After seeing a number of predictions for very high crude oil prices this year – including many from people who believe that world oil production has peaked and $100/bbl this year is a sure thing – I offered up a $1,000 bet that front month WTI would not reach $100 in 2007. Several people kept telling me what a dangerous bet this was – but none of them would pony up any money. I offered to take on 10 people at $100 each, or someone for the entire $1,000.
Well, someone has accepted for the entire $1,000. We have each transferred $1,000 into a Paypal account controlled by one of the personnel at The Oil Drum. If the front month contract reaches $100/bbl at any point in 2007, he collects $2,000. If not, then on January 1, 2008 I will collect the $2,000.
The reason I consider this a safe bet is that I don’t believe we are at Peak Oil yet. A number of posters at The Oil Drum have argued that Saudi production is down because they have peaked. I have argued that Saudi production is down because they are trying to keep prices up. I am confident enough in that claim to put $1,000 on the line.
There are two scenarios in which I could see myself losing the bet. First, if we really are at peak now, and this becomes obvious as demand picks back up, then I could easily lose the bet. The other way is through a series of unfortunate events. If we have a bad hurricane season in the Gulf of Mexico, combined with terrorist attacks or pipeline problems (or any number of things), then I could lose the bet. But I think the odds of either of these is low enough to warrant the risk. By no means am I a gambler, but I am an investor. I see this as better odds than buying oil contracts.
At the moment February WTI is trading at $54.55/bbl, down about 10% since we made the bet last week.
Robert,
I suspect you are spot-on. While we can’t predict the future, $100/bbl in 2007 seems a long shot.
Let me ask you this: how do you see the Future of Energy? Perhaps you have already written an essay on this that you could direct me to. Perhaps it is a topic for a future essay.
Personally, I am optimistic about the future, in spite of the huge challenges we face.
Let me ask you this: how do you see the Future of Energy? Perhaps you have already written an essay on this that you could direct me to. Perhaps it is a topic for a future essay.
I have made comments about the future, but have never really written an essay on how I think this will all play out. You are right; that would be a good topic.
One thing that I see is that energy is going to be a lot more expensive than it is now. I think we will slowly downsize the U.S. fleet, and that the big SUV will become rare. There will always be some, as these will be status symbols for the rich. But soccer moms won’t be driving around in SUVs any longer.
I think oil companies will do very, very well. Perhaps too well, and the government will take serious action to reign in some of the big profits I see as oil supplies start to become scarcer. But I can’t think of anything they can do to the oil companies that will do anything but squeeze supplies further. They could legislate prices, but then they will have to ration fuel.
Lots more I could write on this, and maybe I will at some point.
That’s a good bet based on or Chris Skrebowski’s numbers. He’s done pretty much the only bottom-up approach and it shows quite a bit of capacity coming online this year and to a lesser extent next.
I think oil companies will do very, very well. Perhaps too well, and the government will take serious action to reign in some of the big profits I see as oil supplies start to become scarcer. But I can’t think of anything they can do to the oil companies that will do anything but squeeze supplies further. They could legislate prices, but then they will have to ration fuel.
Oh yes, Big Oil is set to make insane profits. We can only hope that Uncle Sam resists the temptation to interfere. The way I see it, we will be buying renewable fuel from Big Oil, eventually. What, Big Oil is going step aside as fossil oil production drops and watch other players take a huge bite out of their business?
To this end, it is also interesting to watch how Big Oil invests in renewables. No serious investment in corn ethanol that I know of. But Shell is invested in the German company Choren (of BTL fame).
Also, who is better equipped than Big Oil to bring renewable fuel to market?
You could hedge your bet by buying a commodities option. But I think you are fairly safe.
In related developments, the Wall Street Journal ran an article today:
Same Crowd Behind Oil Rise Now Sells Out By ANN DAVIS, January 9, 2007; Page C1
Paying Subscribers
Crude oil’s run last year to close to $80 a barrel drew cries that bullish investors were creating a commodity price bubble. Now it looks like some of the same investors could be accentuating crude’s downward slide. The appeal of holding oil as an investment has changed. Oil itself is losing value — crude-oil futures yesterday closed at $56.09, down 27% from a July 14 peak on the New York Mercantile Exchange, mainly as mild winter weather reduced heating demand.
Moreover, investors are finding it costs a significant amount of money to keep skin in the game in the oil futures markets during the decline. Unlike the stock market, even if crude goes nowhere in 2007, investors employing a buy-and-hold strategy will actually lose money because of the heavy costs of holding oil futures investments. …
Oil-futures contracts expire every month. Investors holding the most current contracts have to buy new ones to replace them if they want to maintain their positions. In the past couple of years — in part, because of the influx of financial investors making long-range bets — these contracts have gotten pricier the further into the future they are scheduled to be delivered, something known as contango. That raises the cost of keeping a position in the market. It’s almost like the difference between walking a mile, and walking a mile uphill. About two years ago, spot prices of crude were higher than future months, something known as backwardation, which boosted investors’ returns every month.
In practical terms, for most investors with oil in their portfolio, the cost of rolling over the expiring near-month futures contract into the one for the next month’s delivery is now more than $1.25 a barrel. The price of oil could be unchanged at $50 per barrel, and an investor would still lose 2.5% because of these costs. …
Meanwhile, another big question mark is hanging over the market: rising inventories. …
A different set of financial speculators — including hedge funds and trading firms that buy and sell physical barrels of oil — have been investing heavily in crude inventories because of the futures market phenomenon. These speculators enter a contract to sell oil months or years into the future. Then they fill their tanks with oil that they buy more cheaply on the open market. The difference between oil delivered next month and that for August delivery, for example, is roughly $5 a barrel. These speculators pay a few dollars for storage, but still pocket a few dollars a barrel in profit.
Some economists think this strategy could unravel should storage facilities fill up. …
That’s a good bet based on or Chris Skrebowski’s numbers.
Skrewboski’s mega-projects list was one of the things that helped convince me that we aren’t at peak right now.
But Shell is invested in the German company Choren (of BTL fame).
I actually have an invitation to visit Choren and tour their labs after I move to Scotland. I am planning on taking them up on it as soon as I get settled.
You could hedge your bet by buying a commodities option. But I think you are fairly safe.
Yeah, I figure since I work for an oil company, and own company stock, I am already hedged. If oil went to $100/bbl, I think our stock would do pretty well.
On the other hand, if there’s any bombing of Iran, you’re going to be in big trouble.
On the other hand, if there’s any bombing of Iran, you’re going to be in big trouble.
Like I said, a series of unfortunate events could get me. But I like my odds. However, you are right that war with Iran would definitely test the previous highs in the oil market. If the speculators suddenly jump back in, then it could go pretty high.
I actually have an invitation to visit Choren and tour their labs after I move to Scotland. I am planning on taking them up on it as soon as I get settled.
Great, look forward to your report on that. The numbers on their website (fuel potential from a given area of land) look very optimistic, even though I like BTL.
BTW, what do you think of Schwarzenegger’s proposal for cutting GHG from CA?
BTW, what do you think of Schwarzenegger’s proposal for cutting GHG from CA?
I think it will be helpful. California is one of the lowest per capita users of energy, and lacking national leadership on this issue, it will be good for them to take the lead here. I read an article today in which several economists thought it would increase gas prices out there for years to come, but that will help conservation.
However, the LA Times indicated that they may think ethanol can get them there. If that’s what they are counting on, they will run into trouble. I think conservation and adoption of certain alternatives might get them there. Ethanol won’t.
This what I like about Schwarzenegger’s proposal: it includes some good objective method to calculate lb CO2/BTU delivered, which supposedly includes exploration, refining, transporation and final use. Obviously there is the potential for endless debate on how valid the method and how to improve it. The main point is the method is lightyears ahead of anything Washington D.C. has proposed so far.
Now the governator may be expecting ethanol to be the winner. But, if the method is administered in a “fair and balanced” way (and as it will be done by a university there is hope), he does not control the outcome of the race. So this opens the door for BTL and other promising technologies. Note again the difference with Washington.
Get some popcorn and a ringside seat – this is going to get interesting!
IMO you left out a lot of variables in the price of oil. War with Iran or a weakness in the dollar are two that come to mind. If the U.S. continues to pillage Iraq and the other last few “under-developed” oil reserves in the world and nothing goes wrong you could well win your bet. With two insanely pompous oil men in the White House with a military second to none at their disposal the rapid exploitation of the world’s remaining oil seems to be the plan. How about double or nothing? $200/bbl within five years?
IMO you left out a lot of variables in the price of oil.
Well, it wasn’t my intent to cover everything. Sure, a lot of things could go wrong. But at this point, we are talking about a 100% increase in the price of oil. That is enormous, unless we actually go to war with Iran (which I don’t think, despite the saber-rattling, is likely). Now, had the bet been $150 oil within 3 years, I wouldn’t have taken it. Too much can happen, and we may peak within 3 years. In that case, no telling how high oil will go.
“who is better equipped than Big Oil to bring renewable fuel to market?”…incumbent companies that have done well at a particular stage of technology are almost never those who succeed when a disruptive technology comes along. Consider the integrated steel companies and the mini-mills, for example. “The Innovator’s Solution,” a business strategy book by Christensen & Raynor, has lots of worthwile thoughts about this.
BP has shown an interest in diversifying into renewables. Halliburton has diversified into being a government piglet. So far it looks like Exxon-Mobil wants to be the last man standing and will eat the rest of the U.S. competition for breakfast, lunch, and dinner. It seems like I read a piece where a company rep said they have little interest in any other type of business. They’ll probably get acquired, or take the company private at the end of the day, and just in time to barely break even.
I hope you didn’t make too many of those bets.
Good points, David,
However, we are still waiting for a disruptive technology to come along and shake up the liquid fuels business.
I also believe that some of Big Oil (maybe all of it) is keeping a close eye on renewables, ready to invest if a disruptive technology proves feasible. Remember, Big Oil is finding it increasing hard to secure future supplies with all those cumbersome state-owned congomerates making increasingly irrational decisions.
Let’s not forget Big Oil is sitting on a huge (and growing) pile of cash. I doubt that Big Steel was in this good a financial position when mini-mills appeared on the scene.
Good job you are not betting on Bremt as its $5.50 higher.
Robert, if you were writing a business prospectus, would you include USD currency devaluation in your ‘risks’ section of your bet?
84$ october
Today over $87 (Nymex Crude)
But still no $100.
ninety dollars, ninety dollars, ninety dollars, do I hear one hundred, do I hear one hundred…
Yeah it is too bad you didn’t factor inflation into your bet. We are most likely one more Fed rate cut away from $100 oil. Have to save the housing market on the backs of food and energy. Too bad for the guy who wins that bet will be handed depreciated currency. 😉
So Robert, are you starting to pull those notes out of the wallet ? 😉
Only a 4 dollar margin left now, and two full months to go. And we have a bull that doesn’t want to stop.
Robert,
I read your stuff over at the oil drum all the time. Thanks! I was wondering about your bet. Does the front month futures contract price on NYMEX have to close above $100 for you to lose this bet or does it have to only make it intraday? Also do you lose at 100.00 or only at 100.01? I hope you win your bet, but things don’t look good today.
Intraday, and I would lose at $100.00 on front month WTI.
You were extremely lucky; the day right after you collected the $2000 the price of oil reached $100!