If you don't know about the Simon-Ehrlich bet, go here to read up on it.  The quick version is that rational optimist Julian Simon bet 'genius' doomsayer Paul Ehrlich that the price of certain commodities that Ehrlich was worried that mankind was using up would go down, not up, in reflection of Simon's belief that human welfare was increasing, not decreasing as Ehrlich insisted.  Simon won.  Earlier this year, the New York Times' resident optimist John Tierney won a similar bet with the late peak oil theorist Matthew Simmons.  Now, peak oiler David Murphy says that Simon and Tierney's wins were just the result of dumb luck.

My boss, Fred Smith, read Murphy's post and commented, with his usual insight:

Engineers and economists think very differently.  Engineers deal with “things” – economists deal (or, at least, should deal) with the interactions of humans and things mediated by the institutions in which these interactions take place.  An engineer estimates the travel range that might be possible with a given engine, fuel tank and driving pattern.  The economist would be more interested in the frequency of gas stations and the variation in prices.  The comments on this article illustrated this well – almost no joining of issues.  Engineers were determined to show that demand was going up and thus physical scarcity was inevitable.  Economists – not many in these comments – focus on price trends and note that economic scarcity rarely increases.  

Indeed, but why should this worry us?  The economists are generally going to be right and, as long as the engineers keep doing their job and deliver the oil according to our demand for it, all will be well.

But the problem is that, as Tom Bowers makes clear in his excellent book Oil, peak oil theory is being factored in to the price of oil by the traders who set the price.  In the 1990s, these traders broke the OPEC cartel wide open and pushed oil down to $10 a barrel.  Today, they are driving up the price of oil at least in part because they believe in peak oil.  It;s no surprise that they should listen to the engineers rather than the economists - they are interested in where the oil is coming from and when, not the end use to which it is put.  Yet that decision is having wide-ranging consequences for the rest of us.

For the record, Simon called off a bet with Auburn Forestry professor David South on the price of timber.  As he pointed out when he sent South his stake in the wager as a gesture of goodwill, this was due to environmental groups and government interfering with the free market.  If governments, as well as environmentalists and oil traders, make decisions based on peak oil theory then we will all suffer in a world with vastly more expensive oil.  Instead, they should listen to the rational optimists.

PS Don Boudreaux of George Mason University and acadmic econblogger Brad DeLong are engaged in discussions over another Simon-style bet.  The omens are not good.