The financial carnage -- hedge fund failures, bank runs, credit tightening, and potentially a recession -- due to the current mortgage crisis demonstrates (yet again) that very smart people can do incredibly stupid things. For all of the insight, experience, and knowledge we gained through previous financial failures, we still walked blithely into the gaping maw of the delinquencies, defaults, and outsized bailouts that characterize a financial black swan (a black swan is an event that defies prediction, but it is usually obvious in hindsight).
Bad AssumptionsThis should lead everyone to contemplate what other dangers are out there, undetected by the very same people that led us into the last crisis. One good way to find these hidden black swans is to sniff out bad assumptions -- particularly those that are only held aloft by boundless optimism, despite growing evidence that they've gone bad. For example, there is a widely embraced assumption that we will always be able to produce enough oil/gas at a reasonable price to meet global needs. Despite this, the oil market is currently characterized by:
- Rapidly increasing prices (on the way to $100 a barrel) that indicate supply stress. Why the stress? Why haven't we had a production increase since 2005?
- Geopolitical maneuvering by the great powers to lock-up sources of energy -- from the Sudan to Iran to Iraq to Russia. If the market was working correctly and future supplies were going to be driven by the magic of economics in combination with technological innovation, why the effort to secure national supplies?
- The peaking/failure of three (and potentially all four) of the world's major oil fields. If these fields are the foundational producers of the global energy system, how can we make up the loss?
Peak Oil?If the current assumptions and the theories that are derived from them aren't very good at explaining current events (let alone predictive), then it is smart to look for alternative theories. One alternative (perhaps better) explanation for the conditions we currently see in the oil market can be found in the thinking being done on peak oil. This theory's foundational assumption is that we have already pumped almost all of the easy to produce oil out of the ground and that the complexity of extracting the remaining oil will advance along a exponential curve of difficulty and expense. According to this analysis, we will see:
- Steadily increasing prices as demand outstrips supply.
- An inability to maintain production levels.
- Eventually, a steady and inexorable slide in production as sources of easy/bountiful oil deplete and fall off-line (the rate of this decline, given our relative unpreparedness, will radically outstrip the development of alternative sources of energy).
Top Level Thoughts On SecurityHere's a quick round-up of some of the security consequences for this theory (there's much more to do on this):
- An increasing number of wars and conflicts in oil producing areas (Iraq, Iran, KSA, Sudan, Nigeria, etc.). Perversely: 1) the very military force we will likely use in these conflicts is extremely energy dependent and those costs will skyrocket, and 2) terrorists/guerrillas will find that the damage they can inflict with systems disruption rises at a multiple to every decrease in production/supply.
- State failures in the developing world where the costs of energy outstrip the means to pay for it. Hollow states will proliferate.
- Economic dislocation due to a string of recessions and persistent inflation in the developed world as increasing energy costs percolate through the global economy. Global guerrillas in the US?