Peak Commodities – and Their Valleys

March 22, 2010

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story_images_oil drillDuring the heady runup to the U.S. mortgage bust – way back in 2007 — energy prices skyrocketed and in some areas gasoline was more than $4 an American gallon. Peak oil theories were in vogue. Peak oil theories are still in play, although a pullback in demand has saved debt-strapped American consumers from at least one worry.

Nevertheless, what would a global economy at full capacity look like? That recalls a famous bet between economist Julian Simon and biologist Paul Ehrlich. They debated humanity’s overuse of the world’s natural resources, thanks to growing populations. The wager was quite simple. Choose a basket of five metals and see if the prices rise or fall in ten years’ time. Ingenuity would lower the prices, Simon suggested. Overdemand would increase them, Ehrlich responded.

Ehrlich lost the bet – in 1990.

But that suggests end-date bias, and Paul Kedrosky, a blogger and senior fellow at the Kauffman Foundation, takes it up with vigour:

“[I]t will surprise no-one that the bet’s payoff was highly dependent on its start date. Simon famously offered to bet comers on any timeline longer than a year, and on any commodity, but the bet itself was over a decade, from 1980-1990. If you started the bet any year during the 1980s Simon won eight of the ten decadal start years. During the 1990s things changed, however, with Simon the decadal winners in four start years and Ehrlich winning six – 60% of the time. And if we extend the bet into the current decade, taking Simon at his word that he was happy to bet on any period from a year on up (we don’t have enough data to do a full 21st century decade), then Ehrlich won every start-year bet in the 2000s. He looks like he’ll be a perfect Simon/Ehrlich ten-for-ten.”

Commodities a growing or declining asset class – bets, anyone?

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