITE an actual increase in spot price since February 15th. Are the markets beginning to accept that Peak Oil is real, and that it is imminent?

More on Oil...

Some interesting developments in the world of oil:

1. In 2005 we used 6.5 barrels of oil for every 1 that we discovered. The latest issue of Foreign Affairs, inside the front cover, has a fascinating ad from Chevron saying that "the world consumes 2 barrles of oil for every barrel discovered." Will you join us??? Sure, if you'll stop blowing smoke about oil use and reserves (see item #3 below, re: the Army's own assessment on this issue). The rest of the issue also had a few PO denial articles. One (by the VP of Eni) was so bold that I found it amusing. To paraphrase, the guy said that Peak Oil is all fearmongering because at present levels of consumption we hav 38 years of oil left, so no big deal. You'd think that, by the time you get to be the VP of Eni, you would know about a standard logistics curve, and realize that 38 years of oil doesn't mean that we'll just go on at current levels of production and then in 2044 just suddenly have no oil. No, production will gradually tail off--and that (particularly how fast production declines) is the source of the Peak Oil problem. But, even setting aside the logistics curve issue, I still plan to be alive in 38 years... I'm guessing this VP of Eni doesn't. I pitty his children.

2. Great graphic on Khuzestan that helps to explain my earlier post, "Keep an Eye on Khuzestan":



3. The US Army (through the Defense Technical Information Center, DTIC), has released for public consumption a report on their projections of Peak Oil, and its impact on future Army operations. Here's a tantalizing quote:

"World oil production is at or near its peak and current world demand exceeds the supply. Saudi Arabia is considered the bellwether nation for oil production and has not increased production since April 2003."

Hmmm...sounds like the US Army has managed to cut through the disinformation. Might want to download and save this .pdf before someone decides that this is no longer fit for public release...

Thoughts on Primitivism

Time for another change of pace from Geopolitics: primitivism...

I don't normally write about primitivism, although it is a topic that interests me a great deal. Other people tend to do it better--the Tribe of Anthropik being the best example. See Jason Godesky's Thirty Theses for an excellent primer. To most people John Zerzan is the leading luminary of primitivism. He's a very kind and intelligent man, from what little personal contact I've had with him, but I don't agree with parts of his more extreme brand of primitivism. For example, I disagree with the assertion that human symbolism, time, art, and language are themselves evils. As I pointed out in A Theory of Power, these tools are not themselves evil, but they have inherent power-relationships associated with them, and we must find ways to control their side effects or we give up control to these symbols...

In general, I see primitivism as one of a number of possible strategies in a post-collapse scenario. It is certainly the most proven--it has demonstrated over hundred of thousands of years that it WILL work. That doesn't mean that it is the only solution, although it certainly seems to be the safest choice. However, I am fairly confident that some alternatives exist--specifically, strategies that merge some elements of pure primitivism with some elements of horticulture, and even some--though carefully constrained and controlled--elements of hierarchal civilization. Just like there are a million different ways to implement primitivism, there are a million different ways to implement non-primitivist strategies. Why bother, though, if primitivism is the safest bet? Well, I think that while primitivism is a proven option, that in itself doesn't make it the BEST option. In fact, I think that if we carefully understand why primitivism offers a superior quality and sustainability of life in some areas, and the benefits and pitfalls of non-primitivist solutions, then a hybrid will be able to provide superior quality of life. I don't mean to paint Anthropik as some zany, purist primitivists--their own writings recognize this kind of hybrid potential. Godesky has even pointed out that tribalism (which I think is his phrase for an intelligent, hybrid primitivism that keeps the necessary aspects of the purist perspective and augments as is wise to do so) and space exploration are not a priori incompatible. Even Zerzan, in a letter to me a few years ago, explicitly endorsed "permaculture or Fukuoka type methods."

That long introduction out of the way, the purpose of this post is to simply state that learning a pure primitivist skill set is never a bad idea. More than mere "survival training," the primitivist skill set provides a potentially complete option that hedges bets against any of a number of future scenarios. One part of the primitivist skill set is hunting--something that, without the benefits of modern civilization, may be much more difficult than most people anticipate. If you don't already have a rifle and bullets, what the hell do you do? Trying to build a bow and arrows with no "modern" tools is an invitation to frustration. I can be done--but you'd better not try to learn when you're already hungry. You can make a spear pretty easily, but getting close enough to large game to use it is another problem altogether. So what to do? Well, anthropology and ancient history teach us that there is a very effective weapon, easily made, with good range, that is useful against a wide range of smaller game, from rabbits and squirrels to birds: the sling. Ancient Britons took down fully armored Roman Legionaries with slings at several hundred feet, so I'm guessing that they could even take down a deer. I read somewhere that some guy also took down a Goliath with a sling, but I'm not sure how much credibility to lend to the story. Not that this is really in any way insightful--most people have probably heard of a sling--but there is a catch: they're damn hard to aim at first. But with a little practice, you can get our aim down pretty quickly. I made a sling while camping once--not, I should say, out of wild materials--and found that after about an hour I could consistently hit a log at about 50 feet.

Anyway, I plan to try making two slings, the first from "modern" materials, and the second from wild materials around my house. I'll let you know how it works out. My inspiration for this bit was the two rabbits and a squirrel that I saw in my back yard this morning... but I don't think I'll be hunting in the backyard anytime soon--too many windows. And on that note, a word of caution: at least for novices like myself, sling have this nasty tendency to sometimes sling their projectile in an entirely unintended direction, so best to practice alone at first...

Resource on slings:

Wikipedia: Slings (Weapons)

Slinging.org

The Sling (Ancient Weapons)

Happy hunting...

Notes

Just returned from an international law conference at Yale. Here's the paper that I presented, which is a much improved and expanded version of a previous post on this site. In general, it was cold, and I managed to walk by the Skull and Bones building several times after dark... creepy, but not as creepy as:

New suggestions that the recent al-Qa'ida attack on the Abqaiq gas oil separation facility wasn't exactly a failure, as has been widely reported. A member at peakoil.com says that, after visiting the facility today, the two explosions definitely happened inside the security perimeter, and in fact right next to critical points in the facility's infrastructure, actually causing some damage to the facility's oil processing capability. Not that a cover-up is surprising.