Raise the Hammer
I've written a fair bit recently about declining oil production, price volatility, economic crisis and painful adjustment to some kind of post-oil economy. My thesis, and it's supported by considerable detailed research - including a major report (PDF link) Robert L Hirsch prepared for the US Defense Department that found the transition will take two decades and be extremely disruptive - is that our civilization is making a very big mistake by ignoring peak oil and defering whatever coordinated steps we may take to prepare for the coming time when the rate of oil production goes into permanent decline.
So-called "cornucopians" argue that we have nothing to worry about and that market forces will bring supply and demand into balance whatever happens to the rate of oil production.
The big problem with this dogmatic optimism is that there's simply no guarantee markets will bring supply and demand into balance by delivering new sources of energy to market and providing new technologies to improve energy efficiency.
Peak oil implies not just high prices (which would provide unambiguous price signals to innovate) but extreme price volatility: wild swings in energy prices as the marginal cost of producing an additional unit of energy skyrockets, and the resulting super-spike in prices stalls economic growth.
In such a volatile environment of spikes followed by recessions, investment in new technologies actually slows due to a tightening of capital markets and the increased risk of soft or unreliable demand.
Markets do achieve a balance (of sorts) between supply and demand, but only through a painful and progressive ratcheting down of living standards as the economy lurches from one crisis to the next, squandering its scarce wealth on shoring up vulnerable oil-era industries rather than laying the groundwork for new post-oil industries.
What we may end up with after twenty years of economic chaos (if we're lucky) is a new equilibrium at a drastically lower standard of living and much sharper income inequality between the remaining wealthy and a vastly expanded underclass of working poor.
If we're not lucky, all that unremitting economic chaos could simply pull our civilization apart. It's not unthinkable: in our own time, plenty of seemingly stable societies have collapsed into lawlessness, warlordism and even genocide.
Thomas Hobbes had the vital insight that civilization rests on a shared expectation of civility and lawfulness. Because I assume that the people around me are going to behave lawfully (for the most part) and that the rule of law will be enforced fairly and consistently, I don't need to expend my own resources in a defensive posture.
In the absence of that shared expectation, I may feel the need to arrange for my own self-defence, by barricading my home and acquiring powerful weapons as a deterrent.
The problem is that others, also operating in the absence of shared lawfulness, will reasonably worry that I am building up my armaments so that I can attack them and steal their scarce resources. They, in turn, will start building their own arms (even if they, like me, are not aggressive in intent).
Now we're having an arms race, and even more wealth is being drained out of food, shelter, infrastructure, etc. to pay for defense. If I become certain that someone else is planning to raid my base, I may decide to raid them pre-emptively (or vice-versa) - again, even if I'm not violent and aggressive by nature.
Add in the odd person who really is aggressive and megalomaniacal, and you have a recipe for warlordism and widespread violence.
This is what Hobbes meant by the war of all against all. What many casual readers of Hobbes' Leviathan don't realize is that it does not assume people are inherently violent and aggressive.
Rather, he understood that security is a collective action problem: if each person is responsible for their own security from others, everyone ends up less secure. The solution - a shared governance structure that individuals accept and that applies to everyone equally - is the reason why violence in our civilization today is orders of magnitude lower than even a couple of centuries ago.
Steven Pinker, a prominent cognitive psychologist at Harvard, makes a compelling argument about the dramatic decline in violence over time and the roles that shared expectations play in allowing people to be increasingly civil, respectful and humane toward each other.
If the legal, social and economic underpinnings of this shared civility start to collapse, the collective action problem resumes and the deadly calculus of competitive self-defence can reassert itself.
Every civilization throughout history has eventually collapsed - mainly through a combination of resource depletion and negative returns on added organizational complexity - and we'd be fools to think our own civilization is somehow exceptional in this regard.
I'm not suggesting that this collapse is inevitable or that it will follow peak oil, but it's absolutely a possibility. At the same time, our civilization does have some important circumstances in our favour that previous civilizations did not:
1. Universal comprehensive education. We're the first civilization in history to commit to educating everyone, not just the children of the elites. This has dramatically increased the average productivity of citizens, as well growing as the pool of researchers, engineers and creative professionals.
2. Science-Based Worldview. Our civilization is still magical in many ways, and we still hold many taboos and irrational beliefs, but our systematic efforts to understanding how the world works are based on empiricism - a rigorous, peer reviewed process of testing hypotheses about how the world works for predictive power. This has resulted, in part, in an rapid and accelerating explosion of new methods, technologies and operating models in a virtuous cycle of self-reinforcement.
3. Regulated free markets. At its best, a regulated free market combines the confidence and predictability of well-maintained public infrastructre and open, transparent, rules-based contracts and transactions with freedom to invest, develop and market inventions. Price signals in an open market are generally (though not universally) much better at allocating resources than the command of a narrow leadership.
4. Liberty. Our civilization is broadly committed to the maximum personal freedom (including freedom of expression, movement, and association) that can be shared by all. A society committed to freedom is better equipped to tolerate open discussions and heed warnings in time to respond to them.
5. Democracy. At the same time, our civilization is committed to the idea that the government ought to represent the public interest as expressed by the citizens themselves. Of course, in practice this is susceptible to bureaucratic imperatives, mission creep and co-optation by interest groups, but it is emphatically possible for citizens to self-organize and hold their political leaders accountable.
6. Feedback systems. All the education and information in the world won't help us if we can't share it and make effective use of it. Between universal education, a vast and growing body of public knowledge, personal freedoms, and democratic accountability, citizens need to be able to get good information about the challenges we face and insist that our governments respond appropriately.
Throughout the 20th century, our main feedback systems were top-down: university researchers publishing papers in academic journals; books; newspapers and magazines; television (both news and current affairs fiction); and government reports. During this time, it was very difficult for citizens acting on their own to gather and coordinate information, publish their own content, and communicate directly with decision-makers.
Dark Age Ahead, the last book Jane Jacobs wrote before she died, argued forcefully that these traditional feedback systems are starting to unravel, to a serious risk of our society no longer being able to respond effectively to challenges.
However, as Clay Shirky argues in his recent book Here Comes Everybody, the development and widespread public adoption of the internet and its related technologies - email, websites (including blogs and social web applications), IRC and so on - means the infrastructural and administrative costs of sharing information, pooling resources, collaborating and publishing content have collapsed.
This has resulted in a huge and rapidly growing amateurization of feedback. For the first time, content publishing is becoming a true meritocracy, available to everyone regardless of institutional connections.
This represents a crisis for the established systems of information professionals that have coalesced around scarce and expensive publication technologies (printing presses, television broadcasting stations), but an historically unique opportunity for much broader citizen participation in information sharing and decision-making.
Our institutional, top-down feedback systems are growing moribund, trapped as they are in bureaucracy, self-preservation, co-optation by narrow interests and path dependence from their previous investments in scarce publishing technologies.
This failure is evident, for example, in the absolute and relative paucity of mainstream discussion about peak oil, a theory that rests on abundant evidence and is well-accepted by most oil geologists and energy investment professionals.
Left to their own devices, the traditional feedback and decision-making bodies in our civilization will likely not acknowledge until too late that the economic assumptions that served us yesterday - an assumption of cheap, available, reliable oil - are already starting to betray us.
That means it's even more important for citizens creating their own parallel information sharing and collaborative systems to step up and fill the empty societal feedback role that will motivate our democratic government to lay the necessary groundwork for the cascade of economic and personal choices to get us through this crisis.
Groups like Raise the Hammer have had some success at collecting and sharing information, but we have a long way to go at putting that awareness to work through new productive collaborations that achieve results. As a society, we need to act quickly to create new institutions of feedback and response in time to bootstrap ourselves off dependence on oil.
By jason (registered) | Posted January 12, 2009 at 10:57:46
60 Minutes last night had a 30 minute segment dedicated to oil prices and their recent rise, then fall. They didn't mention peak oil and kept speaking with 'experts' who said that supply and demand wasn't the problem because US demand gradually decreased even while the price was increasing (I guess it's too much to ask for the US to ever pretend that there is a whole planet full of people besides them). They also interviewed some guy who delivers fuel in Kansas and he said their storage tanks were always full, proving that supply and demand wasn't the issue. LOL. Apparently Kansas is now the benchmark of world supply/demand.
Basically they concluded that Goldman Sachs and other Wall St firms were 100% responsible due to their oil trading. Obviously there is some truth to that, but it was the first US 'news' show I've watched in a few years and it was remarkable to see the same old narrow-minded, US-centric focus that I remember from their 'news' stations. Not a word about peak oil, world supply/demand, slower returns from the worlds largest fields, increasing costs to refine a tougher product and absolutely ZERO mention of the interconnectedness of oil and the economy.
By David (anonymous) | Posted January 12, 2009 at 13:50:28
I think violence generally has diminished only because of past decades of relative prosperity, and in general people have too much to lose and were too busy trying to keep it. But witness the millions of illegals marching through US streets last year - they have nothing to lose and something to gain. And witness that the calamity of the Katrina hurricane caused even the cops to become looters.
Once a critical number of people no longer have anything left to lose in a crumbling economy, especially after seeing the Wall St elite being handed hundreds of billions of the grandchildren's debt, things could change drastically. People have been living too high on the hog to accept entry into a Third World lifestyle with a smile.
Ya gotta wonder if that is why Obama wants 20,000 Pentagon Troops on the street corners, which will only make people morph into a prison camp mentality and fight against it. People are peaceful in peaceful environments, and the sight of "peacekeepers" causes the opposite effect.
By Candide (anonymous) | Posted January 12, 2009 at 14:01:48
Jason and David are such pessimists. True we are in tough economic times. We have been in them before. The world has seen global wars, depressions, calamities and yet here we are, better educated, wealthier, healthier and with better social programs to assist with what's coming. Are we an Eden? Hardly, but I don't think that images of depleted resources or violence in the streets do justice to what we have been able to build on these past generations. Unless you have been preaching doom and gloom for so long that you yearn for calamity just so you can say you were right and everyone else was wrong!
Don't worry (as much); Be Happy (as you can be).
By David (anonymous) | Posted January 12, 2009 at 15:38:08
Candide - not preaching or wishing, but a realization of the kind of insanity that existed. One Trillion Dollar$ is a stack of bills laying flat 70,000 miles high. (You do the kilometer math). The US public and private debt is over $50T and growing by the second - 3.5 million mile stack of bills - 15 times the distance to the Moon. This is how Empires end.
Since the Pilgrims landed, everything that was ever done in the US until 1974 happened within $1T of money stock. The last $1T was added in 3 months. Soon, 3 hours? The exponential function, especially as it relates to the (not)Federal(no)Reserve System is not well understood.
After Depression I, the US could still supply all it's own oil, and the Industrial Revolution was still ahead - the Isolationism of the time allowed the greatest build-up of prosperity in history. But even before this Depression started, the last vestige of US big industry was on bottled oxygen. The Unions have lost to bowl of rice/day workers elsewhere and $29 VCRs. And the rest of the world is now losing due to the end of US credit-card consumerism. We at one time just had to drop to their level to compete, but now they are a moving target. The main US export product was Dollar bills, but now they are broke.
I personally don't go so far as to say this will end in a world of Mad Max, but I do expect "Little House on the Prairie".
By A Smith (anonymous) | Posted January 12, 2009 at 21:19:25
Ryan, if oil prices are volatile in coming decades, this does not mean we will see a drying up of investment. All that will happen is that people take this into consideration when drawing up their investment plans. For example, we may see technologies that enable cars to use both oil and alternative fuels , thus reducing the need to forecast what fuel will be the most economical.
Furthermore, if spikes in oil become predictable, as you suggest they will be, then this will make it far easier for businesses to plan for these spikes and take corrective action before they reduce profit margins. Over time, businesses will find it no harder to adapt to fluctuating energy sources, then humans do with the coming of the seasons.
The fact that some people were caught off guard by this recent spike in inputs is not surprising. Human behaviour is always reactive, however, over time we do find ways of adapting. All it takes is a few smart people to lead the way in managing to overcome a problem and the rest of the world will take those lessons and apply them to their own situation.
In the meantime, allowing the government to increase the price of oil, in an attempt to conserve it, will only slow down the rate at which new and possibly cheaper fuels hit the market. If the market is allowed to work freely, we will either get new technologies quicker, or enjoy the benefits of cheap oil for a while to come. Either way, the consumer should be the one who gets to make the choice, not politicians.
By Brandon (registered) | Posted January 13, 2009 at 07:58:58
A Smith,
Your comment about government increasing the price of oil slowing down new technologies is mind boggling. In fact, it sounds like you aren't aware of the fact that the gov't has kept a finger on the scale in favour of oil by paying billions to the oil companies. If the market was truly free, there would be no oil company subsidies, or there would be equivalent subsidies for all energy sources and we'd be well on the way to green power.
Carping about the free market when it comes to oil is ridiculous as we have no experience to base it on.
By A Smith (anonymous) | Posted January 13, 2009 at 13:33:56
Brandon, I agree with you, drop the oil subsidies.
Ryan, how about pushing for a reduction in government subsidies to roads? As it stands today, we have no idea what the true cost of driving is. I bet that if transportation was delivered solely by the free market, we would see much denser communities, more pedestrian friendly streets and more efficient highways for businesses to bring us our goods.
However, by allowing government to invest limited capital into free roads, where the value is unknowable, we end up with inefficient modes of transportation, higher energy consumption and less disposable income.
Why not come over to the dark side and join the fight for less government involvement in the economy. Once you get over the stigma of being considered evil, you will find the rewards of allowing consumers to direct the economy well worth the cost.
By jason (registered) | Posted January 13, 2009 at 16:54:24
I think I've finally figured out ASmith - you sound like a libertarian. Am I right?
If libertarians had their way, we would all be using horse and buggy on well-worn paths to get around and would have no such thing as health care, medicine, social services, public transit etc..... Everyman for himself.....and nobody getting too far ahead because of it.
By A Smith (anonymous) | Posted January 13, 2009 at 19:45:56
Jason, how do you explain the fact that countries (Russia, China, Vietnam, Eastern Europe, India and Bangladesh, etc.) currently moving from government directed spending to private sector consumption, are leading the world in economic growth? If individual freedom is such a detriment to real output, these economies should be in tough shape, but the opposite is true.
Conversely, if I am wrong and government spending is better at increasing output, why not let them make all the spending decisions? That way, consumers will be better off than had they spent their income themselves. Furthermore, if government is better at making spending decisions, they are probably better at making all economic decisions. Thus, we could have politicians decide what jobs there should be, how long we should work, the optimal size of our family, etc. I mean, as long as politicians are superior in making decisions that benefit society, why let individuals make any decisions?
This of course is bull%$@, because if it worked, the fastest growing countries would be centrally planned, which is not the case. Even in Canada, the provinces that are growing the fastest are the ones who have either cut taxes and/or spending the most, such as Alberta, B.C. and Saskatchewan and even NFLD. In contrast, provinces like Ontario, Quebec, and the Maritimes that turn to the government for direction, suffer because of it.
The fact is, private sector driven economies produce the most output, jobs and real wages. This is because capital is deployed with an eye towards profits. Therefore, before money is spent, there is a way to measure the effectiveness of this spending. Furthermore, if a business does not make wise investments, the market stops giving them money .
In contrast, government spends money with complete disregard as to what the return on each dollar is. Their concern isn't to grow their fortunes, it is to simply get reelected. This means that much of the spending that takes place in our country is spent exactly with that goal in mind, getting members of parliament another 4-5 years in office. There is no concern as to whether this is adding value to society, but simply whether it will keep our beloved politicians in power. Hardly a great rationale for investing limited capital.
By jason (registered) | Posted January 13, 2009 at 21:30:59
there's just way too much fact-twisting going in the above post for me to bother responding to. However, I must call you out on the comment that 'Ontario turns to the government'. 1. Have you seen the inequity when one compares what Ontario sends to Ottawa and what Ottawa gives back?? We're being screwed by the government, not helped. 2. Snag a book from a library on the history of Ontario. you'll find an economy that has grown more powerful than many nations on earth and is very tied into manufacturing (which in case you hadn't noticed is having a rough time right now).
you're ultra-libertarianism is no better than someone's ultra-socialism. A healthy society has a proper mix of public/private ventures and wealth generation that leads to greater growth and health in the future. Let's chat in 20 years and see how the US is doing. It's already feeling the pain resulting from handing over the keys of the nation to a group of private corporations years ago and letting them run wild. Have you ever stopped to wonder why Canada's banking system gets voted as being the safest in the world and why our real estate market didn't crash and burn like our neighbour to the south?? It's called a healthy society in which the government maintains appropriate regulation and doesn't just turn over control to the corporations. crazy idea eh??
By A Smith (anonymous) | Posted January 13, 2009 at 23:16:08
Jason, Ontario has seen its share of federal transfers go from 26.3% in 2003-04 to 30.22% in 2007-08. Therefore, rather than being screwed over in recent years, Ontario has been become more dependent on others to pay our bills.
Furthermore, while Ontario politicians have decided to spend taxpayers money on what it thought were important drivers of the economy, namely the auto sector, other provinces have cut business and sales taxes for all businesses. The provinces that have done this, namely Saskatchewan, B.C., NFLD and Alberta have seen strong economic growth, while Ontario's role in the nation's economy has shrunk.
Therefore, excuse me if I don't buy the argument that politicians have some special insight into what sectors of the economy are important or not. The fact is, judging by recent experience, they are utterly clueless. In fact, if they were being rated on their ability to pick winning industries, they would get an F-.
While it may be true that Ontario used to be a manufacturing powerhouse, that does not mean it will be that way forever. Economies change over time, but that does not mean they become any less wealthy or productive. If government would just let the market produce what is in demand, rather than try to save dying industries, like domestic autos, we could save precious capital for newer industries.
Finally, if companies can only get money from the government, it is a pretty good sign that their prospects are not very good. If they were good, banks and other sources of capital would provide the funds they need.
By jason (registered) | Posted January 14, 2009 at 07:20:46
let's chat in 10 years. Ontario will have rebounded again, just like it did after the late 80's/early90's slowdown with more innovation. I remember this same argument being used back then - people fleeing to go out west to look for work etc.... only to see them all slowly trickle back to Ontario for a job 5-10 years later.
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