Keeping Score

Why Albert Pujols and Alex Rodriguez Are Empty Oil Wells

What do today's bloated baseball contracts have in common with 1960s oil economics? (We know you're asking that question.) A ton, actually.

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Brian Bahr / Getty Images

Albert Pujols of the Los Angeles Angels warms up before a game against the Oakland Athletics at Coliseum on July 26, 2013 in Oakland, California. The A's won 6-4.

Take heart, Los Angeles Angels fans. Yes, it looks like your team may have made a $240 million mistake signing Albert Pujols to that 10-year free-agent deal after the 2011 season. Pujols hit a career-low .285, slugged a career-low 30 home runs, and had a career-low .859 on-base-plus-slugging percentage (OPS) in 2012, as the Angels failed to make the playoffs. And this season, Pujols was hitting a new career-low .258, with 17 home runs and a new career-low .767 OPS, before being sidelined with a foot injury that could cost him the rest of the year.  And yes, the Angels are 48-55, and trail the first place Oakland Athletics by 13 games.

This all stinks. But don’t feel too bad. After all, you’re not the only ones suffering: just ask New York Yankees fans how they feel about the 10-year, $275 million contract Alex Rodriguez signed back in 2007. Or any Philadelphian about how loudly they want to boo Ryan Howard, who signed a five-year, $125 million extension in 2010 (Howard’s contract is now entrenched in the “worst of all time” debate).

And plus, some very smart people — oil analysts and executives, who were bidding for off-shore drilling rights in the Gulf of Mexico in the 1960s and 1970s — made the very similar mistakes.

(MORE: Why Big Contracts Are Bad For A Player’s Legacy)

What, comparing Angels owner Arte Moreno and general manager Jerry Dipoto to oil executives doesn’t exactly cheer you up? I guess I understand. Victor Matheson, a sports economist at the College of the Holy Cross, says the Angels are suffering from something economists call “winner’s curse.” The term originated from a paper that appeared in the Journal of Petroleum Technology in June of 1971.  At the time, oil companies were racing to outbid each other for leases on a relatively new frontier — the Gulf of Mexico — just as baseball teams seek to outbid each other to secure free-agent stars like Pujols. Three petroleum engineers from the Atlantic Richfield Company (ARCO) — E.C. Capen, R.V. Clapp, and W.M. Campbell, we know you won’t forget these names — noted that “the competitive bidding environment is a good place to lose your shirt.”

Oil companies overestimated how much these tracts would produce, overbid to secure them, and thus saw poor returns. In baseball, winning a free-agent bid brings a short-term victory — a celebratory press conference introducing a new star, heightened optimism for an entire city. But often, such optimism haunts you: you’re paying a lot of money, for a long time, for a depreciating asset. You sign A-Rod to a decade-long deal, when he’s 32 years old, like the Yankees did back in 2007 (the Angels inked Pujols right before his 32nd birthday). Now, after the injuries and playoff failure and PED drama, you want him gone. You have winner’s curse.

The similarities between oil bidding, from a half-century ago, and today’s baseball free-agent market are striking. “There are people in our business who fall in love with a certain number, and fail to recognize the uncertainly associated with it,” the authors write in one section. “Some may argue that the industry is smarter now — has new exploration techniques — and will not make the same kind of mistakes in the future,” they write in another. The baseball industry now has access to more advanced data that should help front offices make more rational decisions. “It is certainly true that we are better able to make exploration judgments these days; but it still does not mean we are very good,” the paper says. Ditto, indeed, for baseball.

The oil market corrected itself, says Matheson, and he predicts that we’ll see fewer of these massive, long-term deals for players in the future. Teams can learn a lesson from the St. Louis Cardinals: despite Pujols’ Hall of Fame production, popularity in the city, and the two World Series titles he helped the Cardinals win, the team let him walk to the Angels, at that $240 million price. The results? A return trip to the National League championship series last season, and the best record in baseball so far this year.

Ouch, sorry Angels fans. Know that one hurt.

(MORE: Hey, New York Yankees: You Signed A-Rod. Deal With It)