Wednesday, July 07, 2010

Tierney Wins The Peak Oil Bet

In August of 2005, Houston banking executive Matthew Simmons (one of the world's "leading experts" on the topic of peak oil, although not very good at predicting oil prices) and New York Times columnist John Tierney each put up $5,000 and made a bet about the price of oil in 2010. 

The wager was based on the price of oil in 2010, specifically on the average daily price for the entire year, adjusted for inflation into 2005 dollars. If the inflation-adjusted oil price this year is $200 or more per barrel, Mr. Simmons wins $10,000 plus interest, and if the average price this year is less than $200, Tierney wins the bet.   

The bet was made public in Tierney's New York Times column on August 23, 2005 called "The $10,000.00 Question."  Economist Julian Simon's widow put up $2,500 towards Tierney's $5,000 obligation, to honor the tradition of her husband's famous wager with Paul Ehrlich. 

The chart above shows monthly oil prices in 2010 (converted to 2005 dollars), including monthly projections through the end of the year, from the Energy Information Administration.  Now that we're halfway through 2010, it looks pretty certain that average oil prices this year won't even be anywhere close to $100, and will probably average less than $70, far below the $200 price predicted by Simmons.  Unless oil somehow averages more than $330 per barrel for the rest of the year, I think it's pretty safe to assume that Tierney has won the "peak oil bet." 

17 Comments:

At 7/07/2010 9:46 PM, Anonymous Sigli said...

Matthew Simmons is the leftist version of Alex Jones. Why does the media pay any attention to him. Maybe ITS his hair.

 
At 7/07/2010 10:09 PM, Blogger VangelV said...

Matthew Simmons is the leftist version of Alex Jones. Why does the media pay any attention to him. Maybe ITS his hair.

Simmons is not a lefty. He lost the bet even though he was right about the supply side issues that have caused production to decline. For some reason he could not imagine a collapse in demand that could cause prices to fall. But on the issue of fossil fuels he is still the clear cut winner because the IEA and EIA have finally come around to his conclusions and have seen the writing on the wall. While we could still see a decline in prices if the economy collapses the long term trend is still higher because 2005 is still the year in which the planet's energy companies produced the most light sweet crude in history.

Hubbert's Peak is already behind us. The sooner we figure that out the better we will all be.

 
At 7/07/2010 10:41 PM, Blogger PeakTrader said...

Who in 2005 could've predicted Obama would be President?

Yes, many countries, including the U.S., reached "Peak Oil" long ago.

 
At 7/07/2010 11:04 PM, Anonymous Anonymous said...

It ain't over til it's over.

 
At 7/08/2010 3:32 AM, Blogger VangelV said...

Yes, many countries, including the U.S., reached "Peak Oil" long ago.

The problem is not that many countries have already reached Peak Oil but that the world has reached Peak Oil. It took hundreds of billions of new investment just to keep production from falling between 2005 and 2008. Current production levels trail those in 2004 even though the figures include production of heavy oil projects and unconventional sources that were not producing in 2004. Given the regulations put into place by Obama and a call for reduced exploration and development in the Middle East there is no way to get back to the previous levels even if prices explode.

I thought that this little story might shed some perspective about where we are.

http://tinyurl.com/24d2p59

 
At 7/08/2010 8:37 AM, Blogger James Fraasch said...

I found this rather interesting from the precursor bet.

According to an article in Wired:

All of [Ehrlich's] grim predictions had been decisively overturned by events. Ehrlich was wrong about higher natural resource prices, about "famines of unbelievable proportions" occurring by 1975, about "hundreds of millions of people starving to death" in the 1970s and '80s, about the world "entering a genuine age of scarcity." In 1990, for his having promoted "greater public understanding of environmental problems," Ehrlich received a MacArthur Foundation Genius Award." [Simon] always found it somewhat peculiar that neither the Science piece nor his public wager with Ehrlich nor anything else that he did, said, or wrote seemed to make much of a dent on the world at large. For some reason he could never comprehend, people were inclined to believe the very worst about anything and everything; they were immune to contrary evidence just as if they'd been medically vaccinated against the force of fact. Furthermore, there seemed to be a bizarre reverse-Cassandra effect operating in the universe: whereas the mythical Cassandra spoke the awful truth and was not believed, these days "experts" spoke awful falsehoods, and they were believed. Repeatedly being wrong actually seemed to be an advantage, conferring some sort of puzzling magic glow upon the speaker

 
At 7/08/2010 9:11 AM, Anonymous Eric H said...

Well, Al Gore certainly is magically glowing right about now...

 
At 7/08/2010 1:27 PM, Anonymous Anonymous said...

Al's second chakra is on fire.

 
At 7/08/2010 2:26 PM, Blogger VangelV said...

In 1990, for his having promoted "greater public understanding of environmental problems," Ehrlich received a MacArthur Foundation Genius Award." [Simon] always found it somewhat peculiar that neither the Science piece nor his public wager with Ehrlich nor anything else that he did, said, or wrote seemed to make much of a dent on the world at large. For some reason he could never comprehend, people were inclined to believe the very worst about anything and everything; they were immune to contrary evidence just as if they'd been medically vaccinated against the force of fact.

People are prone to believe the worst, particularly when they are bombarded by false science and hype from the media. Elitists love to spread the tales of doom because they offer themselves as the saviors and do not wish the public to figure out that they are marginal at best and harmful at worst.

 
At 7/08/2010 8:15 PM, Anonymous Gregry Briar said...

VangeIV,

I've read a few of your comments on peak oil and I like what I read - you certainly know a lot about the oil sector. Out of curiosity, do you work in the industry?

 
At 7/08/2010 9:16 PM, Blogger VangelV said...

I've read a few of your comments on peak oil and I like what I read - you certainly know a lot about the oil sector. Out of curiosity, do you work in the industry?

No. I used to work in the aircraft manufacturing industry making planes for McDonnell Douglas and Boeing in Toronto and for a time in China. The Peak Oil was of obvious interest to me because it would have a big effect on the sector. I was very interested in Hubbert as well as the Russian theory on abiotic formation of oil and gas.

While there could have been an argument against Hubbert many years ago, the most recent developments have proven that his theory was correct. After years of making stupid assumptions the IEA has finally seen the light and began to ask some serious questions. And even though some of its reserve numbers are in question, the production data, which is harder to mess up, is showing that we are facing serious troubles going forward. In 2008 it finally admitted that without new investment in development and exploration the natural depletion rate would run at 9.1%. What saved us was not a supply response but a collapse in demand that brought use down by around 2 mbpd. Although that is a small number as a percentage of the total, it was enough to create massive volatility and cut prices by 75% or so. The problem is that the volatility runs both ways and we could see the natural decline rates create a squeeze that drives prices much higher. The process of boom/collapse will likely continue as prices lead to demand destruction that is followed by a reduction in investment in new production.

I would use price declines to purchase shares of tar sands companies with plenty of reserves, decent cash flow, and a low cost base. And buy gold.

 
At 7/09/2010 10:28 AM, Blogger Richard Rider, Chair, San Diego Tax Fighters said...

The idea of "put your money where your mouth is" has always appealed to me. Over and over and OVER I've offered four, five and even six figure wagers to wealthy proponents of boondoggle spending that used bogus projections as justification. I've been quite vocal about this, offering the wagers via the media to all comers for about 15 years. And I am dead serious about it.

So far, no takers.

And with good reason. I'm no fool. I offer only sucker bets -- bets that what they "honestly" predict will not come to pass. I know it, and -- whey it comes to putting up real money -- so do they.

Like the wager discussed above, I insist the wager be funded up front with the money escrowed in a mutually agreed investment fund. Of course, it's winner take all.

 
At 7/09/2010 10:34 AM, Blogger Jet Beagle said...

VangeIV,

I don't think the problem with Peak Oil predictions was ever that they were false. The problem most of us had with the Peak Oil folks was their predictions of doom. The Doom and Gloom crowd have consistently throughout history underestimated the adaptibility of humans.

I don't believe it accurate to describe the change in energy demand as a "collapse". This seems to imply a sudden and non-peating event. As I see it, demand shifts represent market-based adaptations of humans to price changes. Hybrid engines are exactly one such adaptation.

 
At 7/09/2010 10:36 AM, Blogger Richard Rider, Chair, San Diego Tax Fighters said...

One series of wagers I've pushed for the last three years have been the CA high speed rail projections. Of course, many of the projected figures have ALREADY been drastically adjusted closer to reality (though not anywhere near REAL reality yet) by proponents -- AFTER they used these insane predictions to con the voters into passing their bond measure.

If perchance you know any wealthy idiots who wish to back the still-Pollyannish HSR predictions with serious money, kindly have them get in touch with me.

My unborn grandchildren need funding for their colleges!

BTW, I am NOT a wealthy person -- just good at wagering. And I have wealthy friends wanting a piece of such action if it exceeds my means to handle.

 
At 7/09/2010 10:39 AM, Blogger Richard Rider, Chair, San Diego Tax Fighters said...

One problem with wagering I have yet to solve -- apparently it's illegal.

I'm not sure how to deal with that, but obviously others have solved the problem. Setting up such a wager that passes legal muster may be a hassle, which is why I seek higher denomination, escrowed bets.

Guidance on this aspect would be greatly appreciated -- because some day my fool will come.

 
At 7/09/2010 10:51 AM, Blogger Richard Rider, Chair, San Diego Tax Fighters said...

My favorite wager was the 1990's infamous Charger ticket guarantee -- where the city of San Diego renovated a stadium -- charging the Chargers a nominal rent while guaranteeing to pay this NFL team for empty seats for 10 years. It was projected as a zero cost measure (I'll spare you the details).

I offered $100K. If the projection was accurate and cost the city nothing, I would lose. If there was a shortfall, I wanted only FIVE PERCENT of the shortfall as my win.

Result? I would have netted my bet plus over $1,750,000.

BTW, in essence, by guaranteeing the ticket sales, we paid the Chargers 85% more for an empty seat than they netted from SELLING such a seat. As a result, we paid them to lose. In the seven years this deal was in place, the BEST Charger season was 8-8. The owner figures out that spending less on the team would result in more empty seats, which boosted his bottom line.

Since the seat guaranteed ended (at a cost of a $100 million settlement -- which didn't count in my wager offer), the team has been in the playoffs almost every year.

A classic case of the law of unintended consequences!

 
At 7/09/2010 3:18 PM, Blogger VangelV said...

I don't think the problem with Peak Oil predictions was ever that they were false. The problem most of us had with the Peak Oil folks was their predictions of doom. The Doom and Gloom crowd have consistently throughout history underestimated the adaptibility of humans.

What do you think will happen after producers realize that we are at the tail end of Hubbert's Peak and that they hold most of the cards? They will extract a massive amount of wealth from consumers who are unable to adjust quickly enough and must meddle through until the markets come up with a solution. That will make life difficult for many people on this planet just as some have predicted. To be an optimist over the medium term is very unwise because it ignores the reality that will face us.

I don't believe it accurate to describe the change in energy demand as a "collapse". This seems to imply a sudden and non-peating event. As I see it, demand shifts represent market-based adaptations of humans to price changes. Hybrid engines are exactly one such adaptation.

Prices are set at the margin and even a 2-3% fall below supply capacity can be classified as a collapse because it will drive prices down by 50% or more. The same is true if supply falls by a similar amount below demand. Prices can explode to the upside as the marginal users are squeezed out of the markets.

Whether we like it or not, we are looking at some significant volatility that will ruin many people who do not act in a logical and prudent manner.

 

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