The $1,000 Bet on Oil Prices

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.

January 10th, 2007 by