Sunday, May 20, 2007

Peak oil forecasts and asymmetrical risk

It's fun to predict what life will be like 30 or even 50 years from now. There's a steady market for it, both for the optimistic version--designed mostly to make people feel good (or less bad) about destructive behaviors--and the apocalyptic version--designed primarily to bring converts into certain religions and social movements. Until the day approaches, the forecaster doesn't have to account for his or her prediction. Sometimes the forecaster is dead when the date arrives, and no one remembers what he or she said. Or if the forecast is vague enough, it is reinterpreted to explain what is happening, and any followers then feel vindicated.

Oracular pronouncements have become a staple in discussions of peak oil, global warming and other environmental issues. The problem with any forecast, however, is that its accuracy degrades rather quickly the further one projects into the future. This is because our society is characterized by rapid technological change and contained, like all societies, within a complex natural system. It would have been pretty easy to forecast the basic conditions for human beings starting 100,000 years ago for the 5,000 years that followed. People would be living in small groups of hunter-gatherers at the beginning of this period and at the end. But, things were much simpler back then, and nobody really needed a forecaster.

Any long-term forecast today, however, requires that someone predicting the next, say, 20 or even 10 years, would have to know in advance about every major invention. And, if a forecaster already knew this, he or she would be very close to inventing those inventions. The inventions then would not be something for the future, but really for the present. (I am indebted to Nassim Nicholas Taleb, author of The Black Swan: The Impact of the Highly Improbable, for this obvious--once you hear it--insight. It doesn't, however, seem to be obvious to people who call themselves futurists.)

Those concerned with natural systems run into an additional problem. Predicting the trajectory of complex natural systems and their reactions to technological and social change is also exceedingly difficult.

But, forget about the future for a moment. Contemplate how difficult it is to figure out what is going on in the present with our very limited understanding of both the social and natural systems that surround us. So, does this mean that it is hopeless to even think about the future? The short answer is "no." My attempt at a long answer is as follows.

First, humans seem uniquely designed for thinking about events which haven't yet happened. They can imagine how they would react to such events or plan some future course of action that they believe will create their desired outcome. However, as anybody who has lived long enough already knows, nothing ever goes according to plan. Even so, planning can prepare us for contingencies that would otherwise confound us in the heat of action.

Second, even though the precise outlines of the future cannot be ascertained, we can imagine several scenarios within which the future is likely to unfold. While examining various scenarios gives us no precise estimates of risk, at least it gives an indication about the character of those risks. Are the upsides and downsides of the scenarios consequential? In other words, will they affect society much either way? If they are consequential, is the advantage or harm implied by favorable and unfavorable outcomes of equal magnitude? Or is one outcome disproportionately good or bad?

A simple way to explain this is as follows. If I risk getting a hangnail in pursuing a course of action, I will act differently than if I risk getting my arm cut off. It is just such an analysis of risk that deserves consideration in the peak oil debate and in other important debates such as how to respond to global warming.

Here's what such an analysis might look like with regard to peak oil. Let's say the range of predictions about how much oil will be flowing worldwide in 2025 goes from 50 percent less than is being pumped today to 50 percent more. Since oil is not an intellectual product, but rather a physical one that requires considerable work to find, pump, and refine, it is probably safe to assume that we will not be pumping 1,000 percent more than today. Nor is it likely--given what we can ascertain about reserves in the ground today--that we will be producing anything approaching 100 percent less or, in other words, nothing. (Naturally, one could concoct extremely unlikely scenarios in which, for example, aliens teach us how to turn seawater into conventional oil at 3 cents a gallon or conversely, a plague wipes out all human beings who then, of course, cease to pump any oil.)

Within these bounds of 50 percent less and 50 percent more, we can imagine what the consequences might be. A world with 50 percent more oil will probably look like an extension of today's world with a lot more Chinese and Indians driving cars. (I'm not considering global warming as an issue in this example.) A world with 50 percent less oil will certainly be experiencing extreme difficulties. Unless suitable and inexpensive substitutes for petroleum-derived fuels have become widely available, the price of such fuels will be considerably higher. The costs associated with products such as plastics made from oil-derived feedstocks may become prohibitive for many users. Our complex transportation and agricultural systems which are dependent on cheap liquid fuels and oil-based chemicals such as herbicides will be in considerable distress. They may provide neither the level of transportation for goods and people to which we have become accustomed, nor the necessary quantities of food to feed those people.

Clearly, the downside of the pessimistic forecast cannot be equated with the hangnail mentioned above. It must be classed with the amputation.

Those who pooh-pooh such a comparison are likely to call the pessimistic forecast a scare tactic. But remember, no one can possibly know with any precision what worldwide oil output will be in 2025, and no one can confidently ascertain whether technological changes will substantially mitigate--through efficiencies and substitutions--any reduction in oil supplies. In fact, there are sound reasons to doubt that such mitigation will be possible on such a short time scale, even if we ignore the problem of carbon emissions. (A report commissioned by the U. S. Department of Energy, now commonly referred to as the Hirsch report, is probably the most definitive attempt to look at near-term mitigation. It casts doubt on whether we will make sufficient strides at mitigation even if peak oil doesn't occur until the dates offered by the most optimistic scenarios.)

The scenarios we use to peer into the future don't have to be precise in order for us to glean a considerable amount of information from them by contemplating the consequences of each. If the downside of the pessimistic forecast could readily be dismissed as minor, then we could probably (but not with complete certainty) set aside our anxieties.

But such is not the case. The downside of a large reduction in oil supplies is so monumental that it could cripple modern, technological civilization and even initiate a cascade of failures that lead to a long-term downward spiral. In short, the risks posed by pessimistic and optimist scenarios in the peak oil debate are wildly asymmetrical. The downside consequences are possibly civilization-wrecking, while the benefits of the upside can be broadly characterized as nothing more than allowing business as usual to proceed. It's no wonder that optimistic scenarios are popular among such deeply entrenched business interests as the fossil fuel, automotive and utility industries. They would all be hurt by a rapid transition to a sustainable transportation system and a sustainable energy economy.

It is worth asking the oil optimists why they buy insurance for their homes and cars to protect them in case of catastrophe, but refuse to support taking out insurance for society as whole in the form of investing in a sustainable economy. The optimists may complain that we have much more time to make the transition than the pessimists say and that a rapid transition would be unnecessarily costly for society. If this is their argument, then it amounts to nothing more than saying that the main danger we face is creating a sustainable society before we actually have to--a process that will end up hurting some business interests while benefitting others.

For my own part, I can live with that risk!


Anonymous said...

Boy Kurt, that one is on the money.

But then, I've been pushing Taleb to the Peak Oiler for a year or more. I may not be unbiased.

(Stumbling on Happiness, by Daniel Gilbert, is proving to be another good read. And coincidently or not, it begins with a discussion of our "present selves" and the actions we take for our "future selves." Recommended as a follow-on to Taleb.)

- odograph

Anonymous said...

"It is worth asking the oil optimists why they buy insurance for their homes and cars to protect them in case of catastrophe, but refuse to support taking out insurance for society as whole in the form of investing in a sustainable economy."

Red herring comparison. Investing in a sustainable economy is in no way comparable to buying a policy from State Farm. Apples and oranges.

Individually we're basically chained to the tracks as we watch a locomotive bear down upon us. There is no WE to take action here. The system that pretty much runs things is a Golem-like confection of money, computers and cheap energy. It has a vocabulary, time horizon and musculature that precludes even sensing the problem. Individuals can see the problem but the system can't. Hence, no WE - just you and me.

Anonymous said...

When I was a young man, I believed in my own power and, most certainly, in the brilliance of the human mind/abilities of the world to handle whatever came at it. This article makes me think of so many other intellectual discussions I read that solve the problems so neatly. Sustainable economies, back yard gardens, solving problems with sweeping generalizations, etc, etc. When the s... hits the fan, it is, most certainly, going to be much more out of control than the comfortable discussions over a cup of coffee or a beer make it out to be. Believe me, when you're hungry, cold and wet without a solution in sight, we are all a lot more violent and dangerous than we like to admit. Good luck to all you dreamers!!

Anonymous said...

"Red herring comparison. Investing in a sustainable economy is in no way comparable to buying a policy from State Farm. Apples and oranges."

The thing you have to understand is that your foes in this do believe (or at least can maintain hope) that they live in a sustainable economy.

What Kurt is recommending is "insurance" for the case when that idea of "sustainable" doesn't pan out.

FWIW, it might be important to think about the word sustainable, and the psuedo-brand "Sustainable(tm)" that gets packaged and sold by green entrepreneurs. I mean, man of those products are swell and I buy them ... but there is both a group think and often a business model at work there as well.

- odograph

Anonymous said...

What must be emphasized in this is that in terms of asymetrical risk the 50% increase in crude production is what MUST happen to avert the impending crisis. If that outcome is equally likely as a %50 reduction, then we can see that what we really have is a situation where our civilizations existence is contingent on the appearance of the good black swan. We are all pulling for the long shot