Sunday, February 18, 2018

LNG comes to Boston, a harbinger of the future?

The most curious natural gas story of the year so far comes out of Boston and seems to have echoes of a deepening Russia-related scandal in Washington. A liquefied natural gas (LNG) tanker bearing natural gas produced in part in Russia delivered its cargo to the Boston area for insertion into the natural gas pipeline system there. Apparently, the Russian company that supplied some of the gas may fall under U.S. sanctions against the financing and importation of Russian goods.

One of the many ironies of the delivery is that the United States is simultaneously importing LNG in one place even as it exports LNG from another. (I'll explain later why this may become a more frequent occurrence in the years ahead.)

The hue and cry from the natural gas partisans blamed Boston's predicament on the lack of pipelines to carry growing gas production from the nearby Marcellus and Utica shale deposits to needy Bostonians whose gas supplies had been depleted by a deep winter freeze.

Within the context of this narrow appraisal, the partisans are mostly correct. Attempts to bring more pipeline gas to New England have come to grief, especially in New York state where residents have strongly opposed new natural gas pipelines and storage facilities.

In addition, the state banned hydraulic fracturing—the main method for extracting gas from the Marcellus and Utica deposits—in 2014, claiming the process threatened water supplies. That ban, of course, prevented any shale gas development in southern New York under which the deposits lie. And, it brought into disrepute all things related to hydraulic fracturing or "fracking" including natural gas pipelines and storage facilities.

What lurks behind the outrage of the partisans is the assumption—widely touted in the media and by the U.S. Energy Information Administration (EIA)—that the country is about to become a large exporter of LNG for the long term as its natural gas production grows ever skyward. Energy abundance, they like to say, has arrived in America.

There's just one problem—or should I say four? Of the six major U.S. shale gas plays that are the basis for the optimism about supply, four are already in steep decline. (Gas produced from other types of deposits has been either flat or in decline for many years.) As of the end of 2017 the rate of natural gas production in the Barnett play in Texas, the Fayetteville play in Arkansas, and the Haynesville play spanning the area where Arkansas, Louisiana and Texas meet are all coincidentally down by about the same 44 percent from their peaks years ago. The Woodford play is down about 25 percent from its 2016 peak.

That leaves only the Marcellus and Utica plays mentioned previously to carry the United States into an era of continuously climbing overall natural gas production. That's an unlikely prospect and one rated as such by David Hughes, author of "Shale Reality Check." For his analysis Hughes meticulously checked the actual well production histories of shale gas wells—rather than merely scanning misleading energy headlines as most other analysts seem to do.

Even the Marcellus is showing its age as the rate of production from new wells sags, a sign that the most productive prospects have already been drilled. In addition, a preliminary production peak in the Marcellus in early 2017 waits to be confirmed.

If the optimistic scenarios for U.S. natural gas production fail to materialize as seems likely, we will almost certainly see more LNG-related irony as imports and exports occur simultaneously at the country's LNG terminals. This is because long-term delivery contracts entered into by LNG export terminals will prevent any rerouting of gas bound for export to domestic use, possibly even under emergency conditions. If the shale gas boom fizzles, we will discover that government approvals for U.S. export terminals were wildly ill-advised as more LNG delivery ships dock near Boston and other places to make up in part for outgoing U.S. LNG cargoes .

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P. S. I suggested the possibility of the scenario outlined above in a piece in 2013 and discussed the Australian experience with the same predicament in 2017.

Kurt Cobb is a freelance writer and communications consultant who writes frequently about energy and environment. His work has appeared in The Christian Science Monitor, Resilience, Common Dreams, Le Monde Diplomatique, Oilprice.com, OilVoice, TalkMarkets, Investing.com, Business Insider and many other places. He is the author of an oil-themed novel entitled Prelude and has a widely followed blog called Resource Insights. He is currently a fellow of the Arthur Morgan Institute for Community Solutions. He can be contacted at kurtcobb2001@yahoo.com.

Sunday, February 11, 2018

The stock market swoon and our hatred of (some kinds of) volatility

The steepest one-day point drop in the history of the Dow Jones Industrial Average last week shook stock investors into an awareness that all is not sweetness and light in the financial markets. The sudden downside stock market volatility had been preceded by the breathless upside volatility of a months-long melt-up—one that had financial gurus outbidding each other to increase their targets for major stock indices. (See here and here.) Investors, too, felt that heaven had arrived on Earth, at least financial heaven.

After years of steady gains—with only the occasional drop—stock and bond market investors had gotten used to narrow swings in price that didn't disturb their sleep. In fact, whenever the stock (or bond market) looked like it might crash, the world's central banks offered reassurance both in words and deeds. The deeds included unprecedented buying of bonds (which kept interest rates low) and in some cases the purchase of stocks. The Bank of Japan and Swiss National Bank are two central banks which buoyed stocks through purchases though they bought stocks for different reasons.

Whether the current volatility presages a market meltdown or not, I'll leave to others. But volatility in the stock market isn't the only kind of volatility humans don't like. In fact, the entire project of human civilization might be characterized as an attempt to dampen volatility. The basis of civilization, that is, living in settlements, is agriculture, especially agriculture devoted to the production of grains. Why grains? Because grains can be stored from season to season and thereby smooth out food supplies throughout the year and cushion an unexpected drop in supplies from year to year due to drought, floods or other natural catastrophes.

In addition, irrigation allows for a steady supply of water to crops that otherwise would be entirely dependent on the weather to slake their thirst. But erasing the volatility of humans' previous nomadic existence wasn't an unalloyed good. Jared Diamond's famous essay, "The Worst Mistake in the History of the Human Race," catalogs the ills that beset nomadic humans as a result of the adoption of agriculture.

The trade-off for this reduction of volatility in food supplies is apparently that humans worked more while eating a far smaller variety of less nutritious food. They grew to smaller heights, had worse teeth, and suffered more infectious diseases and diseases related to poor nutrition. Besides this, life expectancy dropped considerably.

But agriculture itself produced a different kind of volatility. Reliance on just a few crops meant that failure of one or more of these (due to disease, for example) could lead to starvation. The Irish Potato Famine comes to mind. Volatility which was thought to be banished returned in a different form.

As for irrigation, it brings more consistent moisture to crops. But over time irrigation can also cause salt to build up in the soil, reducing fertility. So, irrigation means less volatility in yields for a while until yields crash as salt concentrations reach a critical level.

We believe that our modern agriculture has eliminated such problems. But, in fact, vulnerabilities have only worsened, waiting for a match to light a fuse that could devastate one or more major grains worldwide.

We also seek to lower volatility in many other areas of our lives. To offset our exposure to the elements, humans mastered fire to guard them against the cold of night and winter. Fire also made it possible to cook foods which in turn made it possible for humans to get far more nutrition out of those foods and thus require less of them to be grown or found.

Today, we seek total control of our living environment. In buildings and vehicles, maintaining the temperature and humidity at a level that suits us is often called climate control, though the only climate we control is very local. The irony is that the energy we use to minimize our exposure to cold in winter and heat (and moisture) in summer adds greenhouse gases to the atmosphere. We thereby exacerbate climate change and create the fierce polar vortexes and more frequent heat waves that cause us to use yet more energy to keep ourselves warm or cool. Once again, the volatility which we sought to repress ends up being expressed elsewhere.

The wonder of modern transportation now has many of us dealing with the fact that trips to the same destination during rush hour and during other times of the day might differ by a factor of two or three. That's a lot of volatility that can be avoided if one can arrange to go to work or school on foot or perhaps by bicycle or possibly by train. The automobile which promised to free us from the confines of our villages and neighborhoods has indeed done that only to thrust us into a hell of volatility related to traffic jams.

Volatility can actually be good for us. Regular exercise moves the body from a sedentary state into a frenzy of activity. The body loves this volatility and most people who exercise report how much better they feel as a result. And, of course, we know that as general fitness improves, it leads to better health outcomes.

To break up our social and work routine, we like vacations, evenings at the theater and visits to friends.

Whenever we seek to reduce volatility in our lives, we should ask whether the result will be volatility transferred elsewhere. And, we should ask whether we are merely postponing volatility that will occur later and more violently in ways that could disable us.

Returning to the example of the stock markets, the world's central banks have dampened volatility whenever it has arisen since the Great Recession. With the world's economies highly correlated to stock market valuations, the banks feared that another steep drop in prices following the market crash of 2008 and 2009 would have put any economic recovery in jeopardy.

Self-styled student of risk Nassim Nicholas Taleb says that when the volatility of complex systems is intentionally repressed—such as a manipulated stock market or an authoritarian political regime—those systems tend to experience huge leaps in volatility at some point. This is because they have not been allowed to adjust to small shocks along the way and therefore have become increasingly maladjusted to their underlying reality.

The questions now for those involved in the stock market are: Have the central banks merely delayed market volatility so that it will one day emerge in a form that is unstoppable and highly destructive? If so, has that day arrived or will it be delayed again?

Kurt Cobb is a freelance writer and communications consultant who writes frequently about energy and environment. His work has appeared in The Christian Science Monitor, Resilience, Common Dreams, Le Monde Diplomatique, Oilprice.com, OilVoice, TalkMarkets, Investing.com, Business Insider and many other places. He is the author of an oil-themed novel entitled Prelude and has a widely followed blog called Resource Insights. He is currently a fellow of the Arthur Morgan Institute for Community Solutions. He can be contacted at kurtcobb2001@yahoo.com.

Sunday, February 04, 2018

Ruin is forever (revisited): Why your death isn't as bad as that of all humankind

It should be obvious that the death of an individual human being isn't as bad as the death of all humankind. But that's only true if you accept the following premise laid out by Nassim Nicholas Taleb in his upcoming book, Skin in the Game:

I have a finite shelf life; humanity should have an infinite duration. Or I am renewable, not humanity or the ecosystem.

The quotation actually comes from a draft version of one chapter available here. The book is not yet out.

But what does this mean in practical terms? The simple answer is that human societies should not engage in activities which risk destroying all of humanity. Nuclear war comes to mind. And, most, if not all, people recognize that a nuclear war would not only result in unthinkably large immediate casualties, but also might threaten all life on Earth with a years-long nuclear winter.

But are we humans risking annihilation through other activities? Climate change comes to mind. But so do our perturbations of the nitrogen cycle which we are now at the very beginnings of understanding. In addition, the introduction of novel genes into the plant kingdom with little testing through genetically engineered crops poses unknown risks not only to food production, but also to biological systems everywhere.

The thing that unites these examples is that they represent an introduction of novel elements (artificial gene combinations not seen in nature) or vast amounts of non-novel substances (carbon dioxide, nitrogen compounds and other greenhouse gases) into complex systems worldwide. Scale, it turns out, matters. A population of only 1 million humans on Earth living with our current technology would almost certainly not threaten climate stability or biodiversity.

But, there is one technology I mentioned that might threaten even this small-scale human society: genetically engineered plants. That's because those plants have one characteristic which the other two threats I alluded to do not; plants are self-propagating. They can spread everywhere without humans making any additional effort beyond introduction into the environment. (For a discussion of why this matters, see "Ruin is forever: Why the precautionary principle is justified.")

Here is the essential finding of the chapter in Taleb's new book: If you keep repeating an action which has a nonzero chance of killing you over time, you will almost surely end up in the grave. If society does the same thing, it risks the same fate. Individuals may die before risky behavior catches up with them. Societies live on to repeat actions that risk ruin. And, we as a society are engaging in multiple activities that risk our ruin as a species, a circumstance in which the probabilities of societal ruin are not merely additive, but multiplicative.

As Taleb notes in his book chapter:

If you climb mountains and ride a motorcycle and hang around the mob and fly your own small plane and drink absinthe, your life expectancy is considerably reduced although not a single action will have a meaningful effect. This idea of repetition makes paranoia about some low probability events perfectly rational.

The confusion about risk entails 1) the inability to see that we are piling danger upon danger and 2) the failure to understand that we have assessed risk in the wrong way.

Taleb illustrates the two kinds of assessments:

Consider the following thought experiment.

First case, one hundred persons go to a casino to gamble a certain set amount each and have complimentary gin and tonic.... Some may lose, some may win, and we can infer at the end of the day what the "edge" is, that is, calculate the returns [for the casino] simply by counting the money left with the people who return. We can thus figure out if the casino is properly pricing the odds. Now assume that gambler number 28 goes bust. Will gambler number 29 be affected? No.

You can safely calculate, from your sample, that about 1% of the gamblers will go bust. And if you keep playing and playing, you will be expected have about the same ratio, 1% of gamblers over that time window.

Now compare to the second case in the thought experiment. One person, your cousin Theodorus Ibn Warqa, goes to the casino a hundred days in a row, starting with a set amount. On day 28 cousin Theodorus Ibn Warqa is bust. Will there be day 29? No. He has hit an uncle point; there is no game [any] more.

What Taleb is explaining is the difference between what he calls ensemble probability (involving 100 gamblers) versus time probability (involving repeated actions by one gambler). He asserts that almost all of social science research and economic theory is tainted by conflation of the two. Social scientists and economists don't know that they are using ensemble probability (something like a snapshot which ignores tail risks) to gauge risk where time probability is appropriate (more like a long-running movie, the opposite of a snapshot and a movie which takes into account tail risks).

In the example, you as an individual do not have a 1 in 100 chance of going broke at a casino unless you never walk into a casino again the day after you and 99 others are observed in the above experiment. If you visit the casino often enough, it is almost certain that you will lose all your money (at least what you've decided to put aside for gambling). Casinos finance themselves on this certainty. The house always has an edge or no one would ever build a casino. If you play against the house continuously, it may take some time, but you will be ruined.

The fact that casino gambling in the long run is unprofitable (for the players, not the owners) is known in advance. It is not hidden from the players. The payoff for placing a bet on the winning number in roulette is 35 to 1. If you get lucky and win, you get the chip you placed on the winning number plus 35 additional ones. Trouble is, there are 38 numbers on the roulette wheel. (You probably didn't remember 0 and 00.) If you were to place a chip on every number so that you could win every turn of the wheel, you'd actually lose two chips out of the 38 you placed each time. The house has a mathematical advantage you cannot beat over time.

In the realm of complex Earth systems, however, the odds of ruin cannot be calculated. In fact, how the actions we take might cause ruin cannot be known for certain. Much about these systems is hidden from us. What we do know is that our very survival depends on their proper functioning, and that therefore, perturbing them as little as is possible makes sense. We cannot be certain exactly what actions at what scale will, for example, create runaway global warming.

Our situation is worse than that of the heedless gambler. At least he or she knows exactly what will lead to ruin and therefore what must be done (or not done) to prevent it. With regard to climate and other Earth systems, we are largely in the dark. We do know with unusual certainty that human activities are warming the planet. We have a good idea about what those activities are. What we don't know is precisely how the climate will change as a result of our actions except for one thing: Our models have been too conservative about the extent and pace of warming. Climate change is moving faster than expected.

So there is one final crucial aspect of the dangers we are creating to the Earth's systems. The precise extent and nature of the systemic planet-wide risks we are taking in fiddling with those systems are hidden. We cannot know all the interactions in the atmosphere, in the soil, in the oceans or in the plant kingdom that result from our actions. That means that our models cannot capture all the possibilities the way a gambler can calculate precisely the odds of winning at roulette. And, this is emphatically a reason for us to be very, very careful. That's because we know that what we are doing could lead to the ruin of our civilization and its people. In fact, we know it is very likely over time because we keep repeating offending acts that have a nonzero chance of causing systemic ruin while increasing their scale.

And yet, we continue to release warming gases and pollutants into the atmosphere across the planet. We continue to release novel genes into the wild across the planet with little testing, genes which can and will self-propagate. We continue to disrupt the nitrogen cycle. Repeating such practices only brings us closer to ruin.

When someone says that genetically engineered crops have been around for years and no catastrophe has occurred that person is either a spokesperson for the industry or simply doesn't understand that we are courting hidden risks under time probability. The same can be said for those downplaying the risks of climate change except the industry in question will, of course, be the fossil fuel industry.

So many of our institutions and arrangements have been premised on the idea that we are exposed only to risk under ensemble probability. The banking, finance and investment industry comes to mind. And yet, the 2008 financial crisis showed that we are, in fact, exposed to risk in that industry under time probability. Hidden risks blew up the world financial system only a year after the head of the U.S. Federal Reserve Bank at the time pronounced the system sound.

Without understanding the difference in the two kinds of risk, we will continue to take actions and build institutions for which we believe we understand the associated dangers—when, in fact, we remain entirely in the dark about the chances we are taking and the stakes involved.

Kurt Cobb is a freelance writer and communications consultant who writes frequently about energy and environment. His work has appeared in The Christian Science Monitor, Resilience, Common Dreams, Le Monde Diplomatique, Oilprice.com, OilVoice, TalkMarkets, Investing.com, Business Insider and many other places. He is the author of an oil-themed novel entitled Prelude and has a widely followed blog called Resource Insights. He is currently a fellow of the Arthur Morgan Institute for Community Solutions. He can be contacted at kurtcobb2001@yahoo.com.