by Jerome a Paris
Fri Aug 19th, 2005 at 12:31:31 AM EST
Matthew Simmons gave a fascinating interview to the financialsense.com people (an economics site I also highly recommend) on the occasion of the publication of his book, "Twilight in the Desert" (helpfully subtitled "The Coming Saudi Oil Shock and the World Economy").
Simmons says emphatically that he expects oil prices to rise 5-10 fold in the very near future:
MATT [Simmons] (...)oil demand globally could easily go to 86-88 million bpd during the Winter, and that could easily exceed supply by 2-5 million bpd.
JIM: If that was to happen we would almost be looking at $75-80 oil, I suspect.
MATT: No, no, no. Oil prices could easily go up 5-10 times.
I'd like to summarise his arguments below, because there is a lot more to them than just this little spectacular tidbit. But do go read the whole interview. It is very easy to read and it is an absolutely extraordinary document.
If you are not familiar with Matt Simmons name, here's his short biography:
Matthew Simmons. He's Chairman and Chief Executive Officer of Simmons & Company International, a Houston-based investment bank that specializes in the energy industry. Mr. Simmons serves on the boards of Brown-Forman Corporation, The Atlantic Council of The United States, he's also a member of the National Petroleum Council and The Council of Foreign Relations. He has an MBA from Harvard University.
His bank has been active for at least 20 years with the Texas oil industry, and he worked on the Cheney energy task force and has been received by Bush a few times. So he is definitely not a marginal or someone with an axe to grind.
I decided it would be interesting and educational to see if you could actually put together a list of the top 20 oil fields by name. And I thought somebody must have done this before, and the more I dug the more I realized that no one ever had. So I basically decided - arbitrarily - 100,000 barrels per day [bpd] production was my cutoff of what constituted a giant oil field and all Fall of 2000, I believe this was, I basically took data from various areas and kept trying to hone in on the total list (...)
What I came up with was finding that there are about 120 oil fields in the world that still produced over 100,000 bpd, and that they collectively were 49% of the world's oil supply. What I also found is that the top 14 fields that still produce over 500,000 bpd each, were 20% of the world's oil supply, and on average they were 53 years old. The next thing I found was that in the Middle East you had basically, somewhere between 3-5 oil fields in each of the major Middle East oil producers that made up about 90% of their supply.
His book, and all his earlier speeches and papers, come form that exercise, apparently the first of its kind, to simply list the oil fields. This had never been done before! So his information comes from the actual exhaustive study of oil fields, one by one. The fact that he was the first one to do this does not make his data suspect, it makes it all the more useful.
(...) every energy supply model starts with the assumption that Saudi oil is plentiful. It's inexpensive to produce and supply can expand to meet demand.(...)
MATT: Yes. What's interesting is that we've based all of this assumption on no data. (...) I mean, it would be like someone assuming General Electric could basically grow by 30% per annum, and that by 20 years from now they'd have a company that was bigger than the economy of the United States, because they needed to do that to support their stock price, and no one ever saying, "Wait a sec, how could a single company ever grow beyond the economy of the United States."
But this is far more important in the unforeseen consequences: that we've effectively built a world economy on the illusion that Middle East oil would last forever at inexpensive cost.
Cheap?! Oil's at $60 a barrel!" I say "what $60 per barrel is, is 18 cents a pint."
And obviously it's cheap. I don't know what's the next cheapest liquid we actually sell in any bulk is, that has any value. I suspect there are places around the United States where municipal water costs more than 18 cents a pint.
And yet for some reason, we created a society that was built on a belief that oil prices in a normal range were some place in the $15-20 level. It turns out $15/barrel, which is the average price of oil - in 2004 dollars - it sold for, for the last 140 years, is less than 4 cents a pint. So we've basically used up the vast majority of the world's high flow rate, high quality sweet oil at prices that were effectively so cheap, you basically couldn't sustain an industry.
And now we're left with lots of oil. But it's heavy, gunky, dirty, sour, contaminated with various things, it doesn't come out of the ground very fast, is very energy intensive to get out of the ground and we're going to pay a fortune for it.
The interview goes into very detailed asides on the history of Saudi oil, the discovery in the late 60s of the last 3 oil provinces ever found (Alaska, North Sea and Siberia) all now far beyond their peak, the delusions of people like CERA's Daniel Yergin (Simmons suggests that he published his recent study saying that a glut of oil will come on the market in the next 5 years - which I critiqued here - , because Saudi Aramco is one of their top clients), the history of "paper reserves" (the fact that official Saudi oil reserves have not changed in 20 years) and the illusions of the young oil engineers who trust their computers and their technology more than their geology. Like I said, go read it in full.
He points out that all future scenarios for oil production count on 25 mb/d of future Saudi production and states that this is absolutely impossible, and he mentions some internal discussion in Aramco that strongly suggest that some people there know it (but have been silenced). He says that Saudi oil production is unlikely to ever go beyond 12 mb/d, and that there is a strong chance that it could actually collapse in the near future.
His prognosis for 2030: 10-20 mb/d is possible (as opposed to 84 mb/d today).
JIM: Based on reading your book, and the extensive studies - as you said many of these major oil wells are now at tipping points - we're likely to wake up one day and find out that oil is over $100/barrel, we can't meet...
Matt: It's still cheap at $100!
JIM: Yeah, at $120 it's 36 cents a pint, which is still cheap.
MATT: What the economists ought to be trying to figure out is: what constitutes a fair price for oil versus their belief that oil prices are really expensive today. I would argue that probably a number in the $5-10/gallon is a real bargain. [51:24]
JIM: Matt, what comes afterwards? One day, as I mentioned, we're going to wake up and find out that peak oil is here, we're going to be dealing with it. Do we go to oil rationing? Do we go to a major, national conservation program? And I guess even more importantly than that, given the high demand on oil today - not only just from the United States and Europe, but India and China - how do we ration oil without going to war?
MATT: We have to figure out a way to do that because if we go to war, it will actually be the worst war we've ever fought. And if we don't address the problem, we will be in an energy war. What I find interesting is I actually think we can solve this problem, but I also think if we ignore it, you can't create a scenario that is too awful.
Yep, WAR. Simmons proposes some solutions to the coming crisis:
- focus on rail and river transportation for most goods;
- stop "just in time" production and industries where everything is transported around many times to the "cheapest place"
- push energy savings at home
- help India and China to not make the same development mistakes that we made.
but he says that we are essentially in August 1939:
there was still one loud voice in the world, Winston Churchill, saying, "this is madness!" 99% of the other people that observed were basically saying, "You know, I'm so glad we never ever going to have a war again because war is so awful that we should just never have another war again." And we got a rude awakening on September 1st 1939, that in fact we were at war.
Obviously, the comparison to Churchhill is slightly self-serving, but essentially right. And he expects that the only thing that will wake us up, possibly, is not 100$ oil (that's 30cent/pint, still very cheap), but actual shortages, rationing and lines.
What the economists ought to be trying to figure out is: what constitutes a fair price for oil versus their belief that oil prices are really expensive today. I would argue that probably a number in the $5-10/gallon is a real bargain.
But he remains optimistic. Go read the article to see his conclusions.
But we will not escape 100$ oil, and much higher prices.
Earlier "Countdown Diaries":
Countdown to 100$ oil (9) - I am taking bets
Countdown to 100$ oil (8) - just raw data
Countdown to 100$ oil (7) - a smart solution: the bike
Countdown to 100$ oil (6) - and the loser is ... Africa
Countdown to 100$ oil (5) - OPEC inexorably raises floor price
Countdown to 100$ oil (4) - WSJ wingnuts vs China
Countdown to 100$ oil (3) - industry is beginning to suffer
Countdown to 100$ oil (2) - the views of the elites on peak oil
Countdown to 100$ oil (1)