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Book Review: Before The Dawn

Before The Dawn by Nicholas Wade

Nicholas Wade is a science writer with the New York Times and has previously worked for the scientific journals Nature and Science.

Tracing the history and the evolution of the human race from our common ancestor with chimpanzees 5 million years ago in a 300 page book was an ambitious undertaking, but Wade was clearly up to the task.  If you are interested in human evolution and the history of mankind, this book is required reading.

Wade has relied upon dozens of past and recent scientific studies to identify and explain critical junctures in human evolution that occurred in the distant past and, which may come as a surprise to some, in the more recent past.  The book is filled with interesting facts, and the author has done a magnificent job in explaining complex anthropological and linguistic theories in terms that most intelligently people will be able to understand.  It is particularly impressive how he has been able to do this without detracting from the precision with which the essence of the individual studies is communicated to the reader.

The book is deferential to the often stifling political correctness of mainstream anthropologists and sociologists while at the same time providing enough facts that the folly of some of the mainstream assumptions is exposed to the perceptive reader.  For example, the book does an effective job of debunking the fashionable thesis that race is purely a cultural construct without genetic basis, and it does so in a gentle fashion that shows that recognition of the reality of race, particularly in the field of medicine and pharmaceuticals, promises significant benefits in such tangible areas as the diagnosis and treatment of disease. The author effectively presents evidence showing that human history was almost certainly much more violent than is commonly thought, and that humanity has and is continuing to evolve towards a more peaceful nature, particularly in terms of violence between communities or nations, i.e. warfare.

Investing in Peak Oil: The Oil Factor

The Oil Factor: How Oil Controls the Economy and Your Financial Future

by Donna Leeb and Stephen Leeb

Essentially, this book is an investor's guide for those who believe that the Peak Oil theory has credibility.  When I read it sveral months ago, it was exactly what I had been looking for; it is well written and gives specific advice down to the level of individual stocks.

So what investments did they recommend?  I shouldn't give away the store, but they are generally bullish on the large and independent oil companies, not so bullish on the oil service companies and they like gold.  An entire chapter is devoted to the virtues of Berkshire Hathaway and its ability to make money in both inflationary and deflationary environments.  The book is written from a realistic and nonpolitical standpoint, and they are quite open with their opinion that defense stocks will do well as the United States will need to flex its military muscle to ensure access to diminishing oil production in the future, not only in the Middle East but also in places like Nigeria and Venezuela. 

Alternative energy is recommended as well; they think that General Electric will be well positioned for the advent of wind power, although I am somewhat skeptical of this because of the relatively small impact that this division would likely have on the company's overall profits.  Toyota Motor Company is recommended as a possible alternative energy play because of their technological leadership in hybrid vehicles.  The authors are bearish on just about all of the other automobile manufacturers, particularly the European and American companies.

A basic premise of the book's recommendations is their prediction that we will soon be in inflationary environment caused by the spiraling price of oil.  They have an interesting model, the premise of which is that if oil prices are 80 percent or less greater than the previous year's oil prices we should be investing with the expectation of inflation, if oil prices increase more than 80 percent within a one-year period we should begin readjusting our portfolio to hedge against deflation.

The book is an interesting read, and I would recommend it.  I made a number of investments last year based on the advice that is given in the book, with very favorable results.

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Energy At The Crossroads

Energy at the Crossroads: Global Perspectives and Uncertainties
by Vaclav Smil

Vaclav Smil is a professor at the University of Manitoba and has been widely published on energy issues for the past several decades.  According to his web site, his academic interests include:

My interdisciplinary research encompasses a broad area of environmental, energy, food, population, economic and public policy studies, ranging from quantifications and modeling of global biogeochemical cycles to long-range appraisals of energy and environmental options.

Perhaps I have read other books that are as fact intensive as this one, but I can't remember any offhand.  Among the many topics Smil addresses are:

1.  The history of energy.

2.  The linkage between energy and the economy.  This includes many interesting graphs showing the relationship between energy intensity and economic performance.  He reaches many interesting conclusions, including the surprising one that the European economy is less energy intensive than that of the United States mainly because its cities are closer together and has fewer net heating days and air-conditioning days because of its milder climate.

3.  The linkage between energy intensity and quality-of-life.  There is a strong correlation between energy intensity of an economy and such factors as female life expectancy at birth, average per capita food availability and the United Nations Human Development Index, but, somewhat surprisingly, much less of a correlation between energy intensity and political freedom.  He concludes that annual per capita energy consumption of between about 50 to about 70 GigaJoules appears to be the minimum for any society for a general satisfaction of essential physical needs combined with fairly widespread opportunities for intellectual advancement and with respect for basic individual rights.  In the United States, average per capita energy use is about 340 giga joules.

4.  Throughout the book, Smil discusses several current issues in a great amount of detail, including the current debate over Peak Oil and the debate over theories of abiotic origin of petroleum and natural gas.  He spends a great deal of time discussing the general lack of success that experts have had predicting energy trends in past decades.  One perhaps unfortunate consequence of this is that he rarely takes a firm position or makes a firm conclusion on any of these current topics. 

5.  On the issue of Peak Oil, he discusses the weaknesses of both sides arguments, states that it is unlikely that oil production will peak before 2010, and then is on to say that we should be all right even if it does.  He addresses Colin Campbell's work in detail, and identifies its weak points as the near impossibility of knowing what the ultimately recoverable amount of oil will be, both in terms of physical deposits and improved technology that is yet to come.  One of the improved technologies that he mentions is that of directional drilling, which in fact is has been taken into account by many energy commentators in determining the size of Ultimately Recoverable Reserves.  Smil seems to believe that there will be a painless transition to natural gas at the first sign of rising oil prices, which may be unrealistic given the developing natural gas supply situation on the North American continent.

6.  On the theory of abiotic oil he reaches no conclusions but recommends that experts keep an open mind on the issue.  Apparently, the best evidence that proponents of the theory have is the presence of helium in oil deposits, which typically is associated with inorganic processes, and the best evidence that the naysayers have is the presence of carbon 13, in amounts that would be expected in sedimentary deposits of plant life.

7.  There was an extensive section on methane hydrates, which he seems to think might be a legitimate fuel for the future.  Apparently, the volume of methane hydrate deposits is really quite enormous.  He thinks that the most likely locations for the initial harvesting of these deposits would be in Arctic offshore permafrost sediments, such as those by Prudhoe Bay in Alaska.

8.  He notes that the European power transmission grid is in much better shape than the corresponding American power grid.  The European power grid is much more able to transmit power from remote locations such as the planned wind farms by the North Sea to the population centers.  The North American power grid will need substantial upgrading before potential wind energy in the Great Plains can be directed to the East Coast or the West Coast.  Similarly, Europe is in a great physical position to receive natural gas from pipelines from Russia and the Middle East.  American will be forced to receive its future natural gas supplies increasingly in LNG form by tanker.

9.  Throughout the book, he mentions that the burning of fossil fuels is creating a clear threat to the biosphere, but when it came time to discuss global warming again he failed to reach a clear conclusion that it really presented a problem.  His attitude seemed to be that we should take action because it might be a problem and we can afford to be wrong if there is.  Sensible enough, I suppose.  On the issue of nuclear power he admitted that he has no idea of what the future may hold.  As throughout the book, he presents both sides of the debate but fails to state a final judgment of his own.  This doesn't detract from content of the book, but I found it somewhat frustrating as by reading the book I developed a great deal of respect for the author and would have liked to known his judgments on such matters.

I would thoroughly recommend this book to anyone who seeks to have a detailed understanding of energy issues.  Smil is clearly a top-level academic thinker, and it shows in this book.

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The Dollar Crisis

The Dollar Crisis 
by Richard Duncan

This is an excellent book to read for any person who would like to learn more about how the international monetary system works. 

Duncan traces what he feels to be excessive worldwide liquidity back to President Nixon's 1973 decision to take the US dollar off the gold standard that had been in place since the 1944 Bretton Woods conference (it is interesting that this decision was made two years after US oil production peaked).  According to Duncan, this caused an unfettered credit expansion, which was greatly exacerbated when the United States began running a huge structural balance of payments deficit.  These trade imbalances caused destabilizing bubbles both in exporting nations that became flush with dollars by selling to us the US (Japan, Thailand, and now China) and ironically in the US itself (The New Paradigm Bubble) as the creditor nations were forced to invest in dollar denominated assets to avoid strengthening their own currencies. 

Presently, with the United States running at least a $500B annual trade deficit, creditor nations have to search hard for attractive dollar assets, according to Duncan.  Corporate and consumer credit in the US is maxed out, and the S&P sits at 30 times earnings.  The dollar is headed for a big fall, in his opinion.  He sees it precipitated by a bursting of the US residential housing boom, or perhaps by a slowdown in US consumer spending.  I can see all three being precipitated by high oil prices, which weren't an issue when the book was written.

Duncan's proposals for easing (not solving) the crisis when it erupts involve the implementation of a global minimum wage and a gradual replacement of the dollar as the world's reserve currency by IMF backed solutions such as enhanced special drawing rights.  This is an interesting proposal, but it would make more sense to in my view to implement a universal global currency or a commodities-based standard so that global money supply could be better regulated.

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Hot Commodities

Hot Commodities : How Anyone Can Invest Profitably in the World's Best Market

Jim Rogers made his fortune as a hedge fund manager in the 1970's, a decade that most investers associate with economic malaise, and retired at the ripe old age of 37.  Like many, I was enthralled with his narrative in the book Investment Biker of a motorcycle tour that he took around the world with an attractive female companion in the early 1990s.  His second book, Adventure Capitalist, chronicled a second trip through 116 countries that Rogers made with a second beautiful woman (now his wife) straddling the Millenium. Both books provide an educational and entertaining mix of adventure, investment insight and a view of different countries and cultures that can only be gleaned from on the ground experience.  There are many reasons to envy Jim Rogers and the life he has made for himself.

The central theme of Hot Commodities is that equity markets and commodities take turns advancing as part of the normal business cycle.  The 1970s was bearish for stocks, but unbelievably bullish for commodities.  Rogers believes that a similar trend began in 1998 and will continue until at least 2011, and presents substantial economic data in support of his thesis.  The two main factors Rogers identifies as driving the current commodities boom are depletion of existing sources and increasing world demand fed by the rise of China as an economic power.

Oil depletion factors large into Roger's analysis, but is just a subset of a bigger picture of changing supply and demand for an entire range of commodities.  The book devotes an entire chapter to oil, describing Hubbert's Peak Oil model and the projections of energy experts such as Matt Simmons.  Rogers has pored over the same IEA Oil Market Reports that I have, and not surprisingly has reached an identical conclusion- that at the end of 2004 world oil supply was 83.5 Mb/day and declining, while demand was 82.4 Mb/day and rising.  Looking at the situation through the prism of a commodities investor, he sees a developing imbalance between supply and demand that usually marks the beginning of a long-term secular bull market. 

According to Rogers, the end of a commodity bull market is usually characterized by a supply overcapacity that develops over time due to investments in infrastructure that are spurred by the rising prices.  Again, he predicts that the current bull market will extend until at least 2011. 

In the case of oil, however, Rogers isn't exactly predicting a buildup of supply capacity, which is interesting as philosophically he has much in common with the so-called "cornucopian" economists who predict that the free market is certain to ensure a never-ending stream of abundant oil.  He notes two simple facts that are familiar to those who have studied the issue: (1) that no large oilfields have been discovered in over 35 years; and (2) that all oilfields invariably deplete.  He also notes that the two most likely sources of increased oil supply in the geologic sense are Saudi Arabia and Russia.  As readers of Adventure Capitalist know, Rogers views Russia as a corrupt gangster-ridden kleptocracy and has long been pessimistic of its chances for real economic growth.  For the same reasons, he does not see Russia as a reliable source for increased oil supply; he sees profits from existing production ending up in Swiss bank accounts rather than being invested in infrastructure.  In the case of Saudi Arabia, he notes the reservations that some experts (notably Matt Simmons) have about the reliability of Saudi reserve estimates and potential for increased production.  He remains agnostic on the issue of whether Saudi supply can materially increase, but notes he has done well in the past when betting against conventional wisdom.  Perhaps unfortunately, the conventional wisdom is that the Saudis can save us by turning on the taps, sort of an energy analogue to Alan Greenspan.

After describing a number potential alternative energy sources and reacing the inevitable conclusion that they are inadequate as a substitute for oil, Rogers ends the chapter with a simple note: It's a good time to buy some oil. While this advice is eminently practical from an investment standpoint (I intend to follow it), I found Rogers' analysis somewhat lacking in that it fails to take into account consequences of the second order: how oil supply shortages and the resulting high prices will affect the industrialized world's economy, and what that in turn will do to demand for the other commodities he discusses.  He does point out in the book that a poor economy didn't stop commodity prices in the 1970s from going through the roof.  In the 1970s, though, it was clear that the disruption in oil supply was largely political and temporary.  I think it is reasonable to expect that a prolonged and perhaps interminable decline in oil supplies will do much more serious damage, both economically and politically.  Certainly, I think mid-term investments in such commodities as oil, lead (used in deep cycle storage batteries), copper (hybrid cars are going to use a lot) and natural gas (we're running low on this too, at least in North America) are almost certain winners. 

In the long run, though, an investment in arable farmland with a good wood lot, horses and loads of ammunition might pay off more.

As a postcript, Jim Rogers has now predicted $150 dollar per barrel oil within the next ten years.  For those interested in investing based on Rogers' predictions, the Rogers International Commodities Investment Fund is open to individual investors. 

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The Long Emergency

The Long Emergency
by James Howard Kunstler

Jim Kunstler is a familiar face to those who follow the Peak Oil debate.  A former editor at Rolling Stone and now an independent writer and social commentator based in the Adirondack region of New York State, Kunstler has authored three nonfiction books that that address the unsustainability and wastefulness he believes is inherent in the postwar trend of suburban and exurban development in the United States.  Intense, energetic and sometimes crude, Kunstler was prominent in the recent video The End of Suburbia and publishes an oft-amusing weekly online commentary on current events, the title of which I will leave the reader to explore at their own peril. 

The first two chapters of The Long Emergency are an elegant summary of the approaching peak of world crude oil production and the effect that the oilfield depletion that is already well advanced will have on the viability of the American way of life (particularly in the suburbs, or course), globalism and global population.  Some reviewers are finding the book gloomy, which may be the case; I'm more concerned with whether its forecasts are realistic, and based on the research I have done on the issues, many of them may well be.  Others, though, seem to be a stretch, as I will presently discuss. 

The third chapter discusses the geopolitics of Peak Oil.  Kunstler describes the growing struggle against what he calls "militant Islam," the issue of Saudi stability, the reasons behind the Iraq occupation and the potential of future contests between the US and other powers, particularly China, for future access to Middle Eastern oil.  In my opinion, he underemphasizes the role that Israeli excess has played in provoking the Islamists and strengthening groups like Al Qaeda; he views the conflict as "intractable," when it might actually be solvable with some timely adjustments in US foreign policy. His ultimate conclusion is that the US will eventually be worn down military and economically and forced to withdraw from the region.  This seems to me to be the probable outcome as well. 

The fourth chapter gives an excellent pithy description of why alternative fuels are unlikely to be an adequate replacement to crude oil and its byproducts, at least at the prices that would be required to sustain the American way of life and free market globalism as we now know it.

The fifth chapter delves into broader issues such as global warming and how its effects will likely superimpose themselves onto the human misery and dislocation that will be caused by oil depletion.   Catastrophic spread of AIDS, mass starvation due to climate change and lack of petrochemical fertilizers, rampaging strains of antibiotic-resistant bacteria and lack of fresh water are some of the more realistic examples Kunstler gives of what the world has to look forward to in coming decades.  This may be Kunstler at his characteristic gloomiest, but it is worth considering nonetheless, in my opinion.  It is no coincidence that global population has increased at a Malthusian exponential pace during the past 150 years, and that much of this increase is a direct consequence of the exploitation of crude oil and petrochemicals.  Most of the world's fertilizer is synthesized from natural gas, for example, which is also increasingly in short supply in many parts of the world, particularly in North America.  It is quite likely that the population carrying capacity of a world with diminished fossil fuel production would be markedly decreased.

I found the sixth chapter "The Hallucinated Economy" to amount to a cynical leftist diatribe against American-style corporatism and free market globalism, but that might reflect my own political outlook as much as it does Kunstler's.  There is no doubt that the free market system will have a hard time adjusting in future years, but I expect that it will do better than any workable alternative.  In my view, globalism has in its aggregate effect helped the human condition more than it has hurt it.  Its collapse may be cheered by the antidevelopment crowd, but it will harken a final loss of hope for much of the world's poor, many of whom face a bleak uncertain future as their meagre yet essential fossil fuel based infrastructure will no longer be available for use.

The seventh and last chapter, "Living in The Long Emergency" is at once thought-provoking, sobering and unrealistically apocalyptic.  Kunstler projects that the United States will fragment into autonomous regions, with the Southwest and the major cities nationwide ultimately nearly depopulating.  He thinks the rural Northeast and Midwest are best suited as a result of their geography and respect for diversity and the rule of law to making the transition to an economy based on local production.  I have to say that some stereotypical northeastern liberal bias is evident in his gloomy predictions of violence and unrest in the Southeast and Mountain West, which he views as unstable due to the "hyperindividualism" and religious fundamentalism of those who live there.  Personally, I would predict that the potential for civil conflict is greater in the major metropolitan areas of the Northeast, particularly in the inner cities and close-in suburbs, and in the Rust Belt than in the Southeast or in the valleys of Idaho.  In my view, Kunstler defies credibility as well in predicting future attacks by Asian proto-pirates along the coastal regions of the Pacific Northwest.  (Note to Jim: It's a long way from Malacca to Seattle.)

Overall, I would say that the book is a must read for those who are interested in learning more about oil depletion and the changes that is is about the wreak on the world. Kunstler's talent as a writer always makes for an entertaining read, but this book provides much more than that.

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