February 16, 2010

So What's the Problem?

Recently, I stumbled across an interesting article on the X Prize for zero-emissions automobiles. While I think the article had some merit (I especially liked the concept of using the skin of an automobile to store and release energy), the associated commentary actually got me to thinking about a bigger problems: how do you get from the world as it exists today to one where we have far smaller dependency upon oil, are able to significantly curb carbon emissions and still have a society that is able to grow in terms of its intellectual innovations even as it meets the demands placed upon it by its population?

There are of course several camps of thinking here. The first is the BAU - business as usual - camp, which basically says that we can continue doing what we do today and expect some miracle solution to save us. In this scenario, each problem that emerges is essentially isolated and unrelated to any other, resources are limitless because there will always be some magical piece of technology that will keep us empowered and keep our environment clean and productive, and that you can create economies based upon the movement of electrons representing financial tokens. I refer to this world view as Kurzweil City, named after famed futurist Ray Kurzweil and his belief in the power of technology.

The second camp is the apocalypse view - world oil production is falling even while the population is rising, the environmental systems are under extreme stress and will soon result in massive climate change, and we've passed the event horizon. In this view, the end of civilization as we know it is nigh, and we will be in for a painful, long term depression that will ultimately end up with us huddled in our unheated houses, guns at hand, waiting for the morning as the ravening mobs strip the landscape like locusts under cover of night. The resulting Kunstlervilles, named for writer James Howard Kunstler, ultimately resemble nothing more than 18th century frontier towns set against a backdrop of rusting automobiles and decaying suburbs.

While my own views tend to be more Kunstler than Kurzweil, I think that both are missing the point. Humans adapt. It's what we've done successfully for more than three million years, and there's absolutely nothing to indicate that, as a species we've lost this ability to adapt. At the same time, we usually adapt best in times of maximum adversity ... we're not terribly good at anticipating the need for change, but once change has happened, we are actually quite good at seeing what the landscape looks like and changing our behavior accordingly. What that implies is that both Kunstler and Kurzweil are correct, but the scale on which they are correct are different.

Consider, for instance, the twin problems of climate change and peak oil, both of which I think are in play. It's quite probable that the global climate is in fact heating, but there are three questions that, in my mind, are still very much unanswered:

1) Have we accounted for all externalities? That is to say, can we see with any conclusive proof that there are factors that aren't anthropogenic that are causing the changes in the environment?

2) Are the models that we're creating sufficiently powerful to create an accurate (rather than politicized) view of the behavior of weather? and

3) Are we certain that non-linearities in the model won't ultimately end up inducing a negative feedback look that will dampen factors? I'm thinking most specifically of the North Atlantic Gyre here, and the potential for causing localized cooling effects that could ultimately dampen out the heating effects, though there are other feedback loops in the system that I don't think we've fully taken into account.

Climate change is very important to us right now because our civilization is remarkably sensitive to weather based disruptions, from hurricanes to the massive snow-storm that blanked the eastern US this year, while leaving the Olympics snow-free in Vancouver, but we need to understand that there is a distinction between such climate vulnerability and specific trends. Indeed, the most rational course of action is to develop plans for considering many potential futures, then to fine tune them as any given scenario comes to pass.

Peak Oil is another such issue, and likely a far more immediate one. Again, however, the problems that are associated with Peak Oil tend to be problems that have occurred because we've built an oil based economy, and that economy is becoming increasingly tenuous. I have concentrated on the historical aspects of Peak Oil in other posts as well potential effects down the road, but here I want to look at the question of how do we deal with scenarios where oil supplies become unreliable.

The BAU scenario is becoming evidently increasingly unsustainable long term, but the interesting thing is that slowly and far from uniformly, things are changing. One of the most obvious consequences of the oil-based economy is that it has shaped our cities. Most European and Asian cities were formed before the power resources inherent in oil were available, and as such tend to reflect a pedestrian model.

In North and South America, on the other hand, most of the population growth has taken place in the last one hundred years, and as such has fitted very closely to the rise (and to a certain degree fall) of oil as the primary motive and heat source. Small, largely isolated communities were connected first by rail, then by road, growing larger until they eventually overlapped other communities. Political autonomy in this communities was lost as the benefits of centralized authority took hold.

More importantly, work centers shifted out of these small towns to urban centers, in part because of economies of scale, in part because of the strong need for managers to have their primary operations personnel - financial systems, research and development, production and so forth - as close to the management structure as possible in order to minimize communication and resource management problems.

A certain amount of ego was involved as well - you aren't truly successful as a business unless you have a tall, new tower to dominate the landscape, a symbol (fraught with obvious symbolism) of the overarching control you have compared to everyone else. Because power was centralized, this meant that such psychological issues could readily be rationalized as business ones. Similarly, workers in this system were important only for their skills, and as such required constant babysitting and/or bullying lest they revert to the lying, cheating scum that management knew them to be.

This meant that the work was at an increasing distance from the homes. Here's where I break with Kunstler - I don't believe that the suburbs were created due to poor urban planning, but rather occurred because urban planning can at best only nudge the development of a city by zoning - and fails to take into account the fact that in many cases agglomerated townships had their own views of zoning and planning that were consistent at the time but failed to factor in being swallowed by larger entities.

People moved to the suburbs because of three factors:
1) Cheap oil made living at a distance still more affordable than living closer nearer to the urban center, and provided the opportunity to own nicer property at lower prices,
2) Once a family is established in a house, they will live there for a while, and will only move when economic benefits outweigh the benefits of maintaining residence. This meant that expanding populations will end living farther and farther away because there are simply not enough niches closer in, and this factor usually meant smaller communities getting absorbed into larger ones.
3) Cheap oil and the fact that that the US in particular was a net oil exporter meant that there was significant money for the development of large scale interstate projects and traffic artery construction.

This means that the underlying structure of most cities came about at a time when energy was cheap and money was plentiful, and are increasingly at odds with an era where energy is expensive and money is scarce. It is this mismatch, as much as any, that is causing so many problems in our society.

Yet it is worth appreciating the fact that most of this change has occurred within the last fifty years. While, for a certain generation, this may seem like the bulk of their lives, social memory usually doesn't get baked into stone until after a couple of centuries. In many places, such as here in Victoria, the pre-oil era didn't really end until comparatively recently, and there are many still alive who remember a time when the oil economy wasn't so heavy an influence. This means that for many people (especially the younger ones), the oil economy is itself a relatively transient event, which is what offers up some hope.

The year 2007 is notable for the fact that for the first time, Christmas sales online exceeded Christmas sales in the brick and mortar world. More books are now sold online than are sold offline, and an increasing number of those are eBooks. From the Internet today, you can provide your measurements to any number of vendors  and get a full wardrobe sent to you within a few days, a wardrobe that likely is closer in style and fit than anything you could find in stores. Malls, once the center of retail activity, are increasingly becoming ghost towns, and in some places are being razed and left to go fallow again. Meanwhile online retail presences are growing, even in one of the harshest recessions in living memory.

Once critical business support centers - accounts receivable and payable, research and development, marketing, sales and even management - are increasingly becoming distributed, and in more and more cases are becoming virtualized altogether. The office towers, constructed in part because of the need to consolidate business functions, and in part as somewhat phallic representations of power and dominance, are emptying out, not just because businesses are folding but because businesses increasingly have no need for them - they're white elephants from a different era.

Intellectual services - legal services, medical advice, accounting, design, marketing, etc. - have been migrating to a virtualized state for the last couple of decades, as professionals in these fields chase the money to where the market is ... in this case online. Traditional publishing is in freefall because of this, but after a couple of decades of transition, online publishing is beginning to distinguish itself as a profit center, adjusted to the environment of the web.

Physical services - from hair care to acute medical care to restaurantiers and pubs - make up the bulk of the suburban businesses, but it's easy to underestimate their significance. These are services that effectively can't be virtualized (you can't get a haircut online), but can be distributed. What's more, these businesses are shifting away from the major corporate chains, which are facing increasing challenges because their primary benefit - an ability to distribute large amounts of food inexpensively through the use of uniform packaging, marketing and purchasing economies of scale -  are now being challenged by the mix of higher oil prices and stricter environmental regulations.

Indeed, this last point needs to be reiterated. Many business analysts made the mistake of assuming that the primary reason that companies such as McDonalds proved so popular was because of their effective uniformity of marketing. I don't think that was actually the case, or at least all that major a part of it. The real benefit was logistical - by taking advantage of economies of scale due to inexpensive energy and oil availability, such companies could reduce the overall cost of a meal to well below what the local market could provide, forcing many of those companies out of business, except at the boutique end.

However, once that factor fades - once the real costs of shipping those Big Macs and Fries enter into the equation and the cost of mass producing the raw inputs for those meals rise, the local stores (with much shorter supply lines and generally fresher and healthier product) are more effectively able to compete. This is why the next decade will see a dramatic rise in the number of independently owned restaurants compared to the chains.

The same is true of the big box stores, save that their demise will likely come due to the Internet rather than competitive local stores. However, what's interesting here is that the goods being sold will be more locally produced, likely through networks of vendors working either independently or in conjunction with mediating merchants online.

Again, distribution and shipping costs play a big part here, and these will force a relocalization of both raw materials and finished goods. While the middleman may not be completely cut out of the equation, the chances are good that the middleman is likely not going to be spending large amounts of money on mall outlets when they can spend the money online to minimize distribution costs.

This raises questions about the viability of the Walmart model moving forward. Walmart is fundamentally dependent upon the oil economy model. It's goods are generally produced in low labor cost and low materials cost regimes, then distributed in bulk on oil-intensive transport tankers. They have been competitive because of their ability to undercut local producers. As that competitive edge disappears (and local vendors begin to become cost competitive again), expect the big box stores to be closed.

Manufacturing has similar patterns. Manufacturing overall tends to be local, and because of the potential environmental issues, manufacturing in general has been more distributed than other businesses. Because outsourcing of manufacturing is becoming increasingly expensive, local manufacturers should end up being far more competitive than they have been, and will better be able to supply localized economies.

What this means is that urban use patterns are now shifting - intellectual work no longer needs to be tied to an urban center (because these services are being done over the web), which strengthens local suburban communities. Manufacturing and physical services  similarly are becoming more localized and shifting away from either urban centers or outsourced vendors. This will tend to strengthen suburban centers as the needs for such services rise, though such centers will likely become more municipal than commercial.

The final factor in all of this is energy production. As you shift towards more localized and distributed forms of energy production (and alt-energy forms), this tends to provide additional revenues that accrue at the local level. Large scale energy production - coal, oil, nuclear, etc. - on the other hand, favor transnational corporate control of energy resources, as does the oil distribution network (especially when the country is a net importer of oil). This money in turn usually cycles itself back into the local economy, where it can be used to continue upgrading existing infrastructure, setting up a virtuous cycle again.

This process won't happen evenly, and it definitely won't happen without some (perhaps a lot) of pain. It will give more power to specific regions, and metropolitan areas within regions, at the expense of the larger nation-state (the US, Canada and Mexico especially) and rural areas (which currently tend to have a disproportionate amount of influence in the US especially given their greater weight in the Senate).

It will also favor those regions that have the best mix of urban and rural distribution, available water supplies, ports and the like, while coming down especially hard on those regions that are missing key pieces of this mix (for instance, Scottsdale, AZ has few water resources and little in the way of arable farmland, even though they have the potential for solar energy, while areas like Seattle or San Francisco are reasonably well endowed with all of these).

However the speed at which this occurs will depend largely upon the effectiveness of the existing economic power structure in obstructing the changes. That it will occur is a given - these are very hard and fast megatrends at work here - but such an economic transition favors very different players, and the oil economy players have the advantage of incumbency at this stage.

I'm coming to believe that political considerations - the structure of power sharing within a society - are increasingly driven by economic considerations rather than vice versa, though politics generally dictates the degree to which economic costs are externalized to the society at large.

Many economies globally are now going through a period of economic decline as positions favoring the oil economy are being unwound, mostly due to the realization that the underlying assumptions of effectively limitless energy resources, which lays at the foundation of our current credit-based economy, are no longer valid. These assumptions were facile on the surface, but were vital for the oil economy to get access to the necessary funds that would finance the continued development of political structures and labile populations friendly to this economic viewpoint.

The very likely second leg of deflation, now beginning to unfold in Europe as the Maastricht treaty disintegrates though likely to come back round to North America as American and Canadian investments in Europe are hit by the largest margin calls in history, are only continuing the unwinding of these assumptions, further weakening the oil economy and likely causing the political unrest necessary to affect meaningful political change, even if such change ends up redrawing political boundaries to more accurately reflect economic rather than historical realities.

To that end, I'm increasingly of the opinion that while you will see political volatility and a great deal of economic instability over the course of the next fifteen to twenty years, these changes are the necessary precursors to the transition to a new economy and new political reality. It will force us to rethink a great number of assumptions, from the nature of work and the mechanisms of valuation to how we build our cities (and countries) moving forward. It will look superficially more agrarian, but will hide a sophisticated technological underpinning.

It will offer fewer opportunities for "getting rich", but potentially a healthier, more satisfying standard of living for a larger percentage of the population. It will not be uniform - by the end of the twenty first century it is very likely that there will be regions that are technologically and socially far more advanced while other regions may almost be feudal in nature, based largely upon choices made in the next decade.

This should be an interesting time.

February 13, 2010

Economic Hurricane Season

This is my first blog on this platform in a while, though I will likely be writing more from here moving forward. My life seems to have moved into one of those strange interstitial periods where, despite the best of intentions, little seems to be happening. Over the years I've noticed that these are often gestational times, when the batteries are recharging and projects that had been sidelined or abandoned are re-examined and revitalized.