Trial Lead Balloons

It's been amusing over the past month or so watching the new Treasury Secretary, Tim Geither, float off a new trial balloon every weekend on a new plan to deal with the insolvency of the US financial sector. I personally, don't see any easy way out. The only reasonable solution appears to be nationalization, and I don't pretend it will be easy for those involved in managing it (last September):

Bank of America, CitiGroup, and JP Morgan Chase have all been busy building the Jenga tower higher (see making the pie higher) in the effort to become too ginormous to fail. Clearly they all expect to be bailed out, which is a pretty amoral way to run a business. "Bail us out or your retirement savings get it!" The appropriate response at this stage is to raise their moral hazard one and audit them, find out that, "Surprize, you're broke!" and nationalize the lot of them temporarily. Cashier the executives, amalgamate the trash from all three and quarantine it, then start breaking them into non-antitrust sized chunks and IPO them off in sequence.

So now, after attempting to float many balloons full of lead, we are finally getting there. Citi now wants the government to buy 40 % of its stock, stopping just short of nationalization. Does anyone really believe we'll be done at that point?

The only question I have, is were these leaks that came from the Treasury real ideas or was Geither just buying time and making an appearance of exhausting all the alternatives? Afterall, nationalization isn't part of the American culture. Cultures change; sometimes tumulteously, sometimes without even noticing.

All Medical Science is Wrong within a 95 % Confidence Intervalor: A Review of Taubes' "Good Calories, Bad Calories"

Recently I read a very impressive book by Gary Taubes, previously a reporter for the journal Science. The work in question is, "Good Calories, Bad Calories."' In the book, Taubes collects research to challenge the common knowledge of nutrition: that fat is bad for you, that we should eat polyunsaturated vegetable oils, that we should exercise for sixty minutes a day, etc.

The genesis of Taubes' book is an article he wrote for the NY Times in 2003. Five years later, Good Calories, Bad Calories was published. As background, there is a video of Taubes here where he overviews his thesis (1 hour 11 minutes, not safe for work since there are pictures of naked obese individuals) and adds a few pieces that were not in the book. Even if you have read the book, I recommend listening to the lecture. You can see from the video, Taubes is very solidly built.

In return for knocking down a bunch of accepted "common knowledge" hypotheses , Taubes presents ten new hypotheses (p.454) and I will add a few more than I extracted from reading the book:

Dietary fat, whether saturated or not, is not a cause of obesity, heart disease, or any other chronic disease of civilization.

The problem is the carbohydrates in the diet, their effect on insulin secretion, and thus the hormonal regulation of homeostasis—the entire harmonic ensemble of the human body. The more easily digestible and refined the carbohydrates, the greater the effect on our health, weight, and well-being.

Sugars—sucrose and high-fructose corn syrup specifically—are particularly harmful, probably because of the combination of fructose and glucose simultaneously elevates insulin levels while overloading the liver with carbohydrates.

Through their direct effect on insulin and blood sugar, refined carbohydrates, starches, and sugars are the dietary cause of coronary heart disease and diabetes. They are the most likely dietary causes of cancer, Alzheimer's diseases, and the other chronic diseases of civilization.

Obesity is a disorder of excess fat accumulation, not overeating, and not sedentary behavior.

Consuming excess calories does not cause us to grow fatter, any more than it causes a child of grow taller. Expending more energy than we consume does not lead to long-term weight loss; it leads to hunger.

Fattening and obesity are caused by an imbalance—a disequilibrium—in the hormonal regulation of adipose tissue and fat metabolism. Fat synthesis and storage exceed the mobilization of fat from the adipose tissue and its subsequent oxidation. We become leaner when the hormonal regulation of the fat tissue reverses the balance.

Insulin is the primary regulator of fat storage. When insulin levels are elevated—either chronically of after a meal—we accumulate fat in our fat tissue. When insulin levels fall, we release fat from our fat tissue and use it for fuel.

By stimulating insulin secretion, carbohydrates make us fat and ultimately cause obesity. The fewer carbohydrates we consume, the leaner we will be.

By driving fat accumulation, carbohydrates also increase hunger and decrease the amount of energy we expend in metabolism and physical activity.

1. RM: Man, being the premier predator on the planet, evolved to eat a diet high in fat (and in particular the saturated and mono-unsaturated fat found in animal tissue). In the absence of clinical data, we should endeavor to structure our diet to be similar to that we evolved eating, prior to the introduction of agriculture approximately 10,000 BCE.
   
2. RM: Advanced Glycation End-products (abbreviated AGEs) may be a cause or byproduct of the oxidative stress that causes aging and many of the maladies associated with it.
3. RM: A low-calorie, high-carbohydrate diet will make you lethargic as chronically high insulin levels will try to convert glucose to fat while not leaving sufficient calories for the remainder of your basal metabolism. In comparison, low-carbohydrate, moderate-calorie diet will leave you energetic and lean.
   

One cannot help but wonder how a number of the weak hypotheses that Taubes explores came to become common knowledge in the field of nutrition? Taubes paints a picture of a few egotistical researchers who were able to effect what was essentially scientific fraud, by fitting their bias to the data rather than examining it critically. In Taubes words (p. 451), "it is difficult to use the term "scientist" to describe those individuals who work in these disciples [ed: nutrition, chronic disease, and obesity], and, indeed, I have activity avoided doing so in this book."

More importantly, once they established the common wisdom, they were able to better direct government funding to only support their hypotheses. I came to a somewhat different conclusion to Taubes, in that I see the puritanical aspects of American culture in the formation of these bogus hypotheses. For example, Taubes' quotes Jean Mayer, one of the fieriest preacher that lack of exercise causes obesity, in a 1955 The Atlantic magazine article:

Obesity, it is flatly stated, comes from eating too much and that is all there is to it. Any attempt to search for causes deeper than self-indulgence can only giver support to patients already seeking every possible means to evade their own responsibility.

Like I said, puritanical. This line of thinking can be traced all the way back to people like Sylvester Graham in the 1800s. The idea that cardiac disease might be caused by inflammation and bacterial infection and not by living a sinful life has been remarkably slow to percolate through the American consciousnesses yet it is well understood to be the case now. Obesity is probably not dissimilar.

Prior to my introduction to the world of low-carbohydrate diet, I hadn't paid too much attention to nutritional science. I worked on biophysics, where I formed the opinion that medical science was mostly garbage. This isn't largely the fault of the scientists involved; there's little opportunity for adequate learning though experience of repeated experiments and the systems involved are extraordinarily complex. As a physicist, if I get an correlation coefficient, R² < 0.9997 in an experiment, I would consider that a poor result. A nutritional researcher working with human patients cannot even dream of achieving the degree of control or characterization I can, and their data are overloaded with spurious noise.

Researchers in the soft sciences typically do not have sufficient math skills to understand the statistical methods that are they are using to evaluate their data. I've lost track of how many times I've seen evaluations of the mean and standard deviation for distributions that are clearly not normal (also known as Gaussian). Don't even get me started on p-values. More importantly, very few medical studies attempt to test a single hypothesis. Far too many studies will compare apples to bananas, rather than apples to no apples, or they'll compare apples, oranges, and bananas to no fruit. Making conclusions from such messily designed experiments is rife with the potential for misinterpretation. Drug studies are often an exception.

The Insulin Hypothesis

The central thesis of "Good Calories, Bad Calories" is that chronically elevated insulin levels is likely responsibly for the, "diseases of Civilization," such as diabetes, heart disease, cancer, etc. I put, "diseases of Civilization," in scare quotes because although these diseases are absent from primitive cultures, it is obnoxious to explain to individuals of non-Western ancestry that they do not suffer from these diseases because they are uncivilized (Burkitt and Trowell). Wikipedia calls these Lifestyle diseases, which seems a more apt terminology.

Let me be clear: nothing about Taubes' insulin hypotheses are actually owned by Taubes. The idea that carbohydrates are fattening has been known from well before the discovery insulin. The knowledge that diabetes could be cured by avoiding carbohydrates was also known before the discovery of insulin. Taubes is merely going over old research and bringing it together as a strong argument.

When viewed through the prism of evolutionary science, this makes a lot of sense. Fat stores would have been necessary to maintain the organism when hunting failed and there were insufficient edible plants. Carbohydrate stores, on the other hand, requires a huge amount of water to act as solvent. Each gram of glycogen that you store needs ~2.5 g of water solvent, so at 4 kcal/g carb, you have an effective storage capacity of 4 kcal/3.5 g = 1.15 kcal/g. Fat is 9 kcal/g and it doesn't require a solvent when stored in adipose tissue so that's a 7-fold increase in storage capacity. Fat is a vastly superior way to store energy.

So what was the source of carbohydrates for humans before we developed agriculture? Presumably wild fruit. Fruit matures, more or less, all at once as anyone who has owned an apple tree knows, and rots rather quickly after it has fallen off the tree. Thus, when fruit is available, it is perfectly logical to gorge oneself and use all that easily harvested sugar energy to synthesize fat storage for consumption in lean times. Thus the evolutionary reason for our sweet-tooth is easily explained.

Effectively, we evolved to preferentially burn-off the glycogen in our muscles and liver before we switched to fat. There's ~300 g of carbohydrates stored in the body, which corresponds to ~1500 kcal. Just you try and burn 1500 calories via a cardio-workout. Eating three square meals a day with carbs at every serving implies that you will never burn through your reserves and hence the body will never resort to burning fat.

So, briefly, how does one use these conclusions to achieve a healthy low body fat (and BTW, waist circumference is the #1 metric for heart disease)? Certainly not by the standard, low-calorie, high-carbohydrate diet (semi-starvation diet in Taubes' terms) which has been nothing but a dismal failure from a clinical and practical perspective. There are three basic strategies:

1. Very long and very slow exercise (4+ hrs), typically hiking or cycling in my case. This is a far cry from the type of anaerobic-limit cardio exercise one typically sees recommended, for example, by the American Heart Association. There is a yawning gulf between walking and jogging. I personally approve of anaerobic exercise, such as sprint intervals or plyometrics.
   
2. Consistently eat carbohydrates at a low enough level that the brain (which prefers glucose over ketones) consumes the entirety of carbohydrates that you eat, leaving the body to burn ketones. This is a slow process.
   
3. Periodically fast for an extended period of time so that your basal metabolism burns through your glycogen reserve and then begins to mobilize fat. This is not a calorie reduction method, rather you are simply not eating three times a day (on average), and as such having more extremely calories negative and calorie positive periods.
   

Eventually, everyone will plateau at a certain level of body fat. The number of fat cells in your body is more or less set by age twenty; dieting simply changes how full they are. Eventually, fat cells will revolt and through leptin demand a stronger appetite. So is there any need at all for carbohydrates in the diet?

Grains are the ultimate, "empty calories," in terms of micronutrients. Not only to grains have essentially no micronutrients (they are fortified for a reason), they also have a number of anti-nutrients that impede the uptake of nutrients from vegetables and animal tissue. From a health perspective, there's no need to eat grains or starchy vegetables such as potatoes.

Typically one might recommend 50-80 grams per day simply to supply the brain with glucose, but even this is not strictly necessary as the liver can convert fatty acids to glycogen. Of course, people who are obese are likely suffering from hyperinsulina (insulin resistance/metabolic syndrome) and as such may suffer discomfort upon undertaking an low-carbohydrate diet.

For the record, I dropped 22 lbs. (20 lbs. by August 2008) going from a BMI of 24.7 in May 2008 to 21.4 as of now. I've been as low as 143 lbs. in the past but I was never able to maintain that; typically I got to such a weight by bicycling 12+ hours a week at 30-40 km/h. I'm now sitting at 145 lbs. (edit: now 144 lbs.), in January (ed. February), in Edmonton, with no chronic cardio. This is a totally new scenario for me as I almost always put on 10 lbs. over winter.

When I put on weight it is prominently in the form of visceral and subcutaneous fat; I've never had significant interstitial muscular fat so I've always had relatively hard muscles. I try and aim for a distribution of 60 % fat, 25 % protein, and 15 % carbohydrate in my diet. Since my blood sugar/insulin isn't riding a roller coaster up and down throughout the day, I generally don't get hungry. I am much better at concentrating throughout the course of the day, irrelevant of when I last ate and I've found that my thinking process is much cleaner and crisper.

Unanswered Questions

Taubes criticizes a number of scientists in his book for over-simplifying the science of physiology in an effort to understand it. In that respect, reducing the argument of "Good Calories, Bad Calories" to carbohydrates-bad, fat-good is probably guilty of the same offense.

Taubes dose throw us a couple of bones, in the form of some of the more buzzword lines of research in nutrition today. One is Advanced Glycation End-products (AGEs); we know that AGEs are tightly correlated to age. From what I've read, thus far the early reports on AGEs are similar to those on cholesterol fifty years prior: lot's of smoke, but no fire. Efforts to link AGEs to ingestion of AGE materials (e.g. burned meat) has thus far failed, IMO.

Fat-soluble vitamins

One aspect of carbohydrate/fat balance that Taubes does not cover is the impact of the fat-soluble micro-nutrients. We, as humans, have given up our abilities to fabricate the majority of vitamins that we need in favour of having big brains. We are very poor at transforming one complex of a vitamin (typically the vegetable source) to the type we need to function.

As our consumption of fats has declined in favour of carbohydrate the quality of fats that we eat has also declined. As such, we are typically deficient in fat soluble vitamins, in particular D3 and K2. Not only we as a society getting far less vitamin D3 from sun exposure, but the animals we eat are also more often than not locked in a barn eating corn, so they also contain less fat soluble vitamin. When you consider that your skin can produce something like 10,000 IU of D3 in an hour compared to a multivitamin at 400 IU, it's not a giant stretch to believe that the majority of Western people are going through life deficient in it. K2 is similar; butter is a good source, but butter has been demonized by our corporate media.

Poly-unsaturated Fats

Palmitic acid is the fatty acid that your liver manufactures from sugars. In fact, the only fat humans evolved to burn for fuel directly is saturated fat. All other fats we trans-saturate first, and then burn. It would seem strange then given the complexity of the human body that we evolved to preferentially make saturated fats over polyunsaturates, unless we prefer saturated fat because it is more stable and hence less prone to oxidation.

The canard that saturated fats, "clog your arteries," is just that, bogus. The medical establishment has never believed this since they knew full well plaques form inside the arterial wall, not on the surface. Why this idea was allowed to percolate through the public, I do not know.

This begs the question, should we eat polyunsaturates at all? They are, after all, highly unstable and very easily oxidized. I ask a question: when was the last time you bought a nut oil, e.g. walnut or sesame, at the supermarket? Was is refrigerated on the shelf? Was is in a brown bottle to prevent light from damaging the polyunsaturated fat? I've seen flax oil sold in such a fashion but no other. Much of the fat we eat is oxidized by the time it reaches our mouths.

Fish oil (omega-3) is clearly doing people a lot of good, even if it sits in a cylinder for months. A lot of people do feel that we get far too much Linoleic acid, an Omega-6 essential pre-cursor, from soy, corn, safflower and other vegetable oils. It does, after all, have a significant hormonal effect.

This has led some to suggest that one should balance omega-3 and omega-6 consumption. I.e. if your omega-3 consumption is 3-4 one gram capsules of fish oil a day, then you shouldn't eat more than ~5-10 grams of vegetable oil. The American Heart Association apparently felt the need to push out an editorial recommending that the diet 5-10 % of calories should be in the form of omega-6 polyunsaturates to counter this meme. The fascinating thing about this editorial is that there are 81 references in 3 pages (which is beyond extreme), yet, there are no references — no studies, no research — that support the advised level of dietary intake. Take a look at the article (it's free access), it's quite amazing.

Rebuttal: Conservation of Energy

One of Taubes' chapters deals with the idea that energy balance in humans can be reduced to the First Law of Thermodynamics:

ΔE = E_in - E_out

I was somewhat confused to see this Surely the nutritional scientists did not not really believe this, right? I mean, any idiot undergraduate students knows that the 1st Law is only useful in a closed system, and humans live on the planet Earth, not in an insulated box. Right?

Enter a rebuttal by G. Bray in the journal Obesity Reviews. Bray is a to be a major obesity researcher and one of the 2nd tier villains in the book. Taubes relates a story of Bray excising a section of a British report on obesity, where Bray removed the material pertaining to the relationship between insulin and obesity. He clearly has editorial support to make his case. Bray is one of the second-tier villains in Taubes' book. Taubes has a footnote (p. 421), which suggests that Bray actively suppressed the carbohydrate-insulin hypothesis.

* According to Novin, when he wrote up his presentation for the conference proceedings Bray removed the last four pages, all of which were on the link between carbohydrates, insulin, hunger, and weight gain. "I couldn't believe he would make that kind of arbitrary decision," Novin said.

Unfortunately, to a physicist this energy balance hypothesis looks like a silly hand-waving exercise, not a serious argument. Frankly I was flabbergasted when I first read this article. This conservation of energy argument is on the same scientific level as the ridiculous "drink cold water to lose weight" idiocy. A human organism is:

1. Not in thermal equilibrium with their environment. Last time I checked I have a body temperature around 38 °C and spend most of my time in 21 °C rooms.
   
2. Capable of significant mass flows (e.g. respiration).
3. Capable of sequestering entropy (e.g. protein synthesis).
   

Is wearing a sweater fattening (by insulating you from your environment)? Here's a quote from the rebuttal,

Let me make my position very clear. Obesity is the result of a prolonged small positive energy surplus with fat storage as the result. An energy deficit produces weight loss and tips the balance in the opposite direction from overeating.

According Bray's thermodynamics argument, wearing sweaters makes you fat. This illustrates the greatest fallacy of trying to apply the 1st Law to a human: it makes the implication that living organisms consume kilocalories for the purpose of generating heat rather than perform useful work (i.e. breathing, contracting cardio and skeletal muscle, generating nervous action pulses, etc.). In reality heat is the waste product of basal metabolism. The first law does not distinguish between different types of energy. Heat, work are all equal under the First Law of Thermodynamics.

Applying the 1st Law to living organisms is Proof by Tautology. Yes, 1 + 1 = 2, but this tells us absolutely nothing about the underlying mechanics. The 1st Law does not (I repeat N-O-T) tell us whether you store excess energy in the form of fat, or bleed it off into the atmosphere by dilating blood vessels next to the skin, sweating, etc. To do so would require an accounting of entropy.

What would a semi-rigorous description of the thermodynamics of a human organism look like? Look at the title strip on the top of the page. See that equation in the background?

This type of equation would be a bare starting point for energy balance in a complex system like a living organism. Good luck actually accounting for all the terms. Those Σs are sums.

If anyone else has seen any other critical reviews to "Good Calories, Bad Calories," please feel free to post them in comments and I will take a look.

Environmental Aspects

As most people are aware, feedlot meat production produces copious amounts of greenhouse gases, both in terms of the fertilizer required to grow the corn to feed the animals, and the methane produced by rudiment digestion. This provides a bit of a moral quandary, in that feedlot meat is not readily described as sustainable.

First, greenhouse gases are perfectly fungible, so since my personal greenhouse gas emissions are about 1/3 normal, I am still well under any proposed quota. Although this has an aspect of the "beer refrigerator paradox" to it, it's still valid if the numbers work out.

Second, as it happens, I do live in Alberta and I can and do buy pasture-raised meat. Meat that feeds on unfertilized prairie grasses not only has a different composition but a far lower greenhouse potential. The visual difference between feedlot beef and pasture Elk is fairly startling. About 50 - 65 % of what I buy is via individual farmers at the market. In particular, I try to ensure that all the offal (organ meats) that I buy are from pastured, hormone and antibiotic-free animals since they are more likely to concentrate in the organs.

It's true that if everyone tried to by pasture-fed meat, there would not be enough to go around, but at the moment it is sustainable for me.

Misplaced Priorities

So the Securities Exchange Commission is said to be probing Apple over accusations that they may have misled the public over the state of Steve Jobs' health.

Let's play a word association game:

Pancreatic cancer
+
Corporate executive
=
?Healthy?

One can imagine that if Jobs had cancer in the Islets of Langerhans, the portion of the pancreas responsible for insulin regulation, that yes, he might have some diabetic-like health issues associated with that. Doesn't the SEC have something better to do? E.g. meanwhile we learn that Merrill-Lynch maneuvered to deliver $3 billion inbonuses before being bought-out by Bank of America. Merrill-Lynch lost over $20 billion in that quarter, and BoA is demanding that it be bailed out by the US taxpayer now for the same amount. This idea that financial companies need to pay out bonuses to retain "top talent" during a period when the financial sector is undergoing a severe contraction is a canard. Where are they going to go work, the construction industry?

Bitumen-producer Suncor Posts Significant Loss

Via Nathan Vanderklippe at the Globe and Mail, we learn that Suncor, one of the original and bigger oil sands producers, has posted a C$215 million loss for the 4th quarter of 2008.

The price of oil has fallen since then. I don't imagine the other producers will be doing much better, although Suncor does burn the least amount of natural gas and predominately runs an open-pit mine to the best of my knowledge. As I've pointed out previously, the marginal cost-of-production for synthetic crude from bitumen is around $50/bbl. The article is claiming it's more like $36/bbl although that may not include refining. If the oil sands of Alberta shut down due to extended low prices, that's approximately $1.3 million barrels per day taken off the market.

Column-like Films of Silicon for Battery Applications

About a year-ago I relayed the story of Chan's work on using silicon nanowires as a potential anode material for Lithium-ion batteries. Silicon can store some ten-times more charge than Carbon, the current industry standard, but this comes at the expense of a huge volume change. The difference in volume between charged and uncharged is 300 % for Si. Just to give you an idea, the alloy of Lithium and Silicon that's formed is Li₁₄Si₄ from metallic Si. The article from Nature Nano suggested that forming the silicon into high aspect-ratio wires would allow the silicon freedom to expand along the long-axis of the wire and hence be less likely to physically break and no longer have a physical, conductive pathway to the anode.

In general, the lifetime of a battery is determined by how great of a volume change it undergoes when cycling from the charged to uncharged state and vice versa. Volume changes imply stress and the gradual introduction of defects that can trap electrons and reduce electrical conductivity. For LiFePO₄ cathodes, the volume change is around 4-7 %, but this is a crystalline material. Silicon nanowires are amorphous (i.e. poorly ordered) and the introduction of defects on cycling is not necessarily an issue.

The previous work was truly proof of principal, but unlikely for variety of reasons to be a direct path to commercialization. There's some new work out by a local group that expands on the work of Chen. Fleischeur et al. tried their specialty, glancing angle vapour deposition, to form a thin-film of Silicon composed of many, regular pillars. (Disclosure: our research group collaborates with the group that did this research. I personally do not, however.) In glancing angle deposition, the substrate (onto which the film is deposited) is at nearly right angles to the incoming vapour stream. In thin film deposition, one tends to see small clusters form first due to surface tension. As the clusters grow, they amalgamate together and form a (porous) solid thin film. When the substrate is at high angles of incidence, the first clusters to form shadow any smaller trees and grab more than their fair share of the incoming mass stream. Hence glancing-angle deposition typically forms column-like thin films.

The glancing-angle fabrication method has a number of potential advantages over Chan's technique:

1. Chan's thin film process relied on a gold catalyst ($$$), whereas the GLAD process only requires a thin layer of chromium for adhesion on Si substrate and none at all on a stainless steel substrate.
   
2. Glancing-angle deposition can easily control the spacing of pillars by patterning the substrate.
3. The glancing-angle films were "robust" when I asked the author about it. He said hitting the batteries with a hammer had no effect on performance, so presumably the pillars were not breaking.
   
4. Glancing-angle deposition requires a microscopically smooth surface for proper column formation.

Let's look at some results. The question is, how durable are these anodes compared to graphite? The charge curve is really all we are interested in.

Figure 1: Chan et al. charge capacity after 10 total cycles.
Figure 2: Fleischauer et al. charge capacity after cycling up to cycle 70. I don't recall the reason for the discontinuities but I vaguely recall it had something to do with the test electronics.

Both authors show a very large drop in charge capacity after the first recharge. This means there is some sort of irreversible change to the material occuring from film fabrication to charged and uncharged Si. Then there is a progressive loss in capacity. Evidently Chan and company are less confident in their material as they are only showing results up to ten cycles. Average capacity fade for Fleischeur's battery was found to be 0.3 % per cycle. If we extrapolate, that would imply it would take approximately 750 cycles for the charge capacity of the silicon anode to drop below that of a conventional graphite one. Obviously, that's not good enough for commercial applications.

Overall, I think that this is an important step in terms of fabrication and longevity. We are still looking at a minimum of a decade before any such silicon Li-ion batteries hit the shelves; this is progress on that path.

Poster Boy

http://online.wsj.com/article/SB122903010173099377.html

Wow.

Oh yeah, GM and Chrysler are bankrupt, just like 80 % of US banks. Piffle.

GM Sales Fall 45 % YoY; Average 31 % Drop

That's going to leave a mark! USA automobile sales are way way down in October 2008 versus October 2007, as consumer sentiment and credit heads South fast.

About 25 per cent of GM's volume in October 2007 was from leasing, but the auto maker did almost no leasing last month through GMAC, Mr. LaNeve said.

As I mentioned in the comments of this post, when you have to relax your credit requirements to sell cars, you're setting yourself up for trouble in the long-run. I've actually been impressed how well the USA has been holding up under the credit crisis thus far (compared to countries like Iceland, Hungary, Pakistan, etc.) but obviously if the steady drip—drip—drip of job losses continues things will really come to a head. I definitely still stand by my prediction of the US financial sector shrinking in half. The US Treasury bail-outs to date are not solving the trust issue as everyone continues to hoard cash. Tacking on $500 billion a month in federal debt isn't sustainable either.

I'm working towards my doctoral candidacy at the moment so posting will remain sparse until the middle of December.

Demand Destruction

With oil now hovering around $70/bbl, we've seen a decline of roughly 50 % from the peak this year over only a couple of months. I've stated in the past that I felt the run-up starting in February was largely speculation whereas the push from 2002-2007 was more fundemental. Is this new drop an evidence that 2002-2007 was speculation or is it a fundamental move based on supply and demand? I'm going to argue here that this is, once again, a real move, based largely on demand destruction on-going around the world but in particular inside the United States of America.

Oil consumption in the USA started a downhill roll around December last year. In September, it had a Will-E Coyote moment and rolled off a cliff. It's now in free-fall. Oil demand is highly inelastic in the short-term but their is some phase lag that results in more long-term elasticity. What I mean by that is, it takes awhile for individuals and business to adapt to oil price by drilling for more supply, replacing SUVs with econoboxes, driving slower, etc. But when demand drops fast, the price can drop fast too, because supply is short-term inelastic too.

The latest EIA data estimates US petroleum consumption at 18,865,000 bbl/day. Compared to the same time last year, at 21,024,000 bbl/day, that's a drop of just over 10 % yoy. That's a really big deal. From a GDP-to-oil-consumption relation, it suggests the US is headed into a depression. Even during the 1970s oil shocks the US only experienced drops of 3-4 % a year in consumption.

Figure 1: EIA Weekly Oil Consumption (estimate). The chart shows the story: a gradual downturn and then a sudden drop.

That speculative oil bubble that appeared in February? Gone. Yes, Dorthy, a major recession in the country that consumes a quarter of the world's oil can cause a big drop in price. The USA isn't the whole story, but it is driving this price movement.

Figure 2: IEA consumption estimate for OECD countries.

The story starts with the OECD countries, and extends to the BRIC (Brazil-Russia-India-China) 'growing' economies. Consumption was pretty flat from 2005-2007, and then it started dropping in 2008. Note that Figure 2 only extends to August, and the US demand dropped over a million barrels a day in September!

Note when looking at these IEA plots, they are all 12-month moving averages, so any moves you see in the curves likely started a few months earlier. Also note that EIA (US DoE) and IEA (France) data are not strictly equivalent, since they use different methods to come up with their estimates.

Figure 3: IEA Germany and Japan Oil Consumption.

Oil demand in a number of big economies, e.g. Germany and Japan already fell in response to oil prices last year. They are largely unchanged this year, or indeed up. France is already headed back up, as are a number of smaller countries. In North America, Canada's demand is flat and Mexico is well up.

Figure 4: IEA UK and Italy Oil Consumption.

The big weakness in Eurozone oil consumption is coming from Italy, and the UK. However, their drops are still minor in comparison to the story in the `States. If we look over a longer term view, the IEA consumption data (Figure 5) suggest US demand was flat for 2005-2007, so perhaps this recent drop is just the USA making up for lost ground. Looking at US consumption, and world consumption, the two graphs have very similar shapes.

Figure 5: IEA oil consumption data for USA. Future versions of this graph will show a sharp downturn in September.

The BRIC countries are all less transparent. As a consequence of that, releases of their numbers is even slower than OEDC results we see above that are a couple of months behind. In the same manner that the USA drives OEDC and the other countries are just noise, China drives the BRIC numbers. Unfortunately, we don't have any numbers yet on the Olympic effect in China. Vehicle-kilometers in China was probably way down in August, and that's going to have a short term impact on oil demand. China's skies are once again as smoggy as ever before, so unless they've also changed their stockpiling strategy, this is going to have a short-term impact.

Figure 6: China oil consumption (and projections) beside Vehicle Sales in China. Taken from Malcolm Shealy's (Alacrites Inc.) presentation hosted on IEA website.

So outside of a massive step up in China in August and September (which is unlikely) the only other likely variable to examine is oil supply. Production data (Figure 7) indicates supply is actually up this year. This isn't unexpected. It took a couple of years after oil took off in 2002 for the oil companies to get enough confidence to jump into new projects, but a number of projects started in 2003-2004 are now up and running contributing to supply. While the new oil price may choke off new projects, there's still a number in development to stave off the depletion of existing fields.

Figure 7: World oil plus condensates production, 2005-July 2008 (Data from EIA).

So, in conclusion, I think the supply and demand data show pretty conclusively that supply is up, demand is down, hence the price of oil is dropping like a rock. In fact, we have this event occurring at the same time as a commodity is being popped, so the effect is especially strong. This is a good thing. The world economy and the USA in particular is hurting thanks to the bubblicious real-estate fiasco and low energy prices will help conventional economic activities drag us back out of this big hole. I think the housing bust will be extended — adjustable-rate mortgage resets in the US are only about half-way through the pool of potential defaults — and the world economy is not decoupled from the USA so expect fallout damage to hit exporting countries in manufacturing (China, Japan) and commodities (Canada, Russia, Australia) in waves going forward. The US consumer is going to have to live within his or her means, and hopefully revert back to being a citizen first and consumer second.

Can OPEC squeeze the price by implementing quotas? Yes and no. Production of oil products is up big in 2008. There's slack they can take out of the system. Will they? I don't know. OPEC countries in general have not been diversifying their economies so they will have to do something or face the potential for unrest as revenues come back to earth. Basically it comes down to whether or not Saudi Arabia wants to arrest the fall in price, or if Russia as a non-OPEC producer decides to sacrifice some cash flow or not. If I was the Saudi's, I would be thinking about whether or not OPEC as an organization has outlived its usefulness. A Saudi-Russian oil alliance would probably be more practical, and effective.

Looking into the future, it's likely that demand in the USA will be suppressed for awhile, so as a result, investment in new capacity is going to drop especially in conjunction with higher credit rates. Speculative plays in oil shale, gas-to-liquids, and coal-to-liquids are effectively dead. Remember that in order to develop alternative fossil fuels to oil you need to not just cover the marginal cost of production, but also amortize the capital costs, and the capital costs in non-conventional oil are usually very high. I would also expect new deep water plays (Brazil, Atlantic Canada) to come to a grinding halt, but existing ones should go ahead as the cost of production is not excessive.

The most marginal cost-of-production oil in the world is Alberta bitumen, at around $50/bbl. That's not accounting for capital costs at all, which have been in the range of $150,000 /bbl/day capacity recently. Lower than that, and salaries will have to come down to lower costs. Taking that capacity out of the world's supply would only knock off 1.3 million bbl/day. Alberta's provincial government may be facing the end of yet another oil boom with little to show for it.

The D-word

Hmm... so the price of housing and automobiles has been failing for awhile now. Now that another wave of the credit crisis is causing a commotion, the associated margin calls seem to have deflated the commodities bubble. So are we going to see a general fail in prices everywhere?

Are we now in a deflationary period? I was certainly one who believed that the USA would do anything it could to inflate its debt away. It was the logical strategy given the general level of in-indebtedness at all levels of US society. However, the destruction of rent-seeking capital seems to be pervasive and occurring in massive quantities. The Austrian school certainly says that deflation is exactly what we should expect at the end of a credit-driven bubble. The huge amount of leverage involved and the general cross-connectedness of the Credit Default Swaps (CDS) market seems to make the domino-effect of financial corporation failures unstoppable. In fact, the US Federal Reserve seems to have largely lost control over prevailing interest rates.

This isn't like the old inventory-driven recessions of the past thirty years. Structurally, it looks closest to the run-up to the Great Depression around 1924-29 when all the Austrian banks went down.

Fortunately I don't think we are likely to have another coincidental Dust Bowl event (and farming is not quite as important anymore) to match the horrible times of the Great Depression. However, if the financial sector were to shrink by half, bringing it back in line with historical norms, that would certainly result in a GDP shrinkage of > 10 %, meeting the technical definition for a depression.

Canada isn't going to side-step the fallout on this one. Any large scale demand destruction in the USA will hurt producers up here badly. Stephen Harper was bright to call an election when he did, but he would be well advised not to stick his head in the sand. The USA is inevitably going to become more mercantilist so let's move to get ahead of that, shall we?

I continue to believe that the way out of this mess is a drive to shift the developed economies of the world away from fossil fuels and into renewable sources of electricity. Any such drive would generate a lot of high-quality jobs, present many R&D opportunities for the productive employment of capital, and achieve some enormous environmental and security side benefits.

Nanoparticle LiFePO4 Batteries

The lithium-ion batteries based on phospho-olivine (i.e. LiMPO₄, where M = {Mn,Co,Fe}) crystalline structure have been the subject of a great deal of research over the past decade. A recent paper in Nature Materials from Gibot et al. has demonstrated some of the developments in the area and I'd like to rehash them here [1]. The paper demonstrates fabrication of a single phase LiFePO₄ with very small particle dimensions. It's not an, "Oh my god what an amazing engineering development paper," but rather one of scientific interest to elucidate the difference between two-phase and single-phase Li-ion batteries.

LiFePO₄ thus far seems to be the most impressive performer, especially from a safety perspective. It is produced entirely in solution (e.g. a beaker) by a chemical recipe. I don't know what the yields are like but the nature of the production method implies that it can be undertaken in large vats on an industrial scale.

Unfortunately, it suffers from poor conductivity characteristics. Two main approaches have been made to improve the conductivity of LiFePO₄: (1) to coat the particles with a thin layer of amorphous carbon, and (2) to manufacture the LiFePO₄ in the form of small nanoparticles (~ 40 nm average axial dimension). Of course, both approachs can be combined.

Adding carbon improves the conductivity but adds an, "electrochemically inactive," layer to the cathode material, hence reducing performance by adding dead weight to the battery. One can imagine that when you take a mass of Li-ion particles and sinter them together to form the cathode, if they've all been coated with carbon then there's an electronically conductive pathway from any buried particle to the electrolyte.

For the nanoparticle approach, presumably the higher ratio of surface area to volume reduces the ion diffusion length, but the literature also suggests that the introduction of defects to the nanoparticles may also improve conductivity. I know from experience that stacking faults (such as twins) can act as diffusion pathways for reaction species in solid-state reactions.

Normally the cathode material is really Li_xFePO₄, where x = 0.5 - 0.75. This is (at least partially) as a result of the boundry between crystallites being composed of an extremely lithium poor phase (x ~ 0.03). The primary advance shown in the Gibot paper is that they made the nanoparticles small enough that only a single phase is found in each particle. To explain, if you are familar with the difference between monocrystalline and polycrystalline silicon solar cells, the sub-40 nm LiFePO₄ nanoparticles are monocrystalline. Particles in the range of 100 nm are polycrystalline and hence have the low lithium phases present at the boundaries of each crystallite. Note that there's no fundamental electrochemical advantage to the monocrystalline approach as far as I know.

Figure 1: Potential-capacity and capacity-power curves for nanoparticle LiFePO₄ (reprinted from [1]). In the top figure, 'C' represents a charge curve and 'D' a discharge curve for carbon-coated LiFePO₄ nanoparticles. The number after the letter is the number of hours the discharge took place over. I assume '2D' is the discharge curve for thirty minutes.

I infer from the paper that a big difference here seems to be in the lithium loading. Gibot showed by a variety of methods that their nanoparticle was loaded with more lithium (x = 0.82-0.92). However, their discharge performance curves aren't actually more impressive than existing LiFePO₄ batteries with larger particles. Existing batteries have flatter discharge curves from what I've seen.

The real advantage for these monocrystalline nano-LiFePO₄ is likely to be reversibility. As I've discussed previously, the volume of the crystal changes from lithuim insertion to deinsertion. This introduces strain into the crystal and after many cycles defects will form and degrade performance. However, in a monocrystalline material there's not a lot to break. The nano-LiFePO₄ does have some substitution defects (Fe where Li should be and vice versa) but without the crystal boundries the defect density is likely to be lower overall.

Another potential advantage for the nanoparticle approach is that it requires less in the way of process temperature (108 °C versus 500 °C over 24 hours) compared to the traditional approach. That should make the manufacturing process less energy intensive and less expensive.

[1] P. Gibot et al., "Room-temperature single-phase Li insertion/extraction in nanoscale LixFePO4", Nature Mat 7 (2008), 741-747.