I have touched on this before ( Brittleness, January 29, 2007) and now longtime contributors Albert T. and Riley T. have each submitted further examples.

We might recall the the Pareto Principle (February 19, 2007) here, which expresses the truism that 20% of the causal factors/actors bring about 80% of the consequences. Put another way, the "vital few" (20%) influence effects more than the "trivial many" (80%). The corollary, the 4/64 rule, indicates that a mere 4% can trigger 64% of the effects.

This is a special case of the wider phenomenon of Pareto distributions. If the parameters in the Pareto distribution are suitably chosen, then one would have not only 80% of effects coming from 20% of causes, but also 80% of that top 80% of effects coming from 20% of that top 20% of causes, and so on (80% of 80% is 64%; 20% of 20% is 4%, so this implies a "64-4 law").

That suggests that a mere 4% decline in oil production could create massive consequences-- ditto for 4% shortfalls in corn, wheat, soybeans, etc. Indeed, the grain shortgages sweeping the globe appear to have been launched by just this sort of seemingly modest gaps between demand and supply.

We all know we're virtually enslaved to petroleum, but Riley T. suggested a scenario which depicts a vulnerability few contemplate:

For years I have been thinking of our large cities as large heavily populated islands. All things to do with modern civilization are imported, ( electricity, food, petroleum products, water and most every thing else ) and all waste products have to be exported.

The large eastern cities have infrastructure that is 100-150 years old.

This is going to be a lot of fun to watch. My favorite scenario is New York or Chicago in the winter as an Arctic Clipper brings temperatures down to -25 F. for only two days while the power is out. The buildings freeze, the pipes burst and millions of homes become uninhabitable. This from a small problem that lasted only two days. (emphasis added)

I compared the top 15 producers to the top 15 consumers and made a list of the countries that were on the consumer list and not on the producer list. The countries that were on the second list and not on the first by order of total consumption are:

CONSUMERS

3. Japan
5. Germany
6. India
9. S. Korea
12. France
14. Italy

The countries on both the top production list and consumption list were:

CONSUMERS

1. United States
2. China
4. Russia
7. Canada
10. Saudi Arabia
11. Mexico
15. Iran

I did this to support my observations;

Japan, the largest oil user with zero oil production and considering they import most of their food is on borrowed time.

Germany, France and Italy are on the verge of crashing, big oil users almost zero oil production. As go these three goes Europe.

The United States imports about 11-12 million barrels a day. Why any one would continue to take dollars is hard to figure until you look at this list. What else would be good to take. Euros?

I think this exercise points out the precarious position that the industrial countries are in, oil consumption is a good indication of true industrialization and these 15 countries are it.

Having tens of millions of low paid workers doesn't make you an industrialized country.

Total Petroleum Imports Top 15 Countries (EIA, 5/28/08)

Total petroleum is about 11 million barrels a day (thank you, Venezuela, #4) which presumably includes gasoline (yes, we also have to import that, too) but not natural gas.

Albert T. checked in with this report on the absolutely essential commodity you probably never heard of: potash:

China caught in potash crunch:

(Excerpt:)

"The global trade in potash is even more concentrated than OPEC for oil, with just two syndicates dominant: Sinagpore-based Canpotex, which manages sales of the three North American majors (Potash Corporation, Mosaic, and Agrium), and Minsk-based BPC, a joint venture combining Uralkali and Belaruskali."

"As population growth drives demand for foodstuffs, and the arable land available to supply food shrinks, it is the mineral fertilizers farmers use that help cover the gap between consumer demand for calories and the productivity of farm land to supply it. Thus, the biggest consumers of potash are the hungriest - China and India, followed by Brazil.

Nature has not endowed these countries with the sub-soil resources of potash to meet their own requirements. But with just two syndicates in control of trade, and just three major importers, the global feast of foodstuffs is driving potash demand far faster than the miners can produce it. "

In an announcement on April 17, it was revealed that Chinese importers of potash have agreed on a price of about US$650 per tonne, delivered from Russia by sea. This is higher than the Indian benchmark price of $625 agreed just weeks ago. It is $400 per tonne above the price of the expiring Chinese contract, signed a year ago. The term of the new pricing deal is just eight months. The volume of deliveries for this period will be just 1 million tonnes, half of the 2007 contract volume over a 12-month period.

"This week in Moscow, Petrov claimed that a price of $1,000 per tonne was approaching "rather fast". He intended Chinese potash buyers to understand that they may have to outbid the Indians with a premium. If they don't, the potash will sail elsewhere."

(End excerpt.) This is Albert's comment:

Ergo, not enough for all, so bid against each other. What if exports were banned, and the ban was enforced? Considering the concentration of resources it would be doable, ergo Russia/Belarussia ban exports while Canada and US initiate some sort of a subsidy for farmers at $800 or so a ton while imposing export taxes on it at a rate of say $400 dollars making it necessary anyone bidding outside the countries to pay at least $1200+. Even without all this the harvest yields on the margins will be reduced by higher costs/lower supply.

Is fertilizer all that important? According to a variety of sources, the average yield for maize/corn in developing countries (i.e. those who can't afford fertilizer or can't get it logistically to farmers) is 30 bushels of corn per acre, compared to 150 bushels per acre in the heavily-fertilized U.S.

Five times the yield suggests a "green Revolution" entirely dependent on a limited supply of fertilizer ingredients (which include oil) that must be shipped across the globe by burning petroleum.

One of the "essential books" on my list (found in the books/film link at the top of the page) is The Future of Life E. O. Wilson. Wilson uses the analogy of a bottleneck to communicate the fact that environmental degradation is causing widespread extinctions of species. As the world industrializes and burns through its remaining rain forests and oil, pollutes rivers, paves over habitats with developments, etc., then only some species will emerge on the other side, so to speak, of Peak Oil/peak human population/peak food/peak everything.

This is a sobering concept, for surely humanity itself will have to pass through this same bottleneck, and pass through it with dwindling supplies of the very commodities which enabled our population to explode from less than abillion to over 6 billion in a historically brief time period.

In summary:

1. The Pareto Principle suggets a mere 4% of causal conditions can leverage huge consequences on 64% of a market.

2. The smaller the number of sources and suppliers, the longer the supply chain and the more "just in time" that supply chain is, the more vulnerable end consumers are to even minor disruptions in that supply chain.

3. Bottlenecks can become chokepoints. The Strait of Hormuz and the Strait of Malacca are well-known (oil supply) shipping chokepoints. Other bottlenecks include refineries, natural gas ports, large ports for the shipment of fertilizer, grain and oil, key electrical grid nodes, etc.

Devil's Advocate department (and an important one it is here at OTM): Frequent contributor J.F.B. sent in this story on the unregulated oil futures and derivatives markets, which may be a key driver behind the recent spikes in oil prices:

PERHAPS 60% OF TODAY'S OIL PRICE IS PURE SPECULATION (Financial Sense)

For more on Riley's concept of mega-cities as islands, please see the excellent book on the rapid growth and staggering vulnerabilities of mega-cities/mega-slums: Planet of Slums by Mike Davis.

Readers Journal has also been updated: new insights and a mysterious poem.

Thank you, James M. ($25), for your much-appreciated contribution via U.S. Mail to this site. I am greatly honored by your on-going support and readership.

For more on this subject and a wide array of other topics, please visit my weblog.

                                                           

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