The price of oil reaffirms the lesson of a legendary wager

OREANDA-NEWS. February 18, 2015. John Kingston is President of the McGraw Hill Financial Global Institute and Director of Global Market Insights. He continues to observe energy markets after his many years with Platts.

When you look at a chart of the price of oil during the last six months, it says a lot of things. One of them is that Julian Simon has won again.

I’d long known about the legendary Julian Simon-Paul Ehrlich bet, made in the early 1980’s at the tail end of a commodity boom. What I didn’t know, until I recently stumbled upon an academic paper written by Yale professor Paul Sabin from 2013 that was turned into a book called The Bet, was how much the two of them truly despised each other. Why I thought the bet was sort of friendly is a mystery; it was actually part of a long-standing open hostility.

Ehrlich was a neo-Malthusian who as a Stanford professor wrote a widely-quoted book in the late 60’s, The Population Bomb. But his views were expressed in all manner of forums, and they boiled down to the idea that the Earth had a carrying capacity to feed the human race (not just in terms of food, but others of life’s necessities), the population at that time had already exceeded that level, and a cataclysmic outcome awaited. “A population grows rapidly in the presence of abundant resources, finally runs out of food or some other necessity, and crashes to a low level of extinction,” he wrote in a 1979 essay entitled “Eco-Catastrophe.” He thought about 1.5 billion people was an optimal worldwide population; it’s now about 7 billion.

(The biggest challenge in writing about Ehrlich’s prognostications is trying to pick just one apocalyptic forecast from dozens, if not hundreds. For example: “If I were a gambler, I would take even money that England will not exist in the year 2000.” Given that I’m writing this on an airplane flying back from there, he appears to have missed on that one.)

His suggested remedies were draconian. For example, the US should limit food aid only to countries with strong programs in place to reduce their populations.Tax deductions for children should be replaced by tax increases for having little ones. He was widely feted and celebrated, even as he said things like the people of “overdeveloped countries” should be characterized as the “looters and polluters of the planet. We have to change our way of life or we’re doing to die.”

Ehrlich was a peak oil guy before that term was widely used. Simon, by contrast, writing in an anti-Ehrlich piece in Science magazine, noted a now-familiar litany of gains: food yields per acre had increased, farmers then were worried about too much food starting to push down prices, copper supplies could never run out, and so on. “Because we find new lodes, invent better production methods and discover new substitutes,” Simon wrote, the only thing that limited supply was the capacity of human knowledge to more efficiently produce and use raw materials. And that, he believed, had no limit.

(The two men did not fall neatly on a left-right divide. Ehrlich was generally anti-immigrant for population-control reasons, though he ultimately quit some organizations because he believed they were anti-Hispanic. Simon was vociferously pro-immigrant).

So in 1981, Simon, then teaching at the University of Illinois, bemoaned in a piece in Social Science Quarterly that Ehrlich never needed to face the “consequences of being wrong” and said he would “put my money where my mouth is.” He challenged Ehrlich to a bet on the price of several raw materials. “Simon argued that prices generally were falling for natural resources because they were becoming less scarce due to increasing productivity and human ingenuity,” Sabin writes.

The timing of that sentence couldn’t be more perfect to draw an analogy with today. In 1981, the world was coming off a long commodity boom that saw gold hit its (still) all-time inflation-adjusted high, oil prices soar, and all sorts of metals rocket in value. That year was the first to show signs of a long commodity bear market that didn’t really start ending until 1999.

And now, “increasing productivity and human ingenuity” in the form of the shale boom has put the peak oil advocates on the defensive. There’s no doubt that by 2006 or 2007, their arguments looked prescient. But then the most recent example of that ingenuity once again pulled the world back from an Ehrlich-type disaster in the supply of hydrocarbons, and ended the oil and gas portion of a commodity boom that dates back 15-16 years.

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As for the bet, it strangely did not include the price of any agricultural products, even though Ehrlich made his mark talking about starvation. The book gives no reason why oil wasn’t included, but oil prices back then weren’t particularly transparent. Instead, the basket was all metals: chromium, tin, tungsten, copper and nickel. It was a 10-year bet, \\$200 on each metal.

“One day in October 1990, Julian Simon picked up his mail at his house….,” the author writes. “In a small envelope sent from Palo Alto, California, Simon found a sheet of metal prices along with a check form Paul Ehrlich for \\$576.07. There was no note.” All the prices had fallen — the payoff was calculated on the basis of the size of the decline — and the world population that Ehrlich believed needed to be stabilized at about 1.5 billion to prevent catastrophe had jumped from 4.5 billion to 5.3 billion.

Simon died suddenly in 1998. Ehrlich is still alive, continues to be celebrated in many circles today, and has never backed down from any of his doomsday forecasts, the outcome of the bet notwithstanding.

(Addendum: the day after I wrote this on my trip back, I encountered two pieces which showed the Ehrlich-Simon divide is alive and well. Marketwatch’s resident doomsday soothsayer Paul Farrell wrote this piece that sounds precisely like Ehrlich. Meanwhile, this piece in The New York Times is about biofuels, but talks about the ability of the world to feed far more mouths if greater efficiency was brought to bear on global agriculture.)