Sunday, December 27, 2009

Hope, hopelessness and faith

The trouble with hope is that it is so easy to do and so easy to dash. We hear people say that they hope so and so will get well or will get that scholarship he or she needs to attend college or get the job he or she has applied for. There is rarely a second step in this kind of hope. And, those to whom we pay this lip service hope can through circumstances or poor conduct very easily dash our hopes.

In the political world, we often place hope in the leaders we elect. We hope they will do the right thing, enact the right policies, appoint the right people. While there may be a second step in this process--that is, pressuring our political leaders to do what we want them to do--there is little a modern voter can do when arrayed against the money and lobbyists of the corporate world.

We often hear people say that it is impossible to live without hope, by which they mean hope for something better than the current set of problems we face. There may be something to this. To believe that an unbearable present will only be followed by an unbearable future is truly debilitating. But in a world of constant change we can be virtually certain that the status quo will falter at some point.

For those involved in issues of sustainability, peak oil, climate change, and relocalization it might be better to feel a certain hopelessness in our situation. For hope implies dependence on forces outside ourselves. Once we abandon that hope, we can get down to the tasks at hand, the tasks that need to be done--for which we need to ask no politician or government official permission--tasks that we can get started on today. In this way hopelessness concerning the current political and economic arrangements becomes an ally.

So, what we really need is not hope. Hope can be the enemy of action. Hope can be a drug that maroons us in cafes in long, satisfying conversations that never lead anywhere but back to the cafe the next night. In hope's place I nominate faith. Not religious faith, but what George Santayana calls "animal faith." The great American psychologist James Hillman describes it in his book "Inter Views" in this way:

[Animal faith] is faith in the world: that it is there, that it won't give way underfoot when you take the next step, that you just know which way to turn and how to proceed. It's the faith your hands have and your feet have.....the cat jumps on the tree and starts climbing. The tree is not an object of faith to which the cat gives assent. It is a tree in an ecological field belonging to the cat's climbing. The cat has an animal faith in the tree and it loves the tree, loves itself, loves jumping and climbing--no self-examination there, no introspection about belief.

Hope is part and parcel of our pathology, Hillman writes in "Suicide and the Soul." But faith, animal faith, is commitment to the moment, commitment to putting one foot in front of the other, to getting up in the morning and making breakfast. The day will bring what the day will bring. We do not need to "hope" for anything.

And, as we go through the day, our faith can grow. This is not a faith based on belief, but rather on experience, the experience we gain with each small act and the competence that grows in us as a result of those acts. Our faith can also grow as a result of the trust we build with others as we work with them for mutual goals.

So, as we look to the year ahead let us not "hope" for a better year to come. We will almost surely be disappointed and only rarely pleased as we sit on the sidelines watching. Rather let us focus on putting our "animal" faith to work on the tasks at hand and let our engagement be the joy of the new year.

Thursday, December 24, 2009

Why climate change adaptation could make things worse

My latest column on Scitizen entitled "Why Climate Change Adaptation Could Make Things Worse" has now been posted. Here is the teaser:

Because many of the proposals for adaptation to climate change require further extensive release of greenhouse gasses, they will only make climate change worse....Read more

Sunday, December 20, 2009

Technology will save us...or not

Technology will save us--it's the mantra heard around the world when it comes to climate change, fossil fuel depletion, and myriad other environmental and resource challenges. But, that mantra rarely comes with the proviso that technology often has unintended and even perverse consequences.

"Yes, yes," you will say, "we know that." Then, why, may I ask, is this almost never mentioned in the same speeches, op-ed pieces, and journal articles that tout the efficacy of one or another technology to definitively solve or at least help solve critical environmental and resource problems? It is because these pronouncements are polemics, or more properly, sermons meant to instruct us in the supposed invincibility of our technology.

Let us take just one example of a technology that is so ubiquitous that people rarely even think about a world without it: the automobile. The automobile was probably the signature technology of the 20th century, one that shaped culture and in turn shaped so many other technologies that serve our automobile-based culture. If humans had understood ahead of time that automobiles would result directly or indirectly in the following, would society have chosen to allow their widespread use?

  • Climate change
  • Health problems and mortality due to air pollution
  • Pollution of groundwater from decrepit gasoline storage tanks
  • Urban sprawl
  • Hollowing out of many American cities
  • Massive traffic jams
  • Dependence on unreliable foreign sources of oil
  • Serial military conflicts involving access to and control over oil
  • Paving and development of prime farmland and forest
  • Mass death and disability due to accidents on the world's highways
  • An obesity epidemic related to loss of walkable living environments
  • Massive public expenditures for roads, parking and other purposes related to automobiles (to the exclusion of other priorities)

I have not tried to be exhaustive. But, I think this list outlines just how deleterious the automobile has been not only environmentally, but also socially and economically. Now, of course, it would have taken exceptional clairvoyance to have foreseen all the perverse consequences I list. But that is just the point!

What allows those who are so confident about the salutary outcomes for their favorite technological fixes to pretend that there will be no perverse and even fatal consequences related to them? How can the technological optimists be sure that their solutions will not lead either to the opposite of what they intend or to other problems perhaps even more intractable than the ones they purport to solve? Perhaps the most readily obvious example is the notion that energy efficiency will result in a reduction of energy use. But the Jevons Paradox tells us that just the opposite happens by making energy cheaper due to a reduction in demand and thus subject to greater demand as more people take advantage of the lower prices.

The technological optimists seem to be unaware of how complex the energy, climate, forest, and other systems with which they propose to tinker are. They do not know the ecological dictum that you can never do just one thing. Each action ramifies outward into any complex system resulting in multiple unforeseen and often unwelcome effects.

But, all of technological optimism can be summed up in one desire: The desire not to have to change any of our current behaviors. And, yet it is our behavior that most of all needs changing. To be sure, even changes in our behavior can have unforeseen and sometimes perverse consequences. But I would venture that these unforeseen consequences would be far less troublesome than those related to new technologies provided that any changes in behavior are guided by two principles: 1) To increase the long-term resilience of human society and 2) to increase the margin of safety in the way in which we exploit the environment. For example, we could decide that the target for carbon dioxide in the atmosphere should be 350 ppm--below where it is today--as some advocate, instead of taking a chance that a much higher reading could put us past the tipping point that will lead to runaway global warming.

It is hubris to believe we can easily and precisely calculate the limits of extraction and pollution and then move right up to our artificially calculated limits and still achieve sustainability. Instead, we should take a path of much greater humility that acknowledges that we must build greater resilience and wider margins of safety into our physical infrastructure and our everyday practices.

Ultimately, I believe, we will be forced to live in a much lower energy society. And, that means that the set of behaviors that need to change most will be those that currently lead to overconsumption.

Sunday, December 13, 2009

No post this week

I am on deadline for a large writing project and have been unable to find time to write my usual weekly post. I expect to post again on Sunday, December 20.

Sunday, December 06, 2009

Reserves are bunk

Henry Ford is famous for having once said, "History is more or less bunk." He was, in fact, attacking tradition in an age of rapid technological and social change. Almost a century later we have a less ambitious observation which may not achieve the broad visceral appeal of Ford's statement, but one which may turn out to have a good deal of importance, to wit: Oil and natural gas reserve numbers are more or less bunk.

Let me introduce you to B. J. Doyle, vice president of operations for a small Houston-based oil and natural gas exploration company. Doyle's views on the oil and gas business have been on display for more than a year now at The Oil Drum, a site famous for its technical prowess and breadth of coverage when it comes to energy-related issues. On the site Doyle goes by the moniker Rockman, and through his frequent comments he has been trying to educate readers about the realities of the oil and gas business.

Now, he didn't actually say that oil and natural gas reserve numbers are more or less bunk. Nevertheless, that is a fair summary of what he told me when I spoke with him recently. To understand why an insider would cast aspersions on this sacred metric of the oil and gas industry, you need to know two things. First, Doyle doesn't have to please shareholders. The company he works for is privately held. Second, reserve numbers are meaningless unless they are indexed to a price.

Doyle began his explanation with a seemingly astounding statement: "One of the things we're least interested in is the amount of oil and gas that we are going to produce." How can this possibly be true? It turns out that the oil and gas industry uses a method common to nearly every modern business enterprise to evaluate its investments, namely, net present value analysis or NPV.

The concept is actually simple. If you have the choice of receiving $1,000 now or $1,000 three years from now, naturally you'd take the $1,000 today. That's because of what is called the time value of money. If you can invest the $1,000 today, say, in a bank CD, you can at least earn some interest in the next three years. Also, if you were foolish enough to wait for your money, inflation might undermine the purchasing power of that $1,000. The inflation calculator at the U. S. Bureau of Labor Statistics shows that it would take $1,072 in 2009 to equal the purchasing power of $1,000 received in 2006.

Every business knows that there are several ways in which it can invest its capital. So, business owners take the amount of the initial investment in, say, a new factory or a new oil well, and subtract that amount from the present value of what they forecast will be the future cash flows from that investment. If the amount is positive, then the project will be profitable and should be considered. If the amount is negative, the project should be abandoned. Of course, there are many factors when considering an investment, but a project that appears to be unprofitable will certainly not be considered.

Net present value analysis, however, doesn't describe the real world perfectly. This flows from the obvious truth that no one can actually know the future. One has to estimate the expected future cash flows. This is no easy feat when dealing with the uncertainties of yet-to-be drilled underground reservoirs, the challenges of operating producing wells, and the vagaries of the oil and natural gas markets. Then, one needs to apply a so-called discount rate. This process assumes that future cash flows received years down the road must be "discounted" to reflect the time value of money as described above. Doyle explains that discount rates applied in the oil and gas industry often range from 10 to 15 percent per year. He admits it's an arbitrary number, but it's arbitrary in every industry except perhaps as it reflects the presumed risks involved in the venture and the cost of capital (such as interest on loans).

When you work out what this implies for cash flow generated from a well several years after production begins, it becomes clear why the ultimate amount of oil and gas recovered from a well has little relevance to the decision to drill it. Let's do an example to see why. If you invest $3 million to drill a well (not an unusual amount these days) and expect to get cash flow of $1 million per year from the well for 10 years, on the face of it that sounds as if you are reaping more than three times your investment. But when you discount the cash flows appropriately, for example at 12 percent per year, you get an NPV of $5,650,223. That's $2,650,223 more than you are investing, so it's still a positive number even after discounting. And, it's 1.88 times the initial investment, a ratio that will become meaningful below. But the NPV of the $1,000,000 in annual cash flow in years 8, 9, 10 are as follows: $359,634; $316,478; and $278,500. (Remember: Each successive year's cash flow is discounted another 12 percent in this case until you get to the final year.) If the well keeps producing in year 20, the NPV of the cash flow in that year falls to just $77,562. If it is a very long-lived well, the NPV of the cash flow from year 40 is negligible, $6,015. All this serves to illustrate that the further any year's cash flow is from the present, the less valuable it will be to the company and therefore the less bearing it will have on a decision to drill a well.

As it turns out, few companies would even bother drilling such a prospect. Doyle says that right now his company won't even look at a prospect unless, based on seismic data and other information, it reasonably expects that the completed well will produce an NPV six or more times that of the initial investment. When there is keen competition for prospects, companies will drop their expectations down to three to four times the NPV.

This is where things get interesting. Doyle has seen some public companies drop their goal down to one. That's right. They will drill prospects that they believe have no reasonable chance of doing anything other than breaking even. Why will they do this? To boost stated reserves, a number by which Wall Street judges the value of oil and gas companies. They won't, however, make any true profit on these wells. But they will become what Wall Street calls an "asset play." They will be valued on their assets, in this case stated reserves, rather than on their profitability. This strategy has proven especially tempting to those engaged in the hunt for shale gas since drilling success rates are very high. This is a risky strategy, however, that leaves little margin for error. Prices lower than those forecast by such an analysis could quickly bankrupt a company that drills too many wells based on an assumed one-to-one ratio of investment to net present value.

The claims that the United States has 100 years of recoverable natural gas as a result of the newly accessible shale basins has no meaning without attaching a price to it, Doyle contends. The fact that major shale gas producers have trimmed their active drilling fleets to a fraction of what they were during the 2008 boom in natural gas prices proves that price is a critical factor in determining whether to drill. And, where there is no drilling, there are no additions to reserves. The natural gas market has shown itself to be highly volatile which has not surprisingly led to wide swings in natural gas drilling. The notion that somehow there will be a consistent accretion of natural gas reserves from year to year or that all discoveries from previous years will still be considered reserves in a low-price environment is pure bunkum.

The same logic applies to oil discoveries. But these days no one is claiming the United States has enough oil left to supply the entire country for 100 years. And, so hype about oil reserves is less of an issue.

The upshot is that expected cash flow determines what areas will be drilled, not the size of potential reserves. Most companies won't drill a prospect unless they believe they can get their money back within two to three years, Doyle says. If it takes four or five years, the prospect is not very attractive. Cash flow is king.

It turns out that the NPV of the first three years of cash flow from my hypothetical well mentioned above is $2,401,831, less than the initial investment. Most companies would or should pass on such a prospect, and it would therefore never become part of anyone's reserves, he explains. Part of the hype over shale gas has to do with the claim that the wells may be very long-lived, he adds. Even if that turns out to be true--not a certainty as of now--the low flow rates expected after the initial burst of production and the distant payoffs would actually work against any decision to drill such wells. No wells, no reserves.

Doyle says that given modern technology, oil and natural gas are easier to find than ever before. But he doesn't believe that in North America at least, there is that much more to find. He thinks that shale gas in North America my indeed prove to be plentiful. But it will not be both plentiful and cheap.

And, of course, if we succeed at expanding natural gas production to meet the needs of a new natural gas-powered vehicle fleet--an idea advocated by one of the leading producers of shale gas--and expand other current uses such as the generation of electricity, we can expect that natural gas prices will soar. That may provide the necessary incentive (i.e. cash flow) to extract the shale gas that lies below the American landscape. But it will also certainly mean that the 100 years of supply that has been so frequently touted in the media will rapidly shrink to perhaps 30 or 40, and that the peak in production will come much sooner.

A peak in natural gas production in, say, 20 years would not exactly be a useful talking point for those advocating the wholesale conversion of key parts of the U. S. economy to run on natural gas. Just as we would be finishing such a conversion, we could find ourselves on the downslope of the natural gas production curve and faced with the urgent need to adapt our costly and newly completed natural gas infrastructure to run on some other energy source.