2007: Trending

Well, it's time again for my yearly predictions. First, let's see how my 2006 predictions panned out: I predicted no major Bird Flu outbreak was likely and--pretty safe prediction--none occurred. I'll stick with that for 2007--no major outbreak is likely, but it's certainly possible. It's really just a matter of probabilities at this point, with a pandemic in any given year very likely, but with occurrence at some point in the next 20 pretty probable. I similarly predicted no major terroist attack in '06, and was on the money--but again, this was a pretty safe prediction. I still don't think that it really serves the interests of most islamic extremist groups to waste effort with attacks in the US when that effort can be so much more effectively applied within the Islamic world at this point--though "Islamic Extremism" is by no means a monolithic movement, so the possibilitiy of a "lone-wolf-group" attack is always present. I was pretty close on target with oil prices--I said that they would oscillate around $60/barrel ending the year around $70. As I write this they're just over $62, but there is certainly correlative data that suggests price manipulation around the election (though we must be careful to distinguish correlation and causation). Finally, I was pretty far off the mark with Iraq. I accurately predicted that the Iraqis would realize that the election and "democracy" will not solve their problems, and that those problems would get worse. However, I was not able to accurately forecast the degree of incompetence on the part of the Bush administration, so my prediction that troop levels would be effectively drawn down (re-deployed in theater to provide a theater strike force) never materialized.

2007...

So what will this year bring? I've titled this year's predictions "Trending" after what I see as the overarching theme in the coming months: the continuation of existing trends that will create a "trend line" so clear as to increasingly become obvious. It will no longer be possible to hide the facts or to explain them away as some kind of "blip."

Iraq, Iran, and the Great Game: With Niyazov's death, Turkmenistan enters the "toss-up" category and we will see the geopolitical chess match for control in the Middle East acclerate. However, while violence in Iraq will continue to escalate, and the too-late attempts to force a "Battle of Baghdad" by the current administration will fail, we will see the clear emergence of the trend that has already begun to surface: the de-facto division of Iraq into secular enclaves. US forces will finally begin a draw down, though confusion and disagreement is so rife within US policy circles on this topic that we will even fail to effectively chart this course of action in the coming year. Iran will continue to play pragmatist, balancing their own internal politics with nuclear development, bi-lateral energy deals with China, and a careful tightrope dance with the UN Security Council. No war on Iran this year.

Oil Prices: Here's where the trend becomes clear. I'll resist the temptation to "play it safe" and predict an $80 close at the end of '07. Instead, I'll tell you what I think will really happen. "Peak oil" will become a word that is frequently heard on newscasts as it becomes clear that Saudi Production is dropping (no longer hidden behind a veil of "OPEC cuts"). Russian production will also fall, as will Norway, UK, Venezuela, US, Iran, and Mexico (more on that later). As this trend becomes clear, oil prices will quickly reach $90, and may even flirt with $100 before the year is out. It will be impossible to cover these stories as the media blitz surrounding the '08 elections begins to pick up steam, and the media listens to the various politicians who need to emphasize the problem before they can win points with their "solution." Even though the suggested solutions of Ethanol or Hydrogen or drilling of the Pacific Coast don't hold water, they all have the common theme of being more valuable to their respective candidates the worse that the current oil supply situation seems to be. As a result, "peak oil" will officially "tip."

Economy: Housing prices will level off and stagnate in most areas. But it will be with the "fictional economy" of derivatives that we will continue to see growth. The economy will sustain itself as a whole--driven largely by accelerating gains in the energy sector and among the "super rich" that offset the decline in just about everything else. However the most remarkable phenomenon will be the clear trend towards a division between rich an poor. A new, de-facto aristocracy will begin to make its presence felt as the super rich get richer, and the Median American wage gets lower. The dollar will slowly continue to slide, but I don't see a cliff in '07--we'll probably close out the year around $1.42 per Euro.

Mexico: Here's what I'll say is the most sigificant development in '07--the Mexican economy will collapse. Inflation will go on a tear. Cantarell will drop off a cliff (no real surprise here) and Calderon will leverage what little credit Mexico has left investing billions in new development in the Gulf that will never come to fruition--but that will create the same kind of debt crisis in the coming years that we have seen in other South American countries. With oil revenues essentially 0 (when you factor in the increased exploratory spending and borrowing to "develop"), the federal revenues will fall through the floor. When you account for higher airfare due to fuel costs, tourism dollars will dry up as well. As a result, Mexico will go into a tailspin. The full impact of this will not be felt in '07, but the trend towards this fate will become clear. This will also set in motion forces that will begin to tear (further) apart the illusory fabric of the American nation-state: decentralization in Mexico will lead to increasing cross-border "illicit" activity, from human smuggling to drug smuggling to organized crime to black market activites focused around the death of "intellectual property." Not a good year for Mexico, but it will increasinly become clear that this is also a very bad sign for the US, and for the Nation-State as a concept.

2007 - Year of the Trend. Next up, Breakout.

Transparency

John Robb has an interesting new post called "Radical Transparency to Improve Resiliency." It tackles the same concept that I addressed two years ago in "Open Source Warfare vs. Arcane Use For Power": that "secrecy" is an outmoded symptom of hierarchy, and that focusing instead on accelerating our information processing (via the OODA loop model) and understanding the benefits of transparency within a game-theory model should allow us to move beyond secrecy. Take a look at Robb's article because he provides covereage of this topic from a slighly different perspective--but, interestingly, one that is less "4th-Generation Warfare" centric than his usual posts. Here, his posts directly address economic activities.

I think that the most fascinating part of this whole discussion on transparency vs. secrecy is the prospect that an awareness that processes must move from secretive to transparent may also force them (to some degree) from hierarchal to rhizome. I have long argued that rhizome is a more efficient means of information processing (it just isn't as efficient at accreting benefits to a select few)--perhaps the business world will begin to embrace this? I'm not holding my breath...

**I just can't help but point out, mainly because as someone who is generally not very good at puzzles I'm still rather impressed with myself, that the title of my original post consists of two phrases that are anagrams of each other and ALSO convey the juxtaposition of ideas in conflict therein: OPEN SOURCE WARFARE and ARCANE USE FOR POWER.

However, before I spend too much time congratulating myself, I'd like to appologize for the relative crappiness of my latest post on oil prices, "Curve Ball." I had (and still have) a much more detailed and I hope well-thought out commentary on that topic in the works, but the article as posted reflects a very early and partial draft as it stood at the point when my wife went into labor and I just hit the "publish post" button. One of these days I'll back up and address the issue properly.

Practitioners

It's easy to discuss the feasibility or impossibility of local, small-scale sustainable horticulture or permaculture, vernacular architecture, and low-consumption, high-quality-of-life-living. These people aren't just talking--they're doing and they're sharing their adventure (and what they've learned) with the rest of us. This is truly critical if we are to leverage our "one time shot" (of the availability of unsustainable, high-tech communication) to develop a truly sustainable, high-quality-of-life culture:

Ran Prieur: Ran is developing a permaculture homestead on a few acres in rural Washington, complete with plans for a cob cottage.

Lichenology: Zane is building a sustainable homestead in rural British Columbia.

Farmlet: Kevin & Rebecca are building a permaculture settlement in New Zealand

Farmer Scrub: Norris is building an urban permaculture oasis on a standard house lot in Portland, Oregon.

Please post other examples of this kind of ideologically-focused experimentation in creating self sufficiency in the comments--I plan to provide some of my personal plans on this topic soon.

On another note, take a look at this excellent essay from Rob at Transition Culture about "The Tuscan Way of Surviving Collapse." It's something that is near to my heart--I've written about future sustainability modeled after the Tuscan system--and it is valuable as a bridge between the kind of personal examples of the "practitioners" listed above with creating a fully sustainable society.

Ella

There won't be many posts in the next few weeks, at least not of any value. But I have a beautiful, three-day old excuse.

Curve Ball: Extracting Geological-Economic vs. Geographical-Political Impact on Oil Prices

The Oil Drum had an interesting post today that dredged up some of my old (and I think still accurate) thoughts on the Oil Futures Price Curve. The more I think about it, the more it becomes clear to me that there is very important and very fundamental information available from the shape of this curve, though I don't have the data at this time to prove or disprove my own hypothesis. Three forces impact the curve of oil price futures: Geological-Economic Supply and Demand Balance, Geographical-Political Supply and Demand Balance, and Arbitrage.

Geological-Economic Theory Supply and Demand Balance: Much more predictable out several years, as known projects scheduled to come on line can be forecast several years out, known or predicted geological depletion rates can be applied to existing production, contribution from alternative or non-traditional energy sources can be accounted for at varying price levels, etc. Geology and Economic Theory present a low-noise, digital picture. By that, I mean that day-to-day events in the news have minimal impact on the price as impacted by geology and economics—these forces use broad and general theories to make significant and long-term predictions about what will happen to prices. One example is the “classical” economic prediction that commodity prices will always go down in the long-run. Another example is the “peak oil” hypothesis that supply will begin an inexorable decline, coupled with the economic hypothesis that the elasticity of demand for oil is so low that price will always increase in the face of declining supply. In this sense, the impact of geological-economic factors on prices is digital: either future prices will continually increase or they will continually decrease, depending on which theory one subscribes to.

Geographical-Political Supply and Demand Balance: This is primarily a short-term impact on futures prices due to the imprecise nature of long-term, geopolitical forces acting on supply and demand. Pundits and traders don’t even try to predict the difference between 3-years in the future and 5-years in the future with regards to the impact on crude oil supply due to events in Iran, for example. Predictions are primarily for what will happen in the next year, with impact of future predictions having exponentially less impact to the degree that geopolitical predictions have virtually zero impact on prices more than two years in the future. Geopolitics present a highly “noisy” signal that diminishes sharply as it travels into the future.

Arbitrage: This force pulls the curve towards a mean. Even IF we knew that oil supply would suddenly drop by 75% exactly five years from today, the price of an oil future 5 years out is structurally prevented from vastly outpacing the current price. This is because if prices 5 years out were $30/barrel above prices for next month, arbitrageurs would buy near-term contracts and take delivery while simultaneously selling contracts for 5 years into the future. They would then store the oil until they had to deliver it to cover the future contract, and pocket the difference in the price of those contracts minus the cost to store. The ability to arbitrage is, of course, itself constrained by the availability of storage facilities—but this is only a very near-term constraint because unmet demand for storage facilities will result in more being built.

Reading the Curve: It is my hypothesis that the shape of phase one of the futures price curve is primarily dictated by geopolitics, and that phase two of the curve is primarily dictated by geology & economic theory. If true, then we can extract geopolitical uncertainty by looking at phase one, and we can extract the market consensus on geology and economic theory as it relates to oil production by looking at phase two. This is a critical distinction because it corrects the popular fallacy that current-month price movements are an indication of long-term oil supply (suggesting that only the second phase of the curve should be used for energy policy and economic viability decisions), as well as telling us when the market consensus has finally accepted peak oil (and thereby a contango curve for oil futures prices). More specifically, it is not the empirical level of the second phase of the curve (its dollar value) that matters, but rather its slope: the price of oil two years out compared to the price of oil five years out.

Analysis of the above figure--if you accept my thinking thus far, which remains only a hypothesis--tells us that there is a short-range geopolitical premium in oil prices, and that there is still a general market expectation that, over the long-run, the price of oil will decrease (as shown by the negative slope in phase 2). However, comparison to phase 2 of this same graph from 6 months ago suggests that the market is much less certain in their convictions regarding this point. I think it is also important to point out that the more important contango vs. backwardation determination for oil markets comes exclusively from phase 2, where the valuable information of contango or backwardation conditions can be transmitted, free from the geopolitical noise. Suggesting that oil markets are now in contango because the current price is lower than the price 5 years out is incorrect, in my opinion, because it ignores the upward translation caused almost exclusively by the near-term geopolitical noise.

Passive Cold

Passive heating is pretty broadly understood. Passive cooling is less well known, though there are several different and viable methods. But most people think that "passive" and "ice" or "refrigeration" are just not possible. Not so.

A true passive solar refrigerator is possible--using either anhydrous amonia or water as the refrigerant--but it certainly isn't simple. The point of this post is to consider modern adaptation of the ancient techniques for making ice in the desert. Iranian architect Nader Khalili first piqued my interest in this topic, and I think that it has potential for application in modern, sustainable architecture.

The two key concepts to understand are evaporative cooling and radiative cooling. It takes energy for water to evaporate, so when it does so it cools the remaining standing water and the air into which it evaporates. And when water (or anything else) is exposed to the night sky, it cools through radiative cooling. Combine these two, and it is possible to make ice on a dry desert night, even if temperatures only drop to the low 60's. A few illustrations will help:



Figure 1: The tradtional Iranian and Indian means of making "night ice" is to place a shallow pan of water in a pit, insulated from the warm ground, and exposed to the night sky. Radiative and Evaporative Cooling combine to form a thin layer of ice.


Figure 2: The same concept from above can be modified to create a "cold box," where the cold from the ice tray cools the content of a box.


Figure 3: Or, on a larger scale, this concept could be applied to refrigerate an entire root cellar by cooling it at night to a temperature below what is possible in a traditional root cellar (where the minimum temperature is that of the surrounding earth).

Tort: The Once and Future King

I've been thinking about something that Daniel Quinn wrote some time ago--that "tribes" don't have the same concept of punishment as "civilization" does. Tribes, he says, try to remedy the wrong more than to punish the wrongdoer.

Tribes, of course, do not have crime at all. None--by its very definition. Before the anthropologists dredge up examples of rape, theft, or murder, let me explain: Tribes don't exist free of harmful conduct, but their reaction to it is fundamentally different. Tribes have tort.

Crime, by its definition, is action against the state by an individual. Tort, on the other hand, is action by one individual that harms another individual. This is the accepted legal definition.

Criminal "justice" is intended to punish the individual for violating the authority of the state, and as such the result is usually to lock up the criminal as an examplary, deterrent, or incapacitating measure. Criminal "justice" has absolutely nothing to do with righting the individual victim of a crime. Our criminal system is intended to strengthen the state--it is a positive feedback loop that supports hierarchy.

Tort, on the other hand (if we ignore the recent and ill-advised jurisprudence involving punative or exemplary damages), is intended to compensate the individual victim for the results of the wrongful act. This is a negative feedback loop, supporting stasis.

So, from the perspective of hierarchy vs. rhizome, perhaps we should be a bit less critical of tort claims. Tort is, to borrow the classic phrase, the "once and future king."

Wait... OK, Now Invest!

Maybe the fine people at FXCM read my blog? This just keeps getting funnier: