Thursday, August 25, 2005

Bet on price of oil

Prices are arbitrated in the market place. Now we have an interesting "market" for oil. John Tierney of the New York Times doesn't agree with the pessimistic forecast of Matthew Simmons, an investment banker and expert on the oil market. Tierney put his money where his mouth is. He challenged Simmons to a bet on the price of oil in 2010, that it would not rise as much as Simmons projected. Here is Tierney's version in the International Herald Tribune.
After reading his prediction, quoted Sunday in the cover story of The New York Times Magazine, that oil prices will soar into the triple digits, I called to ask if he'd back his prophecy with cash. Without a second's hesitation, he agreed to bet me $5,000. His only concern seemed to be that he was fleecing me. Mr. Simmons, the head of a Houston investment bank specializing in the energy industry, patiently explained to me why Saudi Arabia's oil production would falter much sooner than expected. That's the thesis of his new book, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy. I didn't try to argue with him about Saudi Arabia, because I know next to nothing about oil production there or anywhere else. I'm just following the advice of a mentor and friend, the economist Julian Simon: if you find anyone willing to bet that natural resource prices are going up, take him for all you can. Julian took up gambling during the last end-of-oil crisis, in 1980, when experts were predicting a new age of scarcity as the planet's resources were depleted by the growing population. Julian had debunked these fears in The Ultimate Resource, the bible of Cornucopian economics, which showed how human ingenuity had kept driving down the price of energy and other natural resources for centuries. He offered to bet the pessimists that oil or any other resource they chose would be cheaper, in real terms, at any date they picked in the future. The ecologist Paul Ehrlich, author of "The Population Bomb" and "The End of Affluence," took up his offer and chose copper, tin and three other metals worth $1,000 in 1980. When the famous bet was settled 10 years later, the value of the metals had declined by more than half. As usual, people had found new ways to get the metals as well as cheaper substitutes, like the fiber optic cables that replaced copper telephone wires.
The blog at Laissez Faire Books does a good summary.

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