The Seduction of Pessimism

The Somber Seventies were a period of existential environmental catastrophism. A scientist named Paul Ehrlich wrote a best-selling book called The Population Bomb and became a media darling. Ehrlich appeared on the Johnny Carson show at least 20 times, cheerfully predicting that with the population growing and the earth running out of resources, hundreds of millions of people were going to starve to death in the coming decade.

Meanwhile, an economics professor named Julian Simon became increasingly convinced that extreme pessimism was not only unwarranted but also exactly wrong. He believed human ingenuity to be the most powerful force on earth and that technological change combined with the profit motive would unlock massive new quantities of all the earth's resources and even lead to the development of new ones. Over time, his outlook began to gain traction, especially as Jimmy Carter's worldview gave way to Ronald Reagan's.

In 1980, Julian Simon proposed a wager to Paul Ehrlich. He gave Ehrlich the right to choose any five natural resources and bet him that in ten years, their inflation-adjusted prices would be lower. The face amount of the bet was a thousand dollars, but the payoff would be calculated based on the actual ending real prices. Ehrlich jumped gleefully at the bet, not least of all because his risk was capped, but his potential payoff was unlimited. He carefully chose copper, chromium, nickel, tin, and tungsten.

One day in October 1990, Julian Simon picked up his mail at his house in Chevy Chase, Maryland. In a small envelope sent from Palo Alto, California, Simon found a sheet of metal prices along with a check from Paul Ehrlich for $576.07. There was no note. Environmental pes­simism (and all other forms of pessimism) has always been met with the countervailing force of human ingenuity, which has continued to vanquish it.

A similar occurrence happened again in this century. In the mid-2000s, the United States was a large net importer of crude oil. We were dependent on foreign-produced oil, often from countries that did not share our political worldview. Even as demand for oil fell along with all other products during the great recession, the price continued to rise, reaching its peak of $145 per barrel in July 2008. 

 Once again, profit motive and human ingenuity came together, and hydraulic fracturing (or

fracking) unlocked a wave of previously inaccessible, or at least uneconomical, oil and gas reserves. Fracking involves forcing liquid, usually water mixed with sand and chemicals, into fissures in shale rock, cracking and expanding the gaps, allowing the once-trapped oil and gas to find its way to the surface.

As it stands today, no other country in the history of our planet has pulled crude oil out of the ground at the pace of the United States over the last six years.

The shale revolution was also applicable to natural gas, and our country's gas production has exploded over the past 15 years, making us a significant exporter of natural gas. Driving much of the boom is America's liquefied natural gas (LNG) export industry, which, as recently as 2015, basically didn't exist.

By liquefying the gas at a frosty -260° Fahrenheit, shipping and storage become a lot easier. The volume of natural gas in its liquid state is roughly 1/600th of the volume in its gaseous state, enabling America's newfound fracking success to be shipped worldwide. 

 Upheaval in energy markets, particularly after Russia invaded Ukraine, further boosted demand for American LNG. Indeed, over the past two years, more than 60% of US LNG exports have found their way to Europe, where buyers have been looking to replace lost supply from Russia. The overall result? From what was pretty much a standing start at the beginning of 2016, America's LNG industry is now shattering records, with the US becoming the largest exporter of LNG in 2023, unseating Australia and Qatar.

Having a pessimistic outlook is always easier, sounds smarter, and is more intellectually captivating. Naming our current problems and the lack of obvious solutions makes for an easy case in favor of pessimism. Optimism, however, is much more closely aligned with the long-term history of mankind.  As long as human ingenuity and profit motive are working together, it is reasonable to assume that progress will continue marching forward. Being a good investor requires not knowing how things will get better, only that they will get better because they always have.