The Oil Drum

389 comments on Why peak oil is probably about now

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Halfin on March 4, 2006 - 7:25pm

I'll give odds of five to three that Matt Simons is about right in his prediction of $200 oil in 2010.

You can get a lot better odds than that, if you're a betting man. For $5,000 you can buy a December 2010 $100 call option which, if oil does hit $200, will be worth $100,000! That's 20 times your investment. Doesn't 20 to 1 odds in your favor sound a lot more attractive than 5 to 3 against?

So what are you waiting for? If you really think the chances are 5/8 that this will happen, and money at 20 to 1 is lying there on the table, why not pick it up?

And oil doesn't have to go to $200 for you to win. As long as it gets above $105 you'll come out ahead. If you think there's a 5/8 chance of $200, you must think $105 is almost a sure thing. So again, why leave a fortune just sitting there when in your model it's almost certain that you could have it with almost no risk?

Now, I don't mean this personally. The point is that markets are extremely skeptical about prospects for very high price oil, as is demonstrated by the relatively low prices for out of the money call options. As you have emphasized, sometimes markets are wrong. But it's also true that markets are frequently right. Which is it in this case? There's the rub, to know in advance whether this is a case where the markets are being blindsided or whether it is the (more common) situation where a few extremists are predicting doom but the market accurately predicts business-as-usual.

I don't know which it is, but I do know this. When something sounds too good to be true, it usually is. The existence of a risk-free investment that has better than 50-50 odds at making you 20 times your money sounds like something too good to be true. The mere fact that someone is willing to take the other side of the bet is evidence that maybe this "sure thing" isn't as sure as it sounds. I have to believe that there is more risk here than you may be recognizing.

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Don Sailorman on March 5, 2006 - 2:00am

I am out of all financial markets and have been since I doubled my money in Pan American Silver a year or two ago.

Now my funds go into more important things than making me richer, though it is a tough call: Do I have a moral responsibility to make as much money as possible to keep giving more to The Nature Conservancey? I decided I did not.

Suppose you put me in a corner and put a gun to my head and say: "All right now, tell me what you really think is going to happen to oil production and prices over the next four years!"

What is my reply?

Well, of course the truth is that I do not know and do not want to venture an opinion in public. You chamber a round and start to froth at the mouth, O.K., I better come up with something. Here goes:

I think output can be maintained roughly at current levels over the next four years--but only at a great increase in cost and hence prices. In other words, yes, we can maintain output, but it is going to cost one helluva lot more than it does now to get gasoline, diesel and all the rest out of sour crude, bitumen, tar sands, and maybe around 2010 even Montana coal to oil.

Thus I still think Matt Simmons is probably right, and for three reasons:
1. He knows more than I do.
2. He is probably smarter than I am.
3. I think he is honest.