
1985: “Oil Prices Will Go Up Forever” - aaronbrethorst
http://www.feld.com/archives/2015/07/1985-oil-prices-will-go-forever.html
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chollida1
Great post.

This is something that I think everyone would say they understand if you ask
them and yet its something that everyone will discard at some point in their
lives.

When I leave the world of finance I'll be ok with forgetting almost everything
I've learned with the exception of one principle.....

Always hedge

Cheap prediction 3 things that are in an unsustainable bubble that will pop in
the next 3 years.

1) Hedge funds, way to much money since 2008, huge bull market since 2008 and
the sell side closing down their prop trading businesses since 2008 created an
unsustainable number of funds.

2) US equity markets, see above

3) Twitter, people will become tired of making excuses for their huge P/E
ratio and move their money to somewhere else that will actually make them a
return, celebrities will become fickle and move onto the next big
communication network.

~~~
onewaystreet
> Twitter, people will become tired of making excuses for their huge P/E ratio
> and move their money to somewhere else that will actually make them a
> return, celebrities will become fickle and move onto the next big
> communication network.

Twitter wont die, it will get bought by someone (probably Google). Twitter is
perfect for celebrities, they don't need another network. It's the common
person that doesn't have much use for it.

~~~
function_seven
> It's the common person that doesn't have much use for it.

As a common person myself, I disagree. I've used Twitter _twice_ to complain
at companies who were ignoring me through their normal support channels. /s

In all seriousness, that's what I find Twitter good for. No way in hell can
TWTR make money of my pattern of use, though.

~~~
sdenton4
Yeah, and once Twitter is the dominant way to complain at companies, it will
stop being useful...

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api
Eventually we will hit the point at which oil prices do go up forever -- if
they are measured as the inverse of EROEI. In other words: we'll reach the
point at which every barrel of (conventional geological) oil that we produce
takes more energy to extract and process than the last. At that point, oil is
a dwindling resource.

This may or may not mean that the price of oil will go up forever in _nominal
dollars_. It may actually have the reverse effect at times, since it could
trigger financial crashes that result in deflation. It may also lead to
replacement of oil with other resources (gas, electric, etc.) or shifts away
from oil-based transport (electric trains, walking, biking) -- and those could
lead to decreases in oil price as well if they occur to enough of an extent.

The error in predicting eternal oil inflation is threefold:

(1) Assuming that financial cost always reflects objective physical cost --
that there is a 1:1 relationship between thermodynamics and price. Reality:
there's only a soft relationship subject to the next two factors.

(2) Assuming infinite demand inelasticity. Reality: increasing oil price fuels
substitution and demand destruction.

(3) Forgetting that money (especially fiat money) is itself variable in value.
Reality: deflation can cause prices to nominally fall when nothing has
actually changed, and inflation can cause the inverse.

~~~
ZeroGravitas
Does that assume that the two Es in EROEI are fungible?

Apparently the largest solar installation in the world is used to generate
steam that is used to extract oil. I can imagine (just about) a strange future
with a renewable powered oil industry, because oil has certain benefits that
electricity doesn't (use as airplane fuel for example). Such fuel would have a
lower carbon impact overall, though probably only slightly lower.

I think it makes sense that at some point we'll start leaving oil in the
ground, but not sure if that's because its price will keep going up, or if its
replacements will keep getting cheaper/better, and what affect that has on oil
prices.

~~~
api
That's really an excellent point! Thanks.

Using renewables or nuclear power to extract fossil fuels amounts to something
almost like indirect energy conversion/storage. It can also work between
fossil sources. I've heard the tar sands described as a massive indirect gas
liquefaction plant -- it's economical because direct GTL is less efficient
than gas -> steam -> bitumen -> liquids.

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josu
This was the same argument that salespeople would use whenever you stepped
into a bank between 2005 and 2008 in Spain: "Real estate prices never go
down". Then they did, and the most of the banking system in Spain went
bankrupt. I'm using the Spanish example because it's the one that I am
familiar with, but this happened pretty much in every developed country.

People tend to forget that generally we can't predict the future, specially
not by extrapolating the data from the past few years. Ironically I think that
economists tend to make this mistake more than any other group except for
fortune tellers and weather forecasters.

Related to this I won't get tired of recommending "The Black Swan: Second
Edition: The Impact of the Highly Improbable" by NN Taleb [1].

[1] [http://www.amazon.com/The-Black-Swan-Improbable-
Robustness/d...](http://www.amazon.com/The-Black-Swan-Improbable-
Robustness/dp/081297381X)

~~~
sytelus
Problem is that these black swans happen only once in blue moon in a given
area. For most other times if you look at trends, it's probabilistically
correct to say that oil _almost_ never goes down and real estate _almost
always_ goes up. I would estimate that there are less than 10 black swans
occur during a life time of adult person that violates conventional "wisdom"
in oil, stock and real estate. If you run your life believing that they would
occur every year, you are likely to be at bigger loss.

BTW, Nasim Taleeb don't suggest that you wait for one big black swan in one
field like oil or real estate. His main argument is that you want maximize
your exposure to all different kind of black swans in all different kind of
places by putting lots of _small_ bets on them. YC is a perfect example of
implementation of Taleeb's theory. A bad implementation of Taleeb's theory
would be to put a large bet that Apple stock would go down to $10.

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oofabz
I see he is using a typical inflation-adjusted graph to show the historical
price of oil. It's interesting to also see the historical ratio between oil
and gold prices as an alternative way to compensate for inflation. The
oil/gold ratio has been much more consistent, perhaps because errors in our
inflation estimates add up over time.

[https://www.wolframalpha.com/input/?i=price+of+oil+%2F+price...](https://www.wolframalpha.com/input/?i=price+of+oil+%2F+price+of+gold)

~~~
danmaz74
> gold prices as an alternative way to compensate for inflation

The price of gold is in no way an alternative to compensate for inflation. I
mean, at least for those countries where consumers don't use most of their
money to buy gold.

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washedup
As of today, crude is back down to $48.70

