$100/bbl Oil: What Would Julian Simon Say?

As today's market for oil nears prices of $100/bbl, my thoughts turn to Julian Simon.

Simon is eloquently described here, in a piece for the Cato Institute, written by his onetime aide, now Wall Street Journal editorialist, Stephen Moore, upon Simon's' death in February of 1998. He wrote, in part,

"I first met "doom-slayer" Julian L. Simon at the University of Illinois in the spring of 1980—at just the time when the environmental doomsday industry had reached the height of its influence and everyone knew the earth was headed to hell in a hand basket.

The Club of Rome had just released its primal scream, Limits to Growth, which reported that the earth was rapidly running out of everything. The most famous declinist of the era, biologist Paul Ehrlich, had appeared on the Tonight Show with Johnny Carson to fill Americans with fear of impending world famine and make gloomy prognostications, such as, "If I were a gambler, I would bet even money that England will not exist in the year 2000."

The Carter administration published in 1980 its multiagency assessment of the earth’s future, titled Global 2000. Its famous doom-and-gloom forecast that "the world in 2000 will be more crowded, more polluted, less stable ecologically. . . . and the world’s people will be poorer in many ways than they are today" received headlines across the nation. Malthusianism was now the official position of the U.S. government.

It was all so damned depressing. And, thanks to iconoclast Julian Simon, we now know that it was all so wrong.

So for more than 15 years I was privileged to occupy a front-row seat from which I watched as Simon thoroughly and often single-handedly capsized the prevailing Malthusian orthodoxy. He routed nearly every prominent environmental scaremonger of our time: from the Club of Rome, to Paul Ehrlich, to Lester Brown, to Al Gore. (After reading Earth in the Balance, Julian was convinced that Gore was one of the most dangerous men and one of the shallowest thinkers in all of American politics.)

The ultimate embarrassment for the Malthusians was when Paul Ehrlich bet Simon $1,000 in 1980 that five resources (of Ehrlich’s choosing) would be more expensive in 10 years. Ehrlich lost: 10 years later every one of the resources had declined in price by an average of 40 percent."

This piece from Wired contains the details of that famous bet.

"The battle lines now drawn, it was not long before Ehrlich and Simon met for a duel in the sun. The face-off occurred in the pages of Social Science Quarterly, where Simon challenged Ehrlich to put his money where his mouth was. In response to Ehrlich's published claim that "If I were a gambler, I would take even money that England will not exist in the year 2000" - a proposition Simon regarded as too silly to bother with - Simon countered with "a public offer to stake US$10,000 ... on my belief that the cost of non-government-controlled raw materials (including grain and oil) will not rise in the long run."

You could name your own terms: select any raw material you wanted - copper, tin, whatever - and select any date in the future, "any date more than a year away," and Simon would bet that the commodity's price on that date would be lower than what it was at the time of the wager.
"How about it, doomsayers and catastrophists? First come, first served."

In California, Paul Ehrlich stepped right up - and why not? He'd been repeating the Malthusian argument for years; he was sure that things were running out, that resources were getting scarcer - "nearing depletion," as he'd said - and therefore would have to become more expensive. A public wager would be the chance to demonstrate the shrewdness of his forecasts, draw attention to the catastrophic state of the world situation, and, not least, force this Julian Simon character to eat his words. So he jumped at the chance: "I and my colleagues, John P. Holdren (University of California, Berkeley) and John Harte (Lawrence Berkeley Laboratory), jointly accept Simon's astonishing offer before other greedy people jump in."

Ehrlich and his colleagues picked five metals that they thought would undergo big price rises: chromium, copper, nickel, tin, and tungsten. Then, on paper, they bought $200 worth of each, for a total bet of $1,000, using the prices on September 29, 1980, as an index. They designated September 29, 1990, 10 years hence, as the payoff date. If the inflation-adjusted prices of the various metals rose in the interim, Simon would pay Ehrlich the combined difference; if the prices fell, Ehrlich et alia would pay Simon.

Then they sat back and waited.

Between 1980 and 1990, the world's population grew by more than 800 million, the largest increase in one decade in all of history. But by September 1990, without a single exception, the price of each of Ehrlich's selected metals had fallen, and in some cases had dropped through the floor. Chrome, which had sold for $3.90 a pound in 1980, was down to $3.70 in 1990. Tin, which was $8.72 a pound in 1980, was down to $3.88 a decade later.

Which is how it came to pass that in October 1990, Paul Ehrlich mailed Julian Simon a check for $576.07.

A more perfect resolution of the Ehrlich-Simon debate could not be imagined. All of the former's grim predictions had been decisively overturned by events. Ehrlich was wrong about higher natural resource prices, about "famines of unbelievable proportions" occurring by 1975, about "hundreds of millions of people starving to death" in the 1970s and '80s, about the world "entering a genuine age of scarcity."

In 1990, for his having promoted "greater public understanding of environmental problems," Ehrlich received a MacArthur Foundation "genius" award. "

No doubt Simon would say that today's high oil prices are the result of supply, so recently managed to closely match modestly-growing demand, temporarily lagging the unexpectedly explosive appetite for oil and gas in China and India.

Thanks to the magic of market price signals, this period of high prices for crude oil, and the related rise in the price for gasoline, will bring more suppliers on stream to cash in on the rewards of finding, producing and marketing crude oil.

Point in time analyses and observations can lead to mistaken conclusions. Nobody can say precisely for how long we'll see these oil prices. But it's reasonable to believe that substitutes such as oil shale, tar sands, and gasified coal will soon be providing energy sources that will replace some petroleum consumption, thus leading to dampened oil prices.

Thus, ironically, a temporary surge in crude oil prices is a good thing. It signals energy producers the world over that more investment in crude exploration and production will be rewarded with high prices for the first to come to market with new supply.