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Matt Simmons’s Failed ‘Peak Oil’ Price Wager (Julian Simon rides again!)

[This is the third and final part in a series on peak-oil theorist/neo-Malthusian Matthew Simmons (1943–2010). Part I by Rob Bradley examined the Simmons's peculiar interpretation of the Club of Rome's 1972 Limits to Growth. Part II by Michael Lynch reviewed the false arguments behind Simmons's peak-oil views.]

Matt Simmons was confident past a fault about the coming decline of world oil output–and record oil prices in the face of growing demand. His 2005 book, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, announced that production in Saudi Arabia had peaked or was about to. In his words:

Saudi Arabian oil production is at or very near its peak sustainable volume (if it did not, in fact peak almost 25 years ago), and is likely to go into decline in the very foreseeable future. There is only a small probability that Saudi Arabia will ever deliver the quantities of petroleum that are assigned to it in all the major forecasts of world oil production and consumption.

And more generally:

We’ve run out of good projects. This is not a money issue… If these oil companies had fantastic projects, they’d be out there [developing new fields].

And at the end of the book comes the call for government to conquer the reality of peak oil by engineering an energy transformation for us mortals. Market failure yes, government failure no.

Putting His Money Where His Mouth Is

With his book out, Simmons was in full peak-oil publicity mode. It was at this time when he was contacted by New York Times writer John Tierney, a disciple of the late Julian Simon (1932–1998). A wager emerged as told by Tierney:

Five years ago, Matthew R. Simmons and I bet $5,000. It was a wager about the future of energy supplies — a Malthusian pessimist versus a Cornucopian optimist — and now the day of reckoning is nigh: Jan. 1, 2011.

The bet was occasioned by a cover article in August 2005 in The New York Times Magazine titled “The Breaking Point.” It featured predictions of soaring oil prices from Mr. Simmons, who was a member of the Council on Foreign Relations, the head of a Houston investment bank specializing in the energy industry, and the author of “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy.”

I called Mr. Simmons to discuss a bet. To his credit — and unlike some other Malthusians — he was eager to back his predictions with cash. He expected the price of oil, then about $65 a barrel, to more than triple in the next five years, even after adjusting for inflation. He offered to bet $5,000 that the average price of oil over the course of 2010 would be at least $200 a barrel in 2005 dollars.

I took him up on it, not because I knew much about Saudi oil production or the other “peak oil” arguments that global production was headed downward. I was just following a rule learned from a mentor and a friend, the economist Julian L. Simon.

And Tierney turned to an ally to join him in the bet:

When I found a new bettor in 2005, the first person I told was Julian’s widow, Rita Simon, a public affairs professor at American University. She was so happy to see Julian’s tradition continue that she wanted to share the bet with me, so we each ended up each putting $2,500 against Mr. Simmons’s $5,000.

The bet came due at year-end 2010, but Simmons died in August. Here is what happened with prices as summarized by Tierney:

Just as Mr. Simmons predicted, oil prices did soar well beyond $65. With the global economy booming in the summer of 2008, the price of a barrel of oil reached $145. American foreign-policy experts called for policies to secure access to this increasingly scarce resource; environmentalists advocated crash programs to reduce dependence on fossil fuels; companies producing power from wind and other alternative energies rushed to expand capacity.

When the global recession hit in the fall of 2008, the price plummeted below $50, but at the end of that year Mr. Simmons was quoted in The Baltimore Sun sounding confident. When Jay Hancock, a Sun financial columnist, asked if he was having any second thoughts about the wager, Mr. Simmons replied: “God, no. We bet on the average price in 2010. That’s an eternity from now.”

The past year the price has rebounded, but the average for 2010 has been just under $80, which is the equivalent of about $71 in 2005 dollars — a little higher than the $65 at the time of our bet, but far below the $200 threshold set by Mr. Simmons.

Tierney contacted the Simmons family, and they check the oil price data, declared Tierney the winner, and paid the amount due. Very fair and noble all around.

What is the lesson of this? It is that in market settings (and even with more statism than we would like), resourceship can win. The ultimate resource of human ingenuity can replenish the master resource of energy. As Tierney concluded:

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.

My Bet with Simmons: Dinner for One Hundred

When I heard about Tierney’s $5,000 bet, I contacted Simmons (an acquaintance here in Houston) about a wager. I would win if the average prices of West Texas Intermediate was below $200 per barrel; he would win if the price was at or above $200 per barrel. I did not adjust the price for inflation like Tierney did, but then again, I would have probably made the bet for $100 (where I certainly would have indexed the price for inflation).

The bet was not for money but for a formal dinner party for one hundred, with the loser paying and getting to invite 25 guests and the winner inviting 75 guests. The venue was picked and the proprieter contacted with the estimated tab being $125 per person.

With the price of oil running at less than half of what Simmons needed to win the bet, I was looking forward to about a $10,000 winning given my gratis 75 invitees (which would have certainly included John Tierney and Rita Simon). But the unfortunate development of Simmons death intervened, so we will see how this bet is resolved.

In my last communication with Simmons, I offered to enter into another wager for some year in the future. I wrote on February 17, 2010:

It looks like the oil price cycle is/will be in my favor this year, and I will win our bet….

Would you like to make the same bet for any particular year in the future? It can be for 2011 or later, but not too late where one of us will not be around. All I ask is that we inflation-adjust the $200 WTI closing price over each trading day.

Let me know if that is of interest, and whether you would like to go the same thing (nice but not extravagant dinner party for 100 where the loser pays and invites 25) or cash, say $5,000.

Best wishes, but not too, too much good luck!

To which he replied the same day:

While it would appear odds are on your side to win, there is still a great deal of 2010 left and it will only take one or two “events” to tip the scales in my favor.

I actually never make energy price bets, but when John Tierney of the NYT wanted to publish this in August 2005, I could not pass up the free publicity for my just published book….

Repentant not … kitchen closed.

——————————-

Appendix: MasterResource Posts on Peak Oil

Dear Peak Oilers: Please Consider Erich Zimmermann’s ‘Functional Theory’ of Mineral Resources (Robert Bradley)

Joe (Romm), Where Art Thou? (my peak oil bet deserves an up or down) (Michael Lynch)

The Undulating Oil Plateau: Peak without Decline (Michael Lynch)

The Peak Oil Secret is Revealed! (Michael Lynch)

More on Peak Oil (Michael Lynch)

Okay, Joe Romm: How about a Wager on $65 Oil? (‘peak-oil’ bull or closet bear?) (Michael Lynch)

Response to ‘Peak Oil’ Critics (the hydrocarbon age is still young: plan accordingly) (Michael Lynch)

8 comments

1 Donna Laframboise { 02.14.11 at 8:22 am }

That was a fun read! Thanks.

2 Vangel { 02.15.11 at 5:39 pm }

I am sorry but the only reason that Simmons ‘lost’ was because the high prices caused the economy to collapse and that took down demand sharply. On the supply side response Simmons was proven right because the production of light sweet crude has not gone up and is now below where it was in 2005 even though the high prices attracted hundreds of billions of new investment.

Winning a bet for the wrong reason is hardly triumphant, particularly when your opponent was right about the supply side response. Now we could argue that someone will come up with a process that will eliminate our liquid fuels problem but I see no evidence of that on the horizon. And while there may be some serious potential in methane hydrates that is still a long way from becoming reality. That means that we are going to be at the mercy of depletion for quite some time. Sadly, Simmons was right.

3 Richard Haydn { 02.15.11 at 7:35 pm }

It was indeed a fun read, but I have to wonder. What does the idea that production of oil will someday peak, and that it will eventually run out have to do with a short term bet on the price of oil? Unless there is as much oil under the ground as there is water in the seas of the world, won’t we one day hit a peak production rate? I am an optomist and believe that more efficient use of energy will play a huge role in this and that eventually technology will offer viable alternatives. But is this substance, oil, not finite? I am not a scientist nor an energy expert in any sense. However, don’t we use a huge amount of oil on the planet each year. Aren’t we likely to use more as the Indias and Chinas of the world rightfully grow their economies and standards of living? I mean, whether oil was made from plant matter or dead dinasours, is it limitless or virtually limitless? How accurate are the estimates of reserves and was it our confidence level in these estimates? I am not one for panick and disdain the “end of the world” crowds hawking books or emergency supplies. I would like to read a real critique of the theme, that oil is a non-renewable resource and we will eventually use it all up. I’ll be sure to search your site and see what I can find. But objectively, one must agree, this article has little to do with the concept of “peak oil”.

4 Jack { 02.15.11 at 11:28 pm }

‘Dont we use a huge amount of oil each year?’

Uh, no, we don’t. We use approx. 1.1 trillion gallons, that would be equivalent to a cubic mile.

That’s it, not much at all. And if oil is abiotic in origin then, yes, we could have a limitless supply

Check out Saturn’s moon Titan, we have discovered lakes of hydrocarbons there, now just where did those originate?

The whole ‘dead dinos’ theory goes straight out the door when you consider pre-salt and sub-salt oil fields such as Tupi off coast of Brazil (some want to pretend it was ‘filled’ with algae coming from the Amazon River…) Bets are it is abiotic.

Other phenomena such as oil fields that have been re-visited after production ceased have begun to refill.

Etc.

Don’t forget that Coal can be converted to liquid fuel and the USA has a 500+ year supply at current rates.

5 rbradley { 02.16.11 at 8:41 am }

Simmons lost–and embarrassingly so. And he would not re-bet, and I am not sure that others would rebet for a year (on longer) in the future.

Vangel: yes, demand cratered due to the recession, but at the same time government policies around the world are restricting the supply of oil. I have long argued that the threat to energy sustainability is government energy policies in the name of ‘sustainability’ (such as carbon rationing), not the physical resource itself.

Also, remember that “peak oil” is not “peak crude oil”…. The market share of oil will move from crude to heavy oils over the decades to keep overall output rising–if government intervention does not make ‘peak oil’ a reality.

Again, Mr. Simmons boldly put his money on the line and lost–dramatically.

6 Jack { 02.16.11 at 10:24 am }

Don’t forget that when China came ‘online’ as a big oil consumer –circa 2003– see graph here

http://brynnevans.com/blog/wp-content/uploads/2008/07/world-oil-production.jpg

we went from 66-68million barrels per day production to 86 million barrels per day production

now, understand this, for a long time (15 years or so) the world production of oil was around 60-68mbpd and there was plenty of “slack” to that could be turned on/off as needed

because of all that and the low price of oil per barrel during the 90s there was not a whole lot of new production coming on line, it just was not needed (there was no money in it at $10/barrel)

now, when China’s thrist used up all the “20mbpd” spare of world wide production everyone went around chirping about ‘peak oil’ when that was just a load of nonsense because, quite suddenly all spare capacity the world had was put into use for China

check around the web for “peak oil” graphs and they all mysteriously start around the year 2000 to 2002…why, to promote their LIES….

So, the 20mbpd spare capacity was put in use, price per barrel shot up, supply/demand you know

What is happening in response: more oil fields are being developed, some quite large, new production methods are reviving offline fields (most fields have been pumped to about 50% of their entire capacity and then capped because we had no way to force the rest of it out…that is now changing because of Hydraulic fracturing or ‘fracing’)

Realize it takes 8-15 years to bring a field fully online

Realize that there is a worldwide shortage of oil field equipment (this is one reason Iraq’s quite sizeable fields are taking a while to come fully online) and new equipment has to be produced, shipped, installed, etc, hence 8-15 years

So, my prediction, by the year 2020 the world will one again have spare capacity of 10mbpd or more and the price of oil (in constant dollars) will hover around $50-$60/barrel..barring any conflicts that take significant amounts of oil offline

7 rbradley { 03.29.11 at 11:23 pm }

Peak Oil–what about synthetic oil?

Here is a story about renewable oil made from CO2 and other things: http://wattsupwiththat.com/2011/03/29/the-greens-worst-nightmare-a-co2-to-oil-process/

8 Gluts and low prices: nothing new | Institute for Energy Research { 01.14.12 at 7:39 am }

[...] mineral prices would be less than the present, adjusted for inflation. And he won what was the most famous bet in the history of economics against Paul Ehrlich, John Holdren, et al. with five such minerals over a ten-year [...]

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