Failure of Networked Systems  

David Clarke has a post up at The Oil Drum looking at some examples of network failure, and considering the idea that the energy, food and financial networks (with the financial network providing the control and feedback function for the others) are now linked.

In summary: The ability to measure and monitor the system gives us the capacity to avoid small avalanches in individual areas. However, if we keep adding load without adding capacity we overload the entire network and thus make an all-encompassing avalanche inevitable.

If we can’t add capacity, then it would have been better to allow a series of small avalanches.

A look at the financial markets at the moment might illustrate the same point. When we look at the “sub-prime” issues that are emerging, we see that the market created a series of “Investment Vehicles” that allowed risk to be shared. A complex network of interdependencies was created to share this risk, but capacity was not added to deal with the possibility of default. The various institutions that bought these “Investment Vehicles” thought they were buying assets, not debts. The institutions failed to recognise that they needed to add “capacity” in the form of liquidity equal to the possible value of defaults on this debt. As a result, now that load is being applied (in the form of defaults) it threatens to bring down the entire network, rather than just the single “node” that originated the debt.

The critical concept is that monitoring and networking the system allows us to go right up to the edge of disaster, and then move load to another part of the network until it, too, is on the edge of disaster.

Now that the networking effects have been discussed, I would like to push the analogy a bit further and look at how this plays out from a Peak Oil perspective.

Several years ago, sweet light crude oil started getting a bit more difficult to obtain. In response, we stopped talking about “oil” and started talking about “liquids”. The word “liquids” covers Liquefied Natural Gas (LNG), ethanol, heavy oils, tar sands, and an increasing number of other oil-substitutes.

Essentially the part of the network called “Sweet Light Crude” turned red, so we started connecting the "Oil Network" to other networks.

We connected oil to the “food” network by turning food into ethanol. Actually food was already connected because you need oil to make food in the modern world, but now the circle is complete – previously we used oil to create food, and now we use food (corn, sugar, palm oil, etc) to create oil (or oil-substitutes).

Adding LNG and CTL (Coal-To-Liquid) to the network connects oil to other energy sources. As this connection strengthens and load starts to be applied, a shortage of any of these sources would have an impact in each of the other sources. To some extent, this has already started to occur.

Adding tar sands and various other oil substitutes to the network has made a surprising connection between the environment and oil. This connection takes many forms, but the most interesting lies in the fact that oil substitutes are less efficient than light sweet crude – much more CO2 is produced for any given amount of work done. This connection is emerging, and could have interesting repercussions. The problem applies to virtually all the oil-substitutes, so the widespread adoption of substitutes (particularly CTL and tar sands) might cause an environmental disaster which in turn would suppress ethanol production and create knock-on effects in other parts of the network.

The financial system has an important role to play in this network. If energy, food and the environment can be considered 3 portions of the network, then our financial system can be considered to be both a form of network monitoring, and the communication medium that the network uses to pass signals around. Consider the financial system to be similar to the blue cable running out the back of your computer. Your computer’s blue cable isn’t likely to run hot, but our finance system is a network of networks, and it is glowing red. In addition to monitoring and communication, the financial system provides support for maintenance and upgrades of the energy systems, so capacity in the financial system is critical.

When one part of the network develops a problem (say production of LNG suddenly drops), then messages get sent via the financial system (in the form of increased prices), and the other parts of the system accept the load, if they can, by increasing production. When compared to an Internet Protocol network there are many faults in this system. High latency leads to slow responses. Poor monitoring leads to conflicting signals or a failure to detect faults. Bad messages are often not corrected, leading to incorrect responses, and so on. ...