Betting Against Peak Oil

Dec.28.10 | About: iPath S&P (OIL)

In the summer of 2005, when oil was trading at $60 per barrel (see chart above), there was a bet between Malthusian Matthew R. Simmons (member of the Council on Foreign Relations, head of a Houston investment bank specializing in the energy industry, and author of “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy”), and New York Times science writer John Tierney, proponent of the Julian Simon school of economics.

"Peak oil" advocate Simmons predicted in 2005 that the inflation-adjusted price of oil would more than triple over the next five years, and he made a $5,000 bet with Tierney that the average price of oil in 2010 would be at least $200 per barrel in 2005 dollars. Tierney actually agreed to share his bet with Julian Simon's widow, who enthusiastically participated in a bet on the real price of a natural resource in the tradition of her late husband, who won the famous bet in 1990 against Malthusian Paul Ehrlich about resource scarcity based on real prices of five commodities selected by Ehrlich and his doomsayer colleagues (see details here).

Although Mr. Simmons died in August of this year, the representatives of his estate will deliver $5,000 on January 1 to John Tierney and Rita Simon, because the price of oil this year has averaged about $80, or about $70 in inflation-adjusted 2005 dollars (see chart above), which is about 1/3 of the $200 per barrel price predicted by Simmons.

John Tierney summarizes his economic optimism a la Julian Simon here:

Giant new oil fields have been discovered off the coasts of Africa and Brazil. The new oil sands projects in Canada now supply more oil to the United States than Saudi Arabia does. Oil production in the United States increased last year, and the Department of Energy projects further increases over the next two decades. The really good news is the discovery of vast quantities of natural gas. It’s now selling for less than half of what it was five years ago. There’s so much available that the Energy Department is predicting low prices for gas and electricity for the next quarter-century.

Maybe something unexpected will change these happy trends, but for now I’d say that Julian Simon’s advice remains as good as ever. You can always make news with doomsday predictions, but you can usually make money betting against them.