More Modeling in Biophysical Economics

Rather than reproduce the whole post here on QE, I will just point readers to a new piece I wrote as a guest poster that has been published on The Oil Drum, Peak Oil: How Supply Crunch Can Lead to Lower Prices (for a while!). It was also picked up at The Energy Bulletin.

This is a paper which explores the complexities of some of the major factors that impact oil supply, demand, and price in a more complex manner than neoclassical economics can explain. The key issues involve the mixing of feedback loops with highly variable time scales. These differences in time scales and delays lead to very noise-like behavior that, in turn, suggests that traditional market mechanisms are simply not sufficient to signal what actions should be taken to manage the economic effects of the decline of oil.

If you read the article and have comments I would appreciate you make them here, but if you are a member of The Oil Drum feel free to make them there as well.

George

Comments

[Phil Henshaw]

One of the difficulties with feedback models is that they all need to assume the parts are following rules.

How economies work, of course, is with" animate learning-bots" (us), all exploring the world and discovering new relationships all the time. That's why I tend to take the limiting conditions nature displays as a guide, based on her own synthesis of the whole process (like the switch from multiplying to diminishing returns on the success of the search for stuff). When you learn to identify them they display what the system as a whole actually IS finding and learning from its environment, using the system itself as a better guide to what ALL the parts are learning at once.

Have you considered what evidence in the environment you'd look for to see if the system as a whole was approaching a danger point of vanishing net energy? One clear sign seems to be where the market mechanisms "hit a snag" and start displaying emergent systemic behavior where there should be smooth market adjustments.

A field called "econophysics" as mentioned in an article in the NY Times. I commented, mentioning a couple of the other examples I know.
fyi http://synapse9.com/blog/2010/08/05/market-earth-quakes-a-sign-of-emergent-chaos/

[Molly Radke]

OK, I re-read the post on the oil drum, of course was very impressed with it, BUT, I like many other relatively well-informed people, have, alas, a one track mind. The systems that you attempt to describe and to explain (admirably, I might add) have MANY interlocking variables, making them intrinsically difficult for many of us to comprehend in their complex entirety. BUT it is possible to understand bits and pieces relatively easily - like the "fact" that high energy prices, resulting from either or both peak oil and greater extraction expenses, will likely lead to an economic slowdown, thus reducing demand for energy and resulting in a (probably short-term) reduction in energy prices. I think it would be helpful to teachers, who are trying to introduce students to the general problem(s) of the relationships between energy and economic conditions, to generate a list of (relatively) simple relationships between energy availability and economic realities. I realize that because of the complex inter-relationships here, simplicity is ultimately, inherently, impossible, but to gain an understanding of bits and pieces of "the problem" relatively "simple" statements of relationships, accompanied by the cautionary note that they are only "snippets" of the entire picture, would be truly helpful for us out here among the "great unwashed." I am reminded here of my pitiful efforts to "understand" some of the concepts and ideas of modern physics (the laws of motion and gravity are challenging enuf for those of us who are mathematically challenged), but I have been ever so grateful to those scientists who have made the effort to communicate with those of us who are handicapped by limited scientific and mathematical abilities.

[Gary Peters]

Hi George,

Your TOD article is a bit complicated but well done. Near the beginning you wrote that "Real life dynamic systems are dominated by complex feedback loops, most of which operate over different scales of time." Perhaps it is just my training as a geographer, but I would add "and space."

One thing I've noticed with Greer, for example, is a lack of geographic concern with concepts such as his catabolic decline.

I'm glad you included the time scale because when it comes to getting people to see the likely problems ahead it is critical to know more about time frames. Greer, for example, talks in terms of centuries, and nothing you or I can do is going to get young people or anyone else interested in a problem that might not arrive for 200 years or so. That is almost as far ahead of us as the beginning of the Industrial Revolution is behind us. You hinted that the time frame may be much shorter but none of us knows. We have the same problem talking about global warming and other long-term problems, accepting Keynes's dictum that "In the long run we are all dead." If we take the really long view of the ecologist or geologist, then we have to accept the likelihood that our species may likely go extinct, a common fate for all species.

Anyway, back to geography. If and when oil and other energy sources truly become scarcer, then it seems to me that regional geopolitical alliances are going to grow, shatter, weaken, fly apart, etc.

Long before the rich countries watch their way of life disappear we will see the four horsemen saddle up again and ride through the poor countries, as once was the case for the entire world. Seven billion people aren't going to make it through whatever deindustrialization may be approaching.

One harbinger of what is to come may be Russia's decision to freeze all grain exports, which immediately drove the world price of wheat and other grains upward. For Americans or Europeans that means a little higher price for bread; for some third world people it may mean life or death.

You are one of the serious people writing about possible problems ahead and the problems of teaching young people to prepare them for a future different than ours. One thing educators could do at every level would be to deepen the understanding of history, philosophy, literature, and art. People need to realize that great cataclysms are not new to humans; we've survived many in the past, including one early bottleneck in which the entire population of homo sapiens may have been reduced to a thousand or fewer breeding pairs.

What is different today is that we've come through an unprecedented growth in our numbers, fueled in large part by our discovery and exploitation of fossil fuels. What is old, however, is the possibility that human population numbers will probably once again decline as fossil fuels become scarcer and more expensive. In some ways we've frittered away the vast wealth of stored solar energy in those fuels to create a population and lifestyle that cannot be sustained. Had we listened to John Stuart Mill and many other classical economists, there would be far fewer of us and life would be better for the vast majority,

Keep throwing stuff at the problem, George, and keep the dialog alive, at least.

[Robin Datta]

Well before the oil price spike of 2008, Richard Duncan of the "Olduvai Theory" had suggested a period of severe volatility in oil prices with repeated spikes and crashes. Indeed it was not until after the 2008 oil price spike that the peak oil blogosphere more widely addressed the issue of elevated petroleum prices depressing the economy. As I understand it, the most that the uS economy can tolerate without heading south is a price of $85 per barrel.

[Gary Peters]

Robin,

I don't think anyone knows at what level of oil prices the U.S. economy might be "heading south," but we may be testing the idea right now. Crude is back up over $80.

Duncan's "Olduvai Gorge Theory" is more like a hypothesis, one that may or may not be close to future reality. Though it is tempting to believe that the rapid rise in human numbers over the last 200 years has been a result of fossil fuels, there is not really a neat and predictable cause and effect relationship. Food supply increases have been necessary but much beside our use of fossil fuels has helped increase food supplies. For example, advances in plant genetics, especially the Green Revolution of the late 1960s and 1970s. The situation is much more complicated and less predictable than Duncan makes it sound.

The problem with many economic and demographic models is that they are seldom good at making predictions. Most demographic models, e.g. the demographic transition model, are derived from historical data; they have little predictive power. As for economic models, I'll only say that a majority of them seem inadequate to deal with reality. One only needs to look at the failure of virtually all economists to predict the collapse of the housing market and the financial collapse that follows.

Whether $85/barrel oil will bring the economy down remains to be seen. The economy is already very shakey and a growing number of economists are talking about deflation ahead. Of course, others deny that. Harry Truman once said that he'd like to meet a one-armed economist because he got so tired of economists telling him one thing but then adding that "on the other hand."

[Phil Henshaw]

Molly and all,

One of the more useful things about the tangle of pushes and pulls we perceive as possibly operating in the economy is how impressive it makes nature's performance seem when she evidently integrates all those and more in displaying behaviors that are remarkably simple.

Take the classic data for world economic growth and energy use, clearly displaying a global system smoothly distributing its stresses of confused and quixotic human behavior to produce smooth worldwide of economic expansion and efficiency improvement. http://www.synapse9.com/issues/EffLearn_grow.jpg

Some examples of the same system displaying convulsions due to a failure of its stress distribution systems are on the page I linked in my first comment.

If nature can be observed as doing something simply, that's the clear proof, the question then becomes "what's the theorem?". Ask your students that!

... So, when will we know the level of oil prices that will knock down the economy again? Other things constant, wouldn't it naturally be higher than the last time? There's attrition involved. The parts of the economy that didn't handle the last global resource price spiral are now mostly gone.

[George Mobus]

To All:

I apologize for the time delays in responding. Not only has my broken leg slowed me down but my home computer has been battling a particularly pernicious virus attack and been in the shop for much of the last three weeks! It takes a bit for me to drive into my office to get on-line and other jobs have had priority. However...

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Phil,

One of the difficulties with feedback models is that they all need to assume the parts are following rules.

This is true to some extent but there are now methods to do agent-based modeling that includes adaptive agents. I am covering some of this in my forthcoming book on systems science.

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Molly,

Ah complexity! You may have seen my latest posting that tries to provide a guide to following systems dynamics models. I hope it helps. As it turns out, my feeble attempts here are quite sparse compared with some models I have run into!

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Gary,

Yes, I agree there is a geographical dimension not adequately covered in these kinds of models. My "excuse" is that I'm looking for time series behavior "averaged" over the globe as a sort of boundary condition analysis. It's a weak argument but...

With systems dynamics models one could attempt to make models of different regions (not unlike grid models for climate) and then find the interlinks - perhaps run them on massively parallel computers. I honestly don't know how one could tackle this to get finer grained resolution on a geographical basis.

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Robin,

Several people have suggested that above $80 we start to see a kind of frictional increase in the economy that if left long enough would trigger another recession or worse. From my own observations I think the number is more like $75, the range we've been in for a while. My reasons have to do with the numerous unaccounted costs that ultimately should be reflected in the price of oil but aren't. These are effectively externalities to the oil companies/nations that do not get added to their basic costs so aren't passed on to the market.

But in the long run it really isn't the price of oil in dollars that matters, its the energy cost to extract that next unit, the declining EROI.

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George

[Auntiegrav]

I left a post on this at "Can we solve two problems at once".
The feedback mechanisms of all of the variables come down to one point: the cash register. Hidden externalities allow those who profit from acceleration of money to influence the positive mechanisms for profit while removing the negative feedback (price). All of the educational/social/statutory actions will not overcome this until the overhead costs are available to those making the decisions when they make the decisions. The "animated choosers" don't 'plan' to go to the store and buy all of the things they buy, and they wouldn't buy much of it if the price reflected the actual cost of disposal, war, security, fire protection, insurance, etc. Instead, the rider thinks he or she is guiding the elephant when the elephant decides to raid the village and drink the beer. People do stuff. They have reasons for doing stuff. In that order.

[Jeremy Bryant]

It seems like the oil prices are on there way back up. Do you see any decline any time soon?

[George Mobus]

Jeremy,

The trend has been steadily rising since the dip after the 2008 spike. The trend prior to the spike had been steadily upward as well, so the dip looked like a rebound effect rather than a true correction. Conclusion: oil is headed upward ($100+ territory). And unless someone comes up with two or three Saudi Arabia-sized deposits soon that is going to go on in the foreseeable future.

We should never get excited about rapid and short-term peaks and valleys. It is the long-term (years to decades) trends and the area under the graph (representing total costs to society) that count.

George