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Would I were a gambling man

Posted by Heading Out on August 22, 2005 - 9:18pm

Well it is hard to admit, having spent the last 3 hours playing Blackjack for play money (it is one of the amusements at our Conference) that I am not normally a gambler. But I am caught by the challenge in John Tierney's column in today's NYT.  And was very tempted to e-mail and see if I could have a piece of Matt's side of the action.

Mr. Simmons said he favored a simpler wager, based on his expectation that the price of oil, now about $65 per barrel, would more than triple during the next five years. He said he'd bet that the price in 2010, when adjusted for inflation so it's stated in 2005 dollars, would be at least $200 per barrel.

Remembering a tip from Julian, I suggested that we use the average price for the whole year of 2010 instead of the price on any particular date - that way, neither of us would be vulnerable to a sudden short-term swing as the market reacted to some unexpected news. Mr. Simmons agreed, and we sealed the deal by e-mail.

In reality, however, I find the rewards that come from answering technical challenges give a much greater return.  In which regard, the Conference I am at does not normally deal with energy related issues in much detail. But this year, for the first time in several years, the Chinese delegation was strong and openly technical.  And two of the more interesting papers, which few of the delegates caught, show that the Chinese have been following Western technology in close detail, and have been willing to put those ideas to the test in some of their wells and laboratories.  Their advances are now to the point that they are certainly at least on par with some of the more advanced techniques that are still being evaluated here in the US. We posted the other day about the geater number of engineers being graduated in China than here, and the message I received today is that they have filtered Western technology and  are now pushing the envelope faster and with more support than those of us who initially conceived the ideas can find here in the US.

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Would I were a gambling man

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Stuart Staniford on August 22, 2005 - 10:02pm Permalink | Comments top
I'm seriously tempted.  I've been trying on-and-off to figure out the mechanics of buying oil futures for a little while (does anyone know a trustworthy commodities broker for small investors - none of the big mainstream investment houses seem to do it).

An issue I note with the terms of this particular bet is that the terms are much worse than just buying 2010 oil futures (currently trading at $59.24 as I write this.  If I buy a barrel of oil for $60 now, and in 2010 its worth $200, I can sell it for that and I make better than triple my money.  On the other hand, if I'm wrong and oil tanks to $30, I only lost half my money.  OTOH, if I bet with John Tierney, my best upside is to only double my money, and my downside is I lose it altogether.

No doubt Matt Simmons is rich and $5k is pocket money, so he's happy to do it just for the publicity (hell, he'll probably make the $5k back in extra book sales in a week or two), but to me the bet looks like a lousy deal.

Stuart.

Stuart Staniford on August 22, 2005 - 10:31pm Permalink | Parent | Comments top
Ok, I emailed Tierney and offered to buy 80 barrels of light sweet crude from him in June 2008 for $61.71 a barrel (the current price for that contract on Nymex).  That's about $5k worth of oil - we'll see what he says.

Stuart.

Stuart Staniford on August 23, 2005 - 3:06pm Permalink | Parent | Comments top
He just got back to me that "We're sorting all the bets now, and we'll get back to you soon.".  So I guess he got some interest :-)
Glenn on August 23, 2005 - 5:20am Permalink | Parent | Comments top
Please let me know if you find a good commodities broker. Where is the Scottrade of commodities? Until then Gold is just fine as an investment/currency hedge.
Halfin on August 23, 2005 - 12:07am Permalink | Comments top
Tierney has a sucker bet with Simmons - Tierney can't lose! All he has to do is make an offsetting bet in the futures market and he can lock in a guaranteed profit no matter what happens.

If Simmons really believes what he says, why is he offering even odds when he can get long odds in his favor by buying oil options? You can buy a December 2010 $100 option for $2.80 today, which will be worth $100 if oil hits $200 as Simmons expects. That's like 35 to 1 in his favor.

I guess he's just not very sophisticated financially (no criticism intended, he's an expert on oil, not commodities trading). Someone should clue him in that he's giving money away.

Stuart Staniford on August 23, 2005 - 12:17am Permalink | Parent | Comments top
He's an investment banker with 30 years experience.  I think we can safely assume he's a sophisticated investor.  My guess is 1) he doesn't care about $5k, and 2) he's very happy to get coverage of his ideas and his book on the opinion page of the NYT.

Stuart.

Halfin on August 23, 2005 - 12:40am Permalink | Parent | Comments top

He's an investment banker with 30 years experience.

Well, it's interesting that he doesn't mind looking like a financial jackass for all the world to see, taking a bet when he could get thirty times better odds elsewhere. The article made it sound like it never occured to the guy that he could make money betting on his beliefs. Some financial whiz.

I guess it's like they say, there's no such thing as bad publicity. Just spell the name right, that's all that matters.

Stuart Staniford on August 23, 2005 - 7:50am Permalink | Parent | Comments top
Well, Simmons has been saying for a while that gas is going to go up well into the three figure range.  I think when the NYT calls you up out of the blue and asks you to put your money where your mouth is, you either say yes or you get humiliated on the op-ed page.  Sounds like he said yes in a heartbeat.  To me he doesn't sound like a jack-ass.  He got handed about the best marketing opportunity a book author can get (a second bout of coverage in the NYT and this time in the paper itself, not the mag), and he didn't blow it.  (And after all, this is the NYT, not the WSJ, so the readers are probably much less likely to run out and check the futures prices).  From his standpoint, taking a lousy bet just makes it all the more resounding if he's right.
Stuart Staniford on August 23, 2005 - 12:23am Permalink | Comments top
I checked and Twilight in the Desert is ranked #39 on Amazon (it was #130 something last week).  I think we can assume Matt Simmon's $5k is pretty safe.
step back on August 23, 2005 - 1:03am Permalink | Parent | Comments top
So I guess that is how we humans "rationally" determine what is true and what is not, we place bets. We dive into diversions. Then we forget about the real problem. How entertaining.
Stuart Staniford on August 23, 2005 - 7:52am Permalink | Parent | Comments top
Well, I think the economics folks do have some good points, and one of them is that if you're not willing to put your money where your mouth is, what do you really believe about peak oil anyway?  If all you do is talk a good line, but then disappear when the opportunity comes to hazard money on it, obviously your beliefs are not deeply held and something else is going on.

Stuart.

step back on August 23, 2005 - 8:14am Permalink | Parent | Comments top
The truth of "Peak Oil" has absolutely nothing to do with what "price" this invisible creature called "the markets" places on the thing the markets term as a commodity. The answer to whether humans are trading oil at $35/barrel (remember those days?) or $65/b or $130/b is not logically related to whether we are at, or past peak. US oil did not spike unitl 1973 the last time around, but the real peak (Hubbert's peak) was silently passed by around 1971.

BTW, on CSPAN today, the pro-ethanol farmers are getting hammmered by the EROI scientists. What is the bet that political parties buy farmer votes anyway? The markets are always wise and all knowing.

Stuart Staniford on August 23, 2005 - 9:33am Permalink | Parent | Comments top
The US peak didn't cause price changes because cheap oil could be imported, until the 73 shock (when global supply got very tight, and then OPEC restricted it further).  Then it did cause high prices.  The global peak cannot be covered with imports, so it should be very clear in prices.  You don't think it's going to take higher prices to make oil usage decline at 3% or 5% or 8% a year, or whatever oil depletion ends up being, than to have it grow at several percent a year?

My opinion is that the peak oil case appears to be very compelling, and that as more and more people get past their prejudices and take a hard look at the evidence, they will be convinced of it too, and the price of oil will go up and up.  It's only just starting to get mainstream exposure now, Once people believe that oil is going to be more and more scarce in the future, they will want to buy it now.

Stuart.

step back on August 23, 2005 - 12:21pm Permalink | Parent | Comments top
As for mainstream exposure,
PO is hitting new highs on Blog Pulse:
http://www.blogpulse.com/trend?query1=peak+oil&label1=&query2=&label2=&query3=&l abel3=&days=180&x=34&y=7
Fernando on August 23, 2005 - 1:04pm Permalink | Parent | Comments top
http://www.adamsmith.org/logicalfallacies/000609.php Crumenam, Argumentum Ad The argementum ad crumenam assumes that money is a measure of rightness, and that those with money are more likely to be correct. 'If you're so right, why ain't you rich?' is the common form, but it translates poetically as the belief that `truth is booty'. *-------------- As an aside, you can bet for lower oil prices. Are the economists betting for lower prices?
Fernando on August 23, 2005 - 1:06pm Permalink | Parent | Comments top

http://www.adamsmith.org/logicalfallacies/000609.php

Crumenam, Argumentum Ad

The argementum ad crumenam assumes that money is a measure of rightness, and that those with money are more likely to be correct. 'If you're so right, why ain't you rich?' is the common form, but it translates poetically as the belief that `truth is booty'.

*--------------

As an aside, you can bet for lower oil prices.

Are the economists betting for lower prices?

Anonymous (not verified) on August 23, 2005 - 3:57am Permalink | Comments top

Tierney's bet with Mr. Simmons is all very amusing, but one thing I found not so funny. I expressed it this way in an e-mail to Mr. Tierney:

One thing bothers me, however. You closed your column with the statement "while I'm at it, I'll extend Julian's challenge and consider bets from anyone else convinced that our way of life is 'unsustainable.'" It may well be true the American way of life is sustainable for Americans, at least for some time to come. But we are only 4.5 percent of the world's population and yet we currently consume 25 percent of the world's energy resources. It's probably not unreasonable to assume that that 25 percent number applies to the use of other resources as well.

As I figure it, this means there would have to be an increase of more than 500% over the world's current yearly output of resources for the rest of the world to share in our bounty. And that's only if the population of the world were to stop growing tomorrow (a very unlikely event). Even if we assume that there will be offsetting increases in the efficiency of resource extraction and use, it's still hard to imagine that it is even remotely possible for all the peoples of the world to enjoy our way of life.

This seems to put a pretty large qualification on Tierney's definition of the word sustainable. From an ethical standpoint, I find this very troubling.

Anonymous (not verified) on August 23, 2005 - 5:16am Permalink | Comments top
FWIW, I think that this is a bad bet because oil will never officially rise to $200/bbl, but only because I think that rationing and price controls will be instituted first in the U.S.  For the same reason buying 2010 oil futures would be futile because they would not be honored.  On the other hand, if the bet was a $200/bbl black market price it would be a good bet.
Glenn on August 23, 2005 - 5:45am Permalink | Parent | Comments top
I think you make a great addition to the terms that Simmons should ask Tierney to take. The amendment would be that the bet could only be honored if the free market is setting the price, with no price controls or forced restrictions.
step back on August 23, 2005 - 9:38am Permalink | Parent | Comments top
What is your definition of the "Price" we humans do, or are willing to, "Pay" for extracting and burning Petroleum?

If you ask the President of one particular country, I hear he is willing to make the "ultimate sacrifice" for freedom to Propel his SUV proudly about the ranch.

If you ask one empty-wombed mother sitting in a ditch by the side of his ranch, she has a different understanding of "Price".

We make a lot of PP noise: "price", "pay", "P...ppproud to be an American". But what does it mean?

...

wkwillis on August 23, 2005 - 11:46am Permalink | Parent | Comments top
A personal bet is controlled by honor and reputation. The oil futures bets he has made are cotrolled by government regulations. I would take that bet the same way I would buy physical copper pipe or other storable objects to be a last ditch ace in the hole resource in case of economic problems. We are not even discussing whether the counterparty to the futures market can honor his side of the deal.
Government controlled markets are not sure things. There are precedents for not getting paid off.
Anonymous (not verified) on August 23, 2005 - 5:26am Permalink | Comments top
I dont think oil is going to hit $200 we are starting to see stress on the economys already. The average persons credit cards are maxed out along with there home loan's the stress of $5.00 a gallon gas is going to kill the economy and along with that demand growth. If demand is killed enough we could be below $50 a barrel by dec10. That is the down side risk Depression=demand distruction if demand is killed at more than 3% per year it may result in cheaper oil out at the back months.
JLA on August 23, 2005 - 6:10am Permalink | Parent | Comments top
That is exactly why I would be hesitant to take this bet.  At some point, higher prices will break the economy and enough people may be priced out for oil prices drop.  

Also, I've invested about 1/3 of my 401k in the energy sector and that's enough exposure for me.    

JLA on August 23, 2005 - 6:13am Permalink | Parent | Comments top
...though I disagree with your numbers...I don't think we'll ever see oil below $50 after 2006-07.
Ripley on August 23, 2005 - 5:57am Permalink | Comments top
The Tierney-Simmons bet isn't about peak oil, it's also about geopolitical risk.  It doesn't matter how much oil Saudi Arabia actually has if the Saudi monarchy falls and the new rulers won't sell it to us, or can't sell it because their infrastructure has been damaged by terrorism.  

Even after the Freakonomics guy, it just amazes me how economists are all-purpose sources nowadays.  I think the Delphi oracle or looking at birds' entrails was more scientific.

mcain6925 on August 23, 2005 - 10:36am Permalink | Comments top
Regarding your comments about the number of engineers.  The ideas are still being conceived here, not there -- quality of engineering and research staff counts at least as much as sheer quantity.  The decision to deploy new technology in the field is not made by the engineers that develop it.  The decision to grow an engineering staff is not made by the engineers that make up that staff.  If the staff is not growing, the number of graduates will decline -- who wants to put in five or six years in a tough discipline if no one is hiring?  I worry much more that the government has allowed an enormous degree of consolidation within the industry, greatly reducing the number of decision-makers who might take a chance on new technology.

Mike Cain  

step back on August 23, 2005 - 11:46am Permalink | Parent | Comments top
Here are a few tid bits from Washington DC to make you feel more at ease.
"They" who are in power and are wise and all seeing bring you the following new gifts:

1) Patent DEFORM: (Lord, make the one hand like the other! --a prayer by a guy with a twisted, deformed right hand):
    http://yro.slashdot.org/yro/05/08/22/2143226.shtml?tid=155&tid=103

and...

2) New Rules: All trucks are equal, but some are more equal than others:
   http://www.cnn.com/2005/AUTOS/08/23/fuel_economy/index.html

step back on August 23, 2005 - 1:03pm Permalink | Comments top
Simmons will lose because, thanks to advanced polling techniques, scientists have uncovered the "real reason" behind high prices: crawford crud
http://swiftreport.blogs.com/news/2005/08/poll_most_blame.html#more
WebHubbleTelescope on August 23, 2005 - 9:14pm Permalink | Comments top
Tierney will not lose the bet, because he is actually investing in his popularity as a bloviating right-wing pundit whore.  It doesn't matter if he actually "loses" the bet in terms of him paying out; his faithful legions will look at his strength and resolve in facing up to the unhinged progressives who spout off about Peak Oil.  They will continue to reward him in readership either way it turns out.

 

Donal on August 24, 2005 - 5:35am Permalink | Comments top
Kevin Drum weighs in

http://www.washingtonmonthly.com/archives/individual/2005_08/006970.php

Would I were a gambling man

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