The Daily Reckoning

Well, August washed up. It was the worst month for US stocks in almost a decade. And yesterday didn’t help. The Dow couldn’t manage a rally. It rose just 4 points.

The British newspaper, The Telegraph, has the story:

Those fears took centre stage again during the final day of trading.

In New York, markets enjoyed some brief respite from the blizzard of weak data as reports on the US housing market and consumer confidence proved better than feared. The Conference Board’s index of consumer confidence climbed to 53.5 last month from 51 in July, while the latest reading from the respected S&P/Case-Shiller index showed that home prices were up 4.2pc in June compared with a year ago.

The day’s rally proved short-lived, however, after the minutes of the Federal Reserve’s latest meeting returned investors to the summer’s familiar themes. Fed chairman Ben Bernanke has spent the past few weeks facing increasing pressure from markets to publicly declare he will do more to fight the prospect of a second recession if the recovery stumbles further. According to the minutes, some members of the Fed’s Open Market Committee saw “increased downside risks to the outlook for both growth and inflation”.

That admission left the Dow up just 4.99 points at 10,014.72 for the day, while the S&P ended the day up 0.41 at 1,049.33.

As predicted on this page, both Martin Wolf and Paul Krugman are taking the low road. Not that we wouldn’t take it too, were we in their position. They urged the Obama team to undertake massive programs of “stimulus.” Now that the stimulus hasn’t worked, they say it wasn’t massive enough.

And thank God the administration at least took some of our advice, they add. Otherwise, things would be a lot worse!

In today’s Financial Times, Wolf refers to a recent paper by Alan Blinder and Mark Zandi. The two use a “standard macro-economic model” to determine that without the feds’ intervention the decline in GDP would have been three times worse and unemployment would have risen to over 16%. And, can you believe it, we would have had a federal deficit of $2.6 trillion.

Oh man, oh man…we’re so grateful to Wolf, Krugman, Summers, Obama, Bernanke and all the other savants who protected us from such a dreadful fate.

But wait a minute, this “standard macro-economic model” sounds great and all…but we can’t help but wonder. It can predict precise outcomes based on federal policy inputs, right? That is, if the feds were to do such and such…it tells us what will happen, right? And Wolf says it’s “standard,” so we imagine that you can get it at any Wal-Mart or filling station. So, the Obama team must have had it two years ago, right? We can’t help wonder if this was the same model they used when they forecast that unemployment wouldn’t go over 8% – if Congress agreed to the stimulus bill the administration proposed. Must have been a different one… Because Congress did pass the stimulus bill and unemployment rose over 9% anyway.

And it’s still over 9% – almost 2 years after the stimulus effort got underway.

So, maybe this “standard macro-economic model” is full of… But let’s imagine that it isn’t. Let’s allow our imaginations to take flight…to soar…to loose themselves from the gravity of worldly cares or practical reality. Let’s imagine that these economists have a clue!

Imagine that the feds had done nothing – which was more or less standard policy for the nation from its founding in 1776 up until the middle of Herbert Hoover’s term in 1930…and for all the years that preceded them…all the way back to the founding of Rome. Now, let’s imagine that Blinder and Zandi are right. Without fed intervention, GDP would have sunk 12% – three times more than the actual loss…and half the loss of the Great Depression. Well, that would have been a disaster, right?

Well. Maybe not. It might have been a blessing. The point of a correction is to correct. The Blinder/Zandi study tells us that the economy had mistakes equal to 12% of GDP. Okay…well, maybe the correction overshoots. Who knows? But think of the crazy years of the Bubble Epoque…when lenders were giving unemployed people a mortgage for 110% of the inflated value of a house. Think about the Private Equity deals based on growth assumptions that were hallucinatory. Think about the hundreds of trillions’ worth of derivatives based on complex formulae that were phony and silly? Think of all the decisions made on the assumption that consumer credit would continue to expand as it had from 1949 to 2007. Was one of every 8 of them too optimistic? Too ambitious? Too unrealistic? We’d be surprised if there weren’t more errors…far more than 12% of GDP.

Now ask yourself…what good was done by failing to correct those mistakes? By failing to wash out the excess debt? Failing to allow insolvent banks to go broke? Failing to permit worn-out, uncompetitive businesses to die in peace?

We don’t know how many mistakes there were. We don’t know how far GDP SHOULD go down. And we don’t know what would have happened if willing buyers and sellers had been allowed to sort themselves out in the age- old ways – by panic, default, bankruptcy, restructuring, and reconstruction.

We don’t know. We’ll never know. But there is no reason to think we’d be any worse off if we’d found out a year ago. A 12% drop in GDP might have been just what we needed. We could be on the road to prosperity now, rather than looking at another 5 to 15 years of stagnation, decline, and desperation.

And more thoughts…

But we have good news. Yes, dear reader, genuine, no-doubt-about-it good news.

Two bits of good news, actually.

First, the café across the street from our office serves a proper café au lait. A real one.

In Paris these days, if you ask for a “café au lait” they mark you as a foreigner. Parisians ask for a “café crème.” Trouble is, the café crème doesn’t have much milk in it. It tends to be a bit watery and bitter.

A proper café au lait, on the other hand, is served with a little pitcher of hot milk. Not many cafes in Paris still serve it that way – unless you ask them specifically. Fortunately, the one across the street still does it the right way.

Second, and perhaps more important, we discovered yesterday that tea- totallers die sooner than heavy drinkers. This comes as a great relief to your editor. He sat down last night with a bottle of Lussac St. Emilion to celebrate.

Here’s the story from John Cloud (originally appearing in Time Magazine):

Why Do Heavy Drinkers Outlive Nondrinkers?

One of the most contentious issues in the vast literature about alcohol consumption has been the consistent finding that those who don’t drink actually tend to die sooner than those who do. The standard Alcoholics Anonymous explanation for this finding is that many of those who show up as abstainers in such research are actually former hard-core drunks who had already incurred health problems associated with drinking.

But a new paper in the journal Alcoholism: Clinical and Experimental Research suggests that – for reasons that aren’t entirely clear – abstaining from alcohol does actually tend to increase one’s risk of dying even when you exclude former drinkers. The most shocking part? Abstainers’ mortality rates are higher than those of heavy drinkers.

Moderate drinking, which is defined as one to three drinks per day, is associated with the lowest mortality rates in alcohol studies. Moderate alcohol use (especially when the beverage of choice is red wine) is thought to improve heart health, circulation and sociability, which can be important because people who are isolated don’t have as many family members and friends who can notice and help treat health problems.

But why would abstaining from alcohol lead to a shorter life? It’s true that those who abstain from alcohol tend to be from lower socioeconomic classes, since drinking can be expensive. And people of lower socioeconomic status have more life stressors – job and child-care worries that might not only keep them from the bottle but also cause stress-related illnesses over long periods. (They also don’t get the stress-reducing benefits of a drink or two after work.)

But even after controlling for nearly all imaginable variables – socioeconomic status, level of physical activity, number of close friends, quality of social support and so on – the researchers (a six- member team led by psychologist Charles Holahan of the University of Texas at Austin) found that over a 20-year period, mortality rates were highest for those who had never been drinkers, second-highest for heavy drinkers and lowest for moderate drinkers.

The sample of those who were studied included individuals between ages 55 and 65 who had had any kind of outpatient care in the previous three years. The 1,824 participants were followed for 20 years. One drawback of the sample: a disproportionate number, 63%, were men. Just over 69% of the never-drinkers died during the 20 years, 60% of the heavy drinkers died and only 41% of moderate drinkers died.

These are remarkable statistics. Even though heavy drinking is associated with higher risk for cirrhosis and several types of cancer (particularly cancers in the mouth and esophagus), heavy drinkers are less likely to die than people who have never drunk. One important reason is that alcohol lubricates so many social interactions, and social interactions are vital for maintaining mental and physical health. As I pointed out last year, nondrinkers show greater signs of depression than those who allow themselves to join the party.

The authors of the new paper are careful to note that even if drinking is associated with longer life, it can be dangerous: it can impair your memory severely and it can lead to nonlethal falls and other mishaps (like, say, cheating on your spouse in a drunken haze) that can screw up your life. There’s also the dependency issue: if you become addicted to alcohol, you may spend a long time trying to get off the bottle.

That said, the new study provides the strongest evidence yet that moderate drinking is not only fun but good for you. So make mine a double.

Bill Bonner
for The Daily Reckoning Australia

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More articles from The Daily Reckoning….

Zero Hedge

Below are the biggest holders of Mariner Energy stock. #1, with 10 million shares, is John Paulson who has bought the stock as part of a merger arb strategy with Apache. Other in the top 5 include Vanguard, Fidelity, Prudential, GMT Capital.

More articles from Zero Hedge….

By Karl Denninger, The Market Ticker

Am I supposed to be impressed with this?

New orders for manufactured goods in July, up following two consecutive monthly decreases, increased $0.6 billion or 0.1 percent to $409.5 billion, the U.S. Census Bureau reported today. This followed a 0.6 percent June decrease. Excluding transportation, new orders decreased 1.5 percent.

So, ex-transports, which are terribly-volatile, the report was moderately-weak.

Shipments, also up following two consecutive monthly decreases, increased $4.4 billion or 1.1 percent to $417.1 billion. This followed a 0.5 percent June decrease. Unfilled orders, down following three consecutive monthly increases, decreased $1.1 billion or 0.1 percent to $802.8 billion. This followed a 0.1 percent June increase. The unfilled orders-to-shipments ratio was 5.53, down from 5.59 in June.

So unfilled orders – that is, committed work for future delivery, continues to decline.  That is, the inventory build meme is overbought in the market, and yet there appears to be little or no recognition of the obvious problem on a forward basis this creates for profits.

Nothing really stands out in this report for me, save one thing – transports.  Up materially, especially light trucks.  That’s interesting, but one month does not a trend make.  This series tends to be very volatile, and remember that this report is also in arrears a month when auto sales were allegedly great and continuing to improve.  Well, we got those numbers yesterday for the auto sector, and they sucked – so next month this segment of the report should show a meaningful contraction.  We’ll see.

Markers for future hiring are not going anywhere good, with computers being down 3.1% after a 1.7% increase last month and a 0.1% increase the month prior – certainly nothing to write home about.  The one place in that category that does look good is storage devices, which showed a 13.7% increase, but this sub-index is extremely volatile, having been down 12% just two months before.  Machinery was down 4% with big drops in industrial machinery (6.7%) and power-generation gear (21%)

All in all this is a fairly weak report.  It’s not a disaster, but it doesn’t show "strong growth" or anything like it – more a "muddle through" at a depressed level of economic activity.

The market yawned, and with apparently good cause – I see nothing in here that turns my head either direction.

More articles from the Market Ticker….

Dr. Adam Brandt of Stanford University’s Department of Energy Resources Engineering sent us a copy of a paper he wrote called Review of mathematical models of future oil supply: Historical overview and synthesizing critique. There seem to be quite a few things of interest, so I have summarized the paper, since the author did not have the time to do this. The box quotes are from the paper.

This paper has two goals. First, it provides a systematic review of oil depletion models produced to date. This serves to make obscure past works (often difficult to find) available to a wider audience so as to limit repetition of past efforts. Second, this paper provides synthesizing critique of previous modeling efforts, with the aim of improving future oil depletion modeling.

A major conclusion of the study is that existing models fare poorly at prediction:

Models based on quite disparate assumptions (e.g., physical simulation vs. economic optimal depletion) have produced approximately bell-shaped production profiles, but data do not support assertions that any one model type is most useful for forecasting future oil production. In fact, evidence suggests that existing models have fared poorly in predicting global oil production. The greatest promise for future developments in oil depletion modeling lies in simulation models that combine both physical and economic aspects of oil production.

Types of Models

Brandt describes four kinds of oil depletion models:

1. Curve Fitting Models

Curve-fitting models of oil production have been used since the 1950s. A variety of models exist, but their general approach is as follows.

1. Define a mathematical function to statistically fit to historical production data.
2. Include constraints to improve the quality of model fit.
3. Fit the constrained model to historical data to project future production.

Curve-fitting models vary in the function used, in the use of ultimately recoverable resources (URR) as a constraint and in the usage (or not) of symmetric model functions.

The paper provides descriptions of various curve fitting models, including Hubbert’s logistic model.

2. System simulations.

Simulation models (in our classification scheme) differ from curve-fitting models as follows: simulation models explicitly represent underlying physical and/or economic mechanisms that govern oil discovery and extraction, letting the shape of the production profile emerge from these mechanisms rather than specifying it in advance. These models include a broader range of independent variables, addressing a key problem of curve-fitting models noted by Taylor [38]: “No cause-and-effect relationship exists between time and the exploitation of crude oil.”

Thus, with the simulation models, one does not need to assume that the oil will be pumped out as quickly as possible. Oil production can follow demand, or some other approach. Brandt comments that a major difficulty of complex simulation models is the numerous input data that are required to parameterize the functional relationships. Figures 3 and 4 give an example of parts of a simulation model.

3. Bottom-up models

Bottom-up models use detailed field- or project-level data to “build up” projections of production from larger regions (such as a nation or the world). Bottom-up modeling has become increasingly prominent as discoveries have slowed and an increasing fraction of future oil is expected to come from already-discovered fields [52].

The most widely published bottom-up model is that of Campbell and co-authors, produced since the mid-1990s [53-55] using national-level models of production to generate global predictions. . .

Skrebowski has produced a bottom up model [58e61], using a database of oil field “megaprojects” e oil field development projects above a threshold size. Because large projects provide the majority of new oil output, this approach provides insight into short-term capacity increases.

4. Economic models of Oil Depletion

The major subcategories of these are

1. Economic optimal depletion theory, such as studied by Hotelling.

2. Economietic models of oil depletion, such as developed by Fisher and later by Kauffman and Cleveland.

Drawbacks and problems of existing models

1. Curve Fitting Models

Unfortunately, curve-fitting models are often used to make overly specific predictions of future production, ignoring many of the difficulties with such an approach.

An example is given by the excessive importance placed by some analysts on the supposed novelty and accuracy of Hubbert’s 1956 prediction. First, Hubbert’s prediction was predated by at least four publications that provided bell-shaped graphs of future U.S. oil production [13,14,81,82], and no fewer than 7 estimates from the 1950s predicted a peak in US oil production between 1963 and 1973, the approximate range of Hubbert’s low-high predictions (see Table 1). Second, Hubbert’s prediction of a peak in 1970 was based on his high value of URR, which he considered unlikely to be ach- ieved (and which itself was an underestimate). Interpretations of these facts vary: one could argue that Hubbert’s method was not extraordinary, as other methods also came close to predicting the peak date. . .

Another often neglected fact is that all of these studies of the 1950s underestimated URR, some significantly so, despite their reasonably correct projections of the peak date (see Table 1). Cumulative US production has already exceeded 200 Gbbl and significant reserves still remain. Thus, production has not dropped as quickly as Hubbert (or the other authors above) thought that it would, and the US curve is asymmetric [83].

Major issues Brandt raises about curve fitting models include

a. Using exogenous estimates of URR to constrain curve-fitting models is problematic because estimates of URR have been too low in the past.

b. The use of logistic or bell-shaped functions is difficult to support with rigorous scientific reasoning.

c. Production profiles are often asymmetric, with slower rates of decline than rates of increase.

d. Curve fitting models do not account for economic factors, such as demand or resource substitution.

2. Simulation Models

a. Authors often make huge assumptions about the assumed functions and the parameters of the model.

b. Models are often unstable and finely balanced between positive and negative feedbacks. They may omit the role of inertia.

c. While models may fit past data well, they often have poor predictive powers.

3. Bottom’s up models

a. If a person builds a model from a magaprojects data base, or similar data base, the person needs more, rather than fewer assumptions about the process–peak production, decline rate, use of enhanced oil recovery

b. It is difficult to model projects not included, like infill drilling, workovers, and use of enhanced oil recovery.

c. The results are generally not reproducible; there is much reliance on the modeler’s judgment.

4. Economic Models

So far, they have been kept simple, but their predictive value has been low. They need to include political factors, but it is unclear how to include them.

The Problem of Prediction

Existing models have fared poorly in predicting global oil production. Even for models that are commonly thought to be successful, after-the-fact interpretation of the success or failure of a predictive effort is not easy (recall the discussion above of Hubbert’s successful prediction). . .

This author’s judgment with respect to the predictive value of models is as follows (noting that these topics are the source of much current debate):

1. Simple curve-fitting models can provide a first-order understanding of future production, assuming a given level of URR and no significant shocks to the system (e.g., demand continues to grow at rates within historical ranges). Such models are likely sufficient to predict the decade of peak production for an estimate of URR. The mathematical logic here is that consumption is so high during the years of peak production that minor variations in URR, or minor deviations due to political or economic factors, will not serve to significantly affect the date of the peak [111]. Unfortunately, such a conclusion is often of little practical use: major disruptions (e.g., the oil crises of the 1974 and 1979), or major errors in URR estimates have occurred in the past, and could occur again.

2. More-detailed mechanistic models (e.g., bottom-up, econometric), exhibit greater fidelity in reproducing historical data and are therefore likely more useful for near term predictions. But this advantage likely wanes for long-term forecasts because they are no less “brittle” with respect to uncertainties than other model types.

3. The most promising avenue for increasing our understanding of oil production lies in integrating the economic and physical factors of oil production.

4. There is no scientific justification for making specific predictions (e.g., the year of peak production) with any of the surveyed mathematical models: the uncertainties involved make such predictions of little use. Efforts should move away from making these kinds of predictions, and toward understanding the impacts of the inevitable transition to oil substitutes.

Improving Oil Depletion Modeling

It is no longer justifiable to build oil depletion models that neglect the reality of economic substitution with alternative resources like oil sands or coal-based liquid fuels. Nor should economic models neglect the underlying physical, geological, and engineering considerations that fundamentally drive the economics of oil production. Future progress will require building integrated models that account for both the economic and physical realities of oil production.

Interview with Michael Smith (Part 2 of 2)

I feel the peak/plateau period is much delayed because of the recession. Currently I am looking at around 2020 – perhaps as late as 2025. But of course it is dependent on what happens to the global economy (and the environment) between now and then. When I first started forecasting in the late 1990s, I had a production plateau beginning around 2016. Over time, supplies got tighter and tighter and oil prices started to rise, and the plateau moved nearer to around 2012. Now it has moved out to 2020, showing how uncertain this modeling can be because so many technological, financial, political and social variables are at work. The fluctuation points to volatility of course which is a signal of tight energy supply. If there is a new surge in economic growth and China and India continue to grow and mop up oil supplies, then it will move back to 2016 very quickly.

Pemex Plans to Invest $269 Billion in Next 10 Years to Increase Oil Output

Petroleos Mexicanos, the state-owned oil company, plans to invest $269 billion by 2019 to increase production, the company’s chief executive officer said.

Pemex, as the company is known, should not have trouble having its planned investments approved by Congress and will spend about $27 billion a year over the next decade, CEO Juan Jose Suarez Coppel, said today at a conference in Mexico City.

Mexico sees big potential near Tsimin oil find

MEXICO CITY (Reuters) – Mexico’s state oil company Pemex is increasingly optimistic about the potential of what appears to be a new cluster of light crude oil fields around its Tsimin discovery, according to company executives.

The side-by-side Tsimin and Xux discoveries are believed to hold the equivalent of 1.5 billion barrels of proved, probable and possible oil reserves said Manuel Teran, a Pemex engineer working on the discoveries, at a petroleum engineering conference this weekend.

For BP, post-spill advertising comes at an unknown cost

FORTUNE — The coverage of BP’s Deepwater Horizon spill is teaching the typically secretive oil industry something about life in the limelight. Now, the company has to account for every cent it spends.

Bahamas Bans Offshore Drilling

The Public is advised that The Ministry of The Environment has suspended consideration of all applications for oil exploration and drilling in the waters of The Bahamas. The Ministry seeks, by this decision, to maintain and safeguard an unpolluted marine environment for The Bahamas, notwithstanding the potential financial benefits of oil explorations.

Additionally all existing licenses will be reviewed to ascertain any legal entitlement for renewal.

Coal India May Set Up Power Plants Because of Shortfall in Rolling Stock

Coal India Ltd., the world’s largest producer of the fuel, said it may be forced to set up power plants to use coal that’s piling up because there aren’t enough railway wagons to carry supplies to utilities.

“It’s not a business we would naturally like to be in because there are already so many players,” Chairman Partha Bhattacharyya said in New Delhi today. “If stocks keep building up, we may not have an option.”

Russia to protect domestic car makers with higher import duty

Russia will gradually raise the import taxes for the foreign-made cars, Russian Prime Minister Vladimir Putin said Monday.

Putin noted this would be done to stimulate foreign companies to build their production facilities in Russia.

Electricity and climate change

Also as a result of global warming, the countries of this region are witnessing dramatic increases in the demand for electric power, as the use of air-conditioning increases in households, shops, places of worship, offices, hotels and factories. And as a result of the exceptional hot weather, the sale of all types of air-conditioning devices flourished, and their stocks were effectively depleted in Lebanon, Jordan, Syria, Egypt and other countries, while their retailers achieved exceptional profits, after taking advantage of the circumstances.

Why “green wizards” get us nowhere new…

So, first question, what is a ‘green wizard’? Greer defines green wizards thus, “individuals who are willing to take on the responsibility to learn, practice and thoroughly master a set of unpopular but valuable skills – the skills of the old appropriate technology movement – and share them with their neighbours when the day comes that neighbours are willing to learn”. The idea, as I read it, is that any notion of a co-ordinated response, a la Heinberg’s ‘Powerdown’, a scenario where communities self-organise and work with, or without, their local authorities, to start the rebuilding of that settlement’s resilience, reduce its oil dependency and carbon footprint, is now for the bin, condemned as impractical and unrealistic. Greer appears to have given up any notion that such a thing might be possible, stating “a movement is a great thing if you want to hang out with congenial people and do interesting things together. It’s just not usually a good way to make change happen”.

Are People Smarter Than Chipmunks?

After witnessing this eccentric behavior, I began wondering why the chipmunk would behave so illogically. It didn’t take too long to realize that it simply doesn’t possess the right equipment to understand the threat posed by a car. A chipmunk’s brain and the behavior produced by it are the result of ages of natural selection – a process that took place in the absence of roads and cars. The mind of a chipmunk, therefore, is incapable of properly interpreting the data coming its way, especially when it’s coming at 60 miles per hour.

The chipmunk’s maladaptive behavior has some prominent parallels with our own predicament. The data are approaching us at a fast and furious clip. We have ample and disturbing evidence about climate destabilization, dwindling energy resources, social breakdowns, and a host of environmental maladies. We know that the economy is a subsystem of the finite planet, and that increasing the scale of the economy impinges on the earth’s ecosystems. In an age of biodiversity die-offs and political buy-offs, however, we don’t seem to possess the wherewithal to interpret the data correctly.

Lenders Back Off of Environmental Risks

Blasting off mountaintops to reach coal in Appalachia or churning out millions of tons of carbon dioxide to extract oil from sand in Alberta are among environmentalists’ biggest industrial irritants. But they are also legal and lucrative.

For a growing number of banks, however, that does not seem to matter.

After years of legal entanglements arising from environmental messes and increased scrutiny of banks that finance the dirtiest industries, several large commercial lenders are taking a stand on industry practices that they regard as risky to their reputations and bottom lines.

New Study Links Toxic Pollutants to Canadian Oil Sands Mining

Native Canadians living downstream from the oil sands mines in Alberta have long contended that their high cancer rates were related to the expanding excavation of bitumen for the production of synthetic crude. Their assertions have been disputed by the reports of a joint oil industry-government research panel that concluded that natural causes — and not mining — were responsible for the high levels of various metals in the sub-Arctic Athabasca River.

But now a new study in the journal Proceedings of the National Academy of Sciences is backing the position of the Native Canadians. Led by several University of Alberta researchers, the study found that unusual levels of lead, mercury, zinc, cadmium and other toxic pollutants were found near oil sands mining sites or downstream from them. The levels exceeded federal and provincial government guidelines.

Crude Oil Heads for First Monthly Slide Since May on Slowing Global Growth

Oil fell, headed for its first monthly decline since May, before a report forecast to show U.S. crude inventories increased to the most in a month.

Futures dropped as much as 1.7 percent, extending their decline from the highest level in a week reached on Aug. 27, after the Commerce Department said incomes rose 0.2 percent, less than the 0.3 percent estimate by economists surveyed by Bloomberg News. An Energy Department report tomorrow may show crude stockpiles gained 1.55 million barrels last week.

Oil Supply Climbing to One-Month High in Bloomberg Survey

U.S. crude oil inventories probably increased to a one-month high last week amid signs that U.S. economic growth is slowing, a Bloomberg News survey showed.

Supplies rose 1.55 million barrels, or 0.4 percent, in the seven days ended Aug. 27 from 358.3 million a week earlier, according to the median of 12 analyst estimates before an Energy Department report tomorrow. The gain would leave stockpiles at the highest level since July 23.

OPEC Oil Output Declined on Iraqi Pipeline Bombing, Bloomberg Survey Shows

The Organization of Petroleum Exporting Countries’ crude-oil output fell in August to a seven- month low, led by Iraq, where production was hobbled by a pipeline bombing, a Bloomberg News survey showed.

Production slipped 75,000 barrels, or 0.3 percent, to an average 29.15 million barrels a day, the lowest level since January, according to the survey. Output by members with quotas, all except Iraq, dropped 5,000 barrels to 26.805 million, 1.96 million above their target.

Japan Issues Storm Warnings, Cancels Okinawa Flights as Typhoon Approaches

Typhoon Kompasu slammed Japan’s southern island of Okinawa, causing the country’s two biggest airlines to cancel flights, disrupting some shipping and closing an oil refinery owned by Brazil’s Petroleo Brasileiro SA.

Ras al Khaimah seeking electricity for growth

Ras al Khaimah’s Government is in talks with the Federal Electricity and Water Authority (FEWA) to boost power supplies to the emirate as it attracts more businesses to its industrial zones and completes development projects.

Russia eyes Rosneft sale

Russia may consider selling a stake in state-controlled oil producer Rosneft in 2011 to 2013, Economy Minister Elvira Nabiullina said today.

LUKOIL to get tax breaks for Caspian oil fields

(Reuters) – Russia’s No.2 oil firm LUKOIL’s CEO said on Tuesday that the government is ready to introduce tax breaks for oil extracted from the company’s Korchagin fields on the Caspian Sea.

‘Fracking’ fractures N.Y. county

A controversial method of natural gas drilling — known as “fracking” — has begun to tap the energy-rich Marcellus Shale, a huge geological formation that underlies much of New York, Pennsylvania, Ohio and West Virginia. In New York, fracking has been stalled by opposition from environmental groups, legislators and people such as the Diehls.

Bad weather delays BP bid to recover blowout preventer

WASHINGTON (AFP) – A bid to recover a key valve that failed to prevent the blowout of the BP well in the Gulf of Mexico has been delayed because of bad weather, the pointman for the US response to the oil spill said Monday.

“We are in a hold pending calming of the current weather,” retired coast guard admiral Thad Allen told reporters, adding that it would be two or three days before the operation could begin.

No gas concerns Memphis officials (Michigan)

Two gas stations in the city but no gas to be pumped has prompted Memphis Mayor Dan Weaver to explore strategies for getting a station open to serve residents.

“I’ve been spinning my wheels talking to people trying to get us a gas station in town,” he said at a recent City Council meeting where he asked officials to consider options such as asking the city’s attorney to advise on issues such as eminent domain.

Stickers would help auto buyers compare fuel economy

DETROIT — In its first major overhaul of fuel-economy ratings in 30 years, the Environmental Protection Agency and the Department of Transportation on Monday released two proposed window stickers designed to make it easier for consumers to compare vehicles.

One version gives cars and trucks a grade from A+ to a D, compares vehicles with three sliding scales and gives an estimated annual fuel cost. The other version omits the grade. At first, only electric vehicles would rate an A+.

Toyota Prius May Lead Japan Car Sale Collapse as Subsidies End

The Prius hybrid has spearheaded sales growth for Toyota Motor Corp. in Japan for more than a year, helped by government subsidies. The model will likely bear the brunt of plunging demand as the support ends.

“A collapse in sales is unavoidable,” said Hiromi Inoue, the new-car sales chief for Tokyo Toyopet Motor Sales Co. “The daily pace of orders for the Prius is already dropping. We are bracing ourselves for the coming crisis.”

Russian billionaire Prokhorov to roll out hybrid car models in December

Russian billionaire Mikhail Prokhorov will present three electric vehicle models in December for public approval, he said on Tuesday.

“If they don’t like them, they can say ‘we don’t want these cars.’ We will hold a vote on the Internet,” said Prokhorov, an active blogger.

Prokhorov said he will decide where to produce the cars after the presentation.

The Biking Boom Breeds Discontent

Mayor Michael R. Bloomberg and other city leaders have praised the increase in cycling for reducing congestion and pollution and making the city streets safer overall. To accommodate the surge in bike commuters, the city has installed hundreds of bike racks and roughly 200 miles of new bike lanes in the past three years, with plans for future expansion.

Yet according to a recent weeklong investigative series by Tony Aiello, a reporter with New York City’s WCBS-TV (Channel 2), the cycling boom is breeding discontent. Titled “Bike Bedlam,” the segments turned a critical eye on reckless riders who flouted traffic laws, and profiled a young father who was killed by a cyclist riding the wrong way on a one-way street in Midtown Manhattan. A former bike shop owner declared that cyclists were “way out of control.”

Blowin’ in the Wind

Pattern Energy wants to do what T. Boone Pickens couldn’t: deliver Texas’ overabundance of wind power to less-windy states.

The wind and transmission line developer aims to build a $1 billion, 400-mile transmission line to carry electricity generated by Texas wind turbines to Mississippi where it could be distributed across existing lines to Georgia, Alabama, Tennessee, and other states in the South.

Red Books And Yellowcake – The Permanent Quest For Uranium

Only taking the world’s present 439 civil reactors and ignoring the 200-plus reactors called “research and military”, these civil reactors will need about 68 000 tonnes of uranium in 2010, but world mine output will be less than 55 000 tonnes. If the vaunted “Nuclear Renaissance” takes place as planned by the industry and about 200 – 225 new reactors are added in 2010-2020, world uranium fuel needs will grow to about 125 000 tonnes a year by 2020.

And You Thought Radiation Was a Problem for Nuclear Plants?

A power plant has overexposed its workers to radiation, and the Nuclear Regulatory Commission is proposing a fine. The plant, though, is not a reactor; it runs on coal.

E.P.A. Turns Down Request to Ban Lead Bullets

The Environmental Protection Agency on Friday rejected a request that it ban lead bullets, saying it does not have the legal authority to do so. The American Bird Conservancy and the Center for Biological Diversity had petitioned for the ban.

To Win, the Green Movement Needs to Understand Leverage, not Just Footprints

A few years ago I got into a heated debate about Al Gore’s Inconvenient Truth with a green-minded friend of mine. My hippy friend couldn’t stand the movie—not because of anything it said, but because of the ‘hypocrisy’ of flying around the world to preach about climate change. “Doesn’t he know this sends his carbon footprint through the roof?!” exclaimed my irate drinking buddy.

“He probably doesn’t care.” replied I. “Nor should he.”

I’ve wondered before why so much of the environmental movement is focused on individual virtue instead of collective success. Yet I’m increasingly realizing that that’s just one part of a broader issue I have with greens—we spend too much time talking about impact, and not enough talking about leverage.

Greenpeace claims to have shut down Greenland oil well

Greenpeace claims its activists have shut down a ”dangerous” oil drilling operation by a British energy company in the Arctic.

Author Simon Singh Puts Up a Fight in the War on Science

The British Chiropractic Association sued Singh, hoping to use Britain’s draconian libel laws to force him to withdraw his statements and issue an apology. Losing the case would have cost Singh both his reputation and a substantial amount of his personal wealth. Such is the state of science, where sometimes even stating simple truths (like the fact that there’s no reliable evidence chiropractic can alleviate asthma in children) can bring the wrath of the antiscience crowd. What the British chiropractors didn’t count on, however, was Singh himself. Having earned a PhD from Cambridge for his work at the Swiss particle physics lab CERN, he wasn’t about to back down from a scientific gunfight. Singh spent more than two years and well over $200,000 of his own money battling the case in court, and this past April he finally prevailed. In the process, he became a hero to those challenging the pseudoscience surrounding everything from global warming to vaccines to evolution.

Three degrees is at least one too many

It is fittingly ominous that 2010, year of the next big climate change conference, has been the hottest in recorded history. The heat rises inexorably yet the world dithers and looks away. None of the excitement that surrounded the opening stages of the climate summit at Copenhagen last year looks like materialising this November at Cancú*in Mexico.

Japan Forsees Starting Carbon-Emissions Trading in 2013, Panel Reports

Japan plans to start emissions trading in 2013, as the government revived a climate-protection draft law that was scrapped earlier this year when then Prime Minister Yukio Hatoyama resigned.

Cap-and-Trade Is Beginning to Raise Some Concerns

Critics have warned for years that this form of offsetting would encourage profiteering, with little or no value in efforts to curb climate change.

More recently, opponents of offsetting have likened the system to the kind of financial engineering on Wall Street that helped precipitate the recent banking crisis.

Review Finds Flaws in U.N. Climate Panel Structure

UNITED NATIONS — The United Nations needs to revise the way it manages its assessments of climate change, with the scientists involved more open to alternative views, more transparent about possible conflicts of interest and more careful to avoid making policy prescriptions, an independent review panel said Monday.

The review panel also recommended that the senior officials involved in producing the periodic assessments serve in their voluntary positions for only one report — a statement interpreted to suggest that the current chairman of the climate panel, Rajendra K. Pachauri, step down.

Virginia Case Against Climate Researcher Is Rejected

RICHMOND, Va. (AP) — The state attorney general has failed to back up accusations that a former University of Virginia climate change researcher defrauded state taxpayers in obtaining government grants, a judge ruled Monday.

Climate Change and the Wealth of Nations

Professor Kahn isn’t skeptical about global warming, but he is (quite reasonably) skeptical about our ability individually and collectively to reduce carbon emissions: “attempts to reduce or reverse our carbon output — to mitigate the damage that we’ve already done — aren’t going so well” and “evidence shows that very few individuals have cut back on their carbon-producing activities at all.” Consequently, he predicts, “the world is going to get hotter.”

But while this would lead many people to doomsday scenarios, Professor Kahn is an optimist who believes “that we will save ourselves by adapting to our ever-changing circumstances.” He says this salvation will come from “a multitude of self-interested people armed only with their wits and access to capital markets.” In short, the same economic system that led to global warming will rescue us from it.

Climate ‘sceptic’ Bjørn Lomborg now believes global warming is one of world’s greatest threats

One of the world’s most prominent climate change sceptics has called for a $100bn fund to fight the effects of global warning, after rethinking his views on the severity of the threat.

Atlantic Rising: sea level rise threatens the Orinoco Delta in Venezuela

Rising sea levels are forcing the migration of indigenous peoples and threatening the freshwater ecosystem of catfish and piranha found in the Orinoco Delta near the coast of Venezuela.

Arctic ice: Less than meets the eye

Barber, an environmental scientist at the University of Manitoba in Winnipeg, Canada, went to sleep one night at midnight, just before the ship was due to reach a region of very thick sea ice. The Amundsen is only capable of breaking solid ice about a metre thick, so according to the ice forecasts for ships, the region should have been impassable.

Yet when Barber woke up early the next morning, the ship was still cruising along almost as fast as usual. Either someone had made a mistake and the ship was headed for catastrophe, or there was something very wrong with the ice, he thought, as he rushed to the bridge in his pyjamas.

This is a letter I received from a reader (with the name changed). Below the fold is an expanded version of my answer to him. I would be interested in what other people’s thoughts are on this subject as well.

Hello,

My name is John Smith. I have been following the peak oil situation since about 2005. A few years back I thought I had a handle on what I could expect from peak oil. Then, the recession hit, and changed (delayed) everything.

My problem is, I have not seen an rigorous peak oil studies/projections that take recent events into account on peak oil projections going forward. As an expert on the subject, could you please point me to some literature that would be of help?

I do not know what the future holds, but it is clear to me that realities have changed, and with it, the timeline of peak oil.

Regards,
John

Dear John,

Curve fitting techniques including Hubbert Linearization, and forecasts based on amounts of reserves and dates of discovery, can be useful tools but, unfortunately, they provide only rough estimates. Now that we are so close to the peak oil date, the deficiencies of these techniques become more of a problem, because a difference of 5 or 10 years in peak date becomes more of an issue.

One thing that these techniques do not tell us is how much oil is really economic. In a way, this is equivalent to saying that these techniques do not tell us how much oil has a high enough Energy Return on Energy Invested (EROEI) that it really can be recovered and sold at a price that customers can afford. We are only now learning what this price might be. A rough estimate is that if the prices are above about $85 a barrel, they will send the economy into recession. It may be that in some places, enhanced oil recovery can be economically used, while in other places it is too expensive, and reserves should be adjusted accordingly.

Another problem with this type of technique is that these techniques were developed in a period when the world economy was growing rapidly, and it was reasonable to assume that the world economy would continue to grow rapidly. Thus, it seemed reasonable to assume that as much oil as could be produced, would be produced. But once oil production starts hitting economic limits, it sends the economy into a downward spiral. Instead of inadequate supply, what one gets is inadequate demand, because the value that the oil can produce is too low to provide consumers enough benefit that they can afford to buy high priced oil, plus all of the other goods they need to sustain their lifestyles. It is not clear that these techniques model inadequate demand as well.

It seems to me that what one really needs is models which consider both geological factors and economic factors, but at this point, I don’t think we really have good models of this type. It is not just recession that is an issue, either. For example, if a country’s tax rate on oil companies goes up, I would expect oil production to go down. It may be higher tax rates on oil companies that bring us down off the current peak oil plateau–not geological constraints.

It would probably also be helpful to adjust the models to reflect improvements in technology. If a better method is developed for extracting very heavy oil, for example, extraction of some such oil may become economic, when it has not been in the past.

Recent Forecasts

We published one recent post showing peak oil projections, but which did not look at economic issues. This was Steve Mohr’s thesis. He used several techniques which give a range of peak oil dates from 2005 to 2019. Regarding OPEC Oil Production, in his thesis paper itself, he says, “OPEC oil production peaks broadly in line with literature peak dates which range from 2008 to 2042.” All of these are very broad ranges.

Another recent estimate of peak oil dates is Forecasting World Crude Oil Production Using Multicyclic Hubbert Model by Ibrahim Sami Nashawi, Adel Malallah, and Mohammed Al-Bisharah of Kuwait University, published in March 2010. This model estimates a peak date of 2014. It was discussed a bit in Drumbeat. It also does not consider economic issues.

Jean LaHerrere and Jean Luc Wingert published an analysis in October 2008 called Forecast of liquids production assuming strong economic constraints. It develops a peak date range of 2012 to 2027. It concludes:

Since 2001 we in ASPO France have claimed that future oil production will be a bumpy plateau with chaotic oil price, but we did not plot any curve, only saying that the smooth peak model (below-ground constraint only) with the estimated ultimate could be disturbed by above-ground constraints. The strong financial crisis the world is now facing will of course have some impact on the world economical situation and oil consumption. Is the financial system going to collapse or not and how quickly is it going to recover? We do not try to answer these questions but imagined two crisis models. Reality will probably be none of the two but we can see that with these simple scenarios, the possible oil peak dates vary below 90 Mb/d from 2012 to 2027 with the same ultimate of 3 Tb. The tensions on oil production will be realised for some years, the risk would be to forget the necessary efforts that have to be made to increase our energy efficiency.

Colin Campbell used to publish forecasts of world oil production, but retired from this after ASPO Ireland’s Newsletter 100 in April 2009. In the final newsletter, this forecast was shown:

Dr. Campbell’s forecasts did not particularly take into account economic conditions, as far as I know. He expected oil production to decline after 2008.

There have also been a number of forecasts based on analyses of oil megaprojects, by Chris Skrebowski and by “ace” (Tony Eriksen) and by Sam Foucher. These studies are fairly different from the general modeling done by others, mentioned above, in that they look specifically at large known projects, and when they are expected to be online, and compare these to expected losses in oil production due to natural declines in oil production. They require keeping abreast of a large amount of detail data, and even then a considerable amount of judgment is required: If capacity of a given amount will be added, how much will really be produced, and for how long? How much impact will infill drilling and enhanced oil recovery have? The most recent projection of this type that we published was by “ace”. It was published in November 2009, and showed oil production declining production after that date.

Information on Connection between Oil Production and Recession

If you want to read more about the connection between oil prices and recession, one possibility is Jeff Rubin’s book, “Why Your World is about to get a Whole Lot Smaller.” I have also written about the issue, for example, in this post and this post and this post.

We will continue to run posts forecasting future oil production, using modeling techniques, as they become available.

Thanks for asking.

Sincerely,

Gail Tverberg, Editor
The Oil Drum

Zero Hedge

What If “It” Doesn’t End With a Bang But With a Whimper?

Mind Games – Chapter One of Two

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” – Mark Twain

One new trick this old dog has learned is elegantly simple. The more certain I am that I’m right, the greater the probability I’m wrong. Before we dismiss this concept as simplistic or nonsensical (because we’re absolutely certain we’re right) why don’t we take a closer look at the underlying supposition and then apply what we learn to “The Crash” meme that’s widely held among a clear majority of Zero Hedge posters, contributors and commentators, including myself. It never hurts to check our math, right?

For those readers looking for an in-depth analysis of the current sociopolitical and economic climate, stop right here because this isn’t what you’re looking for. Other people can, and have, covered that ground better than I could. This is a collective self examination of how we arrive at our beliefs using denial and how this can lead us astray, especially when something’s “obvious”. I wish to swim a bit upstream of the contrary waters, which is not the same thing as taking a dip in the consensus reality pool.

When talking to family and friends about the greater probability of being wrong when we’re absolutely certain we’re right, the initial reaction I get is usually an assumption on their part that I’m applying a high probability of being incorrect. This isn’t the case. For something to be greater, all it needs to be is a bit more than the baseline measure. Often our biggest mistakes materialize when we assume something (because it’s obvious, right?) when more often than we care to admit, our assumptions couldn’t be further from the truth.

Mispricing Risk and Reality

For the sake of this discussion, let’s say there’s normally a 10% chance I’m wrong and a greater chance is defined as 15%. While we might brush this away as minor and immaterial, if you knew the next time you got behind the wheel of your car you had a 10% chance of getting into an accident, would you call that minor? I don’t think so. More to the point, we all have a tendency to minimize risks we’re familiar with and maximize risks we don’t understand or that push our buttons. Since we’re intimately familiar with our own thinking, it stands to reason we don’t recognize the real risk of being wrong.

I suspect we’ve all seen articles or news stories that highlight the public’s misperception of risk in our daily lives. For example, many people consider the risk of being attacked by a shark while swimming to be greater (there’s that term again) than of being hit by a bus or lightening. Of course, none of these risks are even a tiny fraction of 1%. But try telling that to someone after watching the movie Jaws, walking across a bus filled street or playing golf during a lightening storm. Proximity has a lot to do with our perception of risk. For this reason and more, we “misprice” risk in all facets of our lives, especially when developing and maintaining our worldview.

When it comes to our own decision making thought process, our so called inner dialogue, we rarely recognize this variable nor do we properly incorporate it into the conclusions we reach. And I deliberately use the term “inner dialogue” here because when we’re thinking or contemplating, the vast majority of us believe we’re all alone and “talking” to ourselves. Even when we’re conversing with others, either in real time by phone or in person or with a delay via letters, email or blogging, for the most part we believe it’s “us” that’s doing the talking and writing. Why wouldn’t we think this? Who else could it be?

For those who’ve been reading me for awhile, this is an old theme that I’d like to freshen up a bit. Our ego is always present and often front and center. Most people consider their ego to be an inseparable part of themselves and give little thought to what’s really going on in the background. Much of our day to day activity, be it physical, intellectual or emotional, is either ego driven or on “ego” auto pilot. I call it that because when we’re not consciously engaged, it’s still the same body being flown by someone or something other than our conscious awareness. If you think about it, that something’s the ego, though we think of it more like instinct or training.

Our Ego Maniac

Our ego is quite insecure and overly sensitive to being ignored or rejected. It’s assumed that the primary purpose of our ego is to take command of the ship of state during times of stress or emergency and to do whatever it takes to pull our butt out of harm’s way.

What’s tragically misunderstood by most is that the ego considers itself to be a separate and sovereign entity and not a part of the “self”, thus not answerable to or affected by “our” decisions or (in) actions in the same way you or I perceive “being affected”. It helps if we view our ego as a parasite or virus rather than a friend or companion because the ego considers you and me to be nothing more than the host.

For all intents and purposes, we’re living the life of someone with a dual personality. But we’ve been seduced into believing there’s only one person, the “self” or “I” we refer to when speaking about our personal being. The ego doesn’t share this perception, which means there’s an entity involved in our day to day affairs that doesn’t have “our” best interest in “mind”. Consider this concept carefully for a moment because its eye opening. A potentially malicious stranger is permanently living within my house. Do I leave him unattended or ignore his motives and actions?

Our ego is an ego maniac (no pun intended) that possesses (or should I say is) a severe sociopathic personality disorder. It seems our ego will go so far as to create disaster in our lives, in effect sabotage us in order to be needed, wanted and paid attention to. That’s the very definition of an ego maniac and the sociopathic personality. While this self destructive impulse varies from person to person, it’s there in everyone and must be recognized in order to deal with it.

The world’s most disturbed human beings aren’t dropped off on Earth by visiting space aliens nor do they grow on trees. They spring from within and the potential seed of their insanity can be found in all of us. This is why I endlessly repeat that in order to understand why people do certain things, one must look inside oneself. It can be shocking to realize that the raw material of these personality types resides in us all.

Our ego is seamlessly integrated into our lives and society, to the point where its influence is rarely understood by the vast majority of us. The more direct control we cede to our ego, something our narcissistic naval gazing entertain-me-now consumer culture tells us is desirable (which in turn feeds the ego) the more out of control our lives become. A severe side effect of this ego centric life is how it turns us into walking talking intellectual and emotional trip wires that can be, and often are, triggered for a variety of reasons. And this triggering almost always occurs without us being consciously aware of what’s going on or why.

Trip Wires and Mine Fields

Let’s examine a small but commonly shared example of egoic response to outside stimuli. How many times have we read a (Zero Hedge) article or comment and before we’re even finished, we’ve hit the reply button and are pounding away at the keyboard. We leave a caustic or snide reply, or even a heartfelt opinion, and then we move down to the next comment. Ten minutes later, we check back and the next response below ours doesn’t make any sense or isn’t what we expected. “What the hell’s wrong with that idiot? That’s not what I’m talking about.”

When we go back and re-read what we originally responded to, we find that somehow we completely missed what the person was saying. We’ve all had those “I don’t remember reading that” moments where it feels as if we’re absorbing something for the first time, not the second or third. This foolish “error” of ours is sometimes so obvious that we thank God no one knows who the hell we really are.

And this happens more often than we care to admit. It’s almost as if we didn’t read that particular comment but an entirely different one instead. What the hell just happened? You see it all the time in the comment section, to the point where you really don’t pay much attention since it all blends into the back ground noise and shouting.

You really only notice when it happens to you. And even then, you might deny it and blame it on the other person. Then there are times when the comment section degenerates into nothing but shouting and ego responses, where no one listens and everyone’s right.

If we pursue some quiet reflection on the matter we discover that somehow we missed nearly everything except a word or phrase that’s a hot button or trigger for us. Once we’re triggered, it’s usually game over and nothing else is making its way into our central processing unit except how to crush that fool who just triggered us. This is why I talk about reading everything twice, once to feed the egoic trip wires and the second to absorb the information into our conscious awareness. And maybe even a third time just for the joy of it.

While on the surface it might appear that it was “me” who responded, in fact it was most likely my ego. And as I said before, they aren’t the same thing. In today’s fast paced world, it’s our ego that’s often interacting with everything in our personal universe. Only we don’t recognize it because we see little or no difference between our conscious mind and the ego.

A careful reading of centuries of history shows us that while our ego has always been a major influence in our daily lives, our present day ADD need for constant stimuli and entertainment has mostly blurred the dividing line between our inner consciousness, our inner “spirituality” (to use a trigger word) and our ego. In a world where our collective and individual ego has run riot and the ego is nearly always front and center, is it really that surprising we live in an insane world?

Contemplation and Reflection

It’s only during quiet reflective times (some call this meditation, others deep thought) where we deliberately box off and isolate outside distractions and diversions while also restraining the constant chatter of our inner voice (our ego) can we begin to find, and then reinforce, that dividing line. Most of us believe that the inner voice we “hear” is “us” when in fact it’s most often our ego. This misidentification of who and what we are, along with being manipulated by our own ego and the control system, is in my opinion the primary source of many of our personal and social woes.

We’ve been separated for so long from our genuine inner self, our true consciousness, that for many in today’s world being reacquainted is a frightening experience to be avoided at all costs. The control system feeds this fear in order to maintain order and control and we go along because we’ve been told it’s all a part of modern life. The average person flips on the radio or TV as soon as they enter their home or get in their car. It’s all just the back ground noise of the control system and for most people; it’s a shock when it’s gone.

At first I thought this accelerating fusion of the ego and our consciousness appeared only to be affecting the younger generation, mostly I assumed because they quickly assimilated the newest entertainment technology. But over the past decade its spread and I’ve noticed in the general population that there’s almost a quiet desperation never to be alone for long with one’s thoughts. I’ve written in depth about “why” in other essays so I won’t dwell on it here.

A few years ago, while riding my motorcycle solo along a popular mountain ridge with spectacular views and exhilarating switch backs, I pulled into a rest area for a break. In the back corner of the parking lot was a large group of fellow riders. While their ages varied from what looked like the early 20’s to the late 60’s, everyone was riding two up. Most of the riders had communication devices that allowed them to talk to each other or at a minimum MP3 players plugged into their helmets or ears. Here they were, in the heart of Mother Nature, and still they required distraction and communication within the collective.

After exchanging pleasantries and while surrounded by those who came over to look at my bike, one middle aged lady asked me the most remarkable question. She observed I was riding alone and then asked “How can you ride alone? Aren’t you lonely? Don’t you get bored?” I could tell it was a sincere question and she was genuinely perplexed. Immediately the small talk within the group hushed as everyone waited for my response. It kind of surprised me that they would care to hear what I had to say. I soon understood why.

Without thinking I quickly said “No, not at all. In fact, I consider myself quite good company. I love riding alone because it gives me time to think. I’m never bored.” The group just stared at this strange man from another world and then quickly broke up and remounted. I remember seeing combinations of surprise, confusion and even fear in people’s faces and eyes.

From their point of view they were trying to avoid exactly what I was trying to achieve, communication with the inner sanctum. For many years I’d thought the growing lack of quiet reflection among the general population was just distractions and busy lives, but now I see it as overt avoidance and even fear. People are running from themselves and the control system is encouraging this with its constant “me me” consumer meme. We’re becoming passive beginning with ourselves.

It’s All About the Drugs

When examining information for the purpose of forming opinions, we often overlook our own unavoidable but correctable confirmation bias. Ironically our confirmation bias gains considerable strength in part from making “correct” choices in our day to day decision making process. Remember that proximity affects our perception and often being correct in the small daily tasks of life seduces us into believing we’re extremely capable in our decision making process.

During our waking hours, we make hundreds of small decisions that are immediately confirmed as “correct”, at least in our minds. This, along with other influences, encourages us to believe our analytical process is efficient and nearly foolproof, particularly if we’re already influenced by emotional confirmation bias and ego triggers.

We, or more accurately our ego, positively love to be correct. And each time our brilliance is confirmed, even if only in our imagination, our brain floods our body with powerful endorphins such as dopamine, a natural drug that’s dozens of times more powerful and much more subtle than crack or heroin. This biological process has evolved over millions of years and was, and still is to some extent, essential to our survival.

But modern society, or should I say society’s control systems, have distorted this natural mechanism. One only need study psychological warfare techniques or even the advertising, entertainment and official (government) and unofficial (corporate news) propaganda industry to see how our own natural biological responses are being used against us on a daily basis. Because we’re totally immersed within our own world, for those who don’t or won’t pay attention, it’s nearly impossible to see these influences for what they are. After a while, few wish to wake from wonderland, especially when it morphs into hell.

Biologically speaking if we’re doing something “right” it might be in our best interest to continue to be “right” if we wish to survive a while longer. But we need proper incentive beyond just survival to ensure we replicate the survival behavior. Cue that wonderfully delicious feeling we get when we’re “right” on the money. In fact, that natural high we feel is the dopamine drug rush. It’s only a matter of time before we find a way to induce that high on command. And confirmation bias and denial are sure fire ways to that Rocky Mountain high.

(Biased) Junkies Are Us

In effect we’ve become evolutionary dopamine junkies, craving the natural high we get when we’re rewarded for being right, even if it’s all in our mind. It’s better than sex, lasts longer and is infinitely repeatable. Jesus, talk about being biased. Does a super high quality drug factory located inside our brains count as biased when we control the dopamine dispenser?

Is it any wonder we accept transparent lies from those we love or those who lead? We shouldn’t be surprised when we practice deep denial and self deception in order to keep ourselves drugged with dopamine. Not only are we getting off on the (self) love endorphins (which are also triggered by nationalist or patriotic feelings) but we get the confirmation bias endorphins as well in the ultimate two-for-one drug deal from Mother Nature. No wonder we call her Mother since we suckle on her drugs all the time. It’s amazing we get anything done during the day considering we’re all walking around stoned to the eye balls. What a way to go.

This brings to mind old YouTube videos of monkeys or other animals pushing a lever or pecking at a button to solve problems for bits of food or sweets. Or how about those lab rats solving a complicated task for food or a quiet evening of wine and necking with the opposite sex? Does it sound a little like our own rat race?

Of course, even as those images flash in our brains, our ego takes over and tells us “But we’re intelligent human beings who possess reason and logic.” Who exactly are we trying to convince with that little ditty? Just take a look around at the utter insanity we’re currently immersed in and tell me again about the human intellect and logic. Ticks run their lives better than we do. They just lack running water and DirecTV.

Driving to Denial

For a more subtle example of denial, let’s look at my own personal decision making process and the intellectual denial it spawned. While driving to my office I make dozens of decisions that if in error could affect life and limb, particularly mine. Yet I’ve not had an accident in over 16 years and I quite naturally consider myself a good driver. In fact, I’m a great driver. Yet as I’ve aged, I’ve noticed that for some strange reason I drift left and right a bit more and the close calls seem to be occurring with increasing frequency.

So despite the fact that I’m an excellent driver and without ever acknowledging otherwise, I’ve compensated for my aging by slowing down, looking more carefully before changing direction and so on. In other words, at some level I’ve recognized the increasing error rate and I’m compensating, even though I consider myself a superior driver. Or maybe I should say I’m compensating despite being an expert driver that ostensibly would have no need to compensate what-so-ever.

Like walking through a hall of mirrors, we’re never quite sure exactly what we’re seeing. But this doesn’t slow us down one bit. In fact, when facing a conflict, our ego takes over and just barrels on through, pushing aside uncomfortable cognitive dissonances as immaterial, unimportant or just plain silly with little to no conscious thought involved.

Actually, the only reason I’ve slowed down is because it makes sense to be careful, especially considering all the crazy distracted drivers on the road these days. I most certainly didn’t slow down because I needed to change my behavior. It’s them, not me. And even if it were possible that I might have something to do with this, my age has nothing to do with it. At least that’s the cover story I tell myself.

The above illustration might seem ridiculous to some and there’s no doubt I used exaggeration to push the point home. But we’ve all been there and to say otherwise isn’t true. Some might even say that at worst all I engaged in was a simple “white lie” or a harmless self deception to make me feel better about getting older. What’s the big deal? Or maybe I was just playing with “semantics” and it’s all of little consequence. But in fact it’s a wide open window into the mechanism of denial and well worth our time to explore precisely because it’s so insidious and seductive.

The Slippery Slope

Consider that on the physical level I’m compensating for an obvious degradation of my driving skills in order to live a little longer, thus fulfilling my basic survival instincts. Of course I acted this way. Why wouldn’t any sane and prudent person do the same?

However, at the same time I’m maintaining the mental and emotional illusion that few driving skills have degraded or been lost. In fact I use the continuing streak of accident free driving, accomplished in great part because I’ve slowed down and I’m more careful, to support the illusion that I’m still an excellent driver. I’m engaging in a self deception in order to soothe and placate an ego I don’t consciously recognize as material. Why am I stroking my ego to begin with? Isn’t it enough just to survive longer?

As with all lying and self deception, the key to continuing is to rationalize and justify past deceptions in order to continue in the future. To do this successfully, first we deny there’s a problem (even if we fix it) then we deny we ever denied there was a problem in the first place. Then, in the ultimate intellectual coup, we forget we ever indulged in denial what-so-ever. In the closed loop isolated environment of our mind, we create our own reality along with the proofs needed to affirm that reality. We’re masters of our own universe and we make the rules where we rule.

We should recognize that we can still be engaged in denial even if we agree with or recognize some facts or information. It’s how we deal with it that matters, not if we deal with it. We bargain with ourselves all the time to avoid what we don’t wish to see. There’s a great deal of subtlety and subterfuge employed in day to day denial. When juggling reality and fantasy while avoiding the ugly monsters, we determine what’s important and what’s not. So we can play games of all kinds to bury what bothers us.

If denial and self deception is present in such a mundane task as driving to work, wouldn’t it be an act of denial itself to claim that denial doesn’t affect our thought process when considering items of much greater importance, such as the end of the economic world as we know it? From a survival point of view, might we need to concede the possibility that we’re not considering all pieces of information at our disposal when coming to conclusions as to what’s going to happen as well as when where and why?

Tricks of the Denial Trade

One of the tricks we employ when trading in denial is to dismiss (deny) contrary information as quickly as it comes in the front door. This way we rarely experience an uncomfortable cognitive backup that might nag us for attention and create an emotional crisis if left unattended. If one is to self deceive on any scale, out of necessity one must become efficient self deceivers if we’re to live comfortably with ourselves in our insane world.

I’ve often thought that the job of the professional therapist is to untangle the dissonant log jams and get them moving towards the saw mill, not to actually deal with the dissonant logs themselves. Or maybe I should say they deal with just enough of them to get things moving again so the patient can happily remount their hamster wheel. After all, in our society, the measure of sanity is how well we’re coping with our insane world, not how “sane” we are.

In fact, people who in my opinion are declaring their sanity by unplugging and walking away from financially lucrative but morally or emotionally stressful jobs are considered by society to be crazy. When the only goal offered and rewarded by society is to ascend the ladder of “success”, how else would society treat those who chose to descend that very ladder but with disdain? Society tells us “Here is the only reality that exists, now fit in, shut up and be happy” rather than “Here is the raw material, now go forth and create your own happiness and self worth.”

Faced with no real substantial choice other than to fit in and confronted by a society, aka the control system, that shuns and ostracizes those who go against the flow and think and act too far outside the small box, is it really surprising we engage in massive self deception in order to kill the pain and go with the flow? And wouldn’t the control system encourage this self deception in order to keep the hamsters on the wheel? God forbid you think for yourself because left to your own devices, who would remain to fleece investors with another helping of CDO on rye or serve up coffee and cardboard muffins at McSlop’s?

To remain emotionally safe and “happy” on the hamster wheel, we increase our denial efficiency by creating mental rules of judgment, sometimes called rules of thumb or the smell test or ideology or simply assumptions. There are dozens of names and terms to describe this process. The beauty of this intellectual shorthand is that we don’t need to participate in the complicated process of outright denial each time. Once we’ve denied something for whatever reason, we give ourselves permission to do the same with every other piece that’s similar or that we wish to believe is similar.

And we don’t process denial in big pieces but in tiny little bites. We remove the more easily refutable parts and discard the rest. Then we wall these parts off and isolate them from corroborating evidence and context that would disturb the denial process. We use a form of “a priori” to make sweeping generalizations that key off other denials, half truths and outright lies we keep ready for instant deployment and presto, the problem is gone

In the world of denial, all we need is reasonable doubt to deny and we determine what reasonable doubt is. But we demand rock solid proof when defending our denial and any proof offered can always be refuted because we determine what’s valid and what’s not. We can’t lose using these rules of evidence and we never do unless we chose to.

In the ultimate twist, we then use these subsequent denials as further proof that our initial denial was correct. Faulty handling and processing of information (aka denial) is used to deny something as incorrect. Then additional denials are used to buttress the initial denial, thus strengthening our resolve to deny similar future information. We come to the denial party with guns load. That my friend is a closed loop circular logic positive reinforcement mind game taken to the nth degree and it’s the staple of basic long term denial. And it all happens in seconds and it’s almost exclusively handled by our ego auto pilot.

In Chapter Two, we shall continue down the rabbit hole and see what Alice has to say about “The Crash”.

08/31/2010

Cognitive Dissonance

More articles from Zero Hedge….

by Linda Beale
crossposted with Ataxingmatter

Dealing with the Sunset of the Bush Tax Cuts (Part V in a series)–dividends at capital gains rate

IN this series, i’ve been discussing the merits of enacting a new series of tax cuts that mimic, at least in part, the Bush temporary tax cut legislation that expires at the end of this year.

The primary arguments for the original Bush temporary tax cuts were either bogus to start with or proven weak over the period of the tax cuts.

1.The Republicans who pushed the cuts claimed first that they were intended to return to taxpayers the surplus. Of course, that argument was laughable from the beginning: Bush deficits started in the first year of the Bush regime and got worse for the long term as the costs of a military budget pumped up by preemptive war and other augmenting of government spending at the same time that tax revenues were cut again and again throughout the regime.

2.Various Republicans also admitted that their goal was to cut the size of government–though they didn’t mean the military and they did mean any programs that protect average Americans (such as Social Security, unemployment compensation, environmental programs, OSHA, etc.). But the size of government grew in spite of the reductions in revenue, resulting in expanding deficits.

3.The various expensing provisions; repatriation with almost no taxation (in the 2004 “American Jobs Creation Act”); tax breaks for oil and other natural resource companies; international tax breaks; and other corporate-favorable provisions were supposed to stimulate entrepreneurial activity and job creation. Instead, businesses used the low-tax repatriated income to pay managers more and workers less, and laid off workers at the same time. The expensing provisions allowed corporations tax breaks for equipment they would have bought anyway, but didn’t create new jobs–the Bush regime’s jobs record was terrible, barely keeping up with inflation and certainly not spurring new job growth. The tax breaks for natural resource companies fed their complacency about everything from jobs to safety to environmental protection–giving companies more for less doesn’t create better citizens and doesn’t get us cheaper energy either. The record from the tax cuts as far as entrepreneurialism and job creation was dismal–the mainstream neoconservative and neoliberal theories of market fundamentalism didn’t work out as claimed.

4.The lowering of capital gains taxation and the taxation of dividend as a net capital gain at the lower rate were also heralded as ways to spur investment in new businesses (entrepreneurialism) and job creation. Bullshit. Most of the result was just more money in the pocket of the richest Americans who own most of the financial assets, and that money in the pocket was as likely to be invested in offshore bank accounts as put to work supporting a new business here in the US. The dividend tax cut didn’t even lead to much in the way of dividend payouts–except perhaps for firms whose managers and directors saw a chance to benefit themselves. Even if those expiring tax cuts are not renewed with new tax legislation, it is not likely to have much of an effect on companies’ dividend policies. See Higher Taxes May Not Push Firms to Cut Dividends, Wall St. J., Aug. 30, 2010.

5.The cuts in individual rates were supposed to provide more money as an economic stimulus. But the Republicans who passed those rate cuts knew that the AMT would act as a clawback to the cuts over time, except for those at the very top who were always subject to the AMT and those in the bottom who are hardly ever subject to the AMT. And they knew that amending the AMT to conform to the temporary tax cuts would be tremendously expensive–at least a trillion in revenue lost for the decade of the tax cuts, where the “temporary” nature of the bill had been necessary to claim that the cost was “just” 1.3 trillion over a decade. In other words, the tax cut bills passed during the Bush regime with the 2010 sunsetting gimmick were a sham from the beginning–they cost much more than those who passed them wanted to admit, and they carried with them a clawback mechanism that would undo the cuts in rates for many individuals. The various annual “patches” to the AMT are extraordinarily costly in terms of lost tax revenues since they are essentially an extension of the tax cuts to an even broader base, and the corporate changes to the AMT have reduced its effectiveness in cutting back on corporate preferences while costing the fisc billions.

6.The estate tax scaleback and one-year repeal was the most gimmicking of all. Cutting the budget by $30 billion a year in order to fund a giveaway to the wealthiest and most privileged Americans is hard to justify in any budgetary climate. So Republicans pushing estate tax repeal and the various “coalitions” funded by wealthy families like the Walton heirs have painted a facade of “helping little guy farmers and businesses” on their efforts–a facade that many Americans may have bought hook, line, and sinker since they do not tell the truth, much less the whole story. Very few family farms and very few small businesses are threatened at all by the estate tax.

So what should this list of bogus and failed reasoning tell us about what the Congress should do on taxes for 2011 and thereafter?

1.I say let the Bush cuts expire according to the way they were written. But enact a new set of tax cuts that are better targeted to jumpstart the economy and to put money where it is needed.

2.Let the corporate giveaways expire as slated.

3.Let the estate tax mess expire as slated. Enact a new estate tax law that (i) increases the exemption amount to a reasonable level (say, $2 million) and indexes it for inflation and (ii) enacts a progressive rate structure (ranging from 55% on the estate that exceeds the exemption amount, up to some higher rate of 65% or 70% on multi-billion-dollar estates.

4.Let the capital gains changes die as slated, and do not enact any further capital gains preferences (so dividends would go back to being treated as ordinary income).

5.Let the individual rate changes die as slated, and enact a new tax cut for individuals making $100,000 or less, with a temporary tax cut for individuals making up to $200,000 for a three year period to aid us in getting out of this recession.

6.Enact genuine AMT reform–in which capital gains are treated as a preference and which provides a significant exemption amount based on gross income. See the earlier articles (2005-2006) in ataxingmatter on AMT reform for more specifics about the kinds of reforms to the AMT that make sense.

7.In conntection with the rate cut and AMT legislation, enact measures to pay for the tax cut, including
(i) a carried interest provision taxing all profits interests as ordinary income
(ii) a corporate tax provision limiting the benefits of tax-free reorganizations and consolidations, and
(iii) a charitable contribution provision eliminating the deduction of value in excess of basis.

Read more….

By Karl Denninger, The Market Ticker

There are people in the economics world who "get it"….

Debt reduction is now the real story of the American economy, just as real story behind the apparent free lunch of the last two decades was rising debt. The secret that has completely eluded Bernanke is that aggregate demand is the sum of GDP plus the change in debt. So when debt is rising demand exceeds what it could be on the basis of earned incomes alone, and when debt is falling the opposite happens.

Ding ding ding ding.

The entire mantra of "private debt doesn’t matter" is of course idiotic, but it forms the premise upon which Krugman, Bernanke and many others try to labor.  Worse, some of them go a step further and say that government debt doesn’t matter.  This is how you get charts that look like this:

But of course as anyone who has ever been up to their eyeballs in debt knows, it most certainly does matter, because the amount of debt you can carry is finite – no matter who (or what) you are.

So as debt level rises your ability to keep taking more goes down.  That debt adds to aggregate demand just as would more income.  But when that debt accumulation ceases, so does the demand that it sponsored, and when it reverses you wind up subtracting from demand that which goes to pay off the debt!

Of course there are those who argue "but one man’s debt is another man’s asset", and I’d agree with this – if all debt was paid.  But defaulted debt is another matter, isn’t it?  Now what’s that "asset" worth?  Oops.

The other issue, which none of these people (except Keen!) seems to appreciate is that when you’re up to your eyeballs in debt your production is inevitably shifted away from productive and saving pursuits.  The first is a problem.  The second is corrosive to industry, as it is savings that form the predicate for Capital Formation and it is Capital Formation that is the seed from which new businesses, and thus employment, grows.

That sucking sound will continue for many years, because the level of debt that was racked up under Bernankes watch, and that of his predecessor Alan Greenspan, was truly enormous. In the years from 1987, when Greenspan first rescued the financial system from its own follies, till 2009 when the US hit Peak Debt, the US private sector added $34 trillion in debt. Over the same period, the USAs nominal GDP grew by a mere $9 trillion.

Yep.  And guess what – now a good part of that $34 trillion has to come out.  My "best guess" is about $25 trillion of it.

This will of course whack on GDP – probably by 40% and perhaps more.  That takes us back to $10 trillion.

I’ve been arguing this for three years now in these pages.  The exact amount of damage to GDP and debt that must be excised in order to bring the system back into balance is a point of contention, but that this has to happen, as the Ponzi has hit the wall, is not.   That is a mathematical certainty.

The sooner we take our medicine the better.

More articles from the Market Ticker….

Brian Rezny submits:

Source: finance.yahoo.com

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