Friday, July 09, 2010

Another bet on commodities

Star Parker at Big Government writes:
In August of 2005, Houston investment banker Matt Simmons predicted in a New York Times feature article that the price of oil, then $65/barrel, would soar.

Simmons, who had written a book arguing that the world is running out of oil, was predicting oil prices "in the high triple digits."

After reading Simmons' prediction, John Tierney, a libertarian, who was then an op-ed columnist for the New York Times, telephoned Simmons and called him on it.  He asked him if he'd be willing to put money on his prediction.

The two made a $10,000 bet.  If the average oil price five years hence in 2010, adjusted for inflation, exceeded $200, Simmons would win. If not, Tierney would pocket the ten grand.

We're now into the second half of 2010, and the average oil price, in 2005 dollars, is $70.  Unless there is a remarkable explosion in the oil price for the remainder of 2010, driving it well above $300, Matt Simmons loses this bet.  It was not even close.

The point here is to try and learn something from this that is relevant to what is going on today.

Simmons is an energy specialist.  The company he founded advertises itself as "the only investment bank specializing in the entire spectrum of energy."

It's reasonable to assume that he knows a zillion times more about exploring for and producing oil than John Tierney.   But Tierney didn't make the bet because he felt he knew more about drilling for oil.  He made the bet because he knows something about markets and change.

If markets are relatively free to adjust, it just doesn't matter how smart you are, or how much you know about a particular commodity or business, you are not going to know what the world is going to look like in five years.  Chances are, you are not going to know what it is going to look like in a year.

Now suppose Matt Simmons, instead of being a private businessman making bets on his convictions was, instead, a government official setting policy.

This is what we've got today.

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