Oil Prices: Cornucopian Whomps Malthusian Once Again

Economist Julian Simon once famously made a bet back in 1980 with neo-Malthusian doomsters, Paul Ehrlich, John Holdren, and John Harte about future natural resource availability. Simon even let the three self-selected horsemen of the finite resource apocalypse pick the resources on which the bet would be based. They chose a basket of five metals worth $1,000 in 1980 betting that their collective prices (indexed to inflation) would rise by 1990. Simon would pay the three whatever amount above $1,000 it would cost to buy the same basket of metals in 1990. Presumably the doomsayers would have used their winnings to refurbish the caves into which they retired to escape the starving hordes that would be ravaging the countryside a decade later. Note that the upside of the bet was essentially unlimited, whereas Simon would only have won $1,000 if the metals had become free. 

In October 1990, Paul Ehrlich mailed Julian Simon a check for $576.07. In other words the prices of the metals had fallen by more than 50 percent.

Back in 2005, the clamor from the peak oil crowd was growing. New York Times reporter, John Tierney, siding with cornucopians, arranged a bet with oil doomster investment banker Matthew Simmons about what the price of oil would be on January 1, 2011. Today, in the Times Tierney reports the results:

I called Mr. Simmons to discuss a bet. To his credit — and unlike some other Malthusians — he was eager to back his predictions with cash. He expected the price of oil, then about $65 a barrel, to more than triple in the next five years, even after adjusting for inflation. He offered to bet $5,000 that the average price of oil over the course of 2010 would be at least $200 a barrel in 2005 dollars.

I took him up on it, not because I knew much about Saudi oil production or the other "peak oil" arguments that global production was headed downward. I was just following a rule learned from a mentor and a friend, the economist Julian L. Simon. …

When I found a new bettor in 2005, the first person I told was Julian's widow, Rita Simon, a public affairs professor at American University. She was so happy to see Julian's tradition continue that she wanted to share the bet with me, so we each ended up each putting $2,500 against Mr. Simmons's $5,000.

Just as Mr. Simmons predicted, oil prices did soar well beyond $65. With the global economy booming in the summer of 2008, the price of a barrel of oil reached $145. American foreign-policy experts called for policies to secure access to this increasingly scarce resource; environmentalists advocated crash programs to reduce dependence on fossil fuels; companies producing power from wind and other alternative energies rushed to expand capacity.

When the global recession hit in the fall of 2008, the price plummeted below $50, but at the end of that year Mr. Simmons was quoted in The Baltimore Sun sounding confident. When Jay Hancock, a Sun financial columnist, asked if he was having any second thoughts about the wager, Mr. Simmons replied: "God, no. We bet on the average price in 2010. That's an eternity from now."

The past year the price has rebounded, but the average for 2010 has been just under $80, which is the equivalent of about $71 in 2005 dollars — a little higher than the $65 at the time of our bet, but far below the $200 threshold set by Mr. Simmons.

What lesson do we draw from this? I'd hoped to let Mr. Simmons give his view, but I'm very sorry to report that he died in August, at the age of 67. The colleagues handling his affairs reviewed the numbers last week and declared that Mr. Simmons's $5,000 should be awarded to me and to Rita Simon on Jan. 1,…

Tierney correctly concludes:

You can always make news with doomsday predictions, but you can usually make money betting against them.

As usual, Tierney's fellow Timeser, economist Paul Krugman gets it wrong when he opines about future oil prices in one of his latest columns stumping for more federal intervention in energy markets, predicting that "the long-term trend is surely up."

Krugman has covered this territory before. In a 2008 column, Running Out of Planet to Exploit, he fashionably echoed the sort of pessimism that passes for wisdom in the purlieus of Ivy League environmental science departments and Manhattan parlors:

But this time may be different: concerns about what happens when an ever-growing world economy pushes up against the limits of a finite planet ring truer now than they did in the 1970s.

The whole Tierney article is well worth reading.