Saudis Hold Back Oil

(With thanks and a nod to The Oil Drum)

The Kingdom of Saudi Arabia has just made an announcement that changes the Peak Oil scenario, and not for the better. I’ll quote from an article in the Financial Times yesterday:

In a recent interview with Argus, an industry newsletter, Ali Naimi, Saudi Arabia’s energy minister, made clear Saudi Arabia had “no plans" to embark on its next phase of expansion. “We are idling at around 9m bpd and we will reach capacity of 12.5m bpd by 2009.”

King Abdullah of Saudi Arabia concurred. Quoting from the same article:

King Abdullah, reported by the official news agency this month, said: “I keep no secret from you that when there were some new finds, I told them: ‘No, leave it in the ground, with grace from God, our children need it’.”

A brief refresher on peak oil: The oil production in any geographic region (A state, an oil field, a country, the world) tends to start low, then ramp up steeply to a peak production rate. It can plateau for a time, and then irreversibly declines. The peak generally occurs when about half the recoverable oil has been extracted. The world hit a temporary peak in crude and condensate production (“C+C” in industry parlance, which is what actually comes out of oil wells) in May of 2005 at 74.3 million barrels per day (mbpd). Pushing three years later, the world just exceeded that figure by 168,000 bpd, or 0.22%. Pseudo-crude from tar sands in Canada was included in this latest figure, so to some (including this observer) the 2005 peak still stands. As I have written elsewhere, we are on the bumpy plateau of peak oil, waiting for the inevitable decline.

Despite the recent shakes in the U.S. economy and a sense of financial insecurity worldwide, the demand for oil continues to grow. The Saudis are the top producer of crude oil in the world, and for them to look at world demand and say, “Mmmmm…nah,” is a big deal. It is the beginning of what some call the prudential model of oil production.

Ever since the oil embargo in the 1970’s, Saudi Arabia has been relatively cooperative with the West on the subject of oil production. The Kingdom has been cozy with U.S. presidents and has ramped up both production capacity and exports as fast as technically possible. Now we have a situation where the rulers of the world’s premier oil state are making a very public self-interested judgement call about how much oil to export. It marks both a change in Saudi policy and a subtle but seismic change in the power balance between the U.S. and Saudi Arabia.

Some contend that it is not a voluntary change in policy. The largest Saudi oil field, Ghawar, may well be in decline, to such an extent that increases in Saudi production are impossible. See the full technical analysis at The Oil Drum. In that case, the statements about prudential production are just a smokescreen to preserve the illusion that Saudi Arabia can manipulate world output. The political influence of the Saudis rests partly upon that impression.

Whether the Saudis are earnest or bluffing, this represents a loss of power. One scenario is a loss of power by the U.S. and Europe to influence OPEC oil policy. The other is a loss of ability by the human species in general (and the Saudis in particular) to extract oil from the earth at ever increasing rates. Either way, it is yet another signal for us to accelerate our adaptation to a world of declining energy supply.

Livable Wage vs. Standard Deduction

So here it is, April 15th, again. Are you one of the smug, having filed your tax return in February, or one of the frantic, who should be pounding a calculator right now instead of reading this? Either way, there is an oddity in the system I’d like to share with you.

Look on the standard 1040 return, top of the second page, and you will see line 40, the standard deduction, and line 42, the personal exemption. If you are single, the standard deduction ($5350) and the personal exemption ($3400) add up to $8750. The ostensible purpose of these two slices out of your taxable income is to account for the fact that you actually need some money buy the occasional bowl of gruel, a ragged shirt, and a bed for the night. The quite sensible theory is that people, especially poor people, shouldn’t be taxed on income that they actually need to survive.

The problem is that in the modern world it is essentially impossible to live a halfway decent life on $8750 a year. Yes, I have known people who have cut every corner imaginable, been incredibly resourceful, gritted their teeth, and gotten by on such an amount. If you are tempted to say, “I’ve lived on that much!” think about the year you did that and adjust for inflation (and your tolerance for squalor). In many places, especially urban places and cold climates, it is essentially impossible.

This brings me to the concept of a livable (or living) wage, defined as the amount of annual income needed to acquire the basic needs of life. What are the basic needs of life? The answer will vary from person to person, but The Joint Fiscal Office of Vermont Legislature has come up with a definition that includes food, housing, health insurance, child care, transportation, taxes, and basic personal expenses. No vacations, no restaurants, no Christmas gifts, just the necessities. The results will surprise you. Presently, minimum wage in Vermont is $7.53 an hour, or $15,662 annually. According to Vermont’s living wage study, the wage needed to achieve a minimal living standard a single person with no children averages $14.26 an hour, or $29, 653 annually. Of course, many Vermonters don’t earn this much. They survive by doing without basic things such as health insurance or proper health care, by living in substandard housing, and by government subsidies such as food stamps, Medicaid, heating assistance, and housing assistance.

Two things strike me about this situation. One is that in the JFO report, 15% of income is set aside for taxes. The second is that the combined exemptions on the Federal tax form equal only 29% of a livable wage.

This raises several questions in my mind. Why should people on the edge of poverty pay as much in taxes as they do for transportation or child care? Why are we taxing people at all on income they need just to survive? And, of course, why do we mindlessly pay a government subsidy to businesses that are unwilling to pay their employees enough to live on?

But let’s stick to the tax issue. Back in 1913, when the federal income tax was first established, anyone earning less than the equivalent of about $60,000 in today’s dollars was exempt. It was a tax reserved for those who could easily afford to pay. I’d like to see us go back to something like that. The federal government should figure out some regional livable wage scales and increase the personal deduction to match that. Make up the difference by rolling the tax rates on wealthy individuals and corporations back up to the levels of the 1950’s and 60’s. Corporations used to pay a quarter of federal income taxes. Now they pay about 8%, and some of the biggest, most profitable companies manage to pay little or none at all. Same goes for the gazillionaires among us. Fair taxation advocates estimate that we lose about 70 billion dollars a year to millionaire tax cheats, and the marginal tax rates on the likes of Bill Gates are as low as they have been since the Great Depression.

Various politicians and pundits come up with plans to “simplify” the tax code, many of which put the 7/11 clerk in the same tax bracket as the CEO. The Minor Heretic’s tax simplification plan is to exempt the first $30,000 of income for single people with no kids and ramp up the rates in a geometrically increasing curve above that point to make up the difference. The exemption would match the livable wage for whatever family and income category a household is in. Ditch all the complexities of this, that, and the other credit, deduction, and exemption. Combine this with a thorough cleansing of all the various corporate tax shelters and a bump up in the basic corporate tax rate. Multi-millionaires would gnash their teeth. Corporate CEO’s would howl in agony. Most Americans would sigh with relief, fill out their one-page tax forms, and go buy things with their newly regained income. They might even be able to make their mortgage payments.

It's not a mortgage crisis

Back about two hundred years ago, the British army had rigorous standards for its recruits. They were required to have at least two teeth, and those two teeth had to be opposite one another in the front of the man's mouth. I suppose a pulse and four limbs were also required, but this wasn't listed in the rules. Even with the primitive state of dental hygiene in the 18th century this spread the recruiting net wide, which was the point.

So it was in the mortgage industry, up until a short time ago. A pulse and the ability to sign a contract made one a candidate for a mortgage and homeownership. The banks bundled up the resulting loans into so-called Collateralized Debt Obligations, sliced them into shares, got them rated triple-A by complaisant bond rating companies, and sold them to all and sundry. Ever since this scheme started collapsing it has been called “The Mortgage Crisis.” This is akin to calling a head-bashing spree by a pipe wielding maniac “The Fractured Skull Crisis.” We need to go one step back in the process.

Ten years ago the housing industry and the mortgage industry were looking for more customers. One problem was those pesky loan requirements – sufficient income, assets, cash for a down payment. What to do about those marginal, extra risky situations? A sub prime mortgage. Structure the mortgage for low initial payments, even if it means a crippling balloon payment or interest rate jump down the road. Bundle those mortgages and sell them off as noted above. Housing prices were rising, so it was no problem if a few people defaulted. Either these unfortunates could resell their house and pay off the loan, or else the occasional default would be absorbed and hidden by the bulk of the good loans bundled with it. Sadly, even the best scams only last for a while.

The problem was one of income. Selling a few overpriced houses to a few overstretched individuals was not a big deal. When the entire housing market suddenly jumped to almost double its 50 year average it got beyond affordability for many people. It is affordability that puts an upper limit on the value of housing, and the U.S. market overshot that limit. The result has been foreclosures, unsalable homes, and the collapse or near collapse of home builders, banks, and investment firms. It has resulted in “jingle mail,” when a homeowner realizes that the house is worth less than the balance left on the mortgage and walks away, mailing the keys to the bank. It is, ultimately, a home value crisis. If housing was more affordable there would be continued demand, supporting prices. If prices were still going up, or at least steady, the defaulting borrowers could sell out and pay off their mortgages.

Our situation is not without precedent. The present collapse is close to a rerun of the savings and loan fiasco of the late 80's and early 90's, with deregulation, reckless lending, and the bundling and reselling of risky loans. That one cost us about $160 billion. The situation is also comparable to the telecom boom and bust. In the late 90's a cohort of companies installed tens of thousands of miles of fiber optic communications cable in anticipation of unlimited demand. That demand was not forthcoming, so most of them went bankrupt. A second cohort of companies bought the fiber optic lines at fire sale prices and actually made money renting them out. The same process will probably happen with residential housing.

Congress has dithered about this while the Federal Reserve has thrown cash at failing financial institutions. The best our government can come up with for regular folks is a sad little $600 tax rebate. Given that we are in deficit, this means borrowing billions more on international markets, to be paid back later with interest.

I have a couple of suggestions for our elected representatives that attack the value problem behind the mortgage problem.

First, raise the minimum wage. Raise it significantly, and raise it quickly. This will put money in the hands of those who need it and will spend it, boosting the economy without going further in debt to the Chinese. This will also tend to elevate the rest of the wage scale above it, pushing more people into the realm of homeowners.

Second, repeal the Taft-Hartley Act and replace it with legislation more protective of people who want to organize or join unions. Two thirds of Americans want to join unions, according to polls, but many of them are rightly afraid of retaliation from employers. Taft-Hartley is discouraging union membership and therefore denying American workers the higher wages and benefits that come with it. More well-paid union members mean more possible homeowners.

Third, bring our income tax rates back to the levels of the 1950's and 60's. Back then, millionaires and corporations paid a bigger percentage and ordinary working schmoes paid less. Somehow we thrived, despite the dent in the yacht and mansion industries. We had enough tax revenue to build and maintain infrastructure and working people had money in their pockets.

In the long run housing prices are pegged to the number on the average American W-2 form. Eventually they will drop back to something like 60% of what they are now. The graph I linked to above tells the story. Artificial schemes for propping up unsustainable housing prices will fail, costing us both time and money. It is counterproductive to throw driblets of borrowed money at Americans and truckloads of borrowed money at banks. The same goes for lowering interest rates till the dollar crashes. Insulating reckless banks and investment firms from the consequences of their actions will set us up for the next boom and bust scenario.

Perhaps it is asking too much, but it would be useful if Congress could learn a few lessons from its mistakes. Deregulating the financial industry always creates trouble. Booms always become busts. Bailouts encourage risky behavior. The health of the economy is not indicated by the Dow Jones Average but by the economic strength of the average American. The best thing our government can do about the mortgage crisis is to improve the long term economic position of potential home buyers.

Ducks in a Row

Ordinarily, gun control is a subject I won't touch. Arguments about gun control tend to quickly degenerate into spittle-flecked rants or did-didn't-did-didn't exchanges about statistics and causality. I get the feeling that anybody with a strong opinion on the subject, pro or con, has that opinion defined in their DNA, and no amount of argument would dislodge it. And yet, here we are with another spate of mass shootings and the Supreme Court hearing oral arguments about firearm restrictions in Washington D.C. I guess it's time for me to disdain the blindfold, flick away my cigarette, and face my fate.

First, here are the 27 words: A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed.

Every word in that sentence, other than the conjunctions, has had its meaning debated. The meaning of phrases has been debated. The connection between the two clauses has been debated. The implications of the punctuation have been debated. Everything short of the typeface has been debated. It's as if the framers of the Constitution were guaranteeing job security for lawyers and law professors for all eternity. The crux of the arguments is this: Does this sentence guarantee the rights of states to organize and arm militias, or does it guarantee every individual the right to possess a firearm. Does “the people” mean groups of people (in militias) or individual persons?

What makes this particular case (District of Columbia v Heller) special is that it is arguably the most substantive 2nd Amendment case before the Supreme Court since United States v Miller in 1939. There aren't a huge number of 2nd Amendment cases on the Supreme Court books. The three influential ones are United States v Cruikshank (1875), Presser v Illinois (1886), and the aforementioned Miller. Cruikshank established that the 2nd Amendment “has no other effect than to restrict the powers of the national government..." thus freeing the states to make laws regulating firearms. Presser reaffirmed Cruikshank. Miller concerned a law regulating sawed off shotguns, and ruled that such an instrument had no relation to a well regulated militia, thereby enshrining the collective rights position. And yet, individual rights proponents have cited parts of these cases as supporting their position.

The District of Columbia (which is under federal administration, and therefore subject to the 2nd Amendment under Cruikshank) has an outright ban on the private ownership of handguns. A man named Dick Heller challenged this law on the grounds that the 2nd Amendment guaranteed him the individual right to possess a firearm such as a handgun. The case bounced around in the federal courts, ending with a ruling for Heller, striking down the law. The District appealed to the Supreme Court. And off to the races we go.

I consulted with one of my go-to people on matters of constitutional law and she opined that the Supreme Court would split the difference and make a move towards the individual rights argument while retaining for the states the right to intervene in cases of clear public interest. In other words, a slight shuffle towards the NRA and then a little hop back towards Miller.

I went straight to the transcript of the oral arguments made before the Supreme Court on March 18th.

I recommend that anyone with a little time on their hands take a scan through the 110 pages of transcript. The Supreme Court makes decisions concerning the boundaries on our lives every working day. It is worth it to get a feel of the thought processes of these nine people. The representative for the District is Walter Dellinger. The representative for Mr. Heller is Alan Gura. Justices Ginsberg, Souter, and Stevens give the impression of favoring the collective interpretation, while Scalia, Alito, and Roberts seem to tip towards the individual interpretation. Breyer and Kennedy are difficult to peg, and Thomas, per usual, is silent. They explore everything from contemporary murder statistics to bear hunting to Blackstone's 17th century commentaries on English common law. There is, on page 76, an interesting exchange between Stevens, Gura, and Scalia that gives me the impression that my Con-law source may be right. Remember, Gura is arguing for an individual rights interpretation. I quote:

JUSTICE STEVENS: May I ask this question? Are you, in effect, reading the amendment to say that the right shall not be unreasonably infringed instead of shall not be infringed?

MR. GURA: There is that inherent aspect to every right in the Constitution.

JUSTICE STEVENS: So we can -- consistent with your view, we can simply read this: "It shall not be unreasonably infringed"?

MR. GURA: Well, yes, Your Honor, to some extent, except the word "unreasonable" is the one that troubles us because we don't know what this unreasonable standard looks like.

JUSTICE SCALIA: You wouldn't put it that way. You would just say it is not being infringed if reasonable limitations are placed upon it.

MR. GURA: That's another way to look at it, Your Honor. Certainly -

Here is an opening for a debate on reasonable versus unreasonable restrictions on firearms ownership. The use of the word “reasonable” in law is another one of those job security guarantees for lawyers and law professors. And we are off to the races again.

I have my own interpretation of the 2nd Amendment, but it is unimportant. It's the opinion of the nine black robed people that matters to society at large. I'd like to address some other matters pertaining to firearms ownership and violence.

Human society is, of course, imperfect. People get drunk, get angry, get abused, get addicted, and go temporarily or permanently insane. People lash out, and they lash out with whatever comes to hand. Some people go into a state of merciless cold anger and plan their killings. When they do so, they choose the most effective weapon they can obtain.

Whatever your interpretation of the second amendment to the constitution, you have to admit that our country is awash in firearms. One way or another, they are remarkably easy to obtain, especially for those of us with no felony convictions. There are over 200 million firearms in the United States, and firearms of even moderate quality tend to last decades, so at least this supply will be around for generations. Half the households in our country contain firearms. You may applaud or deplore this ease of access, but accept this consequence:

Mass shootings on campuses will keep happening. Mass shootings at workplaces will keep happening. Shootings of all kinds will keep happening.

They will keep happening even if you lock doors, hire armed guards, stick a pistol in every pocket, run stricter background checks for mental instability, or whatever policy you can dream up. A certain small percentage of the population will choose to injure their fellow human beings, and they will use the tools at hand. They will use their human ingenuity, their obsessive persistence, and the freedoms of an open society to gain access to firearms and access to their intended victims. We are up to our knees in blued steel. We have created a shooting gallery and we are the little cartoonish duck targets going back and forth. We are going back and forth to work, to classes, to restaurants, stores, and friend's houses, a little bullseye painted on each of us.

We can do some things to stanch the flow of blood.

According to the Bureau of Alcohol, Tobacco, Firearms, and Explosives, 1% of the firearms dealers in the U.S. account for 57% of the sales of firearms that end up being used in crimes. To put it another way, 86% of firearms dealers have never sold a firearm that has ended up being used in a crime. 14% have, and of that 14%, 1.2% have sold 10 or more firearms that have been used in crimes. Of that 1.2%, 0.2% have sold more than 50 guns that have been used in crimes, and some of them have sold hundreds. This is either criminal intent or criminal negligence. A lot could be accomplished by cracking down on that wicked 0.2% percent. No new laws would be required. Unfortunately, the National Rifle Association has successfully lobbied Congress to hamstring the ATF in its attempts to crack down on this. It would seem to be a no-brainer, even to the staunchest rank-and-file members of the NRA, that allowing one out of every five hundred firearms dealers to run amok does not contribute to their cause.

Something else to consider is that 70-75% of crimes committed with firearms are committed by people with prior criminal convictions. This is not surprising, but the other side of the coin is more important: 25-30% of gun crimes are committed by previously law-abiding citizens. You know, those citizens into whose hands firearms are supposed to freely flow, according to opponents of stricter control. Longer prison sentences and stricter background checks don't help with this.

According to a study by the Department of Justice, 40% of violent crime involves alcohol. Two thirds of domestic violence involves alcohol. The average blood alcohol concentration of those convicted of serious violent offenses was estimated by DOJ researchers at between 0.20 and 0.28. (I've seen a guy get breathalyzed at 0.17, and he was reeling.) A study in Ontario found that increased membership in Alcoholics Anonymous decreased the murder rate in that province. It makes sense. Universally available, free, repeatable, and well publicized addiction treatment would be a good violence prevention tool. I'd bet the rent that it would pay for itself in avoided costs.

There is one new legislative initiative that I think is absolutely necessary to reduce the criminal use of firearms, and that is the coordination of gun laws between states. Right now there is a phenomenon called “The Iron Pipeline.” This generally refers to Interstate 95, which follows the Atlantic Coast all the way from Florida to Maine. According to a study by Columbia University Professor Dr. Howard Andrews, 90% of the firearms recovered from crime scenes in New York between 1996 and 2000 were originally purchased out of state. Most were bought in Florida, Georgia, the Carolinas, and Virginia, all states with lax gun laws. There is a deadly industry consisting of gun runners traveling to these states and others like them, hiring locals to act as straw man purchasers, and returning home with a carload of guns destined for crime. The strict laws in some states are essentially made useless by the lax laws in more rural states. It will be an extremely tough sell, but those of us in rural states need to start looking at ourselves as part of the larger situation. People in other states are dying for our convenience. Perhaps the National Governors Association is the right forum for this discussion. There is a case to be made for a national minimum standard to be adopted by all states, regardless of population or crime rate, in order to stop the interstate flow of illegal firearms.

Part of the solution is to peel our government out of the grip of the firearms industries. The firearms and ammunition trade is a two billion dollar a year industry, and about a quarter of all firearms end up being used in crime within a few years of manufacture. The firearms manufacturers make a profit on sales to both sides of the legal divide, and they'd hate to lose the Iron Pipeline portion of their income.

The problem of firearms and violent crime in America will always be with us. It is a case of an inherent human failing and a ubiquitous, convenient, durable, and particularly deadly instrument with which to indulge that failing. The men of a rural, agrarian, frontier society two centuries past left us with a seemingly ambiguous 27 word sentence that defines something to do with keeping and bearing arms, militias, “the people”, and the security of free states. Today, partisans with clenched jaws and calcified opinions stare each other down across the collective right vs. individual right divide. My hope is that even if District of Columbia v Heller doesn't resolve anything, it creates some movement in this paralyzed situation.

(Given the generally inflammatory nature of this subject, I ask you to read my Rules For Posting Comments and review your comment a couple of times before posting it.)

It's the emotions, stupid

When Bill Clinton was campaigning for president for the first time, he had a note stuck to the wall above his desk that said “It's the economy, stupid.” It was just a reminder to focus on George Bush Senior's weak point. I just read a new book by Drew Westen called The Political Brain (Subtitled “The role of emotion in deciding the fate of the nation”), which shifts that focus to the realm of emotion.

It follows in the wake of books such as “What's Wrong With Kansas?”, which explores the strange disconnect of blue collar conservatives voting against their own economic interests. Westen goes beyond the usual politics into the function of the brain itself. He explores how our brains process political decisions.

Dr. Drew Westen, PhD is a clinical psychologist and professor at Emory University. He has spent years studying the way people actually make political decisions, as opposed to the way people assume that they make political decisions. He has drawn on studies using high tech brain scanning devices and clever word association tests to parse out our decision making processes. The results are not particularly complimentary to the human species.

We like to think of ourselves as rational. How do we pick a candidate? Well, we find out about his or her positions on the issues of the day, look at the candidate's past for signs of character or lack thereof, and.....well, no we don't. What Dr. Westen has found is that people choose candidates according to a combination of tribal loyalty and a web of emotional associations. By tribal I mean, generally, Republican and Democrat. The web of emotional associations is a complex assortment of images, words, and concepts that have been placed in proximity to the candidate's image, name, family, philosophy, associates, and party. If a candidate is smart and/or lucky, those emotional associations were promoted by the candidate's own campaign. If not, the opposition candidate and party will generously supply the emotional baggage.

Polling has shown that ardent supporters of Ronald Reagan tended to disagree with him, point by point, on fundamental political and social issues. A more recent study showed that over half of the people who voted for George W. Bush in 2004 thought that he held many political positions that were the opposite of his actual positions. Westen points out that over the past few decades the Republicans have been quite adept at crafting appealing, forceful, coherent emotional campaigns on behalf of their candidates. These campaigns have generally been less coherent logically, but the GOP has realized the key truth that this is not important. Westen also points out that the Democrats, believing in reason, have lost and lost again as they win rational arguments while neglecting the emotional ones.

Westen provides a prescription for the Democratic party: Get the emotions right. He doesn't tell them to stop being rational, but to enclose their rational arguments in a carefully crafted and tested emotional framework. This failing of the Democratic party is a failing of the progressive movement in general.

Anthropologists call it the error of charity. In anthropology this means that the researcher assumes that the people being studied have the same thought processes and values as the researcher. Progressives tend to make two false assumptions. One is, of course, that evidence and logic on their own will carry the day in a political battle. The other is confusing activities that are emotionally satisfying for the actors with actions that are persuasive for the intended audience. I know I am stepping on a lot of toes here, but I'd propose that the vast majority of vigils and public demonstrations (by anybody) have done exponentially more for the emotional states of the participants than the political beliefs of any spectators. This error of charity also manifests itself in the tone and emphasis of materials published for progressive causes.

Dr. Westen's book is a necessary reference for anybody who either works for a political campaign or is facing a run for elected office. It will also interest anyone who has wondered how these people actually can get elected. It's the emotions.