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:

Invest Now!

This just cracked me up. It seems that I have an odd sense of humor:


Hint: don't forget to look at the banner ad. This is how people lose their hat in currency speculation... maybe FXCM should consider a new sales pitch?

Energy Mercantilism on the March

Just over a year ago I wrote about the New Energy Mercantilism, the set of geopolitical phenomena emerging as nations realize that, in the future, there will not be enough energy to go around to sustain projected demand. A market-economy solves this problem by increasing the price of energy until demand inelasticity is overcome and the energy is allocated to where the market says it is most valuable. Mercantilism, rather than trying to distribute shares of the pie more efficiently, aims to lock down as large a share of the pie as possible for your own needs.

A year later, it is clear that mercantilism is on the march.

Joseph Stroupe has written a fascinating article in Asia Times Online about the rise of energy mercantilism. Specifically, he outlines the mechanism by which nations like China, Russian, and India are embracing the mercantilist approach. All three nations are rapidly moving toward an energy market dominated by long-term, bi-lateral supply contracts. This might not sound like a major change, but consider that today energy is supplied to high-liquidity trading bourses where the person willing to pay the most gets the energy. This is significant for two reasons: 1) it ensures that everyone around the world pays roughly the same price for energy (after transport costs are accounted for), and 2) it reduces the ease for deploying the "oil weapon" through an embargo because such action has very dispersed effect--holding 4 million barrels of Iranian oil per day off the free markets increases the price for everyone, forcing your enemies and allies to bear the diminished effects. Long-term, bi-lateral supply contracts (where, for example, Angola commits to supply China with 200,000 barrels per day of crude oil at $60/barrel for the next 10 years) fundamentally alter this dynamic. First, by locking in future energy prices (at quantities far higher than can be achieved on the futures exchanges), everyone will not pay the same price for oil in the future. Second, by exiting the open market through such contracts, the precsion-targeting of future oil embargos increases dramatically. Increasingly, significant portions of China and India's energy supplies are being locked into such long-term, bi-lateral contracts, as are the majority of Russian gas shipments to Western Europe. As a result, much less of the world's energy needs are being met through freely-traded market instruments. It is especially significant when we consider who remains primarily dependent on the free market for their energy supplies: the US, Western Europe, and Japan. As traditional and swing producers (who's production is expected to decline rapidly over the coming years) begin to export less oil to the open exchanges, the price impact on the "West" will be diproportionate. Similarly, the "West's" vulnerability to oil embargos will increase dramatically. Participants in bi-lateral agreements will not be exposed to the same risks to their supplies--they can always resort to the market exchanges to make up for shortfalls (though at higher prices), but the reverse is not true--the "West" cannot quickly resort to bi-lateral agreements to guarantee supplies in times of crisis.

Long-term, bi-lateral agreements also remove energy supplies from dollar-denominated exchanges far more effectively than does opening a non-dollar-denominated exchange. Russian supply contracts to Europe are already non-dollar denominated, even though Russia's ruble-denominated exchange is not yet in full operation. China pays in yuan for oil from Africa--which doesn't harm the petrodollar system for now, as long as that currency remains pegged to the dollar. But the tipping point when domestic Chinese consumption becomes the prime driver of their economy is fast approaching, and at that point the benefits of maintaining the dollar peg will have evaporated.

Peak oil, when it hits world markets with full force in an unknown number of years, will only exacerbate this trend. I'm not so sure about freedom, but energy mercantilism is definitely on the march.

Imperium

I heard a fascinating interview this morning on NPR with Robert Harris, author of "Imperium: A Novel of Ancient Rome." You can listen to it online here. Harris talks about his new book, Imperium, which is a work of historical fiction set amidst the developing Empire in Rome. Most fascinating was the historical research that Harris discussed. Did you know that one of the key events in the fall of the Republic was a pirate attack against the Roman port of Ostia? These stateless groups had the gaul (no pun intended!) to do what no organized state could and attack Rome right at its heart. The smoke rising from the flaming port of Ostia could be seen from the hills of Rome. Roman citizens, shocked that they could be attacked right at the heart of their realm, were easy pickings for opportunistic politicians. Records suggest that one speach actually included the phrase (in the context of convincint other nations to assist in combating the threat from pirates) "either you are with us or you are our enemy." General Pompey exploited this environment of fear to ram through the Senate new laws essentially stripping the populace of many of their substantive rights and paving the way to Empire. By the time Julius Caesar gained power (asserting dictatorial powers to save the Republic for the people, despite the common assumption to the contrary), momentum was too great to reverse the slide to Empire.

Harris also talks about the historical importance of the study of the Fall of the Roman Republic from the perspective of the leadership of the British Empire at its zenith. Which brings me to something of a tangent: James Bond. Ian Flemming's famous spy was, essentially, a literary reaction to the decline of the British Empire (Query: what was the cultural/literary/spiritual reaction to the fall of the Roman Empire, or the transition from Republic to Empire?? Christianity?). James Bond was someone who's very existence countered the gathering impotence of Britania. And after the Suez Crisis, when it was blatantly clear to all that the British Empire was not merely teetering on the brink, but that it was actively spiraling downward, Flemming's plots became more and more unbelievably fantastical. Bond was no longer merely assisting Britain and confirming her equal status amidst Russia and the US (as the early plots suggested), but rather Bond was singlehandedly saving the world from megalomaniacal villains intent on world domination.

As long as I'm committed in this post to a rambling style, let's back up and I'll explain why Bond has special meaning in my life. It has nothing to do with my background in Intelligence, because Bond was, in reality, so much more than that--Bond was a walking, Wagerian leitmotif, but more on that later. Bond is important to me because most of my Summers as a child were spent with my Grandparents in Berlin. Afternoon thunderstorms, a frequent event, would leave my Grandfather smoking and playing chess in the glassed-in veranda overlooking the garden, and my brother and me laying on the floor in their living room watching old James Bond movies dubbed into German (which neither of us spoke well enough to follow the dialogue). Bond movies can effectively communicate so much about these deeper themes when you strip away the dialogue. Take, for example, the comparative role of Bond and the respective SuperVillain. Robert Anton Wilson takes the side of the supervillain, arguing that this much maligned Bond character is really trying to advance society and bring about progressive change, while Bond is only interested in maintaining an essentially Victorian world order. Take the villain from Thunderball, for example, with his private estate "Palmyra" in the Bahamas. It's worth noting that Palmyra was an ancient trading city in Syria that collapsed amid the breadown of Pax Romana, and is also the picture at the top of this blog. I think that Flemming (and perhaps more important, the Director Albert "Cubby" Broccoli in the production of the movie series) unwittingly set up Bond Villains as collapse theorists--though generally Roddenberry-esque technotopians.

There is something very Jungian at work here. Who is the real hero? How does this dynamic change now that the Bond-archetype no longer exists to address the failings of one empire with regards to other empires, but rather to address the failings of empire with regards to rhizome (Bond has always addressed non-state or quasi-state actors, but in the past this has been within a conflict of empires context, and now it is within a hierarchy vs. rhizome context of the "war on terror). Specifically, take the current Bond movie "Casino Royale." I thought it was outstanding, and I think that Daniel Craig was excellent. Bond is a Jungian Jihad seeking the resurection of the Victorian-era "Caliphate" of the British Empire. In this context, Bond is the leitmotif introducing the theme of structural struggle, and it is interesting to watch how its developmet mirrors our cultural consciousness in general.

Terrorism, Pirates, Ancient Rome, the British Empire, James Bond, Supervillains. It doesn't get much better than this. Talk amongst yourselves...

Citizen Soldiers?

Representitive Charles Rangel wants to bring back the draft. I say good idea.

The "All-Volunteer Force" is a mercenary force...let's not mince words here. Some people certainly enlist in the military because they feel that it is there civic duty, but most do it in large part for the money (or future career/money prospects). If we did away with very hefty enlistment and re-enlistment bonuses, we would have no military. And even with bonuses that can exceed $100,000 tax-free in the first five years (enlistment bonus, re-enlistment bonus and specialty pay bonuses), we still need to contract out a huge proportion of logistical and support functions (and many combat functions) to "real" mercenaries.

There are problems with employing a mercenary military. The foremost, in my mind, is the divide that builds between people who make decisions to employ the military and people who serve in the military. The military, as Clauswitz said, is politics by other means. And it is dirty work. It is always a tempting option to have someone else do your dirty work, but when the question boils down to "do you, personally, want to engage in this dirty work," then the military tends to be much more judiciously utilized. There are lots of people out there in America who "support the war," or at the very least "support the troops" (I still haven't figured out what that amounts to). But there are not many people who support it or them enough to go take part themselves. There are plenty of excuses--but let me disabuse you of at least one: if you are less than 60 years old, male or female, the Arkansas national guard will let you enlist and will ship you off to Iraq within months to help guard convoys. I actually know one person (Rowe Stayton of Lakewood, Colorado) who was 55 when he decided that ne needed to "do his part" and enlist. But you have a job, or a family, you say? Mr. Stayton had both--actually, he was an attorney with his own successful firm, but he enlisted and spent 12 months in Iraq as a military policeman. Stayton joined as a Sergeant in the Army because that was where the need was greatest, even though he had previously served 11 years as a Major and F-15 pilot in the US Air Force. While I question his stance and decision, I do not question his entitlement to legitimately claim that he supports the war and the troops. But a mercenary military allows a large segment of the American population to declare that they support the war, or that they support the troops, all while comfortable in the knowledge that someone else will to the actual dirty work.

States that employ a mercenary military make far less judicious decisions about when and how to employ that military. History bears this out. There is a long history of discourse in the Western Tradition (I can't comment on this same tradition elsewhere out of ignorance) about the importance of the citizen soldier. The Romans (at least during portions of the Republic) undestood the importance of a citizen soldier to the fabric of society. Greeks before them undesrtood the same. Citizen-Militias were the founding backbone of America. Heinlein's "Starship Troopers" (The classic book, not the movie) dealt effectively with the importance of the citizen soldier in the fabric of society. A draft--when done properly, without loopholes for the wealthy, priviledged, or connected--creates a strong society with citizen soldiers.

This is not merely an issue for states. Tribes and tribal conflict is perhaps the epitome of the citizen soldier. The citizen soldier is a critical structural institution. It's easy to say that "this war is worth while," or to cite causus belli. But is it worth you putting your life on the line, or the life of your sons or granddaughters? A draft helps ensure that military action passes the latter test. Here is the critical structural distinction: when the military action in question is legitimately an action in self-defense (even if proactive self-defense), then the answer is almost invariably YES. If the action is offensive, aggressive, exploitative, or a product of hierarchy, then the answer is almost invariably NO. The calculus is entirely different when you are considering employing a mercenary military.

So, while I understand that most readers don't support the war in Iraq, and don't have any interest in joining the military (and I wholeheartedly agree), I do think that a well-constructed draft is a good idea. This is not merely an issue for America, or for large overgrown hierarchies in general. It is a general maxim of societal constrution, a maxim of decentralization, rhizome, sustainability. Citizen Soldiers are more likely to engage in defensive, not offensive wars. They are not a foolproof end to war, but when combined with other elements of decentralization and localization they bring us to the broader concept of a rhizome military that is structurally incapable of engaging in offensive warfare. The ultimate, structural goal is to ensure that the decision makers are personally willing to engage in the dirty work. Put Jenna Bush behind an M-60 on top of a Hummer transiting Route Tampa from Kuwait to Baghdad and see how long we "stay the course."

Light Rail

On an optimistic note, Denver's new Southeast Light Rail line opened last week. I commuted via light rail today, and it was quite pleasant--about 10 minutes longer trip than driving (35min including necessary walking vs. 25 minutes door-to-door driving), but a relaxing opportunity to read, and cheaper than parking alone, not to mention car ownership and gas. My current schedule allows me to commute outside of rush-hour, so the light rail trip is about 10 minutes faster if I had to fight the traffic.

Mass transit alone isn't the solution to our problems, or even a very effective stop-gap. It's quite nice to have, though. And it can certainly buy us time when combined with multi-use zoning, transit-oriented development, higher density residential/commercial, etc. Watching the city breeze from the seat of a train by makes me feel like I'm in Europe, so maybe that's fueling my optimism. But America has a lot of structural problems that don't plague Europe, and that light rail won't solve. But hey, it's nice for me for the time being...

Investment in Photovoltaic Complexity

As my last two posts illustrate, I'm in a bit of a rut on the potential for photovoltaics to solve all of our problems. It would be overly simplistic to boil this argument down to "Roddenberrys" vs. "Doomers," because those terms (the former of which I just coined, so bear with me) seem to only address irrational behavior by individuals at either extreme end of the techno-optimism spectrum. There is a very genuine debate underway in what I consider the more moderate middle of this spectrum. Two people whom I enjoy reading, and who's writing I respect, are on either side of my personal view of this, but both within the "reasonable" zone: Big Gav from Peak Energy (leaning towards Roddenberry), and Ted Heistman from Freerange Organic Human (leaning towards Doomer).

At the end of the day, the information available suggests to me that the Energy Return on Energy Invested (EROEI) for photovoltaics is less than or about equal to 1:1. If I'm wrong, and it is more like 10:1 and will steadily rise indefinitely with futher research, then a strong case for "Star Trek" optimism (and hence "Roddenberrys") can be made. There is no doubt in my mind that improvements in photovoltaics will be made--the real question is whether the return on these investments in technology (in complexity) will provide linear returns, or whether they will be subject to diminishing marginal returns. Here is a recent project from the Solar 2006 convention in San Jose last month:

SunPower is approaching a 23% efficient PV. This helps it take business from typical 17% efficient PV. Dr. Richard Swanson, CEO, SunPower gave the conference good reason to expect continued high growth. He pointed out that in 1975 solar modules cost $100/watt. By 2002, the cost had fallen to $3 per watt. The industry learning curve of 30 years has been consistent – each time that production doubles, cost drops 81%. Dr. Swanson expects $1.40 per watt by 2013 and 65 cents per watt by 2023.

This Dr. Swanson of SunPower is making the case for a kind of "Moores Law" for improving solar panel efficiency. Is this really a linear decrease in cost? Right now there is about 5300 MegaWatts of installed PV capacity worldwide. The US alone currently generates on average over 1,000,000 MegaWatts of electricity (just electricity...this won't power a hydrogen fuel scheme). So existing PV would need to double eight times in order to just match the current US electrical generation. If, per Dr. Swanson's linear decrease in cost projection is true, after eight doublings in capacity PV cells would cost 0.005 cents per watt. You could build enough PV to power the entire United States for $5,095. Something tells me that the reality is not linear! No, the reality is most likely best expressed by some form of logistics curve, such as the diminishing marginal return curve suggested by Joseph Tainter:

The rapid increase in efficiency of photovoltaics coupled by the decrease in cost per watt from the '70s to the present is represented by the return on investmen tin complexity, which rises rapidly from 0,0 to C1,B1. The salient question is: what point on the curve represents the return on current marginal investment in PV complexity? Probably somewhere between C1,B1 and C2,B2. Projections, like Dr. Swanson's that assume linearity in cost decrease per watt are basing this assumption on the roughly linear increase represented by the curve between 0,0 and C1,B1. But the reality is that the benefit from each marginal investment in photovoltaics at this point will return less and less. This technology cannot save us from the ultimate ramifications of diminishing marginal returns.

There is, in fact, some evidence that PV technology is already at the peak of the diminishing marginal return curve (C2,B2). Sunpower, the same company where Dr. Swanson extolls the historical decreasing cost of photovoltaics, recently made this press release:

...Overall, these changes result in a 43 percent increase in power, said Julie Blunden, vice president of external affairs at SunPower. Each panel can generate 315 watts of electricity and will have roughly the same cost per watt as the existing line, she said.

When you improve "efficiency," but the cost of doing so keeps the cost per watt stagnant, then you have peaked on the diminishing marginal returns curve. Future increases in efficiency are most likely possible, but they will become so costly as to actually increase the cost per watt. Investment in complexity is inelegant, and will always run into exactly this problem...

Elegant Technology

Every now and then I get the sense that some people see me as a “doomer.” That I’m perceived as a bit of a pessimist about the future. I don’t know why. In the face of issues like peak oil, global warming, catabolic collapse, I don’t see any need for our quality of life to decrease. I do see a need for our quantity and mode of consumption to decrease—and I think some people are confusing the two. Many people are labeled “doomer” simply because they reject the general idea that technology will be able to save us from all our problems and guarantee the maintenance (even perpetual increase) of our consumer-driven society. I think that this demonstrates a failure to grasp two critical concepts—that extreme consumption does not equate to quality of life, and that technological complexification is not, in itself, of any value.

Technology is only of value to the degree that it provides for quality of life without creating negative power-relationships that outweigh that benefit. And such technology does not have to be complex or “advanced” at all. Technology is nothing more than “knowledge of technics” or knowledge of a technique—knowledge is power. A thin photovoltaic array or a genetically engineered bacterium that converts woody biomass to ethanol both represent technology. The question that we must ask is “does the quality of life provided by this technology outweigh the decrease of our quality of life from the power-relationships that we must enter in to in order to employ this technology?” As a general rule, when the answer is yes, the result is something that may be accurately described as “elegant simplicity.” When the answer is no, as I think it is with both the example of photovoltaics and biotech-ethanol, then the result is not “elegant simplicity.” In fact, because I am using “elegant” not in the vernacular, but as a term of art, the phrase “elegant simplicity” is actually redundant: “elegant” alone will suffice, because I use that term to imply a measure of simplicity—that the benefit from an “elegant” technology outweighs burden of the incurred hierarchy, when measured from the perspective of the median (not mean) individual.

Most people who categorize me as a “doomer” do so, in my opinion, because they fail to understand this concept. I think that the “solutions” presented by most people fail the criteria for elegant simplicity. These solutions—cellulosic ethanol, thin-film photovoltaics, genetically engineered pest-resistant crops, nuclear fusion—will not solve our problems because, at their core, they ARE our problems. The root problem facing human society at present is the composite of the power-relationships that we have submitted to in order to “benefit” from such “non-elegant” technology—what I have elsewhere labeled as “hierarchy.”

While the test laid out above for “elegance” is subjective, there are hallmarks of technologies that fall into the “elegant” and “non-elegant” categories. Elegant technology is probably vernacular, general, and contained. These may not be the best three characteristics to capture the entirety of “elegant,” but they are the three that I will use for now.

Vernacular, for our purposes, means used by and accessible to commoners (the “median individual” from above). It doesn’t require a specialist to understand or implement, but rather is generally accessible.

General, for our purposes, means broadly applicable. An elegant technology is one that can be applied to a broad set of circumstances, not something that is only applicable to a single and unique set of circumstances.

Contained means giving rise, on balance, to negative feedback loops. A contained technology solves one problem without creating two different and greater problems.

These three characteristics of elegant technologies—vernacular, general, and contained—are broad and subjective, but provide a framework for evaluating technologies. To put it as plainly as possible, such evaluation is critical because technologies that are elegant are part of the solution to the problems facing human society. Technologies that are not elegant are part of the problem. Let’s take a look at a specific area of technology: Solar Energy.

Non-Elegant Solar: We’ll start with a negative example—a non-elegant technology for the use of solar energy: photovoltaics. Photovoltaics are not vernacular. Do you know how to make one? Probably not, but even if you do, I’m quite sure that you don’t know how to make all of the machines and tools necessary to create photovoltaics. This is important because when a technology is outside the realm of the vernacular, use (specifically ‘reliance on’) that technology creates a dependency relationship between the user and the provider. Are photovoltaics a general technology? Probably—while they only serve to produce electricity, that is a pretty generally useful thing in our modern world. Are photovoltaics contained? No, for exactly the reasons cited above: such specialized and complex technology relies on a specialized and industrial society. Even if we deem specialization and industrialization to be positive benefits, the mere scope of these non-contained impacts makes this technology non-elegant. Ultimately, photovoltaics require a hierarchal society for implementation, and the problems incumbent in such hierarchy make the technology itself non-elegant.

Elegant Solar: So if photovoltaics are not elegant, does that make any use of solar energy non-elegant? No. Let’s take a particularly clear case. Solar orientation: the understanding that the sun transits a broadly east-west path, and that, north of the tropics, the sun shines primarily on the south side of anything. Is this even a technology? It may not fit the way we commonly think of that term, but it is clearly knowledge of a technique—that specific orientation has a specific effect in terms of solar gain. Is it vernacular? Yes, both potentially (everyone can understand it), and in reality as it is widely used in vernacular architecture. Is it general? Yes—it is quite broadly applicable in terms of architecture, agriculture, energy production, etc. Is it contained? Yes—this technology can be used without creating any outside impact. I can be as simple as planting a frost-sensitive tree on the south side of a rock wall instead of the north side, but it certainly doesn’t require specialization or industrialization. So, solar orientation is an excellent example of an elegant technology.

What is the broader relevance of this definition of “elegance”? Elegance is a solution to the problems of hierarchy. Because elegance is, by this definition, contained, it will foster localized, self-sufficient, and independent societies. Elegance is the feedstock of rhizome. And elegance is a concept that, if we set it as our goal, can steer the vast potential of human innovation to a positive, sustainable end that is compatible with human ontogeny. So I don’t think of myself as a “doomer.” I just think that dreams of a “Star Trek” future where “high” (read non-elegant) technology solves all of our problems is pure fantasy. And I don’t think that this is a bad thing.

Energy Payback from Photovoltaics: Problems in Calculation

Does solar energy—specifically photovoltaic (PV) panels—ever produce as much energy as the energy that was initially invested in their manufacture? Industry, academia, and government all seem to be in agreement that the answer is “yes.” (1)(2)(3) The consensus seems to be that PV produces as much energy as was used in its creation in a time period of 1-5 years, allowing PV to produce between 6 and 30 times more energy over its life than was used in its creation. These two answers—that PV produces more energy than is used in manufacture, and that PV provides an Energy Return on Energy Invested (EROEI) of between 6:1 (2) and 30:1 (2)—suggest that photovoltaics can be and should be a cornerstone of our efforts to replace our reliance on non-renewable fossil fuels.

There are serious problems, however, with the methodology used at present to calculate the EROEI of solar panels. Some authors claim that life-span EROEI for photovoltaics is as high as 50, but provide no information for how that figure is calculated. (4) Others, such as Clarion University’s calculations, take a very limited view of energy invested in PV production, accounting only for energy use of the manufacturing plant itself. Under these assumptions, they understandably arrive at a very optimistic EROEI of 6:1 to 31:1. (1) So what energy inputs are not being accounted for in such a calculation? Let’s work backwards:

* Installation: PV does not good sitting in the factory. It must be installed, and this takes labor. There are various ways of accounting for the energy represented by such labor, but it certainly takes energy.

* Transportation: PV has to get to the installation site. Efficient manufacture is only possible if it is centralized, but this means that it must be shipped—usually by truck, which requires both the fuel directly consumed by shipping, plus the energy consumed in the entire chain of operation necessary to construct the truck, as well as the labor cost of the driver, which also represents an energy input.

* Manufacturing plant: EROEI calculations usually account for the energy consumption of the manufacturing plant, but not for the construction of the manufacturing plant itself, as well as the construction of all the machines used on the PV assembly line (PV advocates often point out that silicon is the most abundant element on earth and therefore requires very little energy to acquire—but this is NOT true for the highly advanced manufacturing machinery necessary to create PV cells, usually made from metals that require great energy input for extraction). If we take the total energy required to create one PV manufacturing plant as well as its expected lifetime production, we can then calculate how much of that energy should be attributed to a given quantity of PV panel.

* Labor: One of the key components in the production of PV panels is human input, and yet this energy cost is not accounted for in standard EROEI calculations. I’m not referring to the actual calories expended operating an assembly line, or answer the phones in the front office, but rather the energy consumed in the course of these people’s daily lives—energy that must be accounted for because it is part of the support structure necessary to create a PV panel. No employees, no PV.

These embodied energy costs in the creation of a PV panel (called “emergy”) are difficult to calculate. We can regress infinitely, eventually going so far as to account for the portion of energy consumed by a rice farmer in China in order to fill the belly of a Merchant Marine captain shipping machine parts across the Pacific, ad infinitum. How do we actually get a composite sense of the total embodied energy in PV production? One way—and certainly not a perfect way—is to use the market’s ability to set prices as an equivalent for embodied energy. This is what I am calling “Price-Estimated EROEI Theory.” It basically suggests that the most accurate representation of the total energy embodied in ANY product is the price of that product. In our example above, the energy required to install PV can be accounted for by the cost of that service. The energy required to transport, to build a manufacturing plant, to employ workers, etc.—all component energy contributions in the production of PV increase the market price of the resulting product.

So what is the Price-estimated EROEI of PV? If we accept that the price of an installed PV system is representative of the energy used, then we can compare that price with the quantity of energy produced over the lifetime of that system (which also has a market price) and reach an EROEI ratio. There are variables involved here, but when we use market-price to account for the full spectrum of energy “invested” in PV, we reach an EROEI of approximately 1:1 (*see full calculations below). This is dramatically different than the 6:1, 30:1, or 40:1 suggested by most sources. Which figure should we rely upon? While I recognize that price-estimated EROEI is not a perfect calculation, at least it attempts to account for the full spectrum of energy inputs, and the precautionary principle suggests that we should err on the side of this number (1:1) as opposed to the quite optimistic figures coming from the PV industry or the government.

Ultimately there is only one way to definitively answer this questions: The bootstrap challenge. I have previously stated that when I see an ethanol plant that distills their ethanol USING ethanol (not natural gas or coal), then I will seriously reconsider the merits of that alternative energy source. Likewise, when I see a PV production plant that is powered entirely by PV, containing machines manufactured at plants powered entirely by PV, machines composed of materials mined, refined, and shipped entirely under PV power, etc., then I will believe that PV has an EROEI greater than 1:1. With an EROEI like 30:1, this should be no problem . . . so the fact that this is not the case is yet another argument, at least in my mind, that reality stands closer to the 1:1 figure.

EROEI is not just a nifty academic exercise. The outcome of the debate on EROEI—whether for PV panels, ethanol production, nuclear fission—is critically important for the future of our economy and society. Regardless of the exact timeline, it is not seriously disputed that non-renewable energy sources such as oil, gas, and coal—all with high EROEI—are running out. There is a commonplace assumption that we will create alternatives to replace them, but at present these alternatives—from PV to ethanol—are all being produced with the very fossil fuels that are disappearing. When they are effectively gone, only energy sources with an EROEI of greater than 1:1 will be viable—and even then, our economy, with its demand for constant growth, cannot survive on energy with an EROEI of 2:1 or 5:1. For that reason, it is critical that we more carefully address this EROEI debate today. If alternative, truly renewable sources of energy cannot match—and eventually improve upon—the EROEI of today’s energy sources, then we must conduct a serious reappraisal of the fundamental structure of our society. My analysis suggests that we must do exactly that.

* CALCULATION: 2 KW complete PV system installed in Phoenix quoted at $16,000 (before any tax rebates or incentives, grid-intertie only,NOT including battery storage)(5). In Phoenix (optimal location), this generates 4,000 KW-hours of electricity per year (5). At prevailing Phoenix rate of electricity ($.10/KW-hour) this is $400/electricity per year. This produces a pay-back time of 40 years if we do not account for the time-value of money. For the purposes of this calculation I will be very conservative and find that actual inflation will equal TVM over this 40-year period. The quoted PV panels have a life-expectancy of 40-years (again, this is conservative as this “complete” system ignores battery storage, which would dramatically decrease the aggregate life expectancy). The resulting price-estimated EROEI of PV solar is 1:1.

REFERENCES:

(1) http://jupiter.clarion.edu/~jpearce/Papers/netenergy.pdf

(2) http://www.nrel.gov/ncpv/energy_payback.html

(3) http://www.csudh.edu/oliver/smt310-handouts/solarpan/pvpayback.htm

(4) http://www.solar2006.org/presentations/forums/f36-swenson.pdf

(5) http://www.solargenerations.com/faqs.html

Solving the Problem of Mutually-Exclusive Overlap in Iraq

Lots of news about Iraq lately. Too bad we haven't heard much about the recent approval of the Kurdish constitution.

Over a year ago, I discussed the problem of mutually exclusive minimum demands between the various parties within Iraq (1 2 3). I've also articulated this mutually-exclusive overlap as a catalyst of conflict in general. Specifically, the problem here is that the Kurds demand control over northern Iraqi oil resources, but the Sunni Arab population will never accept a federal structure where the Kurds get the northern oil, the Shi'a get the southern oil, and they get none.

It's easy to read about how the central government in Iraq plans to gather oil revenues centrally and then distribute it evenly through the country. What we're not hearing is that the recently approved constitution for the Kurdish Regional Government (KRG) isn't playing that game. The KRG constitution explicitly states that Kurdish law trumps Federal (Iraqi) law. It also says that the KRG will retain its Peshmerga militia. Oh, and that if things don't work out, they retain the right to "go their own course." As in become independent. Turkey is, literally, up in arms about this. The US isn't quite so sure how to respond--a strong and independent Kurdistan doesn't exactly help the (potentially unattainable) goal of a stable, multi-ethnic Iraq. But it also accentuates the ethnic divisions within Iran--specifically their large and sometimes restive Kurdish minority.

Mutually-exclusive overlap. The Iraq project WILL FAIL if this issue cannot be addressed. So how do you address mutually-exclusive overlap? That isn't so easy. The first step is recognizing that there is a time element to the creation of mutually exclusive overlap: The artificial divisions created under the Sykes-Picot Accord almost 100 years ago brought this process into high gear. And there will be a time component in any solution. If people think it can be fixed in 5 years, they should hit the history books. In some ways, the recent situation in the former Yugoslavia is informative, but in that situation there was not this highly concentrated and incridibly important feature: oil.

There are other problems with trying to translate the very limited success of erasing mutually-exclusive overlap in the former Yugoslavia to Iraq. But perhaps the one most worth mentioning is that much of the former Yugolsavia is locally self-sufficient. The Serbs and Slovenes and Croats generally have their own localized industry. Their own localized agriculture. Their own localized tourist revenue. They, for the most part, don't rely on the dole. They are a geography of small cities, local markets, domestic production, and localized agriculture. Iraq is not. Iraqi population has exploded over the past decades on their oil wealth. They are fundamentally reliant on it. They are not agriculturally self-sufficient. They have virtually no export product beyond oil. So whatever region does not receive the share of oil revenue that they have come to rely on (and the Sunni Arab regions have traditionally received the vast majority), they no longer have the surplus necessary to maintain the standards that they expect. That they demand. This is why, without an even distribution of oil wealth, there cannot be peace in Iraq--it is the classic problem of the "Arab Street." Many young men on the dole who have no legitimate prospects to support themselves or their families. But with the lengthy history of oppression of the Kurds and Shi'a, these newly empowered groups will not accept their traditional, disproportionately small share of oil revenues. This is one source--probably the key source--of mutually-exclusive overlap in Iraq. And the Balkan model does not provide a solution here. This problem is only solved by moving the Iraqi economy away from its dependence on oil.

Can this be done? I think that it can, and I think that it is informative to look at why the former Yugoslavia was more successful in erasing mutually-exclusive overlap: its higher degree of localized self reliance. If Iraq is to ever erase this mutually-exclusive overlap, it will require a focus on creating localized self-reliance, not on some dream of establishing Iraq as a tourist center or manufacturing center--the solution must be possible within the zero-security environment that currently exists. Anything that depends on first solving that security problem is getting the cart before the horse. Localized self-reliance--the ability to create a quality life on your own--is something that CAN be done in the current environment, and that CAN then pave the way to remove the reliance on oil and reduce the criticality of the existing oil-based mutually exclusive overlap. I have only seen one example of this actually taking place: Geoff Lawton's excellent, Middle East permaculture initiatives. With his wife Nadia he has worked to create local self-reliance in Jordan. And he has worked to create a self-dependent, permaculture orriented village in Iraq. This is far too little, but it is creating a model for how this CAN be accomplished--something that, if seized upon by other NGOs or governments, could, one day, actually solve this problem.

Disarmament

Regardless of its relative success or failure, the recent nuclear test by North Korea resulted in calls from all sides for that country to cease its nuclear armament program. The foundation for all of these calls is the Nuclear Non-Proliferation Treaty (NPT). The NPT, which is binding in international law on all nations, not just its signatories (see 1996 ICJ advisory opinion), requires that non-nuclear states not pursue the development of nuclear weapons. So, clearly, North Korea had no right to develop a bomb, let alone test one. It says so clearly in the NPT, which is binding, and must be respected...

Of course, what we aren't hearing are the cries that the NPT also says that the nuclear powers must disarm. That isn't very convenient, especially with the US Department of Energy working on developing a new generation of smaller and "more useable" nuclear weapons. Yes, the second pillar (article VI) of the NPT, right after non-proliferation, is disarmament. And the 1996 Internatinal Court of Justice advisory opinion also made it clear that this obligation to disarm--to conclude and enact agreements resulting in actual disarmament, not just to enter negotiations--is equally binding on all nations under international law.

Quite the sticky wicket. The US is equally in violation of international law by not disarming as North Korea is by creating a bomb and testing it. Funny, then, that we're only talking about enacting sanctions on North Korea. International law is normative, not rule-based. That means that it only has effect by the standards created for nations by the cumulative actions of others. So the UN or the US can say all they want that the North is in violation of international law. This is only true to the extent that such normative law exists, and because all other nuclear powers are flaunting their obligations under the NPT, it's words do not rise to become normative. Therefore there is no norm--and hence no law--for North Korea to violate. All talk to the contrary is just that. Likewise with Iran. I'm sure we will hear people discussing how Iran is violating international law as well. As soon as those same people point out how the US and France and China are similarly violating that law, then we're getting somewhere. Until then, talk talk talk.

What to do? That one is easy in my book. Disarm. Unilaterally. It's not like we can really use those nuclear weapons anyway. Ignoring for the moment the argument that none of our missiles could even get out of their silos without a month's notice, we stand to lose virtually nothing, and we stand to gain so much. Disarm unilaterally, gain the respect of the world, create a true normative environment to bring pressure on what will only then actually be "rogue" states to meet their own obligations. Obligations that in a normative system will only then really exist. Disarm unilaterally and gain the moral high ground. Or, continue with our hypocritical ways and see how far that gets us. For a change, it really is our choice.

Fallout

North Korea tested a nuclear bomb. Click on that link if you want to read the about the test itself--I'm more interested in the fallout.

Even though the test device was detonated in a 700m deep shaft, radiation will still escape into the atmosphere. And the US Air Force WC-135 Constant Phoenix is surely already busy flying off the coast of North Korea performing their dull but essential particulate analysis mission. This will likely confirm that the fissile material was the product of NK's Youngbyon reactor complex.

Now what? The fears are that this will spark an East Asian arms race. Japan has all the necessary technology and plenty of nuclear facilities to leverage--they could build a nuclear capability very quickly if so inclined. With new PM Shinzo Abe at the helm, and the pacifist voices of Hiroshima and Nagasaki survivors growing more quiet by the year, this is a very real concern. With Japanese deployment to Iraq (albeit in a nominally non-combat role) passing without major controversy at home, the groundwork for rearmament is already being laid. Japan's dependence on imported energy sources may prove to be the final straw--will Japan be able to curry favor abroad and continue to win oil concessions through charity, or will they feel the need to back that up with a military stick? While oil is theoretically fungible and traded freely worldwide, there is simply not enough oil within easy reach of hungry East Asian markets--as effective as charity may be, it is not capable of forcing open a choke point such as the Strait of Mollucca.

In addition, one of the long-standing Korea theories holds that the ultimate goal of America is to maintain the status quo--a divided Korea is stabilizing because it prevents either regional unification or conflict. Specifically, a divided Korea keeps a powerful US military force--and just as importantly a viable excuse to maintain that force--in the theater. A divided Korea provides the justification for the US to remain as the military protector of Japan, and thereby prevent their re-armament. So long as a US military force is committed to the region, and opposed to China, Japan does not have a reason to build up its own "Self-Defense Forces" to counter a chinese threat. Or so the theory goes. But with the US bogged down in Iraq, further tied down by the need to deter Iran, the US military presence in East Asia rings hollow. In my opinion, there is no viable military option available to the US. And so far, the Bush version of diplomacy has failed both locally (it didn't prevent this test) and globally (it has shown nations such as Iran that you will be handled more softly if you already have the bomb). Would the Clinton version--direct engagement and talks--be any more successful? I think it would be more effective locally but equally counterproductive globally--it still shows others that you get what you want when you play the nuclear card. Either way, it will be interesting to see what will happen next...

Oil Prices...Again

Almost a month ago I raised the possibility that the sharp drop in oil prices in the run-up to the November elections may be the result of manipulation. This has been an easy argument to brush aside, as there are also fundamentals behind the recent drop: this hurricane season hasn't lived up to the hype, causing some speculators to bail out of their oil plays. Also, geopolitical tensions impacting oil supplies have been simmering on low (though some of this--especially the easing of pressure on Iran, may not be entirely innocent). Never the less, the potential for price manipulation has received coverage from most of the mainstream media (though mostly as a preface to dismissing the concern). While I think that I presented several very plausible manipulation scenarios, over the past week there has been one theory (not one of mine) that has cearly risen above the rest: a change in the composition of the Goldman Sachs commodity index led to a massive sell-off in oil-complex futures. The Goldman Sachs commodity index is publicly available, and it acts as the benchmark for the composition of over $100 Billion in commodity funds. Suddenly, and without explanation, Goldman Sachs changed the Unleaded Gasoline component of the index from 8.72% to 2.3%, which sparked a lingering sell-off of over $6 billion dollars in oil-complex futures as funds scrambled to bring their portfolios in line. This was in no way a reflection of the fundamental supply and demand picture, just a quirk of the financial markets. With this theory now out in the open, there is speculation that Goldman's close ties to the Bush administration may be involved, but that is a more of a diversion: this is important not because it may or may not suggest political maneuvering, but because it strengthens the argument that the recent drop in oil prices is not based on fundamentals.

As deconsumption recently pointed out, even the NY Times has picked up on this story.

Financial Wizardry & Collapse

Bear with me for a second here. This isn't an easy topic. That's because no one understands Credit-Default Swaps (CDSs), or other complex credit-derivatives, but it is important that we try to understand the implications of their exponential increase. Sure, some people claim to understand: hedge fund managers, investment bankers, etc. They understand the derivatives marketplace just like neuroscientists understand consciousness—they know the component parts, they can use them as tools barely under their control, but when it comes to understanding exactly how the greater dynamic emerges from the component parts they are in the dark.

No one really understands the credit-derivative market, but everyone is impacted by it. Credit-derivatives represent the creation of money out of thin air, like some act of financial wizardry. Take a Credit-Default Swap, for example. Here’s how it works: Corp. A needs to raise funds to expand operations, so they issue a $10 million bond. Pension Fund B buys that bond, but is concerned with the risk of Corp. A going bankrupt and defaulting on the bond. So Hedge Fund C offers what is, in effect an insurance policy—Pension Fund B pays Hedge Fund C $200,000, and in exchange if Corp. A defaults on the bond, Hedge Fund C covers the $10 million for Bank B. Here’s the magic: because this insurance policy creates the market for this otherwise too-risky bond from Corp. A in the first place, and because the par-value of the credit-default swap (the insurance policy) that the Hedge fund issues does nothing more than eat up the difference between the risk-premium on this bond, this $200,000 that the hedge fund makes is essentially fabricated out of thin air. Don’t forget to sprinkle in a liberal portion of fractional-reserve-banking fairy dust and viola: now you understand the credit-derivatives market as well as anyone else in the world.

Clear as mud? Try this on for size: there were $25 Trillion dollars in credit derivatives issued so far in 2006. That’s about half the size of the world economy. Oh, and it’s unreported, unregulated, and largely non-transparent. But wait, it gets better:

What is the effect of this absolutely massive trade in credit-derivatives? It has the effect of creating liquidity in the market for credit, but the larger effect is that it spreads risks very, very effectively. Because these credit-derivatives get pooled, sliced up, re-packaged, and re-sold, they have the effect of distributing the risk of default very, very broadly. Because virtually every hedge fund borrows from virtually every bank, which is connected to virtually every mutual fund, pension fund, and corporation, the risk of default is spread among virtually everyone. So this makes the world economy very, very resilient in the face of minor financial crises—say, the Asian Financial Crisis of the mid ‘90s, or the fall-out from September 11^th. In fact, because of this massive trade in credit-derivatives, the world economy is actually far more secure in the face of your garden-variety financial crisis. This resiliency works as long as there’s enough slack, enough “spare capacity” in the world economy to absorb the distributed force of these defaults or crises. But at some tipping point—and because it’s not regulated and not transparent no one knows where this is—the stress cannot be absorbed. At this point, the crisis is no longer just a “recession” or a “depression”—it is a complete global collapse.

The market in credit-derivatives is a “financial weapon of mass destruction.” That’s not just my opinion, it’s a quote from the Oracle of Omaha himself, Mr. Warren Buffett (Berkshire Hathaway 2002 Quarterly Report, sorry, no link). Complex societies such as ours collapse because diminishing marginal returns eventually weaken a society until it cannot overcome periodic stressor events. The continually advancing sophistication of the derivatives markets represent the desperate efforts of the global economic system to climb high enough to reach even the hardest to reach fruit from the marginal-return orchard. The irony of a derivative collapse is that it will afford us the illusion that not only is everything OK, but that it is actually continually improving and expanding right up until the point where the whole house of cards implodes.

Derrick Jensen vs. the Dalai Lama

Talk about a billing for fight night.

This weekend I went to the “Peace Jam,” a gathering that bills itself with the tag-line “Change Starts Here.” Listening to the Dalai Lama, Desmond Tutu, Sharin Ebadi, Rigoberta Manchu Tu, and five other Nobel Peace Price winners speak about how to solve the world’s problems was the perfect frame for reading Derrick Jensen’s latest tome, “Endgame, Vol. II: Resistance.” Their approaches could not be more different, each providing a counter-argument to the other. On top of that, It’s currently 4:30 in the morning and I’ve been sitting in a fluorescent-illuminated tile hallway all night (long story) listening to Rise Against’s latest album. Perhaps a bit of sensory overload.

Jensen’s “Endgame” is surprisingly direct. After indicting civilization in Volume I, he proceeds to outline his dream of a violent resistance to civilization. It is literally a declaration of war. I found it particularly fascinating because it focuses on a detailed prescription for an all-out campaign to destroy dams, including targeting strategies, how to effectively use explosives, creating cascading failure, identification of critical nodes, etc. Since this is the exact reason why the government sees fit to keep me in their employ, I am not at liberty to comment on this aspect of Jensen’s work. But my aim here is to address Jensen’s broader proposal to address the problems of civilization through direct and violent confrontation. His first chapter, “We Shall Destroy Them All,” begins with this quote from Thomas Jefferson (providing prospective on the then-current conflicts with Native Americans): “In war, they shall kill some of us; we shall destroy them all.” As Jensen points out, this is the approach that our growth-based civilization takes towards its opponents, and by default towards the Earth in general. Jensen recommends adopting that same strategy in defense of the Earth, summarizing the demand of one faction within anarcho-primitivism—the complete destruction of industrialized civilization. Jensen wraps up his introduction by expressing his displeasure with the pacifist approach to solving the problem of civilization, specifically leveling criticism at the Buddhist practitioner who said “what I do for peace is split wood.” It is the failure of this kind of withdrawal approach that Jensen claims validates his “fight back” alternative.

The Dalai Lama, on the other hand, thinks that the problem of civilization can be solved through compassion and a reduction in negative emotions, specifically advocating the personal change path and advising that we follow Ghandi’s advice to “be the change we wish to see in the world.” While I think that this approach is much more sophisticated than Jensen’s simple characterization of “withdrawal,” I don’t find it necessarily superior to “fight back.”

I think that both Jensen’s “fight back” and the Dalai Lama’s “personal compassion” are selectively valuable tools. In truth I think that “personal compassion” is universally valuable, just not universally effective. Ultimately, both strategies only work to the degree that they address the fundamental causes of the problem of civilization. I think that “fight back,” at least as articulated by Jensen, fails to clearly identify these causes, and therefore only has effect to the degree that such action chances upon sources of causation. Differently, “personal compassion” intends to address causation directly but, to use terminology (probably inaccurately) from Buddhism, succeeds only in affecting a makyo of ultimate causation—that is, compassion directly addresses only an ephemeral symptom of the ultimate causes of the problem of civilization. Ultimately, I think that the failures of these very different approaches highlight the actual solution—which is firmly grounded in the need to properly define the problem.

This ultimate source of causation is, in my opinion, the structural underpinnings of civilization. I’ve written at length about this (see A Theory of Power), but in essence hierarchy is structurally unstable, and the symptoms of “Civilization” are in fact symptoms of this underlying, hierarchal structure. A solution that does not specifically and directly address hierarchy as the source of these problems will fail. Jensen’s “fight back” will fail because, for all its military overtones, it does not leverage the fundamental military principle of economy of force—the large portion of its energy wasted in misdirected action takes away from its ability to actually impact our fundamental hierarchy. It would be difficult enough to defeat hierarchy with 100% of the effort that Jensen hopes to muster. With the 20% that may, by chance, actually impact hierarchy-in-itself, it will surely fail to have the desired effect. Likewise, the “personal compassion” advocated by the Dalai Lama will fail because it does not actually address hierarchy. While I think that personal compassion is a valuable tool in affecting change, it must be combined with more before it can actually form a viable alternative to our present, hierarchal system.

One of the Nobel Laureates at “Peace Jam” came very close to articulating this exact problem. Rigoberta Manchu Tu, an indigenous Mayan activist, commented that the US economy is predicated upon the exploitation of other, poorer economies. She further stated that wealth in the rest of the world necessarily required poverty in the US. A bold statement, certainly, in front of a mostly upper-class crowd of “Land Rover Liberals,” but the one comment that most closely identified that the source of the problem lies with hierarchy.

A solution to hierarchy must, ultimately, be an alternative to hierarchy. Even if Jensen’s dreams succeed, the resulting anarchy would lack the communication structure to maintain an awareness of the problems of civilization that is necessary to prevent its rebirth (even if only in some patchwork of dystopian micro-agrarian despotisms). It is precisely because a solution must also be an alternative that I think, ultimately, the Dalai Lama’s second message—that of non-violence—is not only a possible attribute of a solution, but a necessity. As Daniel Quinn noted, organized violence is the sine qua non of civilization, and it is uniquely adapted to defeat a challenge that is itself predicated on violence. While, as John Robb has pointed out (and I have often advocated), Fourth Generation Warfare is able to effectively confront the weaknesses of civilization, it remains incapable of providing an alternative to civilization. Ultimately, a fifth-generation conflict moves beyond the current spectrum of insurgencies to provide a fundamental alternative to the hierarchal mode of organization. In a way this comes full circle and embodies both the Dalai Lama and Jensen while rejecting their superficialities: fifth generation “conceptual” warfare will defeat civilization by “fighting back” with “personal compassion,” not acts of violence, to propagate an alternative system of coordinating complexity from hierarchy. As I have written about extensively elsewhere (see Rhizome Theory Directory), this fifth generation “warfare” is the establishment of a rhizome structure to coordinate complexity in human society without the hierarchal symptoms of diminishing marginal returns or the demand for growth. Ultimately, in any world that I can imagine to be worth saving, destruction of civilization is ultimately only temporary. Depending on various theories of collapse, overshoot, resource depletion, and environmental destruction, it is likely that hierarchal civilization will never again rise to its present level. But that does not mean that a still-hierarchal, still-destructive patchwork dystopia cannot soon emerge from the ashes. For this reason, even if Jensen succeeds, his efforts to end domination and the abuses of hierarchy will ultimately fail. Only the maintenance of a sufficient level of organized complexity can perpetuate a sufficiently uniform anthropological self-awareness to prevent the recurrence of hierarchy—an anthropological self-awareness that can be effectively maintained within a rhizome structure.

By “anthropological self-awareness,” I mean an understanding within the general populace of the forces that operate within human society, of the dangers of hierarchy, and of the specific theories that permit rhizome complexity without creating the dependencies that degrade eventually into hierarchal structures. For lack of a better analogy, it is much like the self-awareness of the rules of a horror movie by the characters in the movie “Scream.” This anthropological self-awareness must, itself, become our new mythology. Within such an environment—and I think only within such an environment—a network of rhizome nodes can be established that co-exists with hierarchy, while at the same time out of phase with hierarchy, gradually replacing hierarchy as the latter becomes increasingly irrelevant. It’s a complicated vision—and that is certainly one of its weaknesses—but if the Catholic church can get away with the Trinity for two millennia, it seems like rhizome is worth a shot…

Fasten Your Seat Belts

Well, it may seem like an odd proclamation during the most significant oil price retracement in months, but here it is:

OPEC officially abandons production quotas

"[OPEC's President and Nigerian Oil Minister Edmond] Daukoru said: There is no quota, no, either up or down."

This is a significant move away from the previous 28 million barrel per day quota. While it is largely recognized that the quota has had no meaning for some time now, its formal abandonment is significant. The same action by the Texas Railroad Commission (the Texas oil & gas regulatory body) in the early '70's is viewed, with the benefit of historical hindsight, as the turning point signifying a peak in oil production.

In my opinion, interesting times are ahead. I don't see any catastrophic collapse or similar events in the next few years, but I do think that at current prices there now is a historical buying opportunity for oil. But that's a topic for a future note on post-peak investing strategies...

Brainstorming on Oil Price Manipulation

There is plenty of conjecture and theorizing about why oil prices are dropping at the moment (currently at $63.75). I've certainly engaged in some of it myself. The most popular line seems to be the theory that President Bush is magically pushing down oil prices just in time for the mid-term elections (with the corollary that they'll shoot up again shortly thereafter). If you asked me to guess, I would say that this is exactly what is happening--it certainly wouldn't be a first, after all, considering that Clinton did the same thing by opening the Strategic Petroleum Reserve to drive down prices shortly before the 2000 elections. What bothers me about all of this conjecture is that no one seems to be pointing to details of how this is actually being done. After all, it's not like someone--even the President--can just wish the price of a market-traded commodity lower. So my goal here is to engage in a little honest brainstorming about how this could actually be accomplished. Who knows, it may even lead to the discovery of how it IS being accomplished. As far as I am aware, despite all the talk about oil price manipulation prior to the election, none of these theories have yet been publicly articulated:

Theory 1: Political pressure on, an administrative agency--let's say, just for fun, the Regulatory Commission of Alaska--to drop some cumbersome environmental regulation that is currently keeping a significant amount of oil off the market. For example, approval to skip replacing all the corroded, leaking pipeline from Prudhoe Bay and just build a quick bypass around the broken section, releasing 400,000 barrels of oil back on the market by October. Surprise, BP granted initial approval for bypass.

Theory 2: More political pressure on an administrative agency, this time to expedite the implementation of ultra-low sulfur diesel fuel. Refinery hang-ups in diesel production while they try to implement this new regulation mean that the crude they can't refine into diesel will be refined into gasoline instead. The price of diesel goes up (hurting business), but the price of gasoline drops (voter: "yeah incumbents!"). In addition, the lag-time and uncertainty in swapping refining product leads to some portion of the decrease in diesel production translating to a drop in crude oil demand, and hence lower prices. Surprise, New EPA Diesel Regs closed comment period and became effective June 30th.

Theory 3: More political pressure on an administrative agency--let's say the Commodity Futures Trading Commission--to change some little noted regulation on speculative limits on crude trading. For example, reducing the number of contracts that large players can hold at one time in crude oil down to 2,000 for the spot month. This means that anyone holding more than that would need to sell the excess in near-month contracts, making the price of those contracts go down. Surprise: Here's the current limit, and here's the request in the Federal Register to reduce those limits from last year. I was unable to find confirmation of when the new limits took effect, but note that the current limit advisory was published in August 2006.

Theory 4: Pressure on Nigerian President Obasanjo to add an ethanol component requirement to domestic gasoline, similar to in the US. As Nigerian refiners try to implement such a requirement there would be two results: 1) lower domestic demand for their own crude oil production as 10% of existing gasoline demand would now be ethanol, and 2) increased price of domestic gasoline, further decreasing demand. both of these have the result of freeing up more Nigerian crude oil production for export to the world market, thereby lowering the price of crude internationally. Looks like that just happened, too.

Theory 5: Encourage more production from Iraq to lower the price of crude oil. Sure, you can't actually produce more under constant attack from insurgents, but in a zero sum fashion you can take production that was being consumed by the Iraqi people and put it on the world market. Iraq has very low fixed oil prices, so smugglers have a great incentive to smuggle crude out of Iraq to other gulf states--and there is a long history of exactly this happening. The relatively effective US Navy was patrolling Iraq's coast for maritime smuggling, but last week that responsibility was turned over to the far less effective Iraqi navy. In fact, this transition has been underway for some time, leading to the steady increase in crude smuggled out of Iraq--perhaps as much as 100k-200k barrels per day. That can have a significant effect on the market.

Or, you could just hype up a "big oil find" that was actually registered with the Mineral Management Service in 2004 (the 6,000 barrel per day Jack 2 test flow was recorded with MMS in May 2006). Talked about that one last time.

I'd love to hear other people's theories about how oil prices are actually being manipulated downward. For now, I certainly can't prove malicious intent, or even intent to influence elections, by pointing out all of these coincidences. But they certainly are interesting...