Oil Prices: Cornucopian Whomps Malthusian Once Again

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Paul Ehrlich weeps.

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.

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  1. 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.

    I love pointing out to the Obamatrons that 2 of their Ivy League Best and the Brightest (the other from Berkley) was beaten handlily by a biz admin professor from a mid-tier state school.

    1. That John Holdren is President Barack Obama’s Director of the White House Office of Science and Technology Policy.

      1. Yep.

        Put him and Berwick together and you’ve got a good mini-Mao going.

        1. Yeah, it’s pretty sickening that these losers run our country, when they’re almost always wrong and don’t know anything.

  2. 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.

    See?

    IT WORKED!

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

    So, basically, he ripped the Malthusians head off and shit down his neck hole? Nice.

  4. ring truer now than they did in the 1970s.

    Wrong.

    1. C’mon, you expect Krugenstein to READ the same paper he works for? That would be, like, work, or something.

  5. By 1990, the prices were lower, and the Malthusians paid up, although they didn’t seem to suffer any professional consequences. Dr. Ehrlich and Dr. Holdren both won MacArthur “genius awards” (Julian never did). Dr. Holdren went on to lead the American Association for the Advancement of Science, and today he serves as President Obama’s science adviser.

    Where can I get this job that allows me to have my head firmly shoved up my ass and be so consistently and freakishly wrong most of the time that I’m rewarded for it?

    1. Step 1) Get degree from Ivy League or comparable (MIT, Chicago, Stanford) institution. Whenever someone questions your findings, you can fall back on your educational pedigree to silence them.

      Step 2) Develop talking points that support increased levels of government intervention which appeal to liberal elites. This will help you get a job at Ivy League or comparable institution and/or the federal government.

      Step 3) Profit.

      1. Yeah, too late for Step 1 for me. This middle-class troglodyte will just have to fall back on competence and hard work (and be thusly compensated).

        1. Pfft. MSL didn’t even leave step 2 as ???’s, I have a hard time believing the rest of the process.

  6. 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.”

    But Krugman has an ace up his sleeve in this prediction.

    So long as the malinvestments in the economy that led to the recent recession are not cleared out, pumping more money into the economy as Krugman and his ilk want to do will lead to price rises in those things that everyone is certain that people want. I.e, commodities!

    Resource prices decline only in an economy with growing productivity and greater leverage over those resources. Stalled as the economy is today, greater stimulus is a recipe for greater commodity prices.

    1. But won’t betting on an inflation adjusted basis of price smooth out any inflationary effects of the exorbitant government spending currently underway?

      1. Say you are the lucky recipient of some first-pressed, extra-virgin stimulus. You have to do something with it.

        In a healthy, growing economy you put it toward higher valued investments that yield greater productivity down the road, making end goods and services more valuable relative to resources.

        In a stalled economy that still invests too much in construction and too much in finance and probably too much in other things without any obvious path forward, you place the money in safer places. You hold it in dollars and dollar-like assets. Or if you want to put it toward something, you invest it in those things that you know people always need: resources.

        In other words, what such bets measure is the price of basic resources relative to higher valued economic outputs. In the long run, the relative prices of resources decline as there is more wealth in tangible and intangible capital.

        But if there is a decrease in higher valued economic output, then resource prices rise relative to higher valued output. Shoving more money into the economy in the vain hope of stimulating it only exacerbates this situation as its recipients are forced to choose what to invest the new money in, and commodities are a safer bet in a slow economy.

        1. some first-pressed, extra-virgin stimulus.

          Whoops, sorry, was I drooling just now?

        2. So if I understand correctly (and I’m not certain I do), investing $1 million to produce Microsoft Office is a better bet IN A GOOD ECONOMY then investing the same money in copper to build computer wires, because it will result in a MUCH higher payoff. The fact that so many institutions that know this are STILL investing in copper indicates that the economy ISN’T in very good shape (or they’d be in the higher quality investment).

          Is that about right?

          1. All this is happening at the margins, so it’s not likely so clear cut. But when people look for investments in a stalled economy, they are more likely to choose those investments that depend less on higher value-add and greater intangible capital. At the limit, the most preferred investment would be in natural resources.

            As Tim Cavanaugh quoted last week, evidence abounds that the presumably noninflationary monetary expansion course set upon by the Fed has in fact yielded significant inflation in commodity prices.

            Since the Fed pushed interest rates to near zero in December 2008, commodity price inflation has resumed at rates rarely seen in the past. Over the last two years, under the effects of near-zero interest rates and ample dollar liquidity, gold prices have jumped from $756 an ounce in December 2008 to $1,430 in December 2010 (up 89%); crude oil from $44 per barrel to $91 (up 107%); copper from $1.29 per pound to $4.2 (up 230%); sugar from $308 a ton to $738 (up 154%), soybeans from $786 a bushel to $1,300 (up 65%); wheat from $457 a bushel to $730 (up 60%); corn from $294 a bushel to $595 (up 102%); and coffee from $1.02 a pound to $2.17 (up 113%)…

            Rarely have economic growth and full-employment in the US or in other major industrial countries been associated with two-digit commodity price inflation. Durable economic growth and sustained employment creation have generally been associated with stable or declining commodity prices.

            New money from expansionist Fed policies may not cause inflation on average. But the new money goes preferentially to some sectors by fiat or by choice: those sectors will see inflation. In a weaker economy, the tendency will be for the money to flow preferentially toward those sectors with the lowest value-add.

  7. 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,…

    That seems like something that would likely be contested by family or something, doesn’t it?

    Leave it to me to wonder about the least important aspect of the story…

    1. Is Simmons a welsh* name? Why would his family contest it?

      *Woo, fun with ethnic slurs!!!!

      1. I can just see the kids or wife or whoever saying “some of MY inheritance is going to some idiot he made a bet with? Over my dead body!”

        But I don’t know. Maybe Simmons doesn’t have any family or they’re decent people who won’t mind.

  8. A couple of points that the ‘peak oil’ types, who imagine they know all that is knowable, seem to consistently disregard or willfully ignore, consistently – that we’ve actually stuck little tubes into the earth in a relatively small percentage of the planet, and it seems like there’s freakin oil just about everywhere. Also, they seem wedded to the ‘dead dinosaur’ theory of how oil comes to exist in the first place. If the abiotic theory is even half correct, there’s oil all over the freakin place, and it is almost constantly being regenerated, even as we use the relatively small percentage we’ve found so far. Naturally, the energy companies aren’t going to contradict the doom and gloomsters, as it would likely cut significantly into their profit margins and potentials.

    1. While “peak oil” is demonstrably wrong, so is abiotic oil. Please provide verifiable evidence that oil is not biological in origin.

      1. Well, my understanding is that VERY little oil is actually “dead dinosaurs”. The VAST majority of it is dead grassland (because back then, just as now, there is FAR more plant life than animal life).

        So while oil does have to come from (formerly) living things, the lion’s share of every drop that goes into your gas tank is technically a bio-fuel (though one where nature did the processing).

        Congratulations: You guys are all Greenies!

      2. —“Please provide verifiable evidence that oil is not biological in origin.”—

        That seems to be the general consensus, but I have a question. Why are there oceans of methane (natural gas) on various bodies throughout the solar system, with not evidence of life on these same bodies? I’m not taking a position either way, it’s just something I find curious.

  9. 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.

    To the Krugmans of the world, this time is always different.

  10. alright, let me step into the band saw here.

    There is a bit of a strawman set up about peak oil. Its not that we’re going to run out of oil, its that oil is a tremendous windfall, hugely productive and without a clear replacement, and that the big price swings themselves can cause economic hardship. You guys note in the Teirney article that the price per barrel went up to 145$ and what then brought the price down was a world-wide recession and related demand destruction. Do you think its possible the first thing had bearing upon the second?

    To windriders comment above, if there is oil everywhere in the world, why arent we pumping it out? Answer, we’ve pumped much of the easy stuff. Now it gets expensive. Sure, most oil is state run biz, and therefore inefficient, etc. No doubt there is much malinvestment slack in the system that could be removed. But look at Pemex. They are bringing in outside private investment, finally. Are there any new massive and easy to pump fields being found? Not that Im aware. Expensive deepwater fields in the gulf, maybe. Thats not nothing, but its not the windfall of easy oil that our worldwide economy rests on.

    The worlds demand for oil is rising faster than we are pumping. China will not become a car-mobile society like America, and it wants to. How this important tension is resolved in the coming century falls under the broad purview of peak oil worries.

    I’ll be as happy as the next guy if Craig Venter grows some algae we can burn like gasoline. No doubt we will come up with some replacement. There is tremendous financial and political incentive today for such an invention. We’re waiting. There is no guarantee whatever we come up with will be the equivalent of oil in terms of EROI. History is not a straight line upwards of economic progress.

    1. Your bolded statement is important for both the ‘pessimist’ *and* ‘optimist’ view. Yes, with the way infrastructure is set up now, price spikes damage the economy.

      But given a *sustained* level of higher oil prices (for whatever reason), the infrastructure would adapt. As it stands now, just about everything else becomes more economical if oil is stuck around 250 to 300 US dollars a barrel (in current dollars)

      I happen to think ‘Peak Oil’ is real enough, but like “Peak Whale” and (better analogy) “Peak Land” (of 1890) the economic system will be able to adapt and overcome.

      1. True, Kolohe. but that euphemism you use ‘adapt and overcome’ can mean an awful lot. There is no guarantee that will be a painless process and while Im quite skeptical of any major government action designed to avoid it, and if we agree its more likely to be painful it simply is not a human reaction to see what you think is a problem and not want to do anything at all about it.

        1. Oil is used for many products. One point the article makes is that we’ve found a great deal of natural gas, which can replace oil in power generation relatively cheaply. Thus oil can be kept for petroleum and petro-chemicals which can’t be created by natural gas.

          Furthermore, if a method is developed to cleanly develop gas hydrates, energy production issues will be over. (Keep in mind that the hydrates in question usually consist of methane, which gives much more power per carbon molecule than gasoline.)

          The estimates of gas hydrates in the US are about 320 Trillion cubic feet. This is enough to for 100% of power generation in the US at 2005 for nearly 1,000 years. I’d say we have some time to develop more efficient solar cells and wind mills.

          1. Relating to the concept of other fossil fuels, how much would coal-to-oil cost, expressed as price per barrel of oil? I remember reading it was around $165/barrel, and naturally, that will change as and if more coal-to-oil plants are built. Given the sheer size of global coal reserves, it would seem that price would be a ceiling on how crazy crude oil prices can get.

            As far as global crude oil production goes, everything I’ve seen indicates the Arctic and deepwater are the next big areas. Deepwater in particular, as the tech improves to place most of the processing machinery on very deep seabeds, seems to be an incredibly promising area. It will get interesting as commercially available oil gets discovered outside of EEOZs, determining who has title to those minerals.

          2. RoEI (Return on Energy Invested). That’s where we need to look. Middle Eastern oil has a large RoEI, oil sands have a low RoEI. Where gas hydrates fall, its hard to tell, but the only way we’ll have another energy bonanza is if we find another energy source as abundant and easy as oil from the 30’s to the 70’s. From here on out, the hill we’re climbing just gets steeper.

        2. Matt:

          Kolohe, like most conservatives and libertarians, believes in what I call “Russian Roulette Economics”, as in its perfectly OK to point a half-loaded gun at your head and pull the trigger, because we can be certain that the market will find a solution to your “bullet speeding towards brain” problem if the wrong chamber comes up.

          Libertarians honestly believe we can dump any crap we want to on our grandkids, because somehow they will just figure out how to deal with it with minimal effort.

          1. Matt: Chad, like most of the Leftarded, is a Malthusian idiot. Even after the astronomical butt-fucking given to his world view by the bets in this article, he remains oblivious.

          2. Like massive debt?

          3. Chad, I am honored to be the subject of your vitriol.

            But really, there’s going to be oil for the grandkids, it’s just going to be more expensive than now. And that’s true whether you make it expensive right away (for whatever reason) or it becomes expensive over the course of time due to The Market (PBUI)

    2. Matt:

      Here is a good example of untapped oil that has heretofore been economically unattractive.

      Note that after the oil crash of the early 80s, almost all of the oil that came onstream for the next 20 years had to be profitable at $18/bbl. If you want to know why the big oil guys are so rich, its because they made highly pessimistic forecasts (that weren’t very wrong) on the long-term price of oil after very nearly going out of business. If the new baseline is $50/bbl you can expect hundreds of new fields to be developed.

  11. http://www.theoildrum.com/node/7017

    This guy is worth listening to even if you dont agree. He’s a combination of oil-pessimism and techno-optimism. Ron Id love to hear you interview him.

  12. Wait a minute, a guy who actually works for the NYT said “You can always make news with doomsday predictions, but you can usually make money betting against them.”

    How the hell did he get through the hiring process?

  13. Would love to see Tierney offer a similar bet to Krugman.

  14. eh? Reported Price Per Barrel today is $90, with expectations of approaching $100 in the near term:

    http://tinyurl.com/2dmdwod

    Oil prices are highly volatile, going up and down a lot in the short term. Pricing it in dollars makes it more so. Adjusting according to our government’s ever-morphing, thoroughly politicized inflation measures makes it even more so.

    To get a good idea on the “real” price of oil over time would involve gauging it against the several major currencies, and in relation to other important commodities. That’s a lot of work, though.

    More to the point, whatever the price is right now, production is flattening out and headed for decline. The North Sea peaked. Mexico peaked. the U.S. peaked. Russia has probably peaked. Saudi Arabia alone can’t make up for everybody else peaking and declining. Given the trend, the only hope is loonie-bird theories about “abiotic oil” and such, or some genetically-unprecedented miracle-algae.

    1. Sounds like you’ve learned the art of Krugmanesque excuse-making.

      1. So, are you a declared “corno”?

        Do you expect the daily production to go above 100 Million Barrels per Day? Do you even expect it to go above 95M BPD?

        Or do you instead expect that consumption of oil as a transportation and industrial fuel is going to shift to alternatives so fast and so dramatically that prices stay at or below the current range even with a flat or declining supply and a flat or increasing consumption of energy?

        1. “Do you expect the daily production to go above 100 Million Barrels per Day? Do you even expect it to go above 95M BPD?

          Or do you instead expect that consumption of oil as a transportation and industrial fuel is going to shift to alternatives so fast and so dramatically that prices stay at or below the current range even with a flat or declining supply and a flat or increasing consumption of energy?”

          Ah, yes, danny has it all figured out. It can only be this or that!
          I expect that you are constantly blind-sided.

          1. It can be part this and part that (e.g., extra 3M BPD produced plus 4M BPD shifted for a total gain of 7M BPD.) But, yes, it must, at least, be some combination of one and the other.

            You have some other magical alternative? If so, you really could get rich quick.

        2. Do you expect the daily production to go above 100 Million Barrels per Day? Do you even expect it to go above 95M BPD?

          I would be willing to be on it. Like in the article, I have little knowledge about the potential future production of oil. I am more than willing to put my money upon the esteemed Dr. Simon, however.

          Seriously, e-mail me. I will bet you $1k that we will produce 95M BPD within 10 years.

          1. What is a wager between us? We both already have everything we hold dear riding on you being right. And there is precious little we can do to change that.

            The country has bet its national survival on the corno thesis, without any hedge whatsoever. And yet, you want some further vindication? How insecure are you in your smug presumptions?

            1. And yet, you want some further vindication? How insecure are you in your smug presumptions?

              Actually, I just like it when self-aggrandized chicken littles have to actually pay when they turn out to be fantastically wrong. Since they attempt to impose costs upon me due to their lack of knowledge and inability to learn, they deserve to be publicly humiliated when they are wrong.

              The fucking absolutely amazing part is how, even after a complete demolition of their claims, these guys have others continue to defend them. Like you.

              1. Peakniks have been right about the US (1970), right about Mexico (2004), right about Norway (2001), right about the UK (1999). And the clock is ticking. So who’s really getting demolished, a##clown?

    2. This all sounds so familiar…

  15. I’ve been wondering how to make money in L.A..

    All I have to do is make a bet with every Malthusian I meet and I’ll be rich in no time.

  16. I’m predicting much higher oil prices because of the increased demand for heating oil caused by the frigid temperatures caused by global warming.

  17. But this time may be different

    Oh, if only every Krugman column started off with this disclaimer by management, followed by a listing of all the other columns where he got it completely wrong, but hey, some day, if only by accident, he’ll get it right.

  18. “Peak Oil” from 5 years ago. 100+ comments, and nobody was called a douche or ordered to die in a fire. Who were those people?

    https://reason.com/blog/2005/08…..tcontainer

    1. Likely they were all douches who subsequently died in fires.

      1. Most of the civilized people left this place.

        1. But for where?

    2. That’s a pretty good find.

    3. On that very thread I made a prediction we are now halfway to.

      Peak Oil is so last week…

      I predict that biodiesel will replace gasoline at $4 a gallon. In fact, as petroleum production costs rise past that price, there will be a large but painless shift in the developed and developing world to vegetable-derived transportation fuel.

      But in the undeveloped world disaster awaits…. As the hungry industries demand more and more plant oil, it actually outcompetes food crops on lands in the undeveloped world. The western world, China, and India push more and more people from their farms, increasing displacement and potential famine throughout the nonindustrial nations.

      In 2016 Peak Vegetable Oil arrives when a man named Morris leads a transnational rebellion against the vegetable oil interests. He organizes the vegetable oil producing nations into VOPEC and extracts huge price concessions from the industrialized world. Worldwide depression follows. Oh, and all the economic laws you ever knew anything about fail, yadda, yadda, yadda.

      “Peak Vegetable Oil” is not snappy enough. I will call my theory “Collapse of the Wesson World”.

      Can I be on Fresh Air now, or do I have to write a book first?

      We’ll have to revisit in six more years…

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

    So true. So true. City due to flood over if storm bad enough? Pssh.

    1. Bullshit! My city flooded because the US Army Corps of Engineers built shitty levies & dredged poorly thought out access canals through the mangroves. The storm had been over for a whole day before the deluge came.

  20. For some of this? http://www.hilaryshepherd.com/…..t-415.jpg?

    Stupid fucking spam filter

  21. It’s a shame that Tierney shares a name with the execrable Mass. rep. from where I grew up.

  22. On the one hand, we *did* hit a major economic wall, which caused oil usage to drop precipitously. On the other hand, Bernanke’s devaluation of the dollar has caused oil prices to spike dramatically.

    Regardless of what the bet was, the price of oil — even with sharply lower usage today than would have been predicted in 2005 — is now roughly 40% higher than it was in 2005.

    If the U.S. economy truly recovers, it will soon be crushed by skyrocketing oil prices; if Bernanke continues to devalue the dollar, we will also see much higher oil prices.

    Laugha while you can, monkey boys. While the “neo-Malthusian” got the mechanism and timing wrong, I believe he will still have the last laugh.

  23. You guys are a lot like the thanksgiving turkey who stated for 364 days, “Well, I’ve never had my neck cut off before!”

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