April 03, 2006

Betting the Planet: The Sequel

Asia Times, 03.04.2006

Last August, New York Times columnist John Tierney placed a bet with Houston energy prognosticator Matthew Simmons (a leading proponent of the "peak oil" theory) about the future price movements of crude oil, with each side putting up US$5,000. The episode was regarded by many as a kind of sequel to the famous bet in the 1980s between libertarian economist Julian Simon and ecologist Paul Ehrlich, which Simon won.

Simmons had argued that "oil prices will soar into the triple digits" in the coming years. More specifically, prices would more than triple the contemporary figure of $65 a barrel by 2010, reaching "at least $200 a barrel" (in 2005 dollars). His thesis was based on the argument that the world's oil resources – most notably in the Middle East – will become increasingly scarce. Added to recent events such as Iranian president Mahmud Ahmadinejad threatening to spike oil prices by halting exports, Simmons' prophecy has developed a common-sense appeal.

But what has actually been happening with oil prices lately? Data from the International Monetary Fund offer an interesting read. Using the average of three spot prices, the monthly figures for oil prices from September to February were (per barrel, in current dollars) $61.65, $58.18, $54.98, $56.47, $62.36, and $59.71. In other words, there has in fact been a 3.5% fall in oil prices if we were to compare the latest prices to last August.

Bear in mind that during the past six months, there has been increased violence in Iraq that has rendered its oil assets vulnerable. We have seen energy supplies in Europe being threatened by Russia's oil diplomacy in Ukraine. We have seen Venezuelan President Hugo Chavez threatening to disrupt oil exports to North America. The Iranian president has delivered frequent threats to cut exports to the oil markets to drive prices up. All this is not to mention the fact that Hurricanes Katrina and Rita caused considerable damage to oil supplies and refinery facilities in the United States and adjacent countries.

It could be argued that the reserves were adequate to avoid any supply crunch that would have raised prices, and that there was little tangible damage to oil supplies to the global market. However, knowing how speculative markets can be, it is indeed curious to see oil prices not rising to levels suggested by Simmons. How can we explain the failure of the doomsayers' predictions to pan out?

Perhaps we can take a cue from the arguments of the late Julian Simon, who suggested that constant human endeavors have ensured throughout the centuries that commodities have gradually become easier to acquire, and new techniques have continually been developed to make use of them more efficiently. In his book The Ultimate Resource, Simon even argued that a larger population is a net benefit, not a cost, because the additional people increase the pace of innovation that allows the more effective exploitation and efficient use of resources.

With respect to oil prices, there are significant factors tending to depress prices, such as the drive in many countries toward alternative sources of energy and an emphasis on greener cars and energy efficiency. Thus, though the demand for oil in China and India is indeed steeply increasing, this alone is unlikely to push the price through the ceiling.

Ehrlich, the author of The Population Bomb, The End of Affluence and other books, rejects this optimistic line of thought, and predicts a doomsday for mankind if it continues its dynamic lifestyle (as he has been doing since the 1970s). The problem with the arguments of Ehrlich and other like-minded prophets of doom is that they are asking too much of 21st-century capitalist men and women, and simultaneously ignoring their capabilities. Is it fair to ask an Indian taxi driver who earns perhaps less than $5 a day to spend more than his monthly wages to install a more energy-efficient engine or take his car for servicing more frequently?

Surely this is the larger question the governments of poorer countries must throw at the Organization of Economic Cooperation and Development nations – why should they be left behind on the pretext of damaging the environment when Europe and the West virtually industrialized on the corpse of their own (and the world's) environment and by stretching their empires' resources? The only long-lasting response must come from those who can afford this technology. Only if richer nations genuinely assist their poorer counterparts by providing cheap access to such technology will they be able to persuade them to be greener.

Reviewing the history of the Simon/Ehrlich wager is instructive. Simon challenged Ehrlich and other environmental scientists to a bet that the price of natural resources would go down, not up as they had been predicting, and offered to let the environmentalists pick the specific commodities and the time frame.

Ehrlich accepted the bet for $1,000 worth of copper, tin, nickel, tungsten and chromium, wagering that the price of the five would increase between 1980 and 1990. When Simon and Ehrlich checked their predictions against real price movements in 1990, Simon emerged the clear winner – indeed, the price decline of the metal-commodity basket was so steep that he would have won even without adjusting for inflation. For instance, the price of tungsten had dropped by 57% during the decade, while tin was down by 40%, and copper by 18.5% (in 1980 dollars).

What if the bet had been extended? Taking 1980 prices = 100, in 2000 copper prices were down by 48% since 1990, and although the prices rose slightly after that, in 2005 (average until the end of November for this and consequent figures) the price was still about 18% lower than in 1990, instead of rising as the pessimists had predicted. Similarly, tin prices had fallen by nearly 26% in 2005 vis-a-vis 1990, while they were down by 32% in 2000, whereas tungsten prices plummeted by nearly 48% between 1990 and 2000. Although they have subsequently risen, they are still below the 1980 mark.

The US Bureau of Labor Statistics has an interesting consumer-price-index tool that calculates the purchasing power of money in a given year and compares it with how much it could purchase in another year. Although this is based on US inflation rates, it does give a rough indication of what the current prices actually imply. For example, if we were to calculate crude-oil prices in 2005 dollars, then the figure for 1980 would be $85.61 a barrel and the 2005 counterpart about $55 a barrel. It needs to be kept in mind that 1970 oil prices would be even higher. Similarly, the price of rice has plummeted from $1,039 a tonne in 1980 to $288 a tonne in 2005, whereas wheat has sunk from $414.19 a tonne in 1980 to $151.34 in 2005.

I am no hardcore Simonite. I have my own reservations about whether the intentions of actors in the global market will spontaneously reach equilibrium with the demands of the global environment. I still believe that self-interest will lead to short-termism, and an awareness of the wider picture is necessary.

But Simon provokes the question of whether such awareness can only come when the machine of capitalism is leading to constant innovation and developing newer techniques to extract and use resources. His thesis on population being the ultimate resource admittedly does depend on the capability of countries to build institutions that turn consumers into producers, but it is a thought-provoking argument nonetheless.

The outcome of this latest episode in the legacy of Julian Simon – as this latest bet might prove to be – will raise important questions, and perhaps provide some answers to the lasting validity of his ideas. Certainly, we will know the answer on January 1, 2011, when either Tierney or Simmons will collect his $10,000, plus accumulated interest.

Aruni Mukherjee is based at the University of Warwick, England.


- One comment Not publicly viewable

  1. Mark Cowan

    I think if you look at the trend of oil prices, the issues with OPEC reserves, the desperation to find new fields in the face of a lack of technology, “petroleum man” as The Last Oil Shock: A Survival Guide to the Imminent Extinction of Petroleum Man by David Strachan, George Bush’s 2006 Presidential address when he admitted America was addicted to oil, you can see that $250 a barrel for oil will be reached because there is an Americanisation of the world culture at present. Not just cars, but bigger cars and an ongoing denial of the resource situation. In the longer term neither Tierney, Simmons or any other humans can regard themselves as winners of the ongoing betting of the planet where we steal from the future to pay for the present.

    31 Oct 2007, 19:55


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