April 4, 2006


Betting the planet: The sequel (Aruni Mukherjee, 4/04/06, Asia Times)

Last August, New York Times columnist John Tierney placed a bet with Houston energy prognosticator Matthew Simmons (a leading proponent of the "peak oil" theory) about the future price movements of crude oil, with each side putting up US$5,000. The episode was regarded by many as a kind of sequel to the famous bet in the 1980s between libertarian economist Julian Simon and ecologist Paul Ehrlich, which Simon won.

Simmons had argued that "oil prices will soar into the triple digits" in the coming years. More specifically, prices would more than triple the contemporary figure of $65 a barrel by 2010, reaching "at least $200 a barrel" (in 2005 dollars). His thesis was based on the argument that the world's oil resources - most notably in the Middle East - will become increasingly scarce. Added to recent events such as Iranian president Mahmud Ahmadinejad threatening to spike oil prices by halting exports, Simmons' prophecy has developed a common-sense appeal.

But what has actually been happening with oil prices lately? Data from the International Monetary Fund offer an interesting read. Using the average of three spot prices, the monthly figures for oil prices from September to February were (per barrel, in current dollars) $61.65, $58.18, $54.98, $56.47, $62.36, and $59.71. In other words, there has in fact been a 3.5% fall in oil prices if we were to compare the latest prices to last August.

Bear in mind that during the past six months, there has been increased violence in Iraq that has rendered its oil assets vulnerable. We have seen energy supplies in Europe being threatened by Russia's oil diplomacy in Ukraine. We have seen Venezuelan President Hugo Chavez threatening to disrupt oil exports to North America. The Iranian president has delivered frequent threats to cut exports to the oil markets to drive prices up. All this is not to mention the fact that Hurricanes Katrina and Rita caused considerable damage to oil supplies and refinery facilities in the United States and adjacent countries.

There'll still be ample oil left over when the good Lord summons us home.

Posted by Orrin Judd at April 4, 2006 11:16 AM

I wish he was right. Think of all the cool gear we'd build if we had a $200/barrel price umbrella. Of course once we did that, oil would become cheap in the long run. Chavez recently said he hoped for a target price of $50. Maybe he should bet Simmons too.

Posted by: JAB at April 4, 2006 11:45 AM

given that oil is a byproduct of the internal processes of the earth, of course there will always be plenty.

Posted by: toe at April 4, 2006 12:10 PM

Give the gold bugs a break. They're just people who are stil trying to unload the gold and silver they bought back in the '70s when they were $750/oz and $40/oz respectively.

Posted by: Raoul Ortega at April 4, 2006 12:43 PM

Chavez wants to fix that price at $50 because he said he has 200 years worth of oil, more than even Saudi Arabia. Sounds like there is lots of oil out there. When it is used up, we will switch to something else.

Posted by: pchuck at April 4, 2006 12:51 PM

Orrin, I'm still waiting for your prediction of sub $40 oil to come true.

If you are going to take the word of Hugh Chavez on how much oil his country has, I have a bridge to sell you. Wait for summer hurricane season, we'll see a new all-time high this year. Less famous than the Tierney-Simmons bet is my bet with Michael Herdegen that oil will hit $100 by the end of the year. Bret at the GreatGuys blog calculated the odds for the bet.

Posted by: Robert Duquette at April 4, 2006 1:10 PM

Anyone who has invested in gold in the last four years is doing quite well right now.

Posted by: Robert Duquette at April 4, 2006 1:11 PM

A foaming-at-the-mouth Bush-hater I ran into was saying about six months back that we wouldn't see gas back below $3 in our lifetimes. I thought about asking him for some action on that, but it wasn't worth the hassle.

Posted by: Mike Earl at April 4, 2006 1:13 PM

Need to be careful to distinguish between supply issues due to lack of supply (i.e the earth is running out of oil) and supply issues due to temporary/political factors (i.e. Iraq, Iran). Most oil analyses I've seen put the price per barrel in the $30-$40 range based on supply and demand and the rest is political uncertainty/speculation. For oil to hit $100/barrel there would need to be a major disruption in the Middle East like a war or overthrow of an existing govt. As for hurricanes as we saw with Katrina the price of oil didn't shoot up but gas did as refining capacity was lost.

Posted by: AWW at April 4, 2006 1:19 PM

Don't forget about the 25% loss of capacity in the Nigerian Delta. Things have been unsettled there for some time, and it's probably going to get worse.

Posted by: jim hamlen at April 4, 2006 1:26 PM

mike earl: he wouldn't have paid off on it anyway

Posted by: toe at April 4, 2006 2:13 PM

the inbreeding doesn't help either.

Posted by: toe at April 4, 2006 6:16 PM

it just coincidentally appears everywhere, in unlimited amounts.

Posted by: toe at April 6, 2006 12:28 PM

Not everywhere, nor in unlimited amounts.

If you can prove the linked article wrong, you can start writing your Nobel acceptance speech.
Good luck with that.

Posted by: Michael Herdegen [TypeKey Profile Page] at April 7, 2006 5:16 AM

It's good to see OJ quoting another of my articles (the first one triggered off a lengthy debate).

The success rate of Simon's predictions when extended from 1990 to 2000 and 2005 has been nearly perfect, with some standout exception commodities. This supports my somewhat qualified support for his optimistic ideas. Humans will always innovate and find ways around the natural supply crunch, although adequate incentives and institutions need to be ordered first.

Posted by: Aruni Mukherjee at April 10, 2006 10:40 AM

Set your society up on the Anglospheric model and all else follows.

Posted by: oj at April 10, 2006 10:44 AM