Sunday
Feb142010

Essley’s Law:

Never trust those with all of the modesty of absolute certainty.

Corollaries:

1  The conventional wisdom is often wrong.

2  Conviction overrules common sense.

3  An open mind always leaves room for doubt.

4   It is useless to argue with a closed mind.

5  When pseudo-science flourishes, none dare call it false.

Thursday
Feb112010

on war and peace entry

On War and Peace:

Is war the terrible interlude that breaks between periods of peace?  Or is peace a necessary rest period between periods of war to allow man to recover from its favorite past time, just as sleep is required between periods of wakefulness?

War is a lose-lose situation.  There are many more losers than winners.  In fact, history records many cases where participants on both sides lose and some outside party comes in to pick up the pieces, such as when the relatively few  Muslims exploded our of Arabia to defeat the exhausted Byzantines and Persians (after their century long wars) and acquired the territories of both parties.  It could happen again if Russia and the U.S. ever go at it.  In fact, many Muslims are hoping for just that. 

Is conquest possible without all-out war?  Absolutely!  Two recent examples:  a California Latino politician bragged “We are accomplishing the ‘reconquista’ without firing a shot.”  Also demographic trends in Europe indicate it will be predominantly Muslim by mid-century.  This has prompted one Muslim leader to state “We will accomplish through the loins of our women what we couldn’t do through the arms of our men.”  Unfortunately, both men may prove to be prophets.

For Europe to prevent becoming predominantly Muslim will require action that would make the Holocaust look as benign as a child’s tea party.  It is unlikely to happen. Already you are seeing signs of European surrender.  It is just a matter of time for England, France, Germany and Spain to surrender their culture, and when they fall so will the rest of Europe.  We are even seeing the beginning signs of surrender in Canada and the U.S.

When Europe falls will it be America alone against Islamic, Russian and Chinese enemies, or will we already be bankrupt by then and the point of surrender ourselves?  When Europe falls, will it also be Russia alone, surrounded by enemies more than ten times as numerous?  When Europe falls and with the U.S bankrupt, can Israel stand alone?

Who knows?   Will the 21st century be one of peace or will it be bloodier than the 20th century?  Israel isn’t likely to wait to find out.  Their only chance of surviving is to initiate WWIII while they still have allies strong enough to win.  They have learned the hard way that they can’t do it alone.  Their only choice is war or surrender. That is also Europe’s, Russia’s, and even our future choice before mid-century.

One thing for sure, surrender always prevents the killings—initially. Surrender will always be an option to some.

The U.S. and Russia appear headed for confrontation over Georgian and other ex-USSR territories now sovereign states.  Still, if either is to survive the future they must eventually become allies.  But who in the U.S. is looking that far ahead with an election only 40 days in the future.  When we elect a man born as a Muslim as President—and as an apparent apostate to Islam (a crime punishable by death) is still highly popular in all Muslin counties—don’t  expect Israel to wait for our leadership or follow our advice.  They will attempt and likely succeed in getting us involved in a war with Iran.  It may be their only chance for survival.  That instinct is strong, in nations, as well as man.

Viewing the confrontations coming down the line, the 21st century will likely be bloodier than the 20th.  The world has rested from its interlude of peace.  It is time for the killings to start again.   They will!  Perhaps soon!

 

PLE  September 21, 2008

 

Thursday
Feb112010

On Forecasting Change

Predicting Change:

Sometime in the 1980s, Dr. Fred Singer, then a professor at George Mason University, ask me to come talk to his students on the art of forecasting change.  Like any good teacher, I did my homework before facing the students.  I found a course description of methods taught at one university (it may have been George Mason) and found several articles on techniques for forecasting.  I first described the techniques my research  uncovered and then made a bold prediction.  I informed the students that if they faithfully applied those techniques throughout their entire careers, they would never once successfully predict change.  I gained their attention.

If a company spends a half-billion to build a plant and the projected demand then drops drastically, they may lose their entire investment.  Those that make billions in the stock market don’t get rich by projecting trends, but by predicting when trends change, thus knowing when to buy or sell.  The art of forecasting isn’t projecting trends (any first year engineering student with a straight-edge and some semi-log paper can do that) but successfully predicting when trends will change.

All of which makes me think of a question my wife has asked me at least a dozen times. “All right Mr. WiseGuy, if you are so good at predicting change, have an MBA from Harvard,  a Masters degree in Engineering, claim to understand economics, have had courses in finance and investing—why aren’t we rich?  A logical and excellent question from her point-of-view.  My lack of wealth might also be a logical basis for the reader to question my explanations on how to predict change.    But I digress.

Predicting change is simple. So simple, one can wonder why so few can do it. All you need to do is: (1) Understand the forces or circumstances causing current trends.  (2) Look for factors that can change such forces or circumstances and consider how men will react to such change.  An example:  When the Government, in its infinite wisdom, imposes or changes regulations, consider how those affected will react to increase profits or reduce loses.  My prediction of the results of one change in regulation resulted in my being described as “the man who predicted the refinery fire” and later as one who “saved the nation $4 billion.” Pretty heady stuff—but not quite true.

To make a short story long (my wife says I’m even better at that than predicting change), and maybe just to brag a little, I’ve described some of my experiences starting with my first forecast and later how I didn’t really save the nation $4 billion. Those who would have gained the $4 billion used their clout in Congress to change the regulation again and later captured most of it.   Never underestimate your adversaries, or what some men will do for $4 billion. 

My two steps above on how to predict change is really all you need to know.  All that follows is commentary.

  *   *   *   *   *

My first forecasting success came early in my career.  I was the lead reservoir engineer in The Ohio Oil Company’s district office in Sidney, Nebraska.  My company had been rather late recognizing the value of engineers, but had expanded rapidly following WWII.  Mostly it was a case of the blind leading the blind and learning through experience.  I had two sidekicks and was the lead reservoir engineer, not because I had earned the lead but simply because I joined the company a year earlier than the other two. Reservoir engineers aren’t involved with drilling or production but study the reservoir to learn how to get the most oil out of the ground.  Perhaps that is why I was successful in forecasting change.  To predict oil production I had to understand the underlying (underground) forces involved and what causes them to change.  This is exactly what one must do to predict change.

Reservoir engineers usually get questions others don’t know how to answer, which also provided good training. Instead of having one-year experience forty times, they usually end up with a variety of different experiences during their career.  For example, my first oil company had to purchase a large ranch in Wyoming in order to get the mineral rights to the oil. The Division production superintendent asked one of my reservoir engineering compatriots in Wyoming “How many bulls do we need for 200 cows?  But I digress again.

Ohio owned a third interest in the Platte Pipeline, which carried oil from Wyoming, through Nebraska to refineries at Wood River, IL.  The line was running at capacity and Platte was considering expanding it.  The three neophytes working as reservoir engineers in Sidney received the task of predicting production from the State of Nebraska for the next ten years. One of the other pipeline owners was to predict the production from the Colorado portion of the Denver-Julesburg basin, and another group to predict production from Wyoming.  This was fairly early in the 1950, and the first production from the Denver-Julesburg basin and Western Nebraska had been discovered in mid-1949.  The fields were quite small, but the drilling was fast and cheap, production wasn’t prorated, and the wells were generally quite profitable with a fast payout.

Production in Nebraska had risen rather fast after the initial discover and the brisk drilling the followed, and the tailed off to a growth rate of 6-10% per year, I don’t remember the amount exactly, but the production trend was one that could be easily projected. At the time, production was around 7,000 barrels per day. We didn’t project the trend. Some way, somehow, one of us got the bright idea that perhaps we should look at what had caused that trend and consider things that might cause it to change.  Following the discovery well in the basin, most land had been leased with five-year leases.  Normally, when a company leases land for possible drilling, it will spend several years doing geological and geophysical investigations and then decide sometime before the leases expire whether it should spend the money to drill an exploratory well.  So the first thing we did was determine when most of the leases in Western Nebraska would expire.  Our reasoning ran as follows:  

  1. Drilling was cheap.
  2. A relatively high percentage of exploratory wells had discovered oil (compared to most areas).
  3. Many leases were expiring and would require testing or renewal (not always granted).
  4. To avoid losing possibly productive leases, many exploratory wells would be drilled.
  5. Increased exploratory drilling would lead to more discoveries.
  6. Increased discoveries would lead to drilling to produce the fields discovered and that would lead to increased production.

With many leases expiring, we figured there would be an upturn in drilling.  So with all of the confidence of brash young engineers who know everything when coming out of college and had not yet acquired the knowledge of failure, we built a model.  This was at a time when the early computers were hand-wired to solve accounting and payroll problems and weren’t available to engineers.  We spent a month or so working nights and weekends putting in data and grinding out numbers on Frieden desk calculators.  You have to be an old timer to remember Friedens.  Twenty years later I could have spent a week programming our model and obtained the answer in thirty minutes.  The personal computer on my desk as I write this could spit out an answer in a second, once programmed.  But that was then, before computers allowed engineers the ability to make mistakes a thousand times faster.

When we put everything together for our answer we were stunned.  It predicted a rather rapid upturn in production, then a steep yearly increase that leveled off at about 55,000 barrels per day and started a slow decline.  Could it be?  We spent a couple of days checking our assumptions, our calculations, and decided either “yes”, or “to hell with it, we’d rather do something else than continue working overtime and pounding calculator keys”, I don’t remember which, and sent our prediction to our Division office in Casper.  The geologists in our district office and the field engineers almost laughed us out of existence the predicted change was so drastic.  I was scheduled to go to our Division office in Casper early the next week to defend our projection.   I assumed I’d be laughed at.

I never went!  The meeting was cancelled.  A couple of days before the meeting Sinclair announced that they had acquired a right-of-way and had let a contract to build a pipeline from Wyoming to Wood River through Colorado, not far south of the Platte Pipeline.  I learned my first lesson about pipelining I would see repeated numerous times later.  While a pipeline in operation is a regulated monopoly, there is competition in the planning stage and obtaining the right to construct the line.  I later learned that a third company was planning a pipeline that also collapsed when Sinclair applied the southern Civil War General Bedford Forrest’s formula for success in battle “Get their fustest with the mostest.”

Several years later, while working with another company, I happened to see a statistic that production from the state of Nebraska was 55,000 barrels per day.  That number rang a bell, so I pulled out a copy of our old projection, looked up production data from Nebraska and plotted it against our old projection.  Surprisingly, that projection from three neophyte engineers never varied more than two months from what actually happened.  It was by far the most accurate forecast I ever made or was associated with, or for that matter I ever saw for a similar type projection.  Lucky?  Absolutely!  Still, some of our assumptions for our model must have been amazingly close.  Looking back, fifty-five years later, another thing I now find amazing is that we built a model, although we didn’t call it that then.  That was long before computers and modeling became the vogue in engineering.

My ego would like to say that I had dreamed up the idea for that successful projection, but truthfully, I can’t remember which of the three of us was responsible. It didn’t matter.  I had learned that if you successfully predict changes in a factor, or factors, affecting a trend, you can successfully predict a change from that trend.  I also learned that one of the factors to consider are decisions that individual or companies make when conditions change.  That knowledge during my career led to many successful predictions that differed drastically from many made by others.

Several years later, while serving as lead reservoir engineer at Skelly Oil Company (actually, I was their only reservoir engineer at the time), at a meeting I and the top engineers of three major companies were asked to predict the future ‘allowable’ days in Texas (at the time, 15 days).  I built a simplified model with broader assumptions than the three of us used earlier (I was dealing with the entire state of Texas, not just western Nebraska) but still based upon the number of leases that would expire if not drilled.  I was wrong!  I predicted allowable days would decline to twelve and then start a slow rise.  Allowable days actually dropped to eight before starting to rise.  Still, all of the others predicted an immediate slow rise from 15 days.  I was the only one to get the trend correct.  What happened?  They threw my projection out and averaged the three upward projections from the older, more experienced engineers.  Such is the fate of prophets.

Looking back at my various successes, it seemed so easy at times that I still can’t understand how so many others often failed.

Let me describe two of the easy ones I made when I first joined the government.  I was working for the Office of Emergency Prepardness (OEP) in their oil import program.  My job was to predict US. production to determine how many imports to allow.  For the previous several years, US production had increased in accordance with increased oil demand.  The American Petroleum Institute (API) and several others continued projecting that trend.  Yet in early 1972 I stated that our production had peaked several months earlier and would be down hill from then on.  What did I see that others didn’t?  During the 1950s we made so many discoveries and drilled so many wells that we had to limit (prorate) production from most wells.  We started by regulators issuing ‘allowables’ for individual wells.  When that wasn’t sufficient Texas reduced the number of days you could produce your ‘allowables’, eventually reaching a low of 8 days.  Oklahoma used a percentage, reaching a low of 25%, if I remember correctly. Eventually, the number of days and percentage started rising. It reached 100% in 1971 and few wells then could still meet their initially assigned ‘allowable.’  I short, I recognized that our production increases the past several years resulted from increasing ‘allowable’ percentages, not from new discoveries or new wells, and we could no longer get additional oil for that reason.  With existing wells essentially at peak production and no new significant discoveries, predicting that production had peaked and would thereafter decline barring major new discoveries, seemed amazingly simple. The OEP prepared to change its import quotas as a result.  It was my first government success.

Several months later I predicted another change in a trend that differed from that of others.  Jet fuel demand had been increasing by 10+% per year.  I don’t remember the exact number, but when plotted was a straight line—the easiest type projection to make.  Instead of projecting that trend, as others did, I projected a sharp break and a new growth trend under 2% per year.  So what did I see?  The major airlines had just completed conversion of all of their piston planes to jets.  There was a companion sharp decrease in aviation gasoline demand the previous years.  I reasoned correctly that the past trend had resulted from a replacement of aviation gasoline as more and more jets were introduced and the type of fuel used to fly customers switched.  Consequently, I made my successful projection of jet fuel increase based on the trend of previous years increase in total passenger miles, not on a trend resulting from converting piston planes to jets.  Simple?  Absolutely!  So why did so many miss it and why did some of my companions laugh at my projection that differed so drastically from the previous trend?

I can’t say my next projection differed from all others. To my knowledge it was the only one (at the time).  While with the OEP, a brilliant young PhD, Dr. Ronald Bass, and I set out to learn how the U.S. could respond if its supplies of imported oil were cut off?  Just before completion of the study the OEP was disbanded in one of the many Government reorganizations (Eventually becoming FEMA) and the responsibility for the oil import program, was transferred to the Department of Treasury under the direction of then Deputy Secretary of Treasury, Bill Simon.  Dr. Bass and I weren’t transferred with the oil import program, but Bill Simon’s choice for his energy advisor, Dr. William Johnson, hired from the staff of the Council of Economic Advisors, made an unusual decision for a government employee.  He said, “I  know almost nothing about energy, I’d better get a staff that does.”  He hired me as his deputy with a task of assembling an energy staff.  Dr. Bass was one of the first I hired.  The staff I assembled and its success will have to wait for another story on Government efficiency (mostly inefficiency).  A short time later, the Yom Kippur war started. and the Arab nations declared a boycott on selling oil to the west.  Suddenly, Dr. Bass and I were the most qualified individuals in the U.S. government for the problem at hand since we had each spent most of the previous year studying the problem at the OEP and our study and report was about 95% complete.  The Yom Kippur war and the embargo started on a Saturday morning.  I got to the office that morning at about the same time as Dr. Bass and Dr, Johnson.  Dr. Johnson, wisely (his decisions usually were) turned everything over to Dr. Bass and myself and used his other staff as foot soldiers to run errands or dig out information for us.  Ron took on the job of finishing the report while I turned to the task of predicting what the shortage would be and how we would meet it.  I don’t recall if we slept at the office that night or went home for a few hours sleep.  I do remember that early Sunday morning I had unwelcome visitors in my office at the Treasury Department.

The CIA, which was caught completely flat footed, without an analyst with any appreciable energy experience, and I suppose, as any ‘so-called’ intelligence agency should, found out that I was making a shortage forecast.  For the next eight hours I had two agents hovering over my shoulders generally getting in my way and asking dumb questions.  When I finished my analysis about six PM Sunday evening the CIA agents took a copy of my report and disappeared.  I later discovered that the CIA’s forecast made Monday morning to the President Nixon was identical to mine.  It is amazing how two separate government agencies could come up with an identical forecast. 

You have to give the CIA a lot of credit   A year or so later a study was made to determine what the shortfall had actually been during the oil cutoff. The report stated that CIA’s forecast to President Nixon made two days after the start of the embargo, was less than 1% off the actual shortfall.  It showed that FEO’s later forecasts (after expanding within a month to about 3000 instant experts and I was involved elsewhere.) had varied from 50% to 75% higher than the actual shortfall.   It really made me feel good about the future to think that a U.S. intelligence agency could predict upcoming events so accurately.

Actually, when the embargo started there was just over two months oil at sea in tankers headed our way the Arabs couldn’t cut off.  While no shortage would develop for two months, conservation measures we would take and fuel switching would actually start immediately and allow stocks to increase initially.  In February, four months later, FEO’s new economics group (with its instant experts) stated in a staff meeting that the shortage was 50% greater than I had projected. Obviously they hadn’t looked at storage data because our tanks were full.  But hey!  Our citizens had to wait in long lines to buy gasoline and no more tankers from the middle-east were arriving.  There had to be a serious shortage didn’t there?

I digress again, but I must tell the rest of the story since it says a lot about the Government.  Monday morning, with Ron’s and my report finished, Bill Simon sent it to the President Nixon’s National Security Advisor.  That afternoon, the National Security advisor, who had just recently inherited the job when Henry Kissinger left it to become Secretary of State, sent a copy of the Treasury department report to Kissinger.  The cover letter read  “Attached is a joint National Security Advisor/Treasury Department report on how to meet the Arab oil embargo.”  The National Security Advisor’s contribution was to stamp every page “TOP SECRET.”  Thus, there are two identical reports, now forever lost in the archives of the U.S. Government, one unclassified and the other TOP SECRET.

But there is more to the story.  Ex-Governor Love of Colorado earlier had been appointed Energy Czar by President Nixon.  The Governor was vacationing in Colorado that Saturday morning when the crisis started.  He didn’t see the need to return immediately to Washington.  Monday afternoon, General Haig, President Nixon’s chief-of-staff, ordered him back to Washington.  He came charging in Tuesday morning and immediately ordered his staff to prepare an analysis of the situation.  Love and Simon had been feuding so Love’s staff were instructed not to speak to us.  Actually, the most intelligent man on Love’s staff, a Lt. Commander in the Navy on assignment, knew better.  He spent every evening conferring with us and obtained a copy of our report.  That Saturday, a week after the embargo started, Love sent his report to Dr. Kissinger.  The good doctor couldn’t help but notice that except for a few minor recommendations at the start, Love’s report was identical to the one he had received five days earlier.  That was the beginning of the end of Governor Love’s short sojourn in Washington as the Energy Czar.  A short time later, Love made a couple of similar anemic responses to a Senate Committee and soon after headed back to Colorado permanently.   A Federal Energy Office (FEO) was organized and Bill Simon became its head.

Bill Simon was beside himself in his enthusiasm for the report Dr. Bass and I had prepared.  He stated  “that never before in the annals of the Government have two individuals produced so much in such a short period of time,” or something close to that. Dr. Bass and I then made a serious mistake.  Basking in our own egos we neglected to tell Bill that we had over two man-years invested in that report, not four man-days.  Bill Simon expected similar results from us on nearly every weekend for the next several months during the crisis.  No way.  If my wife, with a serious illness at the time, wanted to see me, she had to come in and look at me during the few hours I was home sleeping.  The energy crisis took its toll on both her and me.  The next summer, I stepped down as an officer at FEO and took a lesser position as an aide to another officer to be able to spend more time with her and our children.

Which brings me to the most startling predictions of my career a short while later, where I earned my salary for all twenty years of my government employment.  It involved my predicting how individuals (companies) would react to a change in government regulations.  About ten months earlier citizens had just come off a couple of months of long waits at gas stations at the start of each month to buy gasoline.  Following the 1973 Yom Kippur war and the resulting oil embargo oil prices had risen, the major companies were making record profits but were being crucified by the liberal press who had discovered numerous oil tankers waiting offshore while the poor citizens were waiting in long lines to buy gasoline.  Actually, there was a good reason why the oil tankers waited offshore instead of unloading immediately.  They had too because all of our oil storage tanks were full and they had no place to unload their cargo. In fact, one of the large pipelines delivering products to the East Coast also shut down for a couple of days because their tanks were full.  Dr. Johnson would later write a report on “How to create a shortage” (by regulation).

So why were we waiting in long lines to buy gasoline when our storage tanks were full and the oil companies were begging the government to do something to move the oil?  The answer is simple—U.S. Government regulations.  Following the oil embargo we had adopted regulations that allowed for price increase as costs increased, but only at the beginning of each month.  An unexpected thing happened.  Actually, it wasn’t amazing at all and should have been anticipated, but wasn’t.  The individual service station owners, mostly independent small businessmen, reasoned that if they refused to sell gasoline the last several days of the month, they could sell it the first days of the next month at several cents per gallon more under our regulations. They shut down the last several days of the month. Few resisted the temptation to make extra shekels. There appeared to be a severe gasoline shortage. Actually, our storage tanks were full.  This is another digression and doesn’t involve one of my predictions, but it illustrates how individuals will react to game government regulations to maximize profits.  In this case, thousands of small businessmen (not the oil companies) acted simultaneously, reacting to Government regulations.

My great moment, if you can call it that, came later and resulted from peculiarities of the same price regulations, and the same type gamesmanship, this time resulting from a change in regulations and the larger oil companies.  In the government’s infinite wisdom (I wasn’t involved in any of the pricing regulations), we had set price controls on all products but had stated that if the oil companies couldn’t recover all of actual cost increases they could ‘bank’ the difference and recover it later if a shortage allowed such recovery.  The regs specified how much of the allowed price increase could be obtained from each product.  That worked out such that they recovered costs on most products but not gasoline. The ‘banked’ unrecovered gasoline costs increased to just over four billion dollars.  With the shortage over, early in 1975 FEO announced the phasing out of price regulations and also a change them to allow more recovery from gasoline.

At the time our gasoline storage tanks were full to the brim, but the oil companies could recover an extra $4 billion if they could create a shortage in a short period of time before our regulations expired.  For $4 billion the big boys will play hardball.  So I put myself in the shoes of an oil company president and asked myself “how do I create a shortage and send a message to other presidents without violating the antitrust laws concerning collaboration among competitors?”  I didn’t have to wait for my own answer.  A couple of days later, the President of one of the largest oil companies gave a speech to an investor group that included a couple of points that didn’t make sense to me.  It dawned on me that that was the message.  It wouldn’t make sense to other oil company presidents either and they would watch what he did to figure out his hidden message.  I figured they would, so a boldly predicted a coming shortage of gasoline. The PhD economist who headed my agency’s forecasting group and by then had about 100 instant energy experts working for him—don’t ever say the Government can’t expand in a hurry in a crisis—stated that ’no way’ would there be a gasoline shortage that summer.  Based on the amount of gasoline in storage and past trends, he was right. But past trends were about to change drastically.

So how did I predict the oil companies would create a shortage.   I predicted two things would happen.  Refineries have a certain flexibility on what products they can recover from crude oil.  So at the end of every summer they switch some capacity from gasoline to heating oil and in the spring to producing more gasoline and less heating oil.  I predicted that the oil companies that spring would delay switching from heating oil back to gasoline.  They did.  Refineries also shut down for several weeks every three years for maintenance, repairs and to check for corrosion (more often, when necessary).  In industry parlance, it’s called a ‘turnaround’.  I predicted that a number of refineries not scheduled for a turnaround that year would discover they were having unexpected corrosion problems and shut down that spring for a ‘turnaround’.  Within a week the first refinery announced corrosion problems and shutdown for an early ‘turnaround.’  The other companies got the message and several more started having unexpected corrosion, shutdowns for turnarounds increased and gasoline stocks started disappearing.

At a staff meeting while discussing how the oil companies might create a gasoline shortage I said one possibility would be for a small fire that knocked out a key refinery pump that could take up to two months to replace (they weren’t off-the-shelf stock items).  Several weeks later something happened that I didn’t expect.  A refinery fire totally destroyed a Gulf Oil Company refinery.  I gained some notoriety among my colleagues as ‘the man that predicted the refinery fire’.

Towards the end of April even our forecasting group, all 100 strong, recognized that we were headed for a severe gasoline shortage. “No way”, their PhD head wrote three months earlier.

Then I made another prediction concerning how oil company CEO’s might react to a changing circumstance.  The previous spring they had received a lot of unwarranted adverse publicity when a number of their tankers had to wait offshore before unloading because all of our tanks were full.  They were also making record profits and more unfavorable publicity could cause Congress to react with more price regulations, or an excess profits tax.  Both were actively being discussed in Congress.  I had my boss call in all of the oil companies’ Washington representatives (an illegal meeting under the anti-trust laws?) and handed out two editorials I had written. They differed slightly and used examples from different companies, but basically showed how the companies had gamed the situation by shutting down refineries to create an artificial shortage. I showed the extra profits they could gain.  We then stated that unless they had their shutdown refineries back online within a week they were going to see those two editorials and others like them in every major newspaper in America.  We were playing hardball also.

It worked.   Refineries started coming back on line and by the first of June the crisis was over.  Gasoline prices went up three cents but soon dropped back. (I guess the PhD economist and his 100+ instant experts could claim they were right.  No gasoline shortage developed that summer.)

At about the time refineries started going back on line, Senator Scoop Jackson (D. Washington) and the Senate Interior Committee discovered the low stocks and that a gasoline shortage was pending. Like any good politicians, they called a hearing to criticize the administration, the oil companies, and gain some favorable publicity concerning what good guardians of the public interest they were.  When the hearing started, Frank Zarb, then FEA Administrator, and my boss, an army reserve general, Gorman Smith, went before the committee, showed when we first recognized the problem, the steps we had taken and that the crisis was over.  The good senator disbanded the investigation after about an hour with no publicity.  Why give a Republican administration credit for perhaps doing something right?

Several colleagues stated that my boss and I had saved the public $4billion. It appeared that we had.  Actually, we hadn’t.  When plan ‘A’ doesn’t work, fall back on contingency plan ‘B’, which is what the industry did.  They had their friends in Congress push through legislation extending the FEA’s regulations for a year and other minor changes concerning recovery of the ‘banks’.  They recovered most of the $4 billion the following year.

Still, my boss and I had saved the public some of the $4 billion, far more than enough to cover our salaries for all of the time we were government employees.  Not many government workers can make that claim.  I became a legend in my own mind, if not in others, on my ability to make forecasts and predict change.

My next published government forecast also involved predicting how individuals might react to changing conditions.  But this one differed from all of the others.  In it I had to gain considerable new knowledge in order to predict how some of the individuals involved might react to changing circumstances.  It involved predicting international oil prices when an oligopoly (OPEC) was essentially controlling them.  There is a considerable body of economic literature regarding monopolies and monopoly pricing.  I first assumed that an oligopoly would behave somewhat like a monopoly, at least until they were no longer able to function as an effective monopoly and individual members started cheating.  Therefore I had to learn what I could about monopolies. What market share was required to set prices?  At what point would a monopolist lose its market power?   The oil companies, with their foreign concessions mostly nationalized and being retained as consultants at a lesser profit, were furiously drilling elsewhere (in the North Sea and other areas) to try to make up for lost profits.  The production increase from that source was relatively easy to predict given my previous experience.   When the oil companies produced enough elsewhere so that OPEC essentially lost its market power, when would the various OPEC members start to cheat and produce more that their OPEC assigned quota and drive prices down?  Questions I had to make assumptions about.

My prediction differed almost totally from the prediction of 170 economists surveyed by the Energy Department at the time.  The DOE projection was simply the average of the 170 replies from the economists they queried, throwing out the top and bottom few.  According to the government report, only three of the 170 economists predicted oil prices declining from the $33 /barrel +/- at the time of the forecast.  The Energy Department projection showed oil prices rising gradually to just over $100/bbl. by the year 2000.  One well know PhD economist publicly stated that OPEC had effectively repealed the economic law of supply and demand and by the year 2000 oil prices would be over $1000/bbl (in1983 dollars—slightly over $1700 /barrel in year 2000 dollars correcting for inflation).  WOW!

I predicted approximately when I thought that OPEC would lose their economic power,  that prices would break, fall briefly under ten dollars per barrel and the rise in stabilize at about $18’barrel for an number of years and then start a slow rise upward.  In my crude economic reasoning, I figured what was close to a ‘monopoly price’ that OPEC could maintain, even with some cheating by its individual members.  As in my first forecast (with two other neophytes) many years earlier, I was lucky.  Some of my assumptions must have been reasonable, because oil prices closely followed my published projection for over ten years.  They dropped briefly to under $10/barrel, rose and stabilized for a number of years at about $18 dollars/barrel and then started increasing. I didn’t predict the rapid increase in industrial output of India and China starting around the turn of the century. For awhile actual prices rose above my projection when corrected for inflation, but have now dropped down to just below it. It helps when one is lucky.

To my knowledge, there were only two other published reports that stated that oil prices would decline drastically.  A number of economists would later state that they had foreseen it coming but they never went public with their forecasts and could prove that their foresight equaled their hindsight.  One well known energy forecasting group, whose chief honcho would later win a Pulitzer prize for a book on energy, publicly stated that it had been impossible to foresee the price decline that happened (they hadn’t predicted it).  Could be, except I and a couple others had accurately forecast the decline and for the right reasons.  Looking back, the thing that amazed me most is that I (an engineer not an economist) must have been one of the few who bothered to review the vast amount of economic literature on the subject of monopoly power and monopoly pricing.

I must have learned something about economics in the process and from my previous association with economists because I would later become the deputy of a government economic group and briefly headed the group when its leader resigned and my agency was bringing in a new leader.  I wasn’t eligible for the job—I didn’t have a PhD in economics. What happened then is another story.

I had several other forecasting successes, but it will be amazing is anyone has read this far.  Briefly, as I stated near the beginning, to forecast a change you must first understand what is causing the current trends, how such trends might change, and how men will react to changes.  Sometimes that is easy and sometimes quite difficult.  But never, ever, merely project a trend unless you first determine that the forces and factors driving it are going to remain unchanged.

I’m still making forecasts.  See my article on Geopolitics and Confrontation.

 

Phil Essley    September 2008

 

 

 

 

 

 

 

Wednesday
Sep242008

Fed up

I’m fed up.  I’ve had it up to my ears.  I’ve doubted for some time that Western Civilization can survive the 21st century.  Europe with its demographic trends will be Muslim by mid-century.  I thought it would be America alone by then.  Hell, we’ll be bankrupt by then.  We have two idiots running for President (to succeed the current idiot).  They are making Bill Clinton look half-way decent.

The administration is proposing a crash trillion dollar program to save the banks and the economy.  I was associated with a crash government program in 1973 when we set up the FEO/FEA/Energy Department.  What a total mess they made.  But hell, that mess will look as benign as a child’s tea party when compared to a crash trillion dollar program to save the investment banks.  For what purpose?  For Treasury Secretary Paulson to save his banker friends and HBS classmates who head major corporations so they can continue to draw their multi-million dollar per year salaries?.  Hell yes!  But to save them from their folly and greed may avert a major depression, where the little guy will be hurt.  According to the Administration it is either save the banks from their previous greed or face a serious depression. So we save the banks and bankrupt our children and grand children.  Some choice!  We will become a totally socialist nation, instigated by the Republicans, but the Democrats will inherit the job of managing our socialism.  What a  bleak future we face.

Reagan, confronted the USSR, bankrupted them and caused their collapse.  Now we are headed with another confrontation with Russia (not to mention a possible war with Iran).  This time Russia has the oil, they have the financial resources, and in a protracted struggle we will be the one going bankrupt and collapse.  The funny thing, when Europe goes Muslim by mid-century, Russia will be surrounded by Muslim states and China.  Unless they start having more kids, their population will be a third less than it is now.  If they are to survive the mid-21st century and we are to survive, the former enemies must become allies (an enemy of my enemy is my friend).  Yet few, if any, look that far ahead to see our future enemies (right now our leaders time-frame is less than two months ahead).  We want to impose our democratic ideas on the rest of the world.  First we must consider how to save our own democracy. Never has its peril been greater. No one seems to have the slightest idea on how to do that.  The Democrats and Republicans are determined to cut each other’s throats and in the process will cut all of ours. 

It appears that America’s “greatest generation” will be followed by “America’s worst.”  So long capitalism, so long democracy, so long freewill, so long  America, it was nice knowing you while you were here.  Our grandchildren will miss you.

 Phil Essley  September 24, 2008