Sunday, May 27, 2007

Economists are from Mediocristan

Mediocristan is a mythical land inhabited by economists (and other social scientists) who believe that the world's events fit neatly beneath a bell curve of outcomes. Economists live in this land not because they are mediocre--in fact, they are decidedly less than mediocre in their prognostications--but because they accept one very crucial idea. They believe that extreme outcomes such as market crashes and other major discontinuities in our economic life are so rare that we can all but ignore them.

Mediocristan is an invention of the mind of Nassim Nicholas Taleb, a hedge fund manager and self-styled philosopher of uncertainty. His most recent book, The Black Swan: The Impact of the Highly Improbable, provides an entertaining and thoroughly readable critique of how most of us have been taught to think about risk.

Taleb doesn't address oil depletion, global warming or other resource or environmental issues directly. But much of what he says turns out to be useful for those trying to assess risks in such areas.

Economists often like to insist that risk can be easily quantified and that future economic scenarios will be played out within the bounds dictated by models. But risk cannot be easily quantified except in cases where the possible outcomes are already known. An example would be a game involving dice. There are only six possibilities on each die so the range of outcomes (assuming perfect dice) is already known. As for economic models, they are usually backtested which means that they are tested using historical data. First, historical data, probabilistically speaking, represent only one possible outcome among many outcomes. Second, historical data are very unlikely to reflect the dynamics of world peak oil production or global warming since peak by definition happens only once and the effect of global warming on the economy is a wildcard for the future.

The admission that economists are from Mediocristan is sometimes made explicit. This piece lays out many of the arguments frequently used by economists when discussing world peak oil production. But rather than focus here on the counterarguments, let me call your attention to the following sentence in that piece: "Remember that barring any unforeseen tragedy or deliberate measure to limit the supply of oil, the supply will not drop suddenly, meaning that the price will not rise suddenly."

It is precisely this type of risk that peak oil theorists are pointing to, risks of an extreme outcome that could be very disruptive to modern society. The sentence quoted above explains in part why economists and those concerned about peak oil often talk past one another. Economists start by discarding extreme outcomes. Those concerned about the possible severe consequences resulting from peak oil focus on extreme outcomes.

So then, who's right? The rather unfortunate answer is that both are right if you stay within the confines of their assumptions. So you need to figure out which assumptions better reflect the world we live in. The economists are assuming that no unforeseen, disruptive event will occur that causes a dramatic and relatively sudden fall in oil supplies. (They are also assuming rather better knowledge than we actually have about oil reserves.) Those concerned about peak oil think we should look for clues foreshadowing such a disruptive shortfall and take out some insurance in the form of concerted action on conservation and the development of alternative fuels. In other words, most of those pounding the table about peak oil do not believe that the marketplace will solve the problem.

Using Taleb's words, the arrival of peak oil in the near future could be considered a "black swan." The black swan is a metaphor for a rare and unforeseen event that has an extreme impact. Of course, a fair number of people now believe peak oil is imminent. But the vast majority of the world's population knows nothing about peak oil or believes that it is something for the distant future. And, it is expectations among the populace at large that make the impact of such an event extreme (since very few people are, by definition, prepared for it).

Taleb has admitted to making a bet on peak oil, but not one that most people would expect. In keeping with his principle that we cannot really know the future, but that we can expect people to underestimate the number and impact of extreme events, he has bet on two extreme outcomes: very cheap oil and very expensive oil within the next few years. (He does this using the options market, and his record shows that he does not have to be right about any one bet very often to do well financially.)

By doing so, he at least demonstrates a principle that lies behind the thinking of peak oil believers, namely, that it's worth taking out insurance against seemingly unlikely events if their impact could be very severe. And, that places peak oil believers in the other mythical world which Taleb calls Extremistan. In that world unforeseen, extreme, but still rare events happen more often than anyone can calculate. Their consequences are so large that they alter considerably the previously assumed average results for such events.

In the world of easy-to-tally physical measurements such as height and weight, the chance of extreme outcomes that can alter the average is quite small, Taleb explains. We are very unlikely to find a human being who is 100 feet tall or who weighs 10,000 pounds. This is the proper place for using techniques from Mediocristan. But in the world of social and economic affairs where so many factors are unknown and the dynamics of the system are so unruly, exceptional and unexpected events are the ones we should be thinking about because they are the ones that change the course of history. (Oil depletion must be classed within this realm since economic trends, political decisions and technological change as well as geological constraints are all important factors in analyzing it.)

Taleb adds that, by definition, no one can forecast a "black swan" event. Its very nature is that it is unexpected. But he believes we can acknowledge the existence of such events and try to mitigate the damage of "bad" black swans while exposing ourselves to "good" black swans. In the case of oil depletion, a good black swan might be an invention that makes an electrically powered transportation system very easy to deploy and run.

Taleb tells us that financial models based on the bell curve would have predicted that a stock market drop similar to the 1987 crash would occur once every several billion lifetimes of the universe. And, it is from people relying on such models, who believe in the magic of the marketplace (under ideal bell-curve conditions with no "unforeseen tragedies"!), that we now get confident pronouncements that peak oil is nothing to worry about, even if it's here.

Somehow, I don't take any comfort in that.

Sunday, May 20, 2007

Peak oil forecasts and asymmetrical risk

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sunday, May 13, 2007

James Lovelock's strange bedfellows

Scientist James Lovelock stunned the scientific community last year with his assertion that it is too late to do anything about global warming. Even if we have not yet reached the tipping point, he said, the vast momentum of industrial society will soon carry us crashing through it and dash any hope of arresting a deadly planetary heat wave that will wreck civilization as we know it. Lovelock detailed his assessment in a new book entitled The Revenge of Gaia: Earth's Climate Crisis and the Fate of Humanity.

Lovelock is no ordinary researcher. He is a world renown independent scientist and inventor. One of his inventions helped to uncover the role of chlorofluorocarbons in the destruction of the ozone layer. He is probably most famous for his thesis that the Earth is a living organism that regulates its temperature and conditions to make the biosphere amenable to life. He explained his theory in a book published almost 30 years ago entitled Gaia: A New Look at Life On Earth.

At the other end of the spectrum of the global warming debate are the so-called climate change skeptics. They have been known to employ something akin to a modified dog-bite defense. In a classic joke a man whose dog has bitten a passerby defends himself in court by saying: "My dog doesn't bite, it wasn't my dog, and furthermore, I don't have a dog." And, so it is with the so-called climate skeptics. They claim variously that global warming is good for you or at least not so bad that we need to do anything about it; that global warming is not caused by human activity; and that furthermore, there's no global warming.

Most of the skeptics, which comprise a small and dwindling group of scientists and a much larger contingent of professional propagandists, have strong financial ties to the fossil fuel industry. Their intent is not to enlighten, but to confuse and thereby delay any action that could inflict financial pain on their benefactors. But with the evidence so overwhelming that a worldwide warming trend is underway, the skeptics have largely dropped the third part of their modified dog-bite defense. Instead, they've to begun to focus on the second part, namely, that global warming is not caused by human activity. It is here that they have unwittingly walked into a trap. And, it is here they now find themselves in the same camp as Lovelock.

Lovelock's essential point is that humans can no longer do anything about global warming. This is because we have reached or will shortly reach the point at which the Earth's processes will begin to greatly amplify and accelerate warming without any need for further inputs from us. This is often called runaway global warming. It is the point at which the Earth's climate switch has been flipped and after which there is no hope of going back to our former climate. And, it is the reason that climate scientists are calling for immediate action on deep cuts in greenhouse gas emissions in hopes of avoiding flicking this planetary switch.

Lovelock, of course, thinks it's too late. Now, the only thing to do, he counsels, is to adapt. But ironically, the so-called skeptics' main argument has become essentially the same. Of course, they arrive at their conclusion through a different route: Humans aren't causing global warming, so they can't really do anything to stop it. But this is really only another way of saying that we may have entered runaway global warming. The causes cited include increased solar radiation and cyclical warming of the Earth unrelated to human activity. The skeptics cite the geologic record as proof that the Earth periodically undergoes such warmings, and that it's nothing to get excited about. Although the first part of this statement is true, it does not constitute proof that this warmup is natural. The second part of the statement, however, deserves special scrutiny. That's because, inconveniently, the geologic record is full of sudden, dramatic climate shifts, some occurring in as short a period as a decade.

With global warming on a dangerously accelerated schedule, Lovelock believes that governments and societies have no time to lose. They must begin planning now to secure energy and food supplies. They must brace themselves for early and dramatic rises in sea level. He also believes that basic knowledge must now be committed to long-lasting, durable books that won't deteriorate over time. The computer-driven, electricity-filled life we currently lead will not survive the massive dieoff that he predicts will leave only "a few breeding pairs" in the Arctic by the end of the century.

Since the skeptics and Lovelock are now basically in agreement that nothing can be done to stop global warming, why haven't the skeptics outlined a plan for adaptation (even emergency adaptation) as Lovelock has? Perhaps the skeptics are falling back on the first part of their modified dog-bite defense that global temperatures won't rise enough so that we need to do anything to adapt. But, this does not square with their almost constant assertions that there is a great deal of uncertainty about future temperature rises. While true, the uncertainty runs in both directions. Global temperature rises could just as easily turn out to be much higher by the end of the century than current estimates. But so heedless are the skeptics of their own contradictory thinking that in testimony before the U. S. Congress one bona fide climate scientist who styles himself a skeptic simply deleted the median and high temperature estimates from a study done by NASA's famed climate researcher, James Hansen.

The fact that the climate change contrarians 1) have no plan for adaptation to a warming climate; 2) ignore the obvious warnings of the geologic record they cite; 3) claim that the future of climate change is terribly uncertain and then claim to know it with certainty; and 4) deploy mutually contradictory arguments supports the widespread belief that they have a rather narrow agenda, namely, to defeat any attempts to curb greenhouse gas emissions.

But this still leaves them in the same camp as Lovelock (albeit by different reasoning), a position that cries out for a credible plan of adaptation based on the great uncertainties that the skeptics themselves admit surround the future of global warming. Just to be safe, however, I'm not going to hold my breath waiting for them to give me such a plan.

Sunday, May 06, 2007

The Point of Despair

I recently gave a talk to a college audience on what I called the hidden role of energy in every environmental problem. As part of my presentation I went through a depressing list of environmental problems and showed their connection to our energy use. The next day I received a message from an audience member who clearly understood the implications of my talk, but who bemoaned my failure to provide practical solutions. He said I had left the students feeling hopeless.

This unfortunate result was partly a problem of scheduling. Most of the students attending needed to leave early to go to other presentations that evening on campus. Those who stayed did have some opportunity to discuss possible responses. I say "responses," because I don't believe our ecological predicament has any solutions by which people normally mean that we can solve our problems and then go back to business as usual. Instead, we are left with responses--responses which may prove valuable or worthless, but the results of which cannot be known in advance. In short, there are no guarantees that our responses will work. By "work" I mean allow us to maintain the semblance of a technically advanced human civilization.

It's no surprise that such a realization brings many people to the point of despair. Of course, if they remain there, they can accomplish nothing. But, let's not hurry forward. Let's dwell on that despair for a moment. Does it have a function? I think it does. It is at the point of despair that people can feel deep down their connection to all that has come before them and all that will come after. It is not just their personal futures that are at stake anymore. It is the whole project of human civilization, the art, the literature, the philosophy, the great works of architecture, the great institutions of learning and research, the huge store of human knowledge, and the ongoing experiment in self-government. It is also the future of the natural world, not just what it can provide for our sustenance, but also the beauty and diversity that result from its own purposes.

It is no wonder that such an understanding brings with it what seems like an unbearable burden. Indeed, for some people this is the very first time their personal ambitions shrink as their link to the social and natural world greatly expands. To feel that link strongly can be overwhelming. It brings with it a sense of responsibility, the size of which seems immense. The moment seems to say, "If I am linked to all of this, I am somehow responsible for it." But how can one lone person even make a dent in the immense challenges humankind faces?

The question certainly reflects a state of despair; but it is in this state that we can become aware of our connection to the greater world. Without that connection nothing important can be accomplished when it comes to sustainability. With it, in my view, genuine work can begin without hubris; with respect for the size of the task; with the realization that each person can only do a part of the job; and with a sense of solidarity with other humans and with the natural world.

So, how can a person who has been brought to the point of despair take the next step? For those who are late in life, it is often an easy step. I've puzzled over why the older a person is, the more likely her or she is to be concerned about peak oil, global warming and sustainability in general. I've discovered two reasons. First, age teaches us limits in ways that no words can. Second, those in the late stages of life think of their children and grandchildren, and they begin to act out of love.

As for young people, Richard Louv, author of Last Child in the Woods, has a suggestion. He says that every generation likes to think that it will change the world. This generation has to change the world. Everything must change, he explains. That's the kind of invitation that an idealistic young person would find difficult to pass up. No matter what his or her interest--engineering, art, architecture, literature, sports, theater, music, community organizing, politics, agriculture, the building trades, computers--everything must be reworked for sustainability.

And still, on the path to sustainability, I do not think that despair is something to be avoided. Rather, I think the point of despair can become a point of departure for contemplating our deep connections to one another and to nature. When we have made some sense of those connections, then and only then, is it time to move on to action--action now informed by a new and more profound understanding.