Planning, Policy, Strategy and Energy, Part I

A COUPLE OF months ago, I wrote an article in Whiskey & Gunpowder entitled “Things Just Got Worse” (Jan. 25, 2006) concerning a major downward revision to the estimate of oil reserves in Kuwait. My sense of doom and gloom was prompted because if the downward revisions to the Kuwait numbers are true, the world’s total proven oil reserves just decreased by around 50 billion barrels, or 5%.

But why be gloomy about losing something you do not really have? (Well, for starters, doom and gloom is stock-in-trade at Agora Financial. We have made a lot of money being gloomy and doomy in recent years.) If the oil was never there, then it was never there. These lost oil reserves were only phony baloney bookkeeping entries, and just a reflection of the exceedingly creative accounting that goes on within many of the world’s oil-exporting nations. These downward revisions were not real oil in real rocks, right? How much can you miss what was never there in the first place? Is it really a crime to rob an empty bank?

And following the logic of “not missing” something that was never really there, let’s ask the next question. Does it matter, over any period of time, not to have something that was never there?

Anyone who understands the nature of the oil industry can assure you that the downward revision to the Kuwaiti reserve numbers will not create a problem tomorrow or next week or next month. So don’t worry. The oil that you will use tomorrow, next week, or next month has already been pumped from the ground, shipped via tanker or pipeline, refined in a refinery somewhere, and is in transit to your local gas station.

Even the oil that you will use next year is well identified and understood. That is, there is an oil field somewhere in this world, with oil wells that are lifting product out of the ground in a predictable fashion. And some of that oil has your name on it. All you have to do is let the global oil industry do its global oil-thing and then pay for it at the gas pump. Nothing short of a major war in the Middle East will interfere. OK, maybe you should worry a little bit.

But what about the longer term? Does the downward revision matter over the next five, 10, or 20 years? The short answer is yes. Now is the time to worry more, because when the equivalent of 5% of the world’s oil reserves simply vanishes from the ledger books, it makes for a problem even if it was just “phantom oil.” The unavailability of this oil, real or no, will have a severe impact in what are called the “out years.” Why is this so? Because whatever amounts of long-term reserves we thought were down in the ground are no longer on the books, and no longer available. We thought these reserves were there, but now they are gone. Puff of smoke, stroke of a pen, presto, the reserves are gone. In so many words, this screws up the planning.

Planning for Peak Oil

Planning? What is “planning” anyhow? Like the weather, everybody talks about planning. But what does it mean to “plan” something? It makes for an interesting term, and an even more interesting concept.

On a personal level, most people have some sort of a plan for their life. (What, you don’t have a plan for your life? Actually, you do, but you just don’t know it yet.) The plan might be pretty basic, along the lines of go to school, learn a skill or trade, get a job, get married, have kids, whatever. Or maybe the plan is more complex. It is up to you, after all. Do you want to run for president of the United States? Or maybe just run away and join the circus? Be my guest. Things may work out one way, or they may work out another way. But you ought to do whatever you think you can do and give life a try. Good luck.

On a scale larger than just a single individual, families plan, and groups of people plan. Organizations plan. Businesses plan. Governments plan. Nations plan. But let’s go beyond colloquial discussion and get into the philosophical roots of the term. When it comes to Peak Oil, the concept of planning takes on a rather overarching meaning. “In the long run, we are all dead,” said Lord Keynes, speaking of government deficit spending and national debts.

When it comes to Peak Oil, however, the “long run” may arrive sooner than we think. Princeton University’s most famous Peak Oil man, professor Kenneth Deffeyes (author of the highly acclaimed and readable books Hubbert’s Peak: The Impending World Oil Shortage and the sequel, Beyond Oil: The View From Hubbert’s Peak) recently stated that he believes that world oil production “peaked” in December 2005. Whoops.

So if you have not made your plans for life in a post-Peak Oil world, you are showing up late and the excitement has started without you. But then again, there is no time like the present, and it behooves you to be concerned about the issue now. After all, as the saying goes, “The future is now.” (Although people also say things like “the good old days are today.” So apparently, “The good old days are today,” but so is “the future,” because it is “now.” So both the future and the past come together in the present. And remember, “Tomorrow is another day.” It gets kind of confusing, I know.)

The Long Emergency

Speaking of the “good old days” and “the future is now,” if you subscribe to James Kunstler and the viewpoint he expressed in his May 2005 book The Long Emergency, you had better start planning now for a very bleak future. Kunstler is a brilliant writer who postulates a world not too far down the path of time in which there is far less energy availability leading to profound societal changes, most of them negative compared with today. This will lead to smaller human populations living in radically different conditions than we see at present.

According to Kunstler, it is not just that people will be forced by circumstances in a post-Peak Oil world to abandon unsustainable mega-cities, especially desert enclaves like Las Vegas and Phoenix. People will also, for the most part, have to abandon the surrounding and unsustainable “asteroid belts” of mega-suburbs. These refugees from modernity will, if they are lucky, move to small towns. And no, this is not some happy vision of future life going on in endless replays of Mayberry, USA. Kunstler actually envisions human existence reverting to conditions similar to what prevailed in medieval times. Kunstler’s futuristic book is rather shocking, in large part because his arguments are so factual and logical.

The Coming Break Point

If, on the other hand, you believe Peter Tertzakian and the viewpoint in his December 2005 book A Thousand Barrels a Second: The Coming Oil Break Point and the Challenges Facing an Energy Dependent World, the future will follow economic trends similar to those of the past several centuries. Tertzakian, a former geophysicist who worked for Chevron Corp., understands the thesis of Peak Oil. He has read most, if not all, of the currently available books, and cites them appropriately. He refers knowledgeably to the Hubbert school of thought and explains the basic thesis of impending irreversible decline in crude oil production with much clarity, and I would expect no less from someone with his technical background.

When it comes to Peak Oil, Tertzakian understands what is going on, and he is right upfront about predicting that there will be significant future price increases due to oil shortage and scarcity. But Tertzakian also believes in the profit motive, and in the promise of innovation via human ingenuity. He argues that these future price increases will serve as loud economic signals for mankind to find resources and technology with which to substitute for scarce and expensive liquid hydrocarbons.

Tertzakian refers frequently and cogently in his book to the historical transition from whale oil to rock oil for purposes of illumination in an industrial age, and from wood to coal for the energy to run the machines of industry. He discusses the rise of electricity as a source of energy in the late 19th and into the 20th centuries. He correctly cites a lot of the history of the growth of the oil industry, including some great tales of oil patch. He makes a lot of good points about future energy use patterns of both the developed and developing world. Central among Tertzakian’s points is his take on the nature of the impending and profound change in the sources of materials that mankind will use in the future for heating, lighting, and transportation.

Tertzakian foresees the peak in the Peak Oil argument, and forecasts his version of how the future facts of life will alter peoples’ energy use, if not their patterns of social behavior. To this end, Tertzakian identifies so-called historical “break points” during which mankind has in the past made a series of transitions from one kind of energy source to the next. But, and Tertzakian notes this, it is not as if one energy resource entirely replaces the other. People used to burn wood and still burn wood. Despite the rise of oil as a source for liquid fuel, the world still burns a lot of coal. We all live better with electricity, but still use a lot of oil. So, Tertzakian notes, the following energy source does not totally eclipse the previous energy source (except in the case of whale oil).

And when it comes to Peak Oil, in essence, Tertzakian predicts that high-volume usage of conventional oil will decline and rising prices will signal and usher in the next energy-usage “break point.” People will adapt to the new circumstances. Economic activities will rebalance to higher prices and less availability of oil. The energy otherwise derived from today’s use of oil will be replaced in the future with some other form of energy production, as well as by changes in use patterns. So sayeth Tertzakian.

Two Books, Published Between May and December

So to paraphrase the words of the old Frank Sinatra song, do you subscribe to Kunstler’s book, published in May? Or to Tertzakian’s book, from December? “It’s a long, long while from May to December, but the days grow short when you reach September.” These two highly regarded and very knowledgeable authors both acknowledge the Peak Oil thesis. Both forecast a radical decline in future availability of large volumes of today’s version of conventional crude oil. Both authors see prices rising dramatically. But the two authors also offer radically divergent views of the future.

In Kunstler’s view, people will be living a restrictive, and vastly local sort of existence, in many cases in small enclaves. Much of life, for most people, will be spent struggling to eke out an existence by growing food in poor soil under all but medieval circumstances.

In Tertzakian’s view, on the other hand, people will pay more for energy. But the supplies will be there, courtesy of innovative technology and the utilization of other energy resources. People will certainly complain more about paying more for energy (gee, what a surprise), but most people will retain some semblance of what we consider today to be a Western standard of living.

The two forecast futures could hardly be more different. To paraphrase the old carnival saying, “You pays your money at the bookstore, and you takes your choice.”

Of course, Kunstler and Tertzakian are not alone in their willingness to tackle the Peak Oil issue with their respective great insights and good writing. Lately, more and more people are writing about Peak Oil and discussing the related issues, and to varying degrees of understanding, if not misunderstanding. Not long ago (March 1, 2006, to be exact), none other than The New York Times actually endorsed the Peak Oil thesis, and hence the term has now become respectable in the mainstream media. Still, Peak Oil is far from being headlined on “American Idol” or in commercials during the Super Bowl, although the word is getting out. So onward goes the debate.

A Few Words on Politics, Policy, and Strategy

At the beginning of this article, I discussed planning in a general sense. And for my money, at the bookstore, I think that now is the time to discuss policy and strategy in general. What is policy and strategy? What do these things look like? How does one formulate policy and strategy? Is it the same process as “planning”? Is it something else entirely? My experience is that while a lot of people talk about policy and strategy, few have a real understanding of the roots of the concepts. The terms “policy” and “strategy” get confused in conversational language. People substitute strategy for what they really intend to say in a discussion of policy, which is at a higher level than strategy — if not discussing operations or operational plans, or tactics, which are at a lower level than strategy.

In this regard, I am following the logic of the great theorist of policy and strategy, Karl von Clausewitz. Clausewitz’s seminal book On War, published in the pre-oil age days of 1832, analyzed policy and strategy from a military standpoint and in the context of dissecting the Napoleonic Wars. On War has been described as “turgid” by some commentators and the many war college students across the world who have been assigned to read the book over the past century or so, but once you get used to the style, it reads like Gone With the Wind. (OK, I am kind of kidding about the Gone With the Wind thing.) And my point in bringing this up is that the essence of Clausewitz’s work transcends the martial sphere.

Basically, according to Clausewitz, politics sets the tone for policy, although politics and policy are the same word in Clausewitz’s original German. Policy then sets the stage for strategy, which is a key point. Speaking of war, Clausewitz said, “No one starts a war — or rather, no one in his senses ought to do so — without first being clear in his mind what he intends to achieve by that war and how he intends to conduct it.” This is, at root, an expression of how policy must drive strategy, and how strategy must mesh with policy directives and controls. This kind of thinking applies to any great endeavor, not just to waging wars.

Strategy, in turn, governs operations. This means that there is a distinction between strategy and the substrategic, subordinate level of operational art (although Clausewitz did not say this in so many words). Policy controls strategy. Strategy drives operations. And last but not least, tactics are necessary to carry out and achieve operational goals.

Thus, policy, strategy, operations, and tactics are a continuum.

And while a failure of tactics or operations can doom the entire chain, a failure of policy and strategy will also doom the entire chain. Keep that “failure of policy” and “failure of strategy” idea in mind. You see this a lot throughout history, and certainly in current events.

We will pick up on this discussion in Part II.


April 7, 2006

The Daily Reckoning