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In defense of doom and gloom in an oil-price bet


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Unless the price of oil magically surges to $52,831 per barrel on December 31, New York Times columnist John Tierney and Rita Simon, the widow of the economist Julian L. Simon, will collect on a $5,000 bet placed in 2005. As Tierney describes in his entertaining column this past Tuesday, he wagered economist Matthew R. Simmons that the average price of crude would not top $200 a barrel in 2010. As Tierney relates, the 2010 average is so far just under $80, about $71 in 2005 dollars.

Tierney was not taking candy from a baby. Simmons, who died at age 67 this past August, served as a member of the Council on Foreign Relations, headed an investment bank specializing in the energy industry and wrote “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy.”

Simmons was relying on the “peak oil” argument, which suggests that global production is on the decline. Tierney got the great idea to publicly bet Simmons–an homage to his friend Julian Simon, who won a similar kind of bet against Paul Ehrlich, the ecologist who decades ago predicted Malthusian famine because of overpopulation. Simon and Ehrlich wagered on the commodity prices of five metals, and Simon, a glass-half-full kind of guy, won over Ehrlich’s gloomy, rising-price prediction.

Tierney basically presents the bets as the glee club against the Goths. He writes: “As the leader of the Cornucopians, the optimists who believed there would always be abundant supplies of energy and other resources, Julian figured that betting was the best way to make his point. Optimism, he found, didn’t make for cover stories and front-page headlines.”

Let me first address the media aspect of this observation. Simon was referring to the (cynical) dictum, “Good news is no news, and bad news is big news.” Let’s face it: you wouldn’t plunk down $1 for a newspaper if the headlines read “Everything Is Just Fine” and “Nothing Happened Today.” We expect our lives to move along generally predictable routes, and we turn to various media sources to learn of events that could change our routines.

But put aside that practical (and mercenary) reason of news coverage for a moment, and imagine a Cornucopian headline like “Wells Gush, Plenty of Oil for Foreseeable Future.” What are we supposed to take from that information? Should we party like it’s 1999, when gas was $1.14 a gallon? Unless the news is truly revolutionary, Cornucopian feel-goodism can add to complacency and inertia: everything’s just fine, go about your business.

It isn’t that journalists favor bad news–we favor surprising news. Happy, Simonized coverage would work just as well for an editor if the status quo were chronic shortages and high prices.

Now let me address the actual content of the Cornucopian position, at least from a reductionist point of view. (I’ll ignore the environmental harm from fossil fuels, which pretty much renders the Cornucopian position irrelevant — it doesn’t matter how much oil is left if burning it causes global warming and requires us to develop clean sources of energy.)

In peak-oil debates, Cornucopians cite improving technology that will extract fossil fuels more economically. New deposits will be found; new methods will retrieve more from existing reserves; new ways will emerge to affordably process less-than-sweet crude, such as Canada’s tar sands.

But how far can we take such optimism? We all have faith that technology gets better, based on past experience. But does that belief justify policy decisions that affect lives years and decades from now? If the world today lived as if fossil fuels were abundant and affordable, would we bother conserving energy or investing in solar and other renewable sources? And if we chose the partying route, and our abiding faith in technology turns out to be wrong, what then? Will we have burned through our supplies and painted ourselves into an energy corner? The odds that we have hit peak oil may be low, but the consequences are huge if we don’t pay attention to that risk.

Tierney concludes 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.” Maybe so, but if you want to form sensible, long-term policies, then you’re better off somewhere in between, where you can hedge your bet.

Image credit: iStockphoto/Henrik5000





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  1. 1. JamesDavis 7:54 am 12/31/2010

    I see where you’re coming from…. If Bush didn’t scare the bejesus out of us with $4.15 a gallon gas, we wouldn’t have solar panels back on the White House and Nissan would never of brought the first production line electric car to market in the U.S.. I can tell how the republicans are now acting…those two events scared the bejesus out of them since their main goal was to pad their own pockets and increase profit for the oil companies.

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  2. 2. MrEnergyCzar 10:12 am 12/31/2010

    I’ve been preparing my family for Peak Oil for several years and attached a video to help and show people what they can do…

    http://www.youtube.com/watch?v=PUCl1TruUfo

    MrEnergyCzar

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  3. 3. blk 5:17 pm 12/31/2010

    Things like oil can only get so expensive. If they cost more than people can afford, we’ll just stop buying so much until the price becomes affordable.

    So, we’ll never completely run out of oil. It will become so rare and expensive that its profligate mainstream use (fueling cars) will eventually become obsolete. And that will mitigate the price hikes in the long haul.

    But that doesn’t mean we’ll always have enough to avoid major dislocations in the economy, or major economic and military conflicts. The oil shortage in the 70s caused serious problems. Japan attacked the United States in WWII in large part because of their fear that the US would cut off their oil supply. The 2003 invasion of Iraq was justified after the fact as necessary to keep oil flowing from the Middle East.

    The problems caused by the military and economic conflicts of diminishing oil supplies will far outweigh the actual costs of oil. In other words, the cost of the fight to keep the price of oil low will be much greater than the cost to develop new sources of energy. So why are we dragging our feet and letting laggards keep us dependent on oil?

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  4. 4. tharter 7:22 pm 12/31/2010

    because there are plenty of people with a lot of influence who make their livings selling us oil? They also see conflict as a positive benefit since they can sell arms to all. Beyond that conflict always perpetuates the ruling elite in power. Every strongman in history has fomented trouble in his neighborhood for this very reason, and the oilopoly is nothing if not well aware of how power works.

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  5. 5. Ralf123 1:41 am 01/1/2011

    Yup, that’s in a nutshell. However, oil production gets more expensive all the time because the cheap oil is gone, so if the price is too low there is no incentive for oil companies to invest in new wells. That causes supply to stagnate until the price rises (that exact thing is happening with natural gas at the moment.) The big question is if there are enough alternative energy sources at reasonable cost, especially for transportation. Batteries don’t have enough power density for trucks or airplanes.

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  6. 6. karina 2:32 am 01/1/2011

    i don’t know about this topic.please help.

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  7. 7. Biodiversivist 12:47 pm 01/1/2011

    "…Unless the news is truly revolutionary, Cornucopian feel-goodism can add to complacency and inertia: everything’s just fine, go about your business…"

    That’s the money quote. Easter Island’s collapse was the result of cornucopian optimism.

    "…Will we have burned through our supplies and painted ourselves into an energy corner?…""

    Oh, please. Read your history. Human societies never paint themselves into corners and that is why they never collapse.*

    "…Optimism, he found, didn’t make for cover stories and front-page headlines…."

    Like, "Summer will return once again." Now that’s information we can all use.

    These bets depend on timing. Nobody can predict with that kind of precision when something like this happens. Simon would have lost his metals bet had a different time been chosen.

    Tierney would have lost a bet saying that the number of chronically hungry would not cross a billion souls in 2008, or the extinction of the Chinese River Dolphin and on and on it could go. Predictions of polar bear extinction may be what saves them.

    Predicting potential problems is the first step to solving them. Predictions have a tendency to nullify themselves. Where would we be had Tierney written a book instead of the Ehrlichs, telling people to have as many children as possible because the more people there are the better off the world is? The Ehrlichs may be responsible for spreading the global meme that smaller families can be better for parents and children alike as well as stimulating agricultural research that nipped famine in the bud.

    *sarcasm alert

    Biodiversivist

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  8. 8. sofistek 4:12 am 01/4/2011

    The peak oil argument does not suggest that oil production is on the decline, as this article states. It suggests that oil, being finite, will hit a peak of production, usually when about half of the extractable oil has been extracted. It’s been fairly close in a number of regions now in decline. When the actual peak will be or was is unknown.

    Actually, the odds that we have hit peak oil already are not low but quite high. The IEA acknowledged that we hit a peak of the easy/cheap oil in 2006 and EIA data suggests that the top year was 2005. This is despite sustained high prices that economists assume will bring on more supply. Total supply has only been able to keep up with demand (in rough terms; for long periods in 2007/2008, production lagged consumption) by adding more expensive oil and oil that takes much more energy to produce. Official estimates of total peak production have been dropping like a stone in recent years as their cornucopian outlooks have hit harsh reality.

    We’ll only know when peak was, many years after the event. In the meantime, almost no-one is taking the threat seriously, for many reasons. I only hope that the majority are right but common sense tells me that they are so far wrong that collapse will ensue before they realise what a blunder they made in assuming the markets will somehow make it all right.

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  9. 9. ormondotvos 6:06 pm 01/6/2011

    Notice the rachet above: oil search only begins when prices rise. They they fall, but not as much as they rose. And so on.

    Good thing all we need is food, water, air and shelter. Health, maybe. Education, obviously not. Cultural continuit can be supplied by Oprah.

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  10. 10. learnquran 3:46 am 02/2/2011

    I will suggest to learn quran yourself and you will find the truth. Quran guide us towards nature and show us the path where we all are one. Quran teach us how to convert our individual thinking into collective thinking so that peace prevail in our society. http://www.learnquranonline.net

    Link to this

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