Black Swans Gliding In Complex Economic Systems Mean The Precautionary Principle Must Rule

A black swan, says Nicholas Nassim Taleb who popularized the term, is a hard-to-predict event with a large impact.

Economists, oil analysts and other various experts circling the 'don't worry be happy' drain agree that the primary explanation for the free-fall in oil is rising production has created a temporary oversupply of oil: the world is awash in crude oil because producers have jacked up production so much. Given that even implying the official spin -  the global economy is not recessionary - is bullshit, puts an expert immediately into the firing squad lineup, it is not surprising that the free-fall in oil surprised the official class of analysts and pundits.

"Since declaring the global economy is in recession is sacrilege, it was impossible for conventional analysts/pundits to foresee a 37% drop in oil in a few months." says Charles Hugh Smith. Adding, "It is my contention that the recent free-fall in the price of oil qualifies as a financial Black Swan." Wikipedia lists three basic criteria based on Taleb's work:

1. The event is a surprise (to the observer).
2. The event has a major effect.
3. After the first recorded instance of the event, it is rationalized by hindsight, as if it could have been expected; that is, the relevant data were available but unaccounted for in risk mitigation programs.

Hughes' Black Swan has cousins in every highly complex system, they are the unknown unknows and they really like hangin out around the human built mental contraptions called modeling. Humans use modeling to make predictions about what they can't understand by simplifying the inputs. The thing is, no model – whether a wind-tunnel model for designing aircraft, an economic model, a weather model or a climate model for projecting global warming – will ever reproduce the real-world complexity of the system being modeled.

Given that according to the EIA, the average global crude oil production (including OPEC and all non-OPEC) per year is as follows:

2008: 74.0 million barrels per day (MBD)
2009: 72.7 MBD
2010: 74.4 MBD
2011: 74.5 MBD
2012: 75.9 MBD
2013: 76.0 MBD
2014: 76.9 MBD

So #3 applies eh.  The relevant data were available. The blinders uniformly worn by the economic 'experts' [in this case] were self-applied. Modeling science looks backward to predict the future. Imagine trying to drive your beater forward by looking in the rear view mirror. It works OK as long as the road is straight, but as soon as it curves you're in the ditch. In this case, curves would be a tipping point. The driver, having believed that driving by mirror was a good idea, then sees his current position in the ditch as an unpredicable Black Swan Event when in reality highway curves are very predictable when not acting on false beliefs.

Unfortunately, the real world has a lotta curves and ditches. No matter what convolution of tactics we employ at mitagation, the real world is unpredictable beyond generalities. So, IMO, given the enormous consequences of a failure to avoid the economic ditch [and its cousin the global warming ditch] the greatest failure of our 'experts' is that they refuse to apply The Precautionary Principle.

The plummeting prices at the pump are the most visible part of a tipping point in the global demand curve for needless crap. It certainly has already started knocking over dominoes here in Canada where the governments live on the income from resource royalties. The fear up here being stirred is that say so jobs will be lost by folks who work for companies that supply the oil and gas industries is just camouflage to distract the gullible from the fact that every part of every oil and gas play is financed by the banks, those companies won't hang on in the hopes of a brighter tomorrow, they can read the headlines about the deflation phantom, they'll walk on the debt, the banks will own a buncha rusting useless equipment and the banks shareholders - the rich - will not be amused.

It's a predictable outcome, driven only by short term quarterly profits corporate capitalism is running itself over a cliff. Understanding this predicament whereby our expert system's inability to predict the behavior of complex systems because their least likely outcomes are sometimes the most catastrophic allows us to take our own precautions. Great changes happen at tipping points. For some that means maybe being a prepper, for some that means crashing the credit cards on sex, drugs and rock 'n roll. The key IMO is to respond, not react to the life's possibilities and remembering that 'experts' are often as imprisoned by their beliefs as anyone else.