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August 23, 2005
John Tierney puts his money where his mouth is
Here's the setup from the Sunday NY Times. The writer is speaking of an interview with Matthew Simmons, author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy.
Simmons has a lot riding on his campaign -- not only his name but also his business, which would not be rewarded if he is proved to be a fool. What, I asked, if the data show that the Saudis will be able to sustain production of not only 12.5 million barrels a day -- their target for 2009 -- but 15 million barrels, which global demand is expected to require of them in the not-too-distant future? ''The odds of them sustaining 12 million barrels a day is very low,'' Simmons replied. ''The odds of them getting to 15 million for 50 years -- there's a better chance of me having Bill Gates's net worth, and I wouldn't bet a dime on that forecast.''
The gathering of executives took place in a restaurant at Chelsea Piers; about 35 men sat around a set of tables as the host introduced Simmons. He rambled a bit but hit his talking points, and the executives listened raptly; at one point, the man on my right broke into a soft whistle, of the sort that means ''Holy cow.''
Simmons didn't let up. ''We're going to look back at history and say $55 a barrel was cheap,'' he said, recalling a TV interview in which he predicted that a barrel might hit triple digits.
He said that the anchor scoffed, in disbelief, ''A hundred dollars?''
Simmons replied, ''I wasn't talking about low triple digits.''
Enter John Tierney, who takes a page out of the late Julian Simon's playbook and asks Simmons to make a bet on his claim.
I proposed to him a bet using what Julian considered the best measure of a resource's value: how it compares with the average worker's wage. I offered to bet that the price of oil would not rise faster than the average wage, meaning that future workers would be able to afford oil more easily than they could today.
Mr. Simmons said he favored a simpler wager, based on his expectation that the price of oil, now about $65 per barrel, would more than triple during the next five years. He said he'd bet that the price in 2010, when adjusted for inflation so it's stated in 2005 dollars, would be at least $200 per barrel.
Remembering a tip from Julian, I suggested that we use the average price for the whole year of 2010 instead of the price on any particular date - that way, neither of us would be vulnerable to a sudden short-term swing as the market reacted to some unexpected news. Mr. Simmons agreed, and we sealed the deal by e-mail.
Tierney told Julian Simon's widow, Rita Simon, who (as Tierney tells it) "wanted a piece of the action herself." They split the bet.
So, is $200/barrel in 2005 dollars on average for the calendar year 2010 realistic? I don't think so.
I'm sure someone has already told them that they should get their bet on the record for all to see at longbets.org. If not, I just did.
UPDATE: King at SCSU Scholars makes a nice chart to go along with this story.
UPDATE #2: When writing this post, I was tempted to write, "I wonder what James Hamilton will say." Well, wonder no more. He rightly takes to task those who say that Simmons is putting his money where his mouth is. As Hamilton (and Calculated Risk-see comments below) point out, even if Simmons wins he loses because if he really wanted to make some money he would buy a bunch of futures contracts. Tierney, on the other hand, is simply picking up free money. Of course, Simmons is probably going to provoke just the response that he wants. $5000 is a small price for publicity, I guess.
Posted by William Polley at August 23, 2005 11:23 AM
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Sometimes discussions on both sides of the issue of PO (peak oil) look more like a PR (public relations) campaign than an open exchange of ideas.
[Read More]Tracked on August 23, 2005 11:40 PM
Comments
I'd love some of that action ... in fact all Simmons wants to give. Not only don't I think oil will be at $200/bbl in 2010, but I could hedge my bet and buy Dec '10 futures that traded today at 60.56!
Taking a page from Dr. Hamilton, Simmons should have just put his $5000 in 2010 futures - he would do much better than just winning $5K if oil hits $200.
Posted by: CalculatedRisk at August 23, 2005 9:16 PM
Yep. That's exactly right.
Posted by: William Polley at August 23, 2005 11:26 PM
To expand on CR's comment, the really silly thing about Simmons' bet is that even someone who agrees with Simmons that oil will be $200 in 2010 should take Simmons' bet.
After taking the bet, this person buys $5000 of contracts for oil delivery in 2010. If oil reaches $200 a barrel, the contracts are worth about $15K, so the $5K bet can be paid off, leaving $10K for the "bettor" -- doubling his money. Worst case is oil goes to zero in which case the futures contracts are worthless, but the "bettor" wins $5K from Simmons and comes out even. No brainer.
Posted by: ErikR at August 24, 2005 7:51 AM
Simmons, as an investment banker specializing in energy, doesn't need to hedge his bet --
But Tierney, the gentlemen who proposed the bet and wrote the column, sure does.
Simmons doesn't care about the 5k, and he was wealthy before he wrote the book.
In fact, all the publicity he is garnering DOES NOT help his business in the conservative world of energy consulting with the likes of Halliburton.
Begs the question. Why does he have a bee in his bonnet?
Posted by: Jon S. at August 26, 2005 11:37 PM
Looks like Simmons is on track for winning this one.
Posted by: DaveG at July 3, 2008 7:13 AM
Dave,
Thanks for the comment. Comments on old posts are moderated to prevent spam... hence the delay in seeing it appear.
Remember that the bet was for inflation adjusted prices. If inflation is about 4% for 5 years, the nominal price for the bet will be closer to $250/barrel. I'll give you that it is marginally less laughable and marginally more likely than in 2005.
On the other hand, if speculators are helping to push up the price, then one can see scenarios of $100 or $250/barrel in 2010 depending on whether the bubble pops. I have not formed an opinion yet as to how much speculators are responsible for the recent increases, but I am reading many of the blog posts about it with interest.
Posted by: William Polley at July 3, 2008 5:11 PM