Oil is a disappearing commodity. At least that’s what you might think if you’ve done any kind of reading on the subject. There are articles persuading the public at length that resources are finite, and that we will one day run out of essentials we need to get by. This is somewhat of a myth, for a few reasons.
Florida had a recent cold snap that helps to illustrate this point. 30% of the crop production in Florida was projected lost when the weather hit, which translated to losses in the hundreds of millions. As costs soared to the highest level they’d been in five years, citrus shortages were widely reported. Yet the price has since fallen and production levels resumed.
For further explanation, let’s examine the outcome of the Simon-Ehrlich wager. Julian Simon, a statistician, made a bet with the economist Paul Ehrlich on resource scarcity. He argued that the price of any five non-government controlled substances would not rise long-term. They used a period of ten years, from 1980 to 1990, to measure the prices. What they found was that the commodities fell nominally in inflation-adjusted terms.
This means there are actually two myths at play. The first is that commodity loss is not real, which is untrue when measured long term. Surely, the endangered species list should help illustrate that it takes time to threaten an entire system. The second is that commodity loss is inevitable. When growers faced the Great Freeze in 1894, they moved their crops to parts of Florida that were not hit (which is how Miami was founded). People are adaptable. Disappearing resources are only one way of viewing what is otherwise a transition from one source to another.
About the Author: Samuel Phineas Upham is an investor at a family office/ hedgefund, where he focuses on special situation illiquid investing. Before this position, Phin Upham was working at Morgan Stanley in the Media and Telecom group. You may contact Phin on his Samuel Phineas Upham website or Twitter.