Gas Prices Fall as Big Oil Reduces Profits

NEW YORK -- Consumer advocates are dancing in the streets after successfully lobbying Big Oil to forego the record profit strategy agreed upon by the cartel this past summer in hopes of improving the competitiveness of the American economy (home to the greatest workers in the world) and the strength of the American family.

After a closed-door meeting this fall, the powerful transnationals agreeing to lower the Big Oil Required Set Price (BORSP) from more than $140 per barrel in June to $55 this November.

"You know, they were right to suspect massive collusion and corruption behind the soaring oil prices," said Bud Budderson, former head of Collusion & Pricing, and now VP of Smiles & Sunshine at BP. "You know who set the prices? Me. And you know how I did that? I created a formula based on how many new toys I wanted to buy that week.

"I was a bad guy. But I did some thinking, listened to Barack explain the unfairness of our windfall profits, and decided to make a change."

Along with the rest of Big Oil, BP made the difficult decision to stop selling oil at a price they now admit was completely detached from supply and demand, supported only by backroom dealing sealed with sweaty handshakes, evil cackling, and whale steaks marinated in peasants' blood.

The price reduction has in turn won over many former critics.

"The fact that Big Oil, in these tough economic times, has chosen to lower prices by nearly 2/3  for the good of America, serves as a beacon of hope for all those who believe in the essential awesomeness of America," said Tuck Tuckerson, senior analyst at MSNBC, and author of "Speculation, Gouging, and Waterboarding: A Year in Big Oil as a Super-Secret Embedded Reporter."

"We just grew tired of being so goshdarn evil," said Exxon CEO Money Monerton. "You can only read headlines like"Record Gas Prices, Record Oil Industry Profits," for so long without rethinking your decision to put excessive personal profit over the humble dreams of hard-working Americans.

"Sure, the record profit strategy had its benefits, but this time around, we made the right choice, both for our companies, and for America."

Read more!

why bet on climate forecasts?

I have long enjoyed Bjorn Lomborg's critiques of the climate change mitigation plans (e.g., Al Gore's trillion dollar 10-year plan, T. Boone Pickens' giveaway), as he has used numbers of the UN's scientific consensus to show how little sense most (not all) of the plans make.

Funnily enough, when "green" advocates see the small impact (and immense cost) of the Kyoto Protocol spelled out, they become far more amenable to perhaps a more interesting discussion on the viability of the UN's forecasts.

Furthermore, in the wake of a financial crisis brought on (partly) by a reliance on the financial community's consensus statistical modeling, it's not a bad time to question the reliability of these models in the first place.

Both financial and environmental modeling portend to predict the behavior of a complex system, where even small errors can lead to catastrophically wrong predictions thanks to the great number of feedback loops in the system.

And while the financial system saw the failure of the (Nobel winning) Black-Scholes financial model with the collapse of Long-Term Capital Management, environmental forecasters believed we were actually entering a "global cooling" only 30 years ago (quickly forgotten by the environmentalists' new Nobel-led movement).

In both cases, these massive failures are dismissed with a wave of a hand - 'oh, we have better models this time. I mean, we'd never make a mistake like that again. We just needed to add variable X that my stupid old partner missed and not pay attention to variable Y, which I always thought was wrong.'

I greatly enjoyed Nassim Taleb's "The Black Swan" as Taleb took the financial modelers - indeed all forecasters - to task for just this arrogance and failure to admit their projections should not be relied upon.

He states that he wouldn't trust a projection over five years; for the sake of context, the climate forecasts are 100 years (!) into the future.

I should add that I believe I did read somewhere that Taleb has spoken vaguely in favor of conserving the environment as a natural resource. I won't disagree with this. I have already written on what I think makes sense for climate change (Obama's $150 billion for R&D=good, subsidies for inefficient alternative energy applications right now=bad). This post is about the scientific modeling put forth as a consensus by a community with a long history of making drastically wrong forecasts.

Taleb advises, "Learn to read history, get all the knowledge you can, do not frown on the anecdote, but do not draw any causal links, do not try to reverse engineer too much-but if you do, do not make big scientific claims."

It appears to me that not only are our forecasters drawing causal links based on highly-fragile models, but also making "big scientific claims."

Some of my few readers are likely chomping at the bit to add the comment/question: 'Sure, you can criticize the models, or whatever, but Taleb's book is all about protecting yourself from Black Swans - highly improbable events that carry catastrophic risk - how can you possibly distort his arguments into a critique of climate forecasts: you are missing the forest for the trees!'

Maybe so - only Taleb knows, as he has been uncharacteristically reserved about commenting on climate change from what I've seen - but I do not believe I am misrepresenting his logic.

Taleb writes: "Many of the prediction failures come from hedgehogs who are mentally married to a single big Black Swan event, a big bet that is not likely to play out. The hedgehog is someone focusing on a single, improbable, and consequential event, failing for the narrative fallacy ["creating a story post-hoc so that an event will seem to have an identifiable cause"] that makes us so blinded by one single outcome that we cannot imagine others. Hedgehogs, because of the narrative fallacy, are easier for us to understand- their ideas work in sound bites."

Taleb emphasizes that Black Swans are Black Swans because they are indeed unknowable -- uncertainty is just that. His advice is to "to focus on the consequences (which you can know) rather than the probability (which you can't know)... Likewise, do not try to predict precise Black Swans- it tends to make you more vulnerable to the ones you did not predict. ... These thinkers advocate the opposite: invest in preparedness, not in prediction."

Does this sound familiar? It should, because Bjorn Lomborg has advocated investing in preparedness that will pay dividends regardless of climate change (e.g., "malnutrition policies, immunization and agricultural research and development"). These proposals stand in stark contrast to the energy-exclusive solutions of people like Gore and Pickens, which will make us indeed more vulnerable to the Black Swans we don't predict.

To wrap up, I'll return to Taleb: "I do not forbid myself from using the word cause, but the causes I discuss are either bold speculations (presented as such) or the result of experiments, not stories."

Environmental forecasters have treated us to bold speculations presented as scientific fact as part of a grand narrative that ends in apocalypse -- a Mad Max end of humanity unless if not for drastic, expensive, collective action (but secretly great for our economy!) to reduce our carbon footprints -- and thereby meaningfully mitigate climate change in an environment that has undergone catastrophic changes without the help of mankind for millions of years.

Whew. Maybe that is right on target, but I hope that even believers will admit that it just oozes all mankind's cognitive biases and failings that are now well documented in behavioral economics, psychology, and indeed Taleb's work.

The ceremonial rain dance is also well documented. People observed climate change. They created a narrative whereby they were responsible for it. They used their scarce resources to participate in ceremonies that would theoretically change the environment. Even after doing it for a period of time, they were able to explain away the many failures of their efforts to preserve the narrative. At least these ceremonies didn't cost trillions of dollars.

The late Michael Crichton said, "Nobody believes a weather prediction twelve hours ahead. Now we’re asked to believe a prediction that goes out 100 years into the future? And make financial investments based on that prediction? Has everybody lost their minds?"

I'll end with some more wisdom from Taleb. We should not play the role of hedgehog, but that doesn't necessarily mean we slump on the couch and wait or a new wild theory to take root. We should take the advice of Lomborg and Taleb in maximizing our exposure to positive Black Swans by expanding R&D and allowing for the trial-and-error process necessary to innovate, while also investing in multi-use preparedness, e.g., malnutrition, disease prevention, poverty alleviation efforts, etc.

And lastly, a disclaimer: there are lots of good reasons to reduce our impact on the earth, to use resources more efficiently and expend less energy doing the business necessary to provide humans with a healthy and fulfilling life. This post is specifically criticizing the forecasts that have been coopted and the narrative they support.
Read more!

quigley's critique of the clerks of history

I've already posted my summary of Carroll Quigley's narrative of historical development here, and now I'll move straight to the end, where Quigley concludes the Evolution of Civilizations with takeaways for students of the social sciences to better frame inquiries into the past and present. Quigley is disturbed by the inconsistencies and contradictions running rampant in historical study, which he attributes to students focusing on knowing every detail of their area of historical expertise, while failing to carefully consider a deliberate analytical framework from which to understand their historical area.

The eager student would be slower to make bold assertions about the past if he appreciated the complexity of the system he studied. Understanding civilization, and social phenomena more generally, is intrinsically very difficult, as human experience is not static but dynamic: it is a continuum:

"A continuum is a heterogeneous unity each point of which differs from all the surrounding points but differs from them by such subtle gradations in any one respect that no boundaries exist in the unity itself, and it can be divided into parts only by imaginary and arbitrary boundaries."

We are left to cope with the past the same way we deal with the colors of the rainbow, drawing arbitrary lines between red, orange, and yellow. These artificial categories or labels are necessary for discussion, but we must realize they are arbitrary.

Quigley asks students to be ‘executives’ of history, rather than simply its clerks. The distinction is that the clerk concerns himself with knowing the details of history, while the executive is interested in understanding history. The executive’s understanding is only as good as his analysis, and to this end he uses deliberate techniques to provide a systematic understanding of historical development.

These techniques will not be perfect – a fact Karl Popper and Nassim Taleb would insist upon more forcefully than Quigley – but only through the deliberate choice of one technique or another will the student be aware of the potential blind spots of his understanding. That is to say, every understanding of historical development depends on assumptions, whether the student deliberately makes them or remains blissfully unaware.

It is a tremendous err, however, to not deliberately pick a set of assumptions from which to interpret. By unknowingly operating off whatever assumptions make sense at the time, the student ends up with a contradictory and inconsistent assumptions (and interpretation of history). What's more, he never even understands the assumptions implicit in his own garbled understanding.

Quigley also takes issue with the how historical phenomena are compartmentalized into incomprehensible units, such as “nations” or “the middle class.” For the purpose of studying historical development, it is necessary to study distinct groups; a nation-state may have more than one distinct group, or may contain part of a distinct group that exists in another nation-state as well. Defining distinct groups is not easy, but it necessary for rational study.

Quigley also objects to the language of history. Historical terms should be selected to correspond to the process being studied and the technique being employed. Instead, historical development is explained in a language devoid of consistency or meaning, e.g., periods classified as “medieval” and “classical.” At best, terms are descriptive, at worst they are highly misleading. The exact lines drawn to classify different periods or peoples will always be somewhat arbitrary, but that doesn’t excuse sloppiness.

For another example, the time period between 400 and 1400 AD is referred to as the middle ages, medieval period, and the dark ages (for the beginning). The first term provides the student with the knowledge that this period is in the middle of two other periods. Medieval describes the period as “outdated,” which provides the student with the knowledge that this period is less up-to-date than more recent periods. The dark ages provides the student with a similar perception.

None of these terms convey how the events within this period figure in the process of historical development. If anything, they suggest that historical development stopped for 1,000 years. Quigley breaks down the same time period into four parts – mixture, gestation, expansion, and conflict. Quigley deliberately chooses a set of consistent and relevant labels for historical phases that correspond with the process of historical development and the on-the-ground reality; therefore, his technique is better able to explain supposed exceptions to the dark ages or medieval period, such as the Carolingian Renaissance. This periodization is more than a small nuisance: it has led to a high degree of specialization limited within these arbitrary designations. Now the most fruitful studies are likely to come from those who study the gaps and borders of these false categories.

In sum, Quigley joins Arnold Toynbee in arguing for the importance of analytical technique in historical and social analysis. A systematic technique not only provides a more coherent historical narrative, but also provides the self-awareness needed to understand one’s own potential blind spots. Toynbee properly identified these problems in his studies, but failed to provide proper definitions for his own terms and indeed fell prey to the same sloppiness he condemned.

It would be silly to argue that Quigley’s technique of understanding the rise and fall of civilizations is perfect, but with the ubiquitous disclaimer to handle all post-hoc narratives with care, he offers a superior history, an insightful critique of popular history, and a sound reminder for students of history to carefully choose a technique - even if it's not Quigley's. Read more!

useful narrative for civilization development

Carroll Quigley provides probably the best narrative of the rise and decline of civilizations I've come across (better than Toynbee, Durant, Braudel) in his book, Evolution of Civilizations (download a PDF version here). I recently came across a document where I summed up a large portion of his insights and thought I would share it. I also have some notes on his critique of the study of history as a whole, which I'll share shortly.

To begin, Quigley defines civilization as a producing society (as compared to parasitic society) which grows thanks to an “instrument of expansion.” This instrument depends on invention and investment for the purpose of surplus creation. Instruments of expansion appear to be big picture developments, from feudalism to industrial capitalism – means of organizing inputs.

Quigley breaks down the civilization's life cycle into stages: mixture, gestation, expansion, and conflict, with universal empire, decay and invasion follow if the civilization fails to find a new instrument of expansion.

Mixture: A new society needs multiple cultures mixing; while there are millions of cases of cultural mixture, only rarely does it create a new society; usually this occurs on frontiers, where cultures mix to find “alternative ways of satisfying human needs,” e.g., a new instrument of expansion.

Gestation: Period before expansion begins, where few changes are apparent; status is still stabile, but investment and invention are taking place under the radar.

Expansion: Four kinds: a) increased production of goods, eventually leads to rising standards of living, b) increase in population of society as death rate declines, c) increase in geographic extent because of exploration and colonization, d) increase in knowledge; all are interrelated. Period typified by democracy, scientic advance, and revolutionary political change, while in the latter half of expansion, the instrument of expansion becomes institutionalized, “increasingly static and legalistic.” In time, all will see “investment begin to decrease, and the rate of expansion (although not expansion itself) begins to decline.”

Conflict: Period of declining rate of expansion and increasing class conflicts, due to a conflict of interests between the vested minority and frustrated majority, with neither side having clear idea of real issues or workable solution to crisis. The programs the majority want - sharing the surplus of the few with the many - are not germane, since expansion can be resumed only with concentrated surplus; such revolutionary programs will actually make the crisis worse by lowering the accumulation of surplus. The period is also marked by increasingly frequent and violent imperialist wars, along with growing irrationality, pessimism, superstition, and other-wordliness.

Universal Empire: This period is often considered to be the golden age by historians, as there is relative peace and prosperity as there are no competing political units and no struggle with outside societies. There may develop a common set of weights, coinage measures, and extensive government spending. This is all misleading, as there is no real economic expansion, as the previously-productive instrument of expansion has stagnated. Inventions are rare, and real economic investment is lacking. Society is now a monument to the vested interest. Masses live off waste of non-productive expenditures. “Golden age is really the glow of overripeness” - a prelude to decay.

Decay: This period is unsurprisingly marked by “acute economic depression, decline in standards of living, civil wars between the various vested interests, and growing illiteracy.” There is often vain legislation to stop the waste. Religious, intellectual, social, and political levels of society lose the allegiance of masses. Religious movements then sweep society, along with a growing reluctance to fight for the society or pay taxes. This period can last a long time, until it can’t defend itself again the barbarians at the gate.

Invasion: The invaders attack the civilization until it can no longer stand, destroying the civilization, and creating a new period of mixture, providing the possibility for a new gestation period. For instance, the Greek invasion of the Minoans was Classical gestation, the Germanic invasion ended Rome, but birthed Western Civilization. This is not a given though, simply a possibility.

While Quigley’s model is based on the civilization experience, it applies to groups of all sorts all the way down to organisms. Political parties find instruments to expand their influence and popularity. These instruments become institutions protected by individuals who derive disproportionate benefit from their continuance. Over time, this institution sees a declining rate of utility to the party, and many in the party will think it best to reform or circumvent this institution and invest in a new instrument of expansion. If they fail to reform, their party’s position will decay further until they are replaced.

Mancur Olson has a related argument in “The Rise and Decline of Nations,” which argues that small, distributional coalitions form to protect their interests, and as the state endure, it accumulates more and more of these drags on expansion, causing increasing decline.

Quigley essentially takes natural selection theory and incorporates the uniquely human ability to choose. Animals change their instrument of expansion through thousands of years of selective survival and breeding. Humans, and any social groups they might comprise, can change their instrument of expansion simply through a will to change.

At earlier stages in civilization, it was the battle to see who had the strongest few, who would strengthen themselves through plunder abroad and appropriation at home. The chief instruments were indeed war and plunder. However, this initial plunder created a surplus which allowed for inventions that created new economic instruments that created surplus without conflict, and indeed, depended on cooperation and expansion to mature.

This created a lobby for peace and commerce, which butted heads with the entrenched war institution. This economic instrument was also institutionalized to secure its ability to flourish by land barons and guilds. This institution expanded for some time (at less-than-optimal rates) because of expanding items of commerce and expanding markets to sell, before finally commercial capitalism challenged the institution of feudalism. Commercial capitalism became the instrument of expansion until it was displaced by industrial capitalism, which in turn was institutionalized into monopoly capitalism.

Each evolution has depended on surplus-holders with weaker ties to the current instrument of expansion than the draw of potential gains in the untapped instrument. This group will only come into being if the vested interests’ instrument incidentally creates a surplus for another group. The pivotal moment in a society occurs when the vested interests trade a share of surplus to a distinct group for a service they could not provide themselves; if so inclined, the secondary group will continue to accumulate influence through its more efficient instrument before either co-opting the vested interests or stripping the vested institution of its privilege.

It seems like the US is in the Conflict stage, where Quigley offers some sage advice on the popular proscriptions. In this period of growing tension of evolution and increasing class conflicts between the vested minority and frustrated majority, neither side has a clear idea of real issues or workable solution to crisis; agendas to appropriate the surplus of the few by the many are worse than useless, since expansion can be resumed only with concentrated surplus to fund new or reformed instrument of expansion. Revolutionary programs responding to failure of investment will make the crisis worse by lowering accumulation of surplus; both the masses and the few are blind to what’s needed, a new instrument of expansion, which usually appears by accident or circumvention rather than through reform.

Every instrument of expansion sees diminishing returns, and the rate of expansion can only be maintained or increased through reform or circumvention (working around entrenched interests) to ensure surplus is invested in the best available instrument.

Read more!

Fun with polls

I designed a quick and easy game for the election that focuses on the battleground states. I don't particularly follow the polls, but since I have to participate in my own game, I wanted a quick and easy method for making predictions I can at least pretend are more than WAG (wild ass guesses).

Battleground states (5): Virginia, Colorado, Ohio, Florida, Pennsylvania
Close states (5): North Carolina, Missouri, Indiana, Montana, Nevada
Popular Vote (1)

For each state, you must pick the winner and the margin of victory. I decided to simply rely on the average polling data, with one minor adjustment. Thanks to RealClearPolitics, I was able to quickly grab the last polling data from 2004 for each state as well as the eventual results. I then compared the polling forecast with the results, and looked to see if the polling data erred for/against Bush/Kerry.

The polling data for Colorado, Ohio, and Montana was virtually the same as the eventual voting outcomes. So I let Obama (CO, OH) and McCain (MT) keep their forecasted victories.

The 2004 Pennsylvania and Nevada forecasts, meanwhile, underestimated Kerry's eventual wins, so that secured Obama's W's in those states.

Bush outperformed his forecasted margins of victory in North Carolina, Missouri, Indiana, Virginia, and Florida. This solidified NC, MO, and IN as McCain victories in my book. In VA, Obama is +3.8, and Bush only outperformed his expected margin by +2, so I'm calling it for the gentleman from Illinois.

The toughest nut to crack is Florida. Obama is up big (+4.2), but Bush was only up +0.6 and ended up +5. It's a tossup according to my unscientific method, but I am going to go Obama with a slim margin.

For the popular vote, Bush outperformed his forecasted margin by a bit, so I am just taking a bit of shine off Obama (currently, +6.3) and leaving him +5.5

According to these predictions, Obama will bring home the victory with 338 votes: 311 if he comes up short in Florida.

VA: Obama +2
CO: Obama +6
OH: Obama +4
FL: Obama +0.5
PA: Obama +7
NC: McCain +2
MO: McCain +2
IN: McCain +3
MT: McCain +3
NV: Obama +6
Popular: Obama +5.5

After the election, I'll recap how everyone did in the prediction game. If you haven't entered yet, Click Here to take survey.
Read more!