Page 2of 2
Of black swans and greedy oilmen
By Chan Akya

be found and delivered to the US now look increasingly fantasy-prone.

Today's sources of oil to the US and Europe (as well as China and India) look increasingly troubled due to a combination of geopolitical and economic factors. The likelihood for oil to hit US$200 per barrel over the course of the next two years looks higher rather than lower at the beginning of 2008. I argued in the previous article that central bankers, trying to keep their

economies afloat while ignoring rampant inflationary pressures in hard and soft commodities, had no choice but to usher in a recession at this stage.

Note here that an analysis of historical price moves (the Samuelson school) would have shown in the beginning of 2004 that there is "no" chance of oil hitting $100 per barrel and yet that is exactly where we are now. This is where NNT's work on using fractal geometry rather than declarative probability models assumes greater relevance. In simple words, understanding the probability of a major terrorist strike in an oil producing country is not a function of historical data, but rather of using more imaginative and forward-looking analysis based on existing dynamics. This vastly changes the pricing of future events, and with it, factors underlying current prices.

Along the line, we should perhaps spare some thought for the hapless researchers employed by oil and car companies in the US and Europe attempting to devise new technologies that maximize profits under the current regime of assumptions. Thus they look for ways to improve fuel mileage from 10 mpg to 25 mpg, quietly ignoring strategies such as electric cars that may push efficiency to 100 mpg. Meanwhile, oil company researchers spend a lot of time discrediting the global warming lobby, while examining ways of exploiting shale and tar sands more efficiently.

This thinking is analogous to a drunk looking for his car keys near the street light even though he lost them in the bushes - the researchers are merely following the path of white swans in attempting incremental, evolutionary ideas rather than the black swan path of revolutionary ideas that may usher in creative destruction.

China and India could do much to leapfrog the US and Europe if only they focused their attention on the future rather than the past. While their central bankers pretend to be intelligent and throw billions in futile rescues of Wall Street, the need of the hour is for these countries to instead buy the best scientific research outfits responsible for examining solar power, fuel cells and the like. Solar power is under-researched because most US and European energy needs are derived from cold-weather problems - heating in winter for example, when solar power will prove unviable. In contrast, countries like India and all of Southeast Asia could certainly benefit from a leapfrogging in solar power technology, especially if alternatives such as fossil fuels are heavily taxed in the US and Europe.

These technology breakthroughs will represent their own black swans in terms of changing today's geopolitical structures comprehensively. Without the bullying power of oil, Middle-Eastern countries will be rendered irrelevant, even as the vital power-sharing deals with the US changes alongside. Why would the US support irrelevant Saudi monarchs, for example, at the expense of democratic alternatives? Why would China or India kowtow to Islamic interests if Middle Eastern oil did not account for their energy imports? The possibilities are endless, with the only constant being change.

Operation cover-up
All that said, I also have little doubt that the Establishment (financial, oil, car, government) will attempt to quietly bury both books in coming weeks and months. Starting with attempts to discredit the authors based on minor factual deviations, it is highly likely that the books will be treated with increasing suspicion by the mainstream until rebuttals are issued. These will get equal airtime to what the above two books represent, continuing the charade of "fair media" that appears anything but to outsiders such as myself.

My biggest fear with respect to the two books is that they become convenient anchoring points to highlight alternative views. Take Black Swan for example, and already there are attempts to portray extraordinary losses of Wall Street as one-off events, with an underlying statement that such losses are not possible in the future. This twisted use of logic to highlight the possibility of returning health to the patients of Wall Street completely misses the point that risk management with respect to what Wall Street trades is still woefully inadequate to actually controlling or avoiding further losses.

Similarly, Zoom can be used to represent the reasons for car companies to invest in fuel cells and electric car research, albeit without any serious attempt to change underlying dynamics namely an oil tax in the US, accepting higher fuel efficiency targets across the board and forcing oil companies to urgently expand research and deployment of carbon capture technologies. Without carbon capture, the world will continue to stare into the wrong side of the climate change argument.

Worse yet, both books could simply be ignored as policymakers choose to curl up with their copies of Harry Potter instead.

Notes
1. The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb, 2007.
2. Zoom: The Global Race to Fuel the Car of the Future by Iain Carson and Vijay V Vaitheeswaran, 2007.
3. Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life by Nassim Nicholas Taleb, 2001.
4. Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street by William Poundstone, 2006.

(Copyright 2008 Asia Times Online Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

1 2 Back