Douglas T. Breeden - Duke University's Fuqua School of Business

The Shah was extremely pleased with this ingenious
game and granted the Grand Vizier a wish for any reasonable
gift he so pleases. The Grand Vizier named his
price, and he wished to have one single grain of rice on the
first square, two grains on the second, four grains on the
third square, eight grains on the fourth, doubling in number
of grains as he moved to the next square until he reached
all of the sixty-four squares. The Shah responded that the
Grand Vizier was too humble in his request and that he
should at least request a mansion, a castle, or something
befitting this ingenious contraption. The Grand Vizier
stuck to his request.
So let’s work out the mathematics of the number of rice
grains. If you have the patience to continue doubling the
number of rice grains per the algorithm above, then you
will come to 9.2 million trillion grains of rice. That is 9.2
followed by 18 zeros. We don’t know how the Shah and the
Grand Vizier settled this contract, but I want to point out
that this “doubling effect” can quite quickly catch up and
even overtake your imagination.
BACTERIA POLITICS
Picture a bottle of coke full of this black sugared water.
Bacteria eats the sugared water as food and breeds by
doubling every minute. It takes 60 minutes for the
bacteria to finish the coke and fill the whole bottle with
bacteria. So the question is: at which minute is the bottle
half-full? The obvious answer is “at the 59th minute.”
Now imagine at the 59th minute some bacterium environmentalist
raises the alarming issue of this bacteria
coke bottle world running out of foods and space. The
prime minister of this bacteria population standing on
top of the pile of bacteria at the half-way point in the bottle
then downplays this by pointing out that there is as much
space available as there is bacteria. And one minute later,
lights out for every bacteria. This doubling effect is lethal.
It just happens that bacteria doubles its population every
one minute while the human population doubles every
fifty-three years.
FINITY AND SCARCITY
One of the key tenets behind economics is scarcity. More
of something means less of something else. More people,
less cows. More cows, less grass. More guns, less butter,
or more health care, less roads and so on.
Living matters consist in large parts of carbon and
hydrogen molecules. Plant and vegetables are carbonbased.
Humans eat these vegetables and inhale oxygen,
expend energy, and exhale carbon dioxide. The energy
that is not expended is stored as fat. Animals do the same.
Should humans leave those animals and plants to die by
themselves, they get trapped under the ground for a
couple of million years only to become hydrocarbons—
fossil fuels such as oil, gas, coal. Starch, fat, and oil are
just stored energy and all provide colorific values. So,
these molecules dance around changing pairs back and
forth, but they really never disappear—exchanging,
releasing, and storing differing forms of energy.
About thirty years ago, I found myself in remote southern
Thailand, and that was my first time seeing a village
petrol station. Unless somebody told me, I wouldn’t have
recognized that it was a petrol station. On the “pump” side
of the business, lay an array of old whiskey bottles filled
with sunset-orange liquid, gasoline, on a wooden table
just off a dusty road.
Villagers visit on motorcycles and get refills from these
bottles. And when it was time to pay for the gasoline,
some paid with cash and many others paid with eggs and
the next person paid with vegetables and another with
fruits. Something dawned on me: the most common
denominator next to money in today's society is probably
oil (if you’re sentimental about symbols of immortality,
then go ahead and choose gold). Just about everything in our
lives that we are exposed to, either directly or indirectly,
consumes oil. It is no wonder that this base effect has
had on just about the price of every commodity. So, this
Malthusian effect has a broader application.
One way of looking at this is to trace the history of oil,
and you will find that we have only become addicted to oil a
little over a hundred years ago. The first well, the Drake
well, was drilled on August 29, 1859.
In fact, long before the Drake well, oil had been oozing
out of subterranean springs in Ohio onto the Oil Creek.
However, there was no significant volume for oil application—oil
addiction—until around 1900: the British
Navy converted their coal-fired battleships to oil in
1902, and Ford’s Model T rolled out in 1908. At the same
time, we should not belittle oil up to that point because
it has done well enough to have enriched John D.
Rockefeller amongst others.
Oil prices have been low and flat up until 1973. In nominal
price, oil is 19.56 times higher today than it was in
1973. In 2005 money, the oil price is 4.43 times higher
than it was in 1973. This is a thirty-four year period. If you
think in terms of a fifty-three year period of doubling
world population and increasingly we have become an
oil-dependent population, the Malthusian effect and The
Hubbard’s Peak are both showing an emphatic trend.
summer 2007 31