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 coming out, Simmons was in full peak-oil mode. It was here that 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 gave himself the last word:

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: Dinner for 100

When I heard about Tierney’s bet for $5,000, 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).

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 where the manager would plan a suitable party with the estimated tab being $125 per person. So with the price of oil being 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! - Rob Bradley

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.

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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)

Read more at Master Resource