1985: “Oil Prices Will Go Up Forever” | Hacker News Reader

1985: “Oil Prices Will Go Up Forever”

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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.

"The market can remain irrational longer than you can remain solvent" - John Maynard Keynes

> 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.

> 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.

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

Exactly. Put blue theme on the update stream on Google+, restrict text to 140, and call it the next version of Twitter. Collect accolades.

AFTER that happens, announce the migration of the Google+ base to "Twitter."

I think we are in agreement.

Since I was talking about the stock market I assumed it was obvious that I was talking about Twitter the corporation that won't cost in 3 years.

Twitter owns Periscope, which has much greater potential IMO. It is amazing to drop down into someone's life from far away and talk in real time.

Twitter is perfect for celebrities, they don't need another network.

They never needed twitter. The relationship is largely the other way around.

One thing I don't get about "hedging": If you hedge, how do you make profit? While you get downside on your one bet and upside on other, things cancel out, right? Profits seems to be proportional to risk. Hedging reduces risk and hence reduces profits. I've heard "always hedge" lot of time but being naive in this area, I want to know how do professionals hedge while still bringing in significant profits.

There's this joke in trading: "You can't make money hedging." Of course, not losing $1 is the same as making $1. So to answer your question, you don't make money hedging, instead you prevent yourself from losing it. Hedging is to lock in gains you've already made.

When people say "always hedge", what they really mean is be diversified.

While it is of course a vast field with much complication etc etc, here's a simple one.

It does rely on you being right, but that's always true.

If you think company X is going to do well compared to some benchmark, you go long on X and short on the benchmark. As long as you were right (i.e. X does do better than the benchmark) you'll make money no matter how they actually do. If X drops 50% and the benchmark drops 90%, you've made money. If X rises 20% and the benchmark rises 15%, you've made money.

You don't, but hedge funds don't just do hedging. Hedge funds can use basically any investment strategy that they want to. The only common feature that they all share is obscenely high fees.

well hedging could lower your expected value but increase your sharpe ratio (i.e lower the variance relative to reward).

Say I wanted to put my reputation or money where my mouth is with some predictions like this of my own. Are there any online prediction markets that support this?

This was the idea behind Intrade before it folded, no? I remember hearing about it in the popular media all the time during the 2012 US presidential election. Has anything like it arisen in its place?

This soon:

http://www.augur.net/

For the U.S. presidential race, there is the Iowa Electronic market:

http://tippie.uiowa.edu/iem/markets/pres16.html

Well, when it comes to US equity markets, you can just invest in them (or against them).

From what I've read, shorting stuff is complicated.

What about a site, say the web 2.0 version of longbets.org, where users can make predictions just using karma (or HN points) and user results are published? Does anything like that exist?

Instead of short selling an equity (which is indeed complicated not so much in its difficulty but in its potentially unlimited downside), you can buy a put option. For the cost of the option you receive the right (not the obligation) to sell a stock at a specified price. If the stock price then goes down below that that price, simply buy the stock at the lower market price then use your put option to sell it at the higher price. The downside is limited to the cost of the option.

It's not. It's right next to the 'buy/long' field/dropdown for most online brokers.

The broker might make you jump through a trivial hoop to get a margin account and fax in an additional agreement. Stock short account you just had to request and to get option shorting my broker, TD Waterhouse, had a simple Q&A quiz to make sure you understood the risk profiles of option shorting.

Betfair if you put money in the UK.

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.

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.

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.

For physical commodities, financial cost will eventually converges to physical cost as the contracts reach settlements. If not, those financial contracts will be replaced; by another product that can truly provides physical players to hedge their risks.

I'm coming down on the side that oil's long term value is almost wholly based on potential substitution costs and it's current role in the economy. Meaning the value of money and oil are strongly linked. If the price of oil spikes for too long you get a recession and demand falls and the price of oil falls with it. And you can get price spikes/crashes because in the short term demand is inelastic. But long term, it isn't going up forever.

But price spike/crash is something to pay attention too, in any field. Absent graft no one make bank on anything for too long.

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...

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.

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...

> 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.

The graph generated in your link fluctuates wildly between 0.05 and 0.15. Relying on this for inflation adjustments would be catastrophic.

How can gold be used as an indicator of inflation?

Gold went up by almost 50% during the 2008 crisis and has dropped by 1/3 since it's peak. If we use the price of gold as an indicator of inflation that would mean we a huge inflationary spike followed by a severe deflationary period?

As of today, crude is back down to $48.70

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