Ignoring Daniel Yergin

It would be hard for the average person to understand why the vague ramblings of the world's foremost energy cornucopian, the sweet, smiling, even-tempered Daniel Yergin, could stir up so much antipathy. The typical inhabitant of planet Earth has never even heard of this man and remains blissfully unaware of the dangers of fossil fuel depletion--dangers that Yergin naturally dismisses in his recent piece in The Wall Street Journal.

But back in the rarified realm of the energy-obsessed we find two responses posted under the headline: "Daniel Yergin - Oil Company Whore." I was expecting some red meat. But the worst that either of the writers of these responses could muster is that Yergin is a "Pulitzer Prize-winning historian" and not particularly well-qualified to assess future oil supplies. In the comments under these pieces (all rebuttals), one commenter calls Yergin "the Alan Greenspan of the oil industry--the guy everyone thinks is a genius...until he is proved disastrously wrong." It's an unflattering comparison, but only to those who understand both who Alan Greenspan is and the complex reasoning behind the charge that he is the architect of our current economic troubles.

In truth, upon reading Yergin's latest missive to the world's policy elite, I found myself utterly bored. Could this man ever say something that would upset anyone other than a small group of activists who are extremely worried about oil supplies peaking before the end of this decade? I doubt it. He is paid to soothe, and these days so soothing is his writing that it should be placed next to the Sominex on the drugstore shelf.

Certainly, those concerned about how policymakers think about our energy future will feel compelled to respond to this craftily written piece and to Yergin's newest book--a continuation of his famous history of oil, The Prize, but with a broader focus. Even if the respondents succeed at denting the minds of policymakers, what can they achieve? Wherever the peak oil movement plays at the inside game, it will be at a disadvantage. It is far easier to throw sand in the gears of a representative democracy than it is to get anything done. And, it is far more difficult to get people to prepare for a challenging future of energy stringency than it is to convince them that the future of energy should be entrusted to upbeat experts in suits.

I write all of this to lay out briefly the arena in which this battle of ideas is joined. It is an arena chosen by Daniel Yergin in which he has many preponderant advantages. He may be a Pulitzer Prize-winning historian with no formal geological training, but he's also the head honcho of the world's most recognized brand in energy advice, Cambridge Energy Research Associates (now absorbed by IHS). He is a frequent face at Congressional hearings and a man who hobnobs with kings and prime ministers the whole world wide. It is hard to convince anyone at the top levels that he doesn't know what he's talking about, especially when the world's major newspapers and broadcast venues give him access usually reserved for high government officials.

No matter how well-reasoned one's arguments are, as a tactical matter, a head-to-head confrontation in the media with Yergin will be a draw at best, but more likely a loss since reason is not what moves crowds. I agree that the fact that Yergin must now address peak oil explicitly and at length shows that he is actually on the defensive. Before, say, 2005 he wouldn't have bothered even to mention it. This shows some progress, but not among those who matter most.

There is a vast audience of people out there who, as I said, have never heard of Daniel Yergin, and who have never even heard the words "peak oil." The elected officials who guide our policy will do little to address peak oil and related issues until voters communicate that these are top priorities that will affect elections. Beyond this there is the issue of encouraging personal preparedness, something that is in large part outside the scope of government policy.

I was involved in discussions about how to respond to Yergin's long tirade against the peak oil movement. Should the response be point-by-point, or should we just make our case the way we want to? Whether it's the inside game or a more extensive public education strategy, the answer should be obvious. We should largely ignore Daniel Yergin and find better ways to convey not just the facts about energy, but also model an appropriate emotional counterpoint that will penetrate hearts and minds in ways that Yergin's sleep-inducing message never will.

Are we all rogue traders now?

Last week authorities apprehended a trader for UBS, the huge, international Swiss bank, on suspicion that he lost $2 billion of the bank's money in unauthorized trades. It's not the first time something on this scale has happened. In 2008 a trader at Société Générale, the giant French bank now so much in the news, lost $6.7 billion of that bank's money in supposedly unauthorized trades before he was caught.

My question is quite simple. If these traders had made billions for their institutions instead of losing them, would they have been labeled "rogue" and handed over to the authorities? I ask this question because it seems to me that what is being punished is not excessive risk-taking, but rather excessive risk-taking that loses money. Almost nobody labels risk-taking "excessive" if it results in a win. Then it is called "brilliant" or "gutsy" or "a stroke of genius." And, people who take such risks get large bonuses and are promoted.

In 2008 when nearly everything went sour for traders in the world's largest banks, the losses were explained (by the banks and their strategists) as the product of an unbelievably rare confluence of events. When one trader loses a large amount of money, he or she can be labeled "rogue" or, at least, suffer a quick dismissal. But when nearly all traders at a bank have their heads handed to them at the same time, it's not called excessive risk-taking, but rather a fluke.

What is not apparent in all of this is that banks and their risk analysts refuse to acknowledge that they face hidden risks which they cannot quantify because they cannot know about them. Risk models are one thing; the real world another. To my mind that makes all but the most conservative bankers "rogue" traders.

What motivates the non-conservative ones is the certain knowledge that the government will backstop them. As it turns out, the banking system historically has never made money and, in fact, lost money in the long run. The one thing it has done quite well is provide bonuses for its traders and managers--which they don't have to give back when their institutions go bust from their bad trades and loans even as the government bails them out. (To hear Nassim Nicholas Taleb, author of The Black Swan, explain this, see his congressional testimony: Part 1 and Part 2.)

The current maelstrom in the financial world, however, is not a discrete event. Our attitude in general about risk, especially low-probability, hidden risk, is similar to that of the man who sleeps on the railroad tracks but does not know about the existence of trains. Much of the time he can sleep there undisturbed. But he need only be wrong once in his timing to suffer catastrophe.

We have become a society reliant on expert forecasts. In the field of energy, many forecasters make fancy livings pretending to know the future supply and price of various energy sources, especially fossil fuels, projecting sometimes decades into the future. Not wanting to rely on outsiders, governments routinely hire their own experts to make energy forecasts for them. And, policymakers and managers everywhere in society make fateful decisions based on those forecasts without knowing how uncertain they are.

Given how central energy is to the functioning of society, nearly all of us have become in some ways like rogue traders, basing our lives and plans on comforting models that contain hidden risks and may have little resemblance to the future we will live in. In that sense, UBS's rogue trader and, in fact, the entire world of financial traders, may be a mirror for society in general, one that we would do well to examine. We might see that energy and so many other systems rely on forecasts with hidden risks for which we have built in little or no margin of safety. Unfortunately, there will be no central bank of energy or any other essential resource to bail us out as those risks make themselves evident.

A guide for the perplexed energy policymaker

The following is an attempt to weave together many strands of thought from my writings on energy into a compact briefing for energy policymakers. Because of its scope, this briefing is quite a bit longer than my regular weekly pieces.

If you are an energy policymaker (or layperson interested in energy) and you are NOT perplexed by the last decade, read no further. You have little to gain from what I write below. However, if you are a perplexed energy policymaker (or perplexed layperson interested in energy), please continue and learn why poor quality data, lack of transparency, broad uncertainty and flawed thinking about risk have made it difficult for many experts and the public alike to think sensibly about our energy future.

Several often unexamined assumptions made by many of those engaged in energy policy and analysis obscure how they arrive at their conclusions. Those assumptions include the following:

1. Fossil fuel resources are so vast that we need not concern ourselves that their supply will start to decline anytime soon.
2. Technology will always allow us to extract these increasingly difficult-to-get fossil fuel resources in the quantities we need at the time that we need them at prices we like. Prices, it is believed, will govern this process in a completely benign way, that is, high and volatile fossil fuel prices won't destabilize the complex systems of modern society in a way that might impair them in the long term.
3. Substitutes for fossil fuels will be introduced gradually in accordance with market signals and will grow commensurate with our need for them. A smooth transition away from fossil fuels will succeed incrementally over many decades.
4. The data on fossil fuel supplies is either sufficiently robust to reassure us of benign outcomes or the data do not matter since reserves of fossil fuels and the substitutes for them will expand in accordance with market signals thereby vindicating optimistic forecasts for future energy supplies.

Whether such assumptions form the basis for sound energy policy is the subject of this piece.

Poor quality data, lack of transparency

The first thing a perplexed energy policymaker must grapple with is the fact that 86 percent of the energy used by human societies currently comes from fossil fuels. This overwhelming dependence on finite supplies of stored fossil carbon in liquid, gaseous and solid form suggests vulnerability all by itself. But perhaps more worrying is the lack of transparency concerning known underground inventories of these fuels.

For petroleum many analysts rely on the BP Statistical Review of World Energy which also includes information on natural gas, coal, nuclear energy, hydroelectricity and other renewable energy. The data provided in the review is simply that reported by various governments or from published sources. The reliability of that data, however, cannot be assured. One example that raises suspicion is the curious jump in reported reserves among OPEC countries in the mid-1980s. At the time OPEC changed its rules to take into account the size of reserves in assigning a production quota for each country. The bigger the reserves, the larger the production quota. So, this curious jump can be explained by the equivalent of grade inflation in the oilfields of OPEC. Skeptical observers have dubbed these phantom additions "political reserves" and usually subtracted all or some from official tallies of world totals.

Further adding to skepticism about the reported numbers are long, unchanging series which indicate that some reported reserve numbers almost surely do not reflect changes on the ground in exploration and depletion. The United Arab Emirates has reported oil reserves of 97.8 billion barrels for the past 15 years. Kuwait reported 96.5 billion barrels in reserves from 1991 to 2002. From 2004 through 2010, it reported 101.5 billion barrels every year. Saudi Arabia reported reserves within a narrow range of 260.1 to 264.5 billion barrels from 1989 through 2010. At least those numbers shifted slightly each year.

The competition within OPEC continues to this day as Iran attempts to eclipse Iraq's newly updated reserve estimate. Are we seeing new "political reserves" or something based on actual exploration? Certainly, many analysts will offer explanations for these reserve numbers. But there is no way to tell for sure whether their explanations make sense since OPEC nations and many other countries do not submit to independent audits of petroleum reserves. So far, energy planners have simply had to take the word of most petroleum producing countries about their oil reserves.

At least the major publicly traded oil companies must meet a higher standard, right? Not exactly. First, it doesn't really matter that much since 80 percent of all reserves are held by government-controlled companies. Second, new U.S. Securities and Exchange Commission rules allow much more leeway for publicly held companies to report reserve numbers. Perhaps most relevant is the following from an SEC document finalizing the new rules:

We are clarifying that the required disclosure would be limited to a concise summary of the technology or technologies used to create the estimate. A company would not be required to disclose proprietary technologies, or a proprietary mix of technologies, at a level of specificity that would cause competitive harm. Rather, the disclosure may be more general.

The methods for grinding out reserve estimates can now remain secret. To outsiders reserve estimates will in many cases be coming from something which looks more and more like a black box.

Many of the same issues also apply to natural gas estimates since oil and gas are obtained using similar methods by the same industry. One reason for caution is the highly optimistic claims being made for natural gas supplies from shale deposits. The U.S. Energy Information Administration (EIA) has already decided that its methods may have overestimated U.S. production from shale gas wells by 10 percent in 2009, erasing much of the supposed 11 percent jump in domestic natural gas production.

As for reserves, there are many reasons to be skeptical about the reported reserves of shale gas including the failure to specify a price (since prices clearly influence what is economical to get out of the ground) and the booking of very low-return or just breakeven discoveries as a way to inflate reserves and promote a publicly traded company as an asset play. That the picture remains opaque should be cause for concern given the extravagant claims made for shale gas including its ability to displace oil and coal in the near to medium term.

The data for coal reserves are even more problematic since governments don't routinely do comprehensive surveys of coal deposits. The Energy Watch Group's paper entitled "Coal: Resources and Future Production" claims that Vietnam has not updated its stated coal reserves for 40 years. China has not done so since 1992 despite the fact that 20 percent of the country's reserves have presumably been produced since then. Even the venerable BP Statistical Review of World Energy has no historical data on reserves. And, the U.S. Energy Information Administration has reserve data starting only in 2008.

So poor is the data on coal that the National Academy of Sciences in a report issued in 2007 said it could not confirm claims that U.S. domestic coal supplies amounted to 250 years at current rates of consumption. The reported stated:

Present estimates of coal reserves are based upon methods that have not been reviewed or revised since their inception in 1974, and many of the input data were compiled in the early 1970s. Recent programs to assess reserves in limited areas using updated methods indicate that only a small fraction of previously estimated reserves are economically recoverable. Such findings emphasize the need for a reinvigorated coal reserve assessment program using modern methods and technologies to provide a sound basis for informed decision making.

The report suggested that supplies might amount to 100 years at current rates of consumption and urged a thorough survey. Of course, the 100-year figure does not take into account any increase in the rate of production over that period or any decline in production once the peak in the rate of production has passed.

The picture for uranium is just as opaque and confused as it is for fossil fuels. How could it be otherwise for a fuel source that is mined in disparate places, many of which are not known for their transparency? Uranium is, of course, also subject to greater levels of secrecy because of its military applications. The Energy Watch Group believes known reserves--given expected rates of use including amounts needed for new nuclear plants--are likely to last only 30 years. Higher price assumptions could bring that number to 70 years. But in truth nobody knows. Uranium availability remains acutely sensitive to price assumptions and resource estimates.

Perhaps the single most important caveat any of these reports provides comes from both the Energy Watch Group and the National Academy of Sciences report. They said that policymakers need to focus on reserves, not estimated resources. Reserves, of course, are resources that can be extracted profitably at current prices with current technology from known fields. Resources, by contrast, include all amounts of fossil and nuclear fuels believed to be in the Earth's crust. But that classification says nothing about whether those resources are economical to extract or even accessible. And, it says even less about the rate of production which, after all, is the crucial metric for our complex society because it is dependent on continuous inputs of high-quality (and to date rising) energy for its stability and functioning.

Broad uncertainty

It should be no surprise that given the poor quality of energy data and the lack of transparency among many producers, there is broad uncertainty about fossil fuel supplies in the long term. The data is more transparent for renewables such as wind and solar since these involve manufactured devices with aboveground installation and are thus more quantifiable.

The result of all this opacity in the data, especially for fossil fuels, is a set of widely diverging forecasts for future energy supplies. The people providing these diverging forecasts don't necessarily disagree on the data. Rather, they disagree on how to interpret data that is unverified or simply speculative (such as data on so-called "undiscovered" resources). Every forecast is a way to express views about risk; but that is something I will discuss below. First, let's look at a graph created by Glen Sweetnam, an analyst from the EIA.


The graph, when it was discovered online by a French reporter, became an embarrassment for the agency because oil pessimists seized on it and comments by Sweetnam as an acknowledgement by EIA that peak oil production is probably near. In fact, the graph acts as something of a Rorschach test. Oil optimists interpret the same graph as merely showing what portion of future supply will come from new discoveries--discoveries that can be expected because of the size of the resource base (there's that word again) and improvements in technology. The optimists, therefore, are inclined to fill in the gap which Sweetnam leaves empty as follows:


But even the optimists have lowered their expectations as reality has started to make their projections seem less plausible. As recently as 2005 the EIA was projecting that oil consumption would reach 119 million barrels per day by 2025. A forecast prepared in 2010 projects consumption to be 97.6 million barrels per day by 2025.

And, yet Sweetnam's troubling graph also suggests the possibility that a graph based on a model created by Peter Wells of Neftex for Toyota Motor Corp. may prove a better approximation of oil production three decades hence:


The issue that should concern us is that all three graphs are produced by professionals looking at essentially the same data. To find an explanation, we need to examine assumptions. It should be clear by now that Wells has little faith that new (yet-to-be invented?) technology will be able to offset the depletion of conventional oil resources. Detractors of Wells and his brethren are fond of using the straw man that pessimists claim we are "running out of oil." But, of course, Wells' point is that peak means only that a decline in the rate of production is about to begin.

Similar graphs can be adduced for coal and natural gas. The future of coal production looks like this to the EIA:


But, it looks like this to the Energy Watch Group:


Jean Laherrère, the French petroleum engineer who with Colin Campbell co-authored the seminal 1998 Scientific American piece, "The End of Cheap Oil", manages to put into one graph two wildly different scenarios for future natural gas production.


What these graphic representations leave aside entirely is the question of net energy. The assumption embedded in the optimists' projections is that net energy from carbon-based sources will hold steady or rise. This is despite the fact that energy return on investment or EROI has been declining for oil and natural gas for decades. Society runs not on gross energy, but net energy, that is, the energy left over after we find, extract, refine and deliver energy to its final destination.

As society seeks out the more difficult-to-get hydrocarbons, there will be a continuing race between technology and geology. In recent decades, it appears that geology has been winning the race as EROI has fallen despite many technological advances in extracting hydrocarbons. Furthermore, it is logical that net energy from hydrocarbons will peak before gross energy, and this suggests that we need a new way to evaluate our remaining energy resources that accounts for falling EROI.

Though some of the graphs above suggest continued exponential growth in the production and consumption of hydrocarbons, many analyses use "years at current rates of consumption" as a yardstick for the amount of remaining resources for any hydrocarbon. A simple illustration will show how deceptive this can be.

Let's look at the claim that the United States has more than 100 years of natural gas in the ground at current rates of consumption. Even if we accept this claim--which is problematic all by itself--we should note that it is usually accompanied by the idea that natural gas will become a cleaner substitute for coal and oil in the future. This implies exponential growth in production and consumption if gas is to replace other fuels, and that growth considerably reduces the number of years to exhaustion and thus peak production as explained in the following passage:

Simple spreadsheet calculations will tell you what you need to know about what happens to such claims under the pressure of a little exponential growth. At 2 percent per year growth (about what oil production grew prior to the plateau that set in in 2005), the 100-year U.S. domestic natural gas supply is exhausted in 56 years. If we assume that production peaks when about 50 percent of the resource is exhausted, this puts the peak within 35 years. Think about it. Even if the optimists are correct, with a production growth rate of just 2 percent per year, the country reaches a peak within 35 years! What will we do after that?

The picture gets acutely worse as the rate of production growth rises. A 3 percent rate implies exhaustion in 47 years and peak in 31 years. A 5 percent growth rate means exhaustion in 37 years and a peak in just 26 years.

Claims that any finite resource will last X number of years at current rates of consumption when consumption of that resource is growing exponentially are wildly misleading.

Even more misleading is providing forecasts of abundant natural gas without specifying a price. Without a price, such forecasts are virtually meaningless. It is a truism that higher prices allow more of any resource to be extracted profitably than do lower prices. Will the supposed bounty of natural gas be available at the low prices of today? Drillers tap the gas that is easy to get first. Only later do they move on to those deposits which require more money and energy to extract. It's a logical strategy, and one that casts doubt on the idea that natural gas can be both plentiful and cheap in the long run.

Another source of uncertainty is that much of the data on energy perforce must come from industry. Even when companies do not intend to deceive, such data is likely to suffer from an optimistic bias designed to pump up stock prices, impress possible acquirers, or increase a country's share of any OPEC production quota. And, we must remember it is the responsibility of every fossil fuel company to maximize its shareholders' value by making sure it can sell all of its underground inventory. By making inventories seem large, fossil fuel producers encourage complacency among policymakers and the public.

A final source of uncertainty is what is called the rate-of-conversion problem. The phrase refers to the time that it takes to convert from one energy infrastructure to another versus the time a society has before energy from existing fuel sources starts to decline. Optimists don't like to discuss the amount of time it might take to find substitutes for fossil fuels, particularly petroleum, and the time it takes to deploy the infrastructure to deliver them. But finding substitutes for petroleum has turned out to be more difficult than anticipated. Even though petroleum prices have been rising for more than a decade; even though there are plenty of non-economic reasons to move to alternatives including volatile prices, air pollution, greenhouse gas emissions, possible supply disruptions and vulnerability related to the military's reliance on petroleum fuels; and even though there have been decades of research and development on alternative liquid fuels, today 95 percent of all transportation fuel continues to be derived from petroleum.

Energy transitions take generations, not years. And, there is no guarantee of success. Vaclav Smil, who has written extensively about energy and energy transitions, believes that it would be prudent for high-energy consuming nations to create specific targets for reducing overall energy use. Given the constraints he sees, this is one of the best ways to increase the odds of a successful transition.

Asymmetrical risk

Given the poor quality data available to energy policymakers and given the broad uncertainties this engenders, how should policymakers assess risk? I believe policymakers need to ask two questions: 1) What would society look like if the optimists are right versus if the pessimists are right? 2) With which forecast is current policy aligned?

The answer to question one is that human societies will proceed with business-as-usual if the optimists are right. If the pessimists are correct, then world society will be in for a wrenching adjustment that could destabilize the economy, undermine critical areas such as agriculture and transportation, and possibly lead to civil unrest and political chaos. In the pessimists' scenarios, peak production matters because it comes before we will have deployed adequate substitutes and, in all likelihood, before we will have an orderly plan for reducing energy use. This then tells us the answer to question two. Energy policy in most countries is currently aligned with the optimistic forecast. The assumption for most government and corporate planners is simply the extrapolation of recent trends.

The previous discussion illustrates just how asymmetrical the risks we face are. One outcome is decidedly more dangerous for society than the other. It's not as if we are walking into a restaurant seeking a cold beer and finding none available, settling for ginger ale. Fossil fuels are too critical to society's functioning. And, we cannot simply order a substitute on the spot, at least not in sufficient quantities to power all that we need to power.

What this tells us is that the optimistic scenarios must turn out to be largely correct if human societies are going to avoid debilitating shocks (assuming no preparations for more pessimistic scenarios). And, this points up a deficiency in all the graphs sited above. The accuracy of forecasts deteriorates rapidly with time. In fact, two and three decades hence, it is the error bar or range which matters more than the forecast. And yet, none of the forecasts cited even provide an error bar--a serious omission that tends to mislead policymakers and deceive the public about the accuracy of long-range forecasts.

In essence, I have provided my own error bars in this analysis by looking at both the optimistic and pessimistic forecasts. What that analysis suggests is that it would behoove policymakers at the very least to pursue a hedged strategy that involves serious reductions in total energy use, greater funding of research into alternatives, and incentives for rapid deployment of well-vetted alternative energy solutions.

Neoclassical economists (which is almost all economists) will protest that the marketplace will do a much better job of forcing society to make the necessary changes without interference from government. Even if peaks in production are near for oil and perhaps for coal, they believe demand destruction and substitution will allow for an orderly transition. But that's only if their theories about how resource pricing evolves over time are correct.

Douglas Reynolds proposes an alternate theory which, given recent history, seems to fit more closely with the facts. He suggests that actual experience tells us that market prices for critical resources have given us the illusion of decreasing scarcity as resource prices relentlessly fell in real terms (except for the 1970s) for a century. Only as we got quite near the apparent limits of exploitation of fossil fuels have prices skyrocketed. In other words, this is no orderly gradual process mediated by market forces. The energy transition which is already underway and for which we are ill-prepared is likely to continue to be a rocky one, marked by booms and debilitating busts that are already challenging the resilience of major social, political and economic institutions.

The forecast-proof society

Right now world society is dangerously exposed to possibly faulty forecasts of energy abundance. Given the harsh consequences that could result from accepting such forecasts if we fail to make any preparations for a contrary outcome, prudence would suggest policies that err on the side of caution. The aim in energy policy should be ultimately to make world society forecast-proof when it comes to energy. This is not to say that forecasts won't continue to be made or that it is wrong to make them. But the hope would be to fashion an energy infrastructure for which forecasts are largely irrelevant.

How might that be done? A society whose energy needs have been greatly reduced by radical efficiency and changes in methods and behaviors could be largely powered by renewable energy. That the sun will shine, the winds blow and the waters flow for a very, very long time is not so much a forecast as a scientific fact. That's the kind of change that could render the energy forecasting business largely irrelevant and allow society to redirect its efforts to more useful pursuits.

Labor Day Break--No post this week

I am taking a holiday break and expect to post again on Sunday, September 11.

The debt bomb, net energy and ancient Greeks

In the 6th century B.C. Athenians gave extraordinary powers to one man to make needed reforms that would deliver Athens from economic stagnation and the gradual enslavement of the lower classes. That man, Solon, is believed to have forced the forgiveness of debts, forbade the pledging of oneself or one's family members as security for loans, and freed all those Athenians who had been made slaves through such pledges. He also repealed the harsh code instituted by Draco (from which we get the term Draconian) and replaced it with more humane laws. After decreeing that his reforms remain in place for 10 years, Solon went abroad for a years-long vacation--probably so that no one could try to change his mind about what he had done.

Today, in the face of circumstances that Solon would recognize, the case for widespread debt forgiveness has only recently been made. Stephen Roach, a longtime Wall Street economist, has called for lenders to bear considerable pain for the questionable loans they made during the previous boom. The trouble, as he points out, is that such forgiveness would require federal leadership which means that members of the U.S. Congress would have to penalize one of their most lucrative sources of campaign donations--the financial industry. The Athenian assembly had similar problems which is why they chose to give Solon autocratic powers.

Roach is acknowledging that many loans, especially those made to consumers, will not be paid back. An orderly process of debt forgiveness would spread the pain more evenly, speed up the debt deleveraging process that is depressing economic activity and provide more certainty about the results than would merely letting people default. Keep in mind that under new U.S. bankruptcy laws it is much harder for consumers to discharge debts, especially student debt. Doing nothing will guarantee us a generation of student-debt-laden college graduates who will be little better off than the debt slaves of Athens which Solon had to rescue from a life of despair.

Debt forgiveness is of special interest to those like myself who are concerned that society may be approaching or may have passed peak net energy. (For a more complete discussion of this, please see my piece Is Net Energy Peaking?) To recap briefly, net energy is what is left over for the non-energy sectors of society after we subtract the energy needed to extract, transport, refine and deliver energy to where it's needed. We may continue to extract more and more energy on a gross basis from the Earth for some time to come. But since the remaining energy resources are becoming harder and harder to get, we'll be spending more and more energy just to get them, leaving less and less for the rest of society. The day when net energy starts to decline will be a crucial turning point, and that will occur long before gross extractions of energy peak.

How is this related to debt? Well, energy is the motive force in the economy. Nothing gets done without it. Cheap energy makes modern economies hum. Expensive (and therefore scarce) energy makes them sputter. When they sputter, loans made when energy was cheap and the economy growing become more difficult to pay back. In fact, those loans are premised on the idea of perpetual economic growth which is simply not possible without perpetually growing energy supplies. That's two impossibilities in one sentence. If the necessary growth doesn't arrive--and it is not arriving now--the economic activity required to produce the flow of funds to pay back every loan won't be available. In aggregate loans made by the modern banking system are simply a bet on future growth.

The sooner we can admit that a large portion of the loans now outstanding will never be paid back in full and move on, the sooner we will be able to invest in the steps we need to prepare ourselves for a future marked by limits on resources. However, if no acknowledgement is forthcoming, then we are likely to face a long-term stagnation that will starve society of the capital it needs to make important investments in a more sustainable world.

What we need now more than ever is a leader or group of leaders who can tell us honestly and without alarm what is wrong and what we must do--and not be made to bow to the all-powerful financial interests. A few voices from the monied class are now saying that people at the top will have to make sacrifices for the good of society. Will a Solon for our age or several Solons across the world emerge--preferably not dictators as Solon was asked to be? Will they be able to exploit the growing awareness that debt must be reduced and that those who lent too much must bear some responsibility and some losses? Will there be a broad public consensus behind them that will allow them to act?

Solon began his great work when Athens was on the brink of revolution. Will we too arrive at the brink before modern Solons begin their work?

Who are the real radicals?

It is becoming standard procedure these days to decry those who oppose you politically as radicals as in "radical agenda," "radical views," "radical friends," and "radical past." Often this refers to suggested changes in policies that are no more than a few decades old. But I'd like to do something that will seem truly radical to those who are narrowly focused on the contemporary world. I want to look at what might be regarded as radical when considering not the last few decades, but the last 100,000 years.

For most of human existence, we lived as hunter-gatherers, leaving one place when the easy food had been exhausted to find new grounds for hunting and gathering. Only very recently in the human journey have we lived as farmers. The move from nomadic hunting and gathering to the settled life of farming must have seemed radical indeed. As Jared Diamond points out in his 1987 article "The Worst Mistake in the History of the Human Race," farming arose because of increasing population pressures. Whereas some groups chose farming over limiting their numbers, others stuck with hunting and gathering. But the vastly superior number of people in farming communities eventually led to the extinction of all but a few remaining hunter-gatherer communities on Earth.

Contrary to what we have been led to believe, the hunter-gatherers lived longer, healthier lives than their farmer successors. A varied diet and small group size guarded hunter-gatherers from the poor nutrition and epidemics that were constant companions to civilized humans. A flat social structure implied a rough equality or at least not much of a differentiation since wealth was in the forests and not in the hands of individuals.

Almost 10,000 years after the invention of agriculture, humans discovered fossil fuels. This, of course, vastly increased their ability to extract wealth from the land and the seas. And, it allowed for increasingly specialization which led to technical breakthroughs that would have seemed akin to magic only a few generations ago.

There were those at the beginning who protested the effects of this newfound power. The Luddites regarded the new deskilled world of industrial labor as a radical step away from the craft economy they had known. And, even today craft objects are often prized far beyond those made in factories and tend to last longer and work better than their manufactured counterparts. (Certainly, there are exceptions to this, but they only point out the extra cost of producing something of quality and durability meant to last not just a few years, but one or more lifetimes.)

The spread of the automobile and the construction of roads on which to run them eventually led to a whole new way of life labeled as suburban, far outside city centers and completely unrelated to rural life. Those who criticize the suburbs as an ahistorical aberration, contrary to the historical precedent of small villages and compact major cities, are proclaimed radicals by those who do not understand just how radical--and likely transitory--their suburban existences are.

All those in city and suburb alike are now fed by an agriculture powered by fossil fuels and modeled after the factory--and thus the term "factory farm." But farmers who run these factory farms often style themselves as "conservative" despite the rapid and radical change in farming methods in the last half century. But the term factory farm has in some circles become a term of derision as many seek out artisanal food processed locally from ingredients grown on small farms, often organically. Are these the new Luddites?

Of course, the burning of fossil fuels has now put the globe on a path to highly disruptive climate change. But the corporate boardrooms of the very industries most responsible for the burning of those fuels are supposedly filled with "conservative" businessmen and businesswomen. Naturally, they would not succeed at this colossal task of changing the climate without the assent of the consuming public which now enjoys an unparalleled standard of consumption. (I refuse to call it "standard of living" anymore.) And, many in that public consider themselves "conservative." But, ask yourself, What could be more radical than risking the wholesale decimation of the Earth's species including ourselves? We risk all this for a level of consumption that is far beyond our needs--I'm not including people in most poor countries--and which actually creates so-called "diseases of civilization."

I have tried to categorize America's political parties along a continuum not of conservative to liberal, but rather of conservative to radical. By this I mean that conservatives would want to preserve a way of life that ensures the long-term continuity and survivability of human communities. But I find only radical political parties in America. Therefore, crowded on the radical end of the spectrum I characterize the following groups in decreasing order of radicalness (with only tiny distinctions between them):

1. Libertarians - They champion allowing unfettered radical change to the Earth's surface, oceans and atmosphere and unfettered exploitation of its resources. Their distinguishing characteristic from other parties is that they--I mean the real Libertarians--believe government should favor no particular group in this process.


2. Republicans - Like Libertarians they champion allowing unfettered radical change to the Earth's surface, oceans and atmosphere and unfettered exploitation of its resources. But they tend to rail against the evil of cities and laud the totally unsustainable and ahistorical hypertrophy of the suburbs. Unlike Libertarians they are eager to use government to steer public resources toward favored constituencies, primarily the wealthy.


3. Democrats - Democrats believe that radical changes to the Earth's surface, oceans and atmosphere and exploitation of its resources should proceed at a slightly slower pace than Republicans do, and that there should be a minor appearance of public spiritedness by inconveniencing some industries with health and safety regulations and by redistributing some wealth via the tax system and government services from the wealthy to the middle and lower classes. Not surprisingly then, like Republicans Democrats see government as a way to steer public resources toward favored constituencies, primarily, but not exclusively, the wealthy.


4. Socialists - Socialists are like Democrats used to be. Socialists continue to see government as a way to share society's wealth very broadly with the entire population, primarily through publicly-funded education, health care, transportation, pensions and a variety of social services. They tend to believe that government control of and/or stringent regulation of large parts of the economy are the best way to serve the public interest. Some socialist governments have embraced the idea that radical changes to Earth's atmosphere are unwise and have taken modest, but hardly adequate steps toward curbing those changes.


5. Greens - We must distinguish between what I call the techno-optimist Greens and the ecologically-grounded Greens. The techno-optimists feel that technology will allow us to repair radical changes we've made to the Earth's surface, oceans and atmosphere and prevent new ones while radically reducing our exploitation of resources. We'll do all this without missing a beat when it comes to living modern, technological lives. Our use of resources may go down, but we won't have to give up any of the things we've come to expect. They believe that government will have a major role in this transition through regulation, incentives and taxation. One cannot dismiss their ideas as completely without merit. But they certainly partake of the radical catechism of the four previously mentioned parties. On the other hand, ecologically-grounded Greens accept that the modern industrial way of life cannot succeed. They sometimes offer a vision of what I'll call a craft-based, agriculturally-oriented society retaining some of the key technical benefits of industrial society.

Certainly, I haven't exhausted the list of political parties in America. But this sampling provides an idea of just how radical all modern political agendas remain. If one works backward in time from today, the mark of true conservatism would be a honest belief in and embrace of the hunter-gatherer way of life. What I am trying to point out is that today we are all, by virtue of our position in history, radicals. True conservatives are non-existent--except perhaps for a few hunter-gatherers. We are forced then by circumstances to choose which brand of radicalism to practice.

When the sovereign falls: Is this the endgame for world markets?

Back in May in response to a question during an interview I suggested that when the sovereign debt of a major nation is finally questioned, it will signal the endgame for the worldwide bull market in just about everything. That moment has arrived, and my thesis will now be tested.

And, I'm not talking about the United States. I'm talking about France. The downgrade of U.S. government debt by one ratings agency was more political theater than careful, cold calculation. U.S. Treasury bonds rallied on the news. But in France it is a different matter. French banks are known to be heavily exposed to the sovereign debt of what are now infamously called the PIIGS, that is, Portugal, Ireland, Italy, Greece and Spain. What changed this week was that market participants began to think that this matters. They think the problem is so big that it could impair the credit of the French government which will ultimately be saddled with cleaning up the mess. And, who wants to stick around for that?

Nicole Foss, part of the duo who write for the popular financial site The Automatic Earth, once explained to me that liquidity and confidence are the same thing. Liquidity means I'm willing to part with my cash to lend it to you or to buy something from you. When my confidence in you is shattered, I won't lend to you. When my confidence in my own future prospects is shattered, I won't buy from you because I think I may need the cash later. That, it seems, is where much of the world finds itself today.

But the problem for French banks isn't necessarily that they are in worse shape than many other banks in the world. It's that people believe this to be so. And, as that belief spreads, it will become a self-fulfilling prophesy. At first, one, then two, then 10, then 20 banks and so on will refuse to lend to French banks. And, with each withdrawal of a source of funds French banks will become less creditworthy.

But if this loss of confidence isn't stopped soon, it will spread to non-French banks that have large financial ties to French banks. A cascade of financial ruin will be unleashed. We have built of world of huge financial institutions with heavily incestuous relations. They are like rafts all strapped together which doesn't help much if all the rafts are sinking.

Certainly, there are other factors at work. Persistently high oil prices have been draining the pockets of already beleaguered consumers. I was listening to CNBC one day to catch up on the excitement when investment show host Jim Cramer explained to me that falling oil prices were going to be good for the economy. That would be true if prices were falling because there is a glut of oil. In fact, oil prices have been falling in the face of falling production meaning that demand must be falling even faster. That can only happen when the economy is headed for the ditch.

I have people telling me that fundamentally the economy isn't all that bad. Maybe not now, I respond. But we are facing a potentially vicious feedback loop in which our huge, unwieldy, out-of-control and risk-laden financial sector destroys confidence in the real economy which will then make the economy decline, which will then make loans on bank balance sheets seem even more shaky.

One problem is very little transparency. A bank is like a black box. It's hard to evaluate what's on the balance sheet. And, it is especially hard now that banks have been released from the requirement that they mark their portfolios to market prices. They can now do what many skeptics call "mark to fantasy." In such an environment the only thing one bank doing business with another has to go on is reputation. And, this is where things get tricky. Supposedly, a rumor got started that a major French bank, Société Générale, was about to go under. The bank immediately denied it. But the taint and the fear are still there. Who really wants to do business with Société Générale just in case the rumor is true? Under different circumstances the rumor might have been easily dismissed. But the bank is believed to be holding a lot of dicey sovereign debt from countries that may not be able to pay the bank back in full. Anyway, it's a black box. Who really wants to trust a black box, especially when others are questioning the reputation of the black box?

Sovereign debt troubles are the last stop on the way to the endgame for the global bull market that has persisted for almost two years or perhaps more correctly for the last 30. Governments that might take on additional debt to goose the economy by spending on various public priorities such as new infrastructure are now busily reducing their expenditures to shore up their sagging long-term financial prospects. Several central banks have lowered interest rates to near zero to spur borrowing in the real economy. But all they've gotten is speculation in the financial markets which has only made matters worse.

There are really no good options from here on out. And, there's bound to be a lot more pain. The main issue now is who will be made to bear it. On past form the rich--who today so dominate the halls of government everywhere--will once again be exempted.

Keynoting at Illinois Renewable Energy Fair this weekend

I'll be giving a keynote speech at the Illinois Renewable Energy and Sustainable Lifestyle Fair on August 13th at 2:30 p.m. If you are coming to the fair, I hope to see you there.

Norway's mad killer, private justice and the future of the state

When Anders Breivik, a native Norwegian, blew up eight people in downtown Oslo and shot 69 others, mostly young people attending a retreat sponsored by one of Norway's main political parties, he felt he was defending his homeland from an onslaught of immigrants. He wasn't part of the Norwegian army, nor its border patrol, nor any other agency of the government. He was a private individual acting out of his own belief that those associated with a lenient stance on immigration needed to be stopped, in this case Norway's ruling Labor Party.

Breivik distributed a 1500-page manifesto right before his rampage, a grab bag of conspiracy theories that comports neatly with type of individual described in Richard Hofstadter's 1964 essay "The Paranoid Style in American Politics." A considerable amount of the manifesto was taken from other sources, and so it isn't a coherent piece of argumentation. Before I even scanned the document I was sure there would be a section on the threatened Norwegian way of life, or at least an equivalent. There was, and it came in the form of an essay by another writer referring to the so-called "Swedish model," described as a third way between capitalism and communism. While I can't be sure Breivik embraces this idea completely, I'm relatively certain he wouldn't have included it unless he had considerable affinity for it.

I couldn't help contrasting this to America's so-called Tea Party whose members sought to derail health care reform which is designed to provide universal health care coverage. This group seems fully to have embraced the American mythology of the self-reliant man (and woman). Government control of anything is thought to mean less "freedom" for the individual. I put "freedom" in quotes for in this case it means less access to education, health care, old age benefits and a variety of public services which can actually enhance a person's range of choices. Whether many of the Tea Party members will embrace a constriction in the availability of such opportunities and services may now be tested given the recent deal in Congress for cutting spending.

My belief is that many of the Tea Party members are being perniciously misled by the billionaire backers of the movement. These backers are getting their hapless followers to advocate policies that simply reduce the tax burden on the rich while undermining services critical to the functioning of a complex industrial society and ones needed for basic social equity and harmony. It's a movement that can only be called anarchical. It is trying to disassemble the accomplishments of American society achieved through Franklin Roosevelt's New Deal and Lyndon Johnson's Great Society. It is a movement focused not so much on protecting American society from outside forces, but insulating the individual from society's reach and therefore also from its aid.

Breivik offers a significant contrast. He is certain that immigrants, specifically Muslim immigrants, don't share the values necessary to sustain the "Swedish model" in Norway. In a sense Breivik is protecting his "tribe" of Norwegians against outsiders who he believes would upset and ultimately destroy the established arrangements of his society. To that end in his manifesto he advocates energy independence through development of alternatives to displace oil completely (despite the fact that Norway is one of the world's largest oil producers). This independence would free countries from the tyranny of Arab oil and thus Muslim influences. He also believes global corporations should be nationalized in order to make them serve the needs of their host countries and peoples. Nothing could set him apart from America's Tea Party more than this.

From news reports we can deduce that Breivik is a disturbed personality, but not a marginalized person. Although he was from a broken home, he grew up in a comfortable flat with his mother and received all the benefits that any child receives in Norway. Breivik's rampage wasn't meant to bring down Norwegian society. On the contrary, he believed he was trying save it and its third way.

The public's revulsion for Breivik stems not just from the audacity of his deed and the number of people he killed and maimed. The context in which those deeds took place is also a factor. He abandoned normal political means for advancing his views--something he had previously engaged in at least minimally--and he chose to advance his goals as a self-appointed vigilante for the Norwegian people. His actions smack of klan-on-klan violence, something modern nations condemn because only the state ought to be empowered to dispense justice. Anything else is private justice, essentially a family or ethnic feud, which is antithetical to order and stability.

This is the message of the ancient Greek trilogy penned by Aeschylus, the Oresteia. After Orestes' mother kills his father, Agamemnon, in order to allow her lover, a cousin to Agamemnon, to gain Agamemnon's throne, Orestes kills his mother and the new king in vengeance. Plagued by the Furies for his terrible deed, Orestes only finds relief after a criminal trial in which he is found not guilty--a statement not about his actions, but a symbolic verdict designed to put an end to the perpetual blood feud that had cursed the House of Atreus for generations and had thus interfered with the establishment of an orderly state. The supremacy of the state in dispensing justice is also symbolically affirmed, and this affirmation becomes the path to a more peaceful society, the kind that Norway represents.

Breivik's delusions led him to "defend" his society through means that undermine it and could potentially destroy it. One need only look at societies such as Afghanistan, where private justice is still practiced, to see what it means. Although Tea Party members do not explicitly espouse private justice, their broad-ranging attempts to delegitimize the public sphere have the potential to split America into a thousand pieces. It is precisely because America has so much diversity that it sorely needs a strong public sphere to bind its people. Breivik was concerned that Muslims would destroy Norway's expansive and durable public sphere which afforded its native residents so many advantages. By contrast, the Tea Party believes that the public sphere which nominally binds us ought to be weakened in favor of individual action.

And now, finally, I reveal the reason for this line of investigation. The Breivik shootings reminded me that in the last year two acquaintances have urged me on separate occasions to purchase firearms as a measure to protect myself from what they see as emerging anarchy in the United States. One cited the possibility of a race war. After some clarification, what the person seemed to be talking about was an anarchical uprising of the poor against the rich, and many of the poor in urban areas are African-American and Latino. Another cited the depredations associated with the post-peak-oil era which this person suggested was already upon us. My response to both was the same: I don't want to live in a society in which carrying firearms becomes a daily necessity.

"But what if it does become a necessity?" each acquaintance asked in his or her own way.

"Then, perhaps it will be time for me to go." Both acquaintances were suitably astonished by my answer. "Look, even in Dodge City they made people check their guns at the city line before entering," I added.

For me firearms smack of klan or private justice. Nevertheless, I condemn no one who chooses to own guns for the protection of his or her home. But I deplore the notion that guns ought to be carried in public as a matter of course. I would prefer to empower my local authorities with the necessary resources to keep the public sphere safe. I desire private justice neither from those who fire the first shot nor from those who fire the second.

Vigilante, klan, family and private justice, all are the path to barbarism today just as surely as they were when Aeschylus wrote the Oresteia. I will stand on the side of civilization for as long as I am able. The only alternative I see is what philosopher Thomas Hobbes called "a war of all against all."

Can taxation speed our energy transition?

Some time ago an economist with whom I had an extensive exchange suggested that the best way to incentivize an energy transition would be to tax what we don't want and let the market do the rest. It was really such an elegant approach and an impractical one, I thought.

The economist's view was that if we don't want people to burn carbon-based fuels, then we should just tax those fuels heavily. What he opposed was any direct subsidies to alternatives such as wind, solar, and biomass. This would only serve to distort the economy, he said, and it is too hard to figure out the quickest path to an energy transition from the vantage point of a central government.

Indeed, one of the proposals before the U.S. Congress would be to tax carbon and rebate a substantial portion of the revenues to the taxpayers. This increasingly seems like a better idea than so-called "cap and trade" schemes which may not be able to cover all types of carbon-based energy and will likely be gamed by the same financial wizards on Wall Street that brought us the crash of 2008.

And so, I do agree with my economist acquaintance that taxation could be an elegant method for facilitating an energy transition. But is such taxation practical and even adequate? One might point to Europe where extremely high fuel taxes have been part of the reason that the average European uses one-half the amount of energy of the average American. Whether high fuel taxes could become a reality in the United States is an open question. So far no American politician has dared to propose a level of taxation comparable to Europe.

The main reason for this is that the United States still has enormous fossil fuel reserves and as a consequence a well-funded fossil fuel lobby that has a stranglehold on the U.S. Congress. Europe is now largely bereft of fossil fuels and therefore has a fossil fuel lobby without the necessary influence to prevent high energy taxes and heavy expenditures on public transportation.

And what about promoting public transportation? I asked my economist. If automobile and highway transportation had not been so heavily subsidized by the government, he explained, what we call public transportation today might have remained excellent and in private hands just as it was before automobiles supplanted rail and streetcar transportation. In addition, air travel has been heavily subsidized through airport construction and maintenance and a federally supervised air traffic control system. Take away all the subsidies, the economist suggested, and the price of air and automobile transport would rise to the point that privately maintained rail and bus transportation would likely be competitive.

Perhaps. But we cannot run that movie backwards and start over again. The subsidized infrastructure for automobiles and airplanes is already in place. And, periodic attempts to hike energy taxes in the United States to achieve various objectives including reducing the federal deficit, reducing oil imports, increasing energy efficiency, and reducing pollution have only met with failure. In 1970 President Richard Nixon briefly entertained the idea of an oil import tariff, but then dropped it. In 1980 independent presidential candidate John Anderson proposed a 50-cent per gallon tax on gasoline and finished with just 7 percent of the popular vote. President Bill Clinton tried to tax fuels based on their BTU content. But the plan was ultimately shot down in the Senate. Certainly, some energy taxes have risen such as state gasoline taxes, but only to keep pace with the need to maintain and build roads and bridges which, of course, encourage yet more fossil fuel consumption. (And even the increases in these taxes have largely failed to keep pace with the need for repairs of America's crumbling transportation infrastructure.)

The only taxes in the United States which have risen sharply are those on things which the public has long since categorized as a menace. So-called "sin" taxes have been popular with state governments attempting to balance their budgets. For example, taxes on cigarettes have risen steeply in most states.

But it is probably a vain hope that Americans will come to regard our fossil fuel addiction to be as serious as our addiction to cigarettes and decide to levy high taxes both to discourage fossil fuel use and to encourage alternatives. Taxing fossil fuels heavily and ending subsidies that encourage their use would be an elegant approach for sure. But I believe such an approach continues to be politically very difficult to implement in the United States. Therefore, we in America must work with what is currently feasible--a hodgepodge of government subsidies and tax incentives for alternatives to fossil fuels and for energy efficiency that unfortunately are subject to attacks from the fossil fuel lobby on a regular basis.