Peak Oil is You
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Page added on February 16, 2015
The price of oil reaffirms the lesson of a legendary wager
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.
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.)
24 Comments on "The price of oil reaffirms the lesson of a legendary wager"
Plantagenet on Mon, 16th Feb 2015 11:52 am
Sorry to hear the Paul Ehrlich was such a sore loser. He should’ve at least manned up enough to admit he was wrong and Simon was right.
Apneaman on Mon, 16th Feb 2015 12:10 pm
Plant, I think what Ehrlich was trying to say was there is a glut of human beings on the planet.
Plantagenet on Mon, 16th Feb 2015 12:20 pm
Ehrlich is right about the population bomb, but (so far) he’s been dead wrong about the pricing of commodities.
I’d have more respect for him if he had the intellectual honesty to admit his failures as well as his successes.
Jerry McManus on Mon, 16th Feb 2015 12:48 pm
Ehrlich was a fool to bet on prices. They can be influenced by much more than availability of a resource, such as big government subsides, tax breaks, cartel quotas, environmental regulation, the list goes on.
If he had read and understood the Limits to Growth report he would have known that all measures of growth and prosperity would still be growing well into the 21st century.
After all, things are always at their greatest extent just before the collapse, that is the very definition of “peak”.
Had he bet on something more tangible, such as tons of ore required to produce an equivalent amount of metal, “the bet” would have had a very different outcome.
GregT on Mon, 16th Feb 2015 12:52 pm
“And now, “increasing productivity and human ingenuity” in the form of the shale boom has put the peak oil advocates on the defensive.”
This statement in of itself shows how ignorant the author of this piece is of reality. Like so many others, Ehrlich should have refrained from predicting dates.
His predictions will come true soon enough.
Davy on Mon, 16th Feb 2015 1:17 pm
Planter – Sorry to hear the Paul Ehrlich was such a sore loser. He should’ve at least manned up enough to admit he was wrong and Simon was right.
Planter is that the pot calling the kettle black?
Dredd on Mon, 16th Feb 2015 1:50 pm
Principles are not dates on a calendar.
It is foolish to set dates because they will be too early or too late.
Principles, however, will not fail.
The date is not important, the principle is.
Plantagenet on Mon, 16th Feb 2015 2:22 pm
Ehrlich was not a “fool” as some claim above. He is a brilliant scholar who honestly believed that as population pressures increased it would inexorably drive the price of oil and other commodities higher.
The problem isn’t that Ehrlich was a fool—the problem is that his ideas weren’t correct.
The current oil glut is just more evidence that Ehrlich’s ideas of ever increasing commodity prices due to population increases are demonstrably wrong.
shallowsand on Mon, 16th Feb 2015 2:39 pm
Aren’t oil prices higher on the whole? They are down now, but are in the 45-53 range, which is about double what EIA was predicting about 15 years ago. And yet it is difficult for producers to make a profit at the current price.
Likewise, corn was stuck in a range of $1.75-$2.50 for many years. Now the price has “crashed” to $3.80, which my reading indicates is a level that few farmers will be able to turn a profit.
Too early to know if we are in late 1980s-1990s commodity bust yet.
I really am not sure that either of the above subjects was totally right or wrong. A lot depends on timing. Would this article have been written the same way in July, 2008 or October, 2012?
Apneaman on Mon, 16th Feb 2015 2:42 pm
Why do corns keep brining up that little bet from so long ago? How about because they have no evidence to argue with that we are not in resource overshoot. Some bet that a couple of guys made back the 1970s is NOT evidence or proof of anything today in the 21st century. Whats next? my dad’s better than your dad.
Plantagenet on Mon, 16th Feb 2015 2:48 pm
We’ll be in “resource overshoot” when there are shortages and the prices of oil and other commodities go up.
Right now we are in an oil glut—the price of oil has collapsed by 50% due to oversupply—-and may still have farther to fall.
marmico on Mon, 16th Feb 2015 3:12 pm
Why do corns keep brining up that little bet from so long ago?
I’m a corn. Simon did lose a more recent (1996) bet with South on Alabama saw timber prices. He paid off just before his death in 1998.
Ya win some, ya lose some.
Speculawyer on Mon, 16th Feb 2015 3:26 pm
By what I hear, if you look at the prices now, Paul Ehrlich would win.
Perk Earl on Mon, 16th Feb 2015 3:37 pm
“Tax deductions for children should be replaced by tax increases for having little ones.”
Exactly. There should be international at birth fees in addition to annual tax fees.
1 kid, no fee, no yearly tax.
2nd kid, $50,000/2500.
3rd “, 500,000./10,000.
4th ” 1,000,000./50,000.
5th ” 5,000,000./250,000.
It would work too, because very few would have the 3rd. Those failing to pay the fees would be sterilized and have the one/s they cannot afford sold at auction to the highest bidding couple also subject to the same fees.
Davy on Mon, 16th Feb 2015 3:47 pm
Perk, drastic action is needed in difficult circumstances. Yet, I am not even sure it would matter anymore. The only effective population adjustments will come from the usual natural type.
Perk Earl on Mon, 16th Feb 2015 5:58 pm
Yeah, too late is right, Davy. The time for that would have been 40-80 years ago.
BC on Mon, 16th Feb 2015 8:30 pm
Davy and Peak Earl (cool moniker), if one looks at the 10-year change rate of world population growth since the peak in the 1970s, population growth will have declined an order of exponential magnitude by the early 2020s; the second- and third-orders of exponential decay will occur by no later than the mid- to late 2020s; peak will occur sometime in the 2020s; and decline will commence in the 2030s.
Therefore, consider the converging conditions that will emerge over the next 6-10 years to cause population growth to peak and population to decline a decade or so thereafter.
Similarly, the change rate of world population tracks virtually 1:1 the trajectory of US oil production per capita since the 1970s. That is, population and its replacement requires an increasing growth of the supply of the primary energy source of the global civilization. However, that source of energy per capita peaked in 1970-85 in the US and for the world in 2005-08.
Do you, or anyone else reading this, know this? I suspect fewer than 1% know this mathematical fact.
IOW, mass human die-off is a virtual certainty at some point after the 2020s, owing to an inexorable decline in the net energy/exergy capacity per capita of the primary energy to provide sufficient growth of capital accumulation, production (especially of food and its utilization), profits, labor income (after taxes, inflation, and debt service), and gov’t receipts to permit growth of population and its replacement.
If you were talking to Morpheus in “The Matrix”, this information would be presented several steps into the rabbit hole after taking the red pill. The overwhelming majority of us, including Planet, will choose (not that we have a choice) the blue pill and carry on, as we must.
The irony is that not knowing that we don’t know can be conceivably the worst kind of ignorance but also the source of blissful ignorance, depending upon our individual circumstances. So most will choose willful not “knowing” to maintain our “known” situation, which the rentier Anglo-American and European Power Elite top 0.001-0.1% prefer and work so hard to condition successfully.
GregT on Mon, 16th Feb 2015 9:00 pm
“Do you, or anyone else reading this, know this? I suspect fewer than 1% know this mathematical fact.”
BC, I believe that you are slightly exaggerating by at least a couple of orders of magnitude here. The numbers are probably less than .01%.
Davy on Mon, 16th Feb 2015 9:08 pm
Yeap BC, it is a regular ol matrix and a blissful blue pill type of situation. I am thinking 2020ish myself. I am just not sure how the chips are going to fall and where. There are many scenarios that can play out but they all eventually end up at the same point. Even if a region or nation escapes the initial shit storm it will only be a transitory wait.
BAU decouple is not possible. We are in this together maybe not as associates but as occupants. The only hope of a reasonable outcome is some kind of cooperation. How reasonable is that looking at he world we are in now. I am optimistic for some at the bottom but I see little hope at the top. There is just too much pride and power lust to go around on a crowded planet.
thingy on Mon, 16th Feb 2015 11:00 pm
“as population pressures increased it would inexorably drive the price of oil and other commodities higher.”
Which happened in 2008 and again in 2014 as there was demand. Also only some believed inexorably higher, however many pointed out that when energy go to 6% or so of GDP the USA / world went into recession collapsing demand and hence price.
“The problem isn’t that Ehrlich was a fool—the problem is that his ideas weren’t correct.”
No his ideas are correct just the actual economics is far more complex than his simple model. What we will see is a see saw effect.
“The current oil glut is just more evidence that Ehrlich’s ideas of ever increasing commodity prices due to population increases are demonstrably wrong.”
No sensible economists now recognize that a collapse in demand caused by too high a price will cause a recession. So we’ll see volatility in prices. On top of that we have speculation which makes prices even more unstable.
keith on Mon, 16th Feb 2015 11:24 pm
The whole concept of pricing the future is absurd. A dollar today is not equivalent to a dollar 50 years ago. 50 years ago a husband working and a stay at home Mum could buy a house and pay it off in 5 years. They could also afford a car. A product’s cost to the consumer can be changed in three ways: raise price, change ingredients, or reduce amount. Evidence for overshoot is all around us today. We tolerate pollution, we accept environmental damage, most large species are endangered or extinct, mass deforestation. The proof is everywhere, must people don’t see it because they don’t understand the concept to begin with. Mother nature works slow, she’s no Hollywood movie. The mirage around us is slowly being refocused by the return of Nature in the driver seat. These things happen over many lifetimes.
Apneaman on Tue, 17th Feb 2015 9:54 am
That’s why people concentrate on the old bet. Reality is too dire. Rapacious apes love to tell themselves feel good stories. Most everything we tell ourselves is a lie. It’s a new mother nature taking over.
JuanP on Tue, 17th Feb 2015 10:24 am
Ehrlich is a visionary and a genius. Way ahead of his time because there will never be a time for people like that.
The average human being is just smart enough to destroy a lot using external energy and technology, but not smart enough to help prevent our self destruction as a species from the consequences of that destruction. Also, the average intelligence level is going down and has been going down for a very long time, probably since we developed agriculture. Every generation is more stupid and incoherent than the one before.
Humans will breed and consume until they almost completely destroy the biosphere, extinguishing most living species in the process, and probably ourselves, too. As Forrest’s momma used to say “Stupid is as stupid does”
Harquebus on Tue, 17th Feb 2015 5:50 pm
The bet should have included the proviso of no debt. When the debt bomb goes off, Ehrlich will be vindicated. Without debt, Ehrlich would have already won his bet.