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December 19, 2008

Does Matt Simmons still expect $200 oil in two years?

The price for a barrel of oil has fallen from $145 in July to less than $40.

So you might think investment banker Matthew Simmons is worried about his wager that oil will be worth five times that amount two years from now. Convinced that oil production can’t keep up with global growth, Simmons bet New York Times columnist and blogger John Tierney $10,000 that the average daily crude price in 2010 will be more than $200.

Is he having second thoughts?

“God no,” he said on the phone the other day. “We bet on the average price in 2010. That’s an eternity from now.”

Simmons argues that the economy isn’t as weak as it seems, that low oil prices will shut down production and that the world will soon see a supply squeeze and price spike. Oil price graphs, he says, will look like a “V” – straight down and straight up.

“We’re going to create a ’V’ that’s very dangerous," he said. “We could pierce through the old price high like a hot knife through butter in a very short period of time.”

Well, why did oil just crash below $37? Doesn’t that indicate evaporation of demand?

“What we’re witnessing is probably a massive liquidation of paper contracts,” said Simmons, author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy.

Tierney, an admirer of late University of Maryland business professor Julian Simon, likes his chances. The last time commodity prices soared, in the late 1970s, Simon bet environmental scaremonger Paul Ehrlich that they would fall. Simon’s thinking, based on centuries of economic history: Substitution, technology and new discoveries would keep resources from becoming scarce and expensive

Simon won the bet. Tierney had him in mind when he bet Simmons, in 2005.

“I remain utterly ignorant about the intricacies of the oil market either today or in 2010 – and I remain confident that it’s smart to bet against energy or any other resource becoming scarcer and more expensive in the future,” Tierney says via email. “So I figure the odds are with me to win this bet, especially now that prices are still so much below $200 a barrel.”

The futures market says he's right. Oil for delivery in eternity -- 2010 -- is $60 a barrel.

Posted by Jay Hancock at 11:39 AM | | Comments (8)
        

Comments

The IEA report suggests Mr. Simmons may win the bet and then some when one starts to factor in the yearly daily production declines taking place in mature oil fields.

My vote is that Simmons will win. What we are experiencing now is deflation due to the economic downturn. We have seen no increase in oil supply. The $36 dollars a barrel today is caused by a reduction in demand due to the economic problems. If the economy turns around we will experience a major supply crunch resulting from oilfield depeletion which will cause hyperinflation and supply shortages.


does warren buffett own stocks in GM or Ford?

he does own 9.9% of a chinese car company and lots of railroad stocks

Well, I just made my own bet -- bought $5k of USO at $29/share today.

Maybe Simmons and I can go to lunch in 2010... at Per Se!

$200? Maybe but not sustainable either...but neither is current low price. Watch for big spikes in both directions in future. It's way too low currently to make investment in industry worth it to oil companies.

Well Simmons has less than 730 days for his prediction to come true. It wont. The world economy will still be too weak to support $200 oil. In the longer term 2011 and beyond, Simmons will be right not because of peak oil theory but because of an irresponsible Fed and Obama stimulus that will weaken the value of theUSD

My bet is with Matthew Simmons, who knows as much as anyone about what existing wells produce, and what wells may come online in the near future. John Tierney, in comparison, has odd faith in his prediction DESPITE admitting he knows nothing about oil wells or production -- to him it doesn't matter; only his faith in markets matters. But that's not economics or materials science, it's the ostrich-head-in-the ground "trust the force" magic that got us in this mess in the first place.

What is it with Americans? Did they believe Star Wars "trust the force" religion was real -- a justification for NOT thinking? Or maybe too many of our citizens are on Prozac, and not panicking when it's high time to panic.

Supply is screwed because it has peaked, and because this fleeting dip in prices may limit new exploration. That leaves one variable: demand. Until we change how we live (and until India and China stop making the mistake of emulating us and aspiring to be us) demand must increase -- and it won't take much of an increase for price to skyrocket past $200.

Tilyou

The bet was in dollars adjusted for inflation, so dollar weakness will not be a factor.

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About Jay Hancock
Jay Hancock has been a financial columnist for The Baltimore Sun since 2001. He has also been The Baltimore Sun's diplomatic correspondent in Washington and its chief economics writer. Before moving to Baltimore in 1994 he worked for The Virginian-Pilot of Norfolk and The Daily Press of Newport News.

His columns appear Tuesdays and Sundays.
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