Grasping Reality on TypePad, by Brad DeLong

UPDATE: Don has emailed me that I have misread him and am wrong: He says that I have not (yet) failed to get him to bet on John Tierney's claim that our future sees a persistent cornucopian feast of cheap oil--like the cornucopian feast of cheap oil that we saw in the generation before 1973. He says he is thinking about it and will answer on Monday...

He is correct: I saw the first line of his email asking me to wait until Monday, which read "Thanks, but the alternative wager that you present below isn't the Simon-Ehrlich bet," and replied without registering the rest of the message.

I apologize.

Don recommended John Tierney's remarkable article, which contains the striking claim that:

Economic Optimism? Yes, I’ll Take That Bet: [T]he overall energy situation today looks a lot like a Cornucopian feast.... Giant new oil fields... off the coasts of Africa and Brazil... oil sands projects in Canada [that] now supply more oil to the United States than Saudi Arabia... production in the United States increased last year, and the Department of Energy projects further increases over the next two decades...

But, alas! I can't get Don to bet that real oil prices will return to the energy cornucopian feast levels that they were at in the first post-World War II generation.

The most that he will bet is that the average price of some index of five resources will decline.

His proposed bet that the average price of some index of five resources will decline is not a good bet for me to take. Falling expected extraction costs over time will impart a downward trend to resource prices even if net resource earnings are expected to be stable. Moreoever, expected resource earnings are probably not expected to be stable: they are probably on a downward trend because most exhaustible natural resources are negative-beta assets--which means that investors ought to be willing to pay more for them than if they required a Treasury bond-like return. And most organizations that extract natural resources would like to be around for a while and think that their industry has a bright future--which means that it is at least plausible that they are likely to pump a little bit less than they should and so push today's prices up even further above the optimal Hotelling level.

Thus the bet he wants me to make--that exhaustible natural resource prices will more likely rise than fall--does not look like a good one to me. And the bet I want him to make--that John Tierney is speaking sooth when he says that the overall energy situation today looks like a Cornucopian feast--is one that he is unwilling to back with his money.

It is somewhat odd: given that we have different beliefs about the world, there ought to be a bet we can make where we both think we have an edge.

Here's my last try: in 1984 Milton Friedman said that the price of oil would be less than $10 a barrel if we had a truly free market in oil--that's the same real value that we saw in the first post-WWII generation. I'm willing to bet that the price of oil won't average that real value over any five year period over the next twenty years.

UPDATE: Andy Harless emails that he thinks $80/barrel oil is an energy cornucopian feast. What, then, does he call the $20/barrel (real) price of oil we saw in the first post-WWII generation? An energy orgy...