Friday, July 06, 2007

Napping on the railroad tracks

Napping on the railroad tracks sounds risky on its face. But it may not feel that way if you don't know you're napping on the tracks.

Humans seem programmed to believe that the future will look pretty much like the past. But the narrative of history is the narrative of unexpected events. And, so it is surprising that when it comes to resource depletion, cornucopian thinkers love to refer to history. Daniel Yergin, chairman of Cambridge Energy Research Associates, likes to say, "This is not the first time the world has run out of oil. It is more like the fifth." But even though Yergin admits that oil is a finite resource (and that therefore its total quantity is declining), he invites us to snooze with him on the railroad tracks because history has shown that so far it's been safe to do so.

Yergin's faith (and that of many others) is founded on the forecasts of his own firm and that of the U. S. Energy Information Administration (which takes its data from the U. S. Geological Survey's World Petroleum Assessment). But what drives us to make such forecasts? Even create a whole forecasting industry? In his latest book, The Black Swan: The Impact of the Highly Improbable, Nassim Nicholas Taleb believes that we do so because we are planning animals. This behavior may be a successful evolutionary adaptation. We are able to imagine situations that might risk injury or death rather than simply experiment and see what happens. "Used correctly and in place of more visceral reactions, the ability to project effectively frees us from immediate, first-order natural selection....," he writes.

But, imagining the future is not the same as correctly predicting it. Taleb outlines the problems with forecasts as follows. First, variability matters. Most forecasts don't include an error rate, often indicated as a range of possibilities. In other words, how wide of the mark might a forecast be? (The U. S. EIA forecast is an exception, but it is not clear how the error rate is calculated and whether the data upon which it is based can be justified.) Very often, the "error rate is so large that it is far more significant than the projection itself!" (The EIA doesn't seem to understand this point.) Taleb gives this example: If you knew the place you are flying to is expected to be 70 degrees, you would pack much differently if you also knew that the range was plus or minus 40 degrees rather than plus or minus 5 degrees.

Second, forecasts degrade quickly as the forecast period lengthens. There are so many imponderables including technological developments; individual, corporate and government decisions; and unforeseen events such as wars, revolutions, and economic busts and booms, each essentially unknowable and each compounding upon the others with every passing year. "Our forecast errors have traditionally been enormous, and there may be no reasons for us to believe that we are suddenly in a more privileged position to see into the future compared to our blind predecessors," Taleb writes.

Third, there is often a failure to grasp "the random character of the variables being forecast." Taleb doesn't address resource depletion in his book. But, when it comes to oil supplies, those confidently making optimistic forecasts assume substantial new discoveries. However, discoveries can in no way be determined ahead of time; otherwise, they would be classed as reserves and not discoveries. Future consumption rates for oil depend on the economy which depends on so many individual and collective decisions that one cannot tally them all. And, even if we could, how would we know what numbers to use for 2017 or 2026?

When it comes to technology, it has always seemed to be a one-way street, ever improving. There can be no dispute that technology has put into the hands of human societies great power to learn about the world and to manipulate it. But, even here there have been long stretches of only small, incremental improvements in, for example, our ground transportation system which relies on the same basic internal combustion engine technology first produced more than 100 years ago. There have also been notable failures--no commercially feasible fusion energy and no miracle cures for genetic diseases. Technological development moves unevenly through various sectors, sometimes by fits and starts and sometimes not at all.

All of this implies that we have no way of determining whether we should prefer pessimistic or optimistic forecasts for world oil production. What is more perplexing is that both forecasts depend on certain kinds of extrapolations from the past. The pessimists focus on the peak in world oil discovery back in the 1960s and the optimists point to reserve growth through additions to existing fields and to advancing technology for both exploration and extraction. While the pessimists and optimists emphasize certain data, both accept the historical data, but then draw vastly different conclusions, i.e., an imminent peak in world oil supplies versus a distant peak followed in some cases by a long plateau. When it comes to technology, for example, the pessimists argue that technology has done pretty much all it is going to do for oil recovery while the optimists believe that vast increases in the percentage of the oil recovered from existing and undiscovered reservoirs lie ahead.

Taleb suggests a way to look at the problem as follows: "Even if you agree with a given forecast, you have to worry about the real possibility of significant divergence from it," he writes. How might he apply this to the peak oil issue? He gives us a pretty clear idea. "[I]t is the lower bound of estimates (i.e., the worst case) that matters when engaging in a policy--the worst case is far more consequential than the forecast itself. This is particularly true if the bad scenario is not acceptable."

While it's possible that Daniel Yergin and other cornucopians may continue to nap on the railroad tracks without any harm for many years to come, it is faulty logic that leads them to believe that there is very little risk in doing so. And, because of their influence, they are doing a great disservice to society by pretending that their oracular pronouncements are somehow based on something other than conjecture. (Such an admission might cut into demand for their forecasts, but it would be better for policymakers and society as a whole if they admit to uncertainty.)

On the other side of the argument, the pessimists would be wise to attach wide error bars to their forecasts as well. They can do this without abandoning their basic premise, namely, that preparing for a decline in oil supplies will be a monumental task that is better begun early rather than late precisely because we cannot predict when the decline will begin. Moreover, the use of generous error bars will have the added benefit of removing the "Chicken Little" aura which now surrounds so many peak oil theorists.

Taleb has strong words for the unctuous forecaster who won't admit the uncertainty in his or her work:

Anyone who causes harm by forecasting should be treated as either a fool or a liar. Some forecasters cause more damage to society than criminals. Please, don't drive the school bus blindfolded.

9 comments:

odograph said...

What a wonderful essay.

I've left aside my copy of The Black Swan for a while, but you've done a very thorough mapping from Taleb's arguments to Peak Oil.

I agree that it all about the precautionary principal (and also, finding paths that benefit us today, and in a wide range of future outcomes).

My patience is pretty much gone with Peak Oiler's locked into this scenario or that. They, as you note, have a very specific reading of current affairs, and a fixed belief in a single path going forward.

The future is uncertain ... but I know my refrigerator has cut my electric bills, and I'll only put $20 worth of gas in my Prius ... next week.

Dunc said...

But even though Yergin admits that oil is a finite resource (and that therefore its total quantity is declining), he invites us to snooze with him on the railroad tracks because history has shown that so far that it's been safe to do so.

The analogy I like to use here is to pretened that you've jumped off a 100-storey building. Falling past the first 99 floors causes no harm at all, but you'd obviously be wrong to assume that the 100th is going to be the same.

Step Back said...

Calling ourselves planning animals is somewhat naive and self congratulatory.

The human brain is full models. Models that try to emulate the external world.

If I consider myself an "empathic" person it is probably because I have a model of you, of what you are like, running inside my head. I can step into that model and pretend that I am feeling what you are feeling. Then I have a sense of "empathy" for your situation.

I have other models running in my head that try to emulate the world. What is it like? What makes it go round and tick the way it does?

Perhaps my world model includes an Invisible Hand and a Market that mysteriously comes around to make everything right in the end. Perhaps my internally-kept model includes a section for Peak Oil, population overshoot, Global warming; or none of the above. It's different for every human being.

With a model, I can race it forward in time and see what happens. That's called predictive modeling. I can also test the validity of my predictive model by waiting to see what actually happens. For more insight on predictive models, see Kalman Filters.

Step Back said...

So just a little more on predictive modeling and validation.

Say I am running a Cornucopian model inside my head. In other words, the Market always provides and "technology" (whatever that is) is forever progressing forward.

So say I'm not a technical person but I know how to step into a technology store, like a Circuit City or a Radio Shack or what have you.

One day I step in and they are selling vacuum tube color TV's. Wow this technology is cool! The next decade, I step into the store and "they" have created transistorized TV's with remote controls ... and computers. Skip forward to modern day and they are showcasing the iPhone.

All this validates my Cornucopian internal model. Floor 33, and so far not only so good, but it seems to be getting better! What are those Gloom & Doom others talking about? I think I'm going to continue modeling them as being lunatics. My everyday validation tests show they are lunatics. No need to waste time listening to their rants. My internal models prove themselves to be always correct.

Step Back said...

P.S. A validating find for my BS model about validation is here.

Excerpt:
Over the past month, I have been to the following stores:

Public
Target (TGT)
Home Depot (HD)
Lowes (LOW)
Best Buy (BBY)
Circuit City (CC) ...

Anonymous said...

I guess Yergin will live forever, based on past observations!

Nicholas said...

StepBack

That’s why when forecasting models we investigate the 'facts' to produce the most accurate model, instead of relying on blind faith and bias opinions. Just remember energy can’t be exchanged for technology, the two aren’t the same.

Sailor said...

When I first heard of Peak Oil it was like a bell rang in my head and a lot of things that had made me uneasy all of a sudden made sense. Once you have the realization you wonder why everyone else can't or won't see it. I am pretty naive I suppose as one of my main worries was that no one in our government seemed to realize that we were and are 'napping on the tracks'. But I was wrong, I think to not give TPTB more credit. There is a plan 'B' and it involves taking what we need. I am afraid it will all degenerate into a 'last man standing' situation, and the last man standing will be the one with the most nukes that uses them first.

auntiegrav said...

Thanks for the discussion of Taleb's book. I think the more exposure it gets, the better. I only wish I had written it.
More people need to understand the limitations of statistics and mathematics. The predictive modeling sciences are great when used properly and under the right conditions, but we always have to make sure that the people making decisions and the people making models remember that they are specifically models, not reality. Just because my child makes a very accurate picture of a horse, it doesn't mean that horses can be constructed with paper and crayons. Our models of technology advancement and economics do not create the future, they only model one possible outcome of our actions.
The Black Swan I fear is not the 'surprise' one, but the one that has been purposely buried in order to maintain the bell curve profits of petroleum dependency.
Trust no one, but get to know everyone. Know who your neighbors are, and whether you can count on them to cooperate with you. That's the best we can do with the faults in our System of failed information-based systems. If everyone is lying about the important things, then make sure the people you do deal with are within reach of your pitchfork.