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Countdown to 100$ oil (10) - Simmons says 300$ soon - and more

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)

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My only beef with this is his comment about how "if we don't address the problem, we will be in an energy war."

What does he think has been going on in the Middle East for the past sixty or so years?

by asdf on Thu Aug 18th, 2005 at 09:56:05 AM EST
Well there's war and then there is WAR. Do you really want to try the other kind?

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Aug 18th, 2005 at 02:14:10 PM EST
[ Parent ]
It is a great interview - it isn't often that an industry insider is willing to debunk the conventional wisdom.  His book, Twilight in the Desert, is also interesting, and does a good job of making technical points accesible to curious outsiders.  

When people ask me how the current crisis is different from the last one, I usually turn to Simmons.  He pointed out that we have not discovered a truly giant oil field (capable of producting more than 1 million barrels per day) since the early 1970s.  Back then, we still discoverd more oil than we produced every year, but now we produce twice as much as we discover.

by corncam on Thu Aug 18th, 2005 at 10:21:45 AM EST
Actually, Simmons seems to forget about the Caspian, which definitely deserves to be labelled a new oil province, and the Kashagan field, discovered in 1999, and the 5th largest ever. Tengiz also qualifies on size, but I don't remember when it was discovered.

Offshore Angola arguably also qualifies as a new province.

Of course, these two exceptions do not invalidate his point, quite the opposite.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Aug 18th, 2005 at 02:09:50 PM EST
[ Parent ]
... I've recently found I just learned some Chinese.

Ka-CHING!!!

http://www.aftenposten.no/english/local/article1041455.ece

Synopsis:

Norway's central banks said Thursday that the Petroleum Fund, saving wealth for future generations, grew by seven percent in the three months to the end of March and is now worth NOK 1.09 trillion (USD 170.4 billion).

That's ~€29.000/~$37.500 per capita.

____________
Dub mentality

by Coug (me(AT]tommyb{DOT]info) on Thu Aug 18th, 2005 at 11:21:10 AM EST
That's very interesting. Please write a diary on this petroleum fund sometime soon. All countries should be doing this...if I understand it correctly.

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Thu Aug 18th, 2005 at 02:20:46 PM EST
[ Parent ]
I'm afraid that it is beyond the realm of possibility for most nations to do anything like this.
The NPF (check the links in the left-hand margin) invests a certain portion of the state's income in this fund.  The state is running a huge surplus due mainly due to income from the oil (and gas, to a lesser extent) production in the North Sea.
Given the current crude prices, the surplus is beyond any previous (conservative) budget.
by ask on Thu Aug 18th, 2005 at 09:04:31 PM EST
[ Parent ]
I'd love to think that economic lesson-giver Britain had done something intelligent like this with its share of North Sea oil, but..?
by afew (afew(a in a circle)eurotrib_dot_com) on Fri Aug 19th, 2005 at 04:18:21 AM EST
[ Parent ]
Thatcher blew most of the money on tax cuts and randomly quirky economic policies... Our infrastructure (e.g. trains, water, etc.) show the scars to this very day.
by Metatone (metatone [a|t] gmail (dot) com) on Fri Aug 19th, 2005 at 05:53:17 AM EST
[ Parent ]
Jerome - Great article, very informative and thought provoking (this is a Bush insider!!)...quite a find. Thanks!!

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia
by whataboutbob on Thu Aug 18th, 2005 at 02:29:25 PM EST
Not really related directly to this post but I've been wondering about it for a while.
Why does crude go up when there are refinery problems? I can see why the price of refined products jumps but it just doesn't make sense to me why the price of oil goes up.  In fact, if the amounts weren't so marginal I'd expect the reverse - less refinery capacity, less demand for crude.
But I'm just a historian so probably there's something about oil market economics that I don't understand.
by MarekNYC on Thu Aug 18th, 2005 at 04:08:13 PM EST
It'a serious question.

One answer is that this is all a speculative bubble, so all oil-related products go up as soon as there is reason for one of them to go up.

My theory is that the market is so tight that any refining capacity which is lost effectively means that the oil that would have been processed by that capacity is lost as well, which means more shortages dow nthe road. The markets don't react to the temporary drop in demand for oil, but to the expected future extra demand that this will mean as the missing volumes of gasoline keep putting pressure on the demand side  later, in addition to the demand then.

Maybe HiD, who knows the downstream world better than I, has a better answer.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Aug 18th, 2005 at 05:38:45 PM EST
[ Parent ]
It may also be about different qualities. Light crude is easier to refine, so when refinery capacity is limited, demand for light crude increases. The average/reference price (light/heavy mix) then also rises. When there is plenty of spare refinery capacity, heavy oil is (almost) as good.

If this theory is correct, it should be possible to discern a refinery capacity crunch by the divergence of light/heavy crude price. I don't know if that is the case now, and five minutes of google didn't tell me anything.

by jobh (jbh@lupus.ig3.net) on Thu Aug 18th, 2005 at 06:30:19 PM EST
[ Parent ]
Where I live--far northern CA---typically has the highest gasoline prices in the continguous states, and premium is above $3 a gallon now ($3.13), with regular hovering just below the $3 threshhold.

What's different since we crossed the $2 barrier is: 1. It was just a few months ago, 2. we're no longer a complete anomaly, but more like a bellwhether.

I don't know if the Cindy Sheehan phenomenon is well known outside the US, but there were some 1500 candlelight vigils last evening to support her (she's the mother of a soldier killed in Iraq who is camped out in Crawford and demanding to see Bush.)  At the vigil here, the number one topic was Iraq, but number two was gasoline prices.  

Politically, Bush is going to have a hard time selling his Middle East adventures if people--most of whom probably believe that they're really about oil, whether they admit it or not---see gas prices going up anyway.

"The end of all intelligent analysis is to clear the way for synthesis." H.G. Wells "It's not dark yet, but it's getting there." Bob Dylan

by Captain Future (captainfuture is at sbcglobal dot net) on Thu Aug 18th, 2005 at 09:03:14 PM EST
http://tinyurl.com/86fqj hey jerome, this is a link to oil.com-all news about oil.  Came across it when I was googleing oil refinery fires.  There has been a rather unprecedented 'rash' of oil refinery fires and explosions around the world in the last 6 months or more that I know about.  The ones in Iraq are due to insurgents but the ones in the US and other places are deemed 'accidents'.   One in March here in the US in Texas when exploded and caused huge fire killed 15 people.  That particular refinery then had another fire a few months later as did one in Louisiana.   One big fire at refinery in India.  Believe there are more but can't think of them offhand.  

I'm beginning to think it's possible these aren't all just a series of unfortunate accidents. Add to that the fact that right here where I live is a refinery and I believe Chevron owns it and wanted to shut it down for good, saying it was too old to repair...cost of gas is tied to how many refineries are working and due to the huge outcry here it is still running but I don't know for how long.(oil company says their to expensive to build a new one-yeah because of course the oil companies have nooooooo money right).

"People never do evil so throughly and happily as when they do it from moral conviction."-Blaise Pascal

by chocolate ink on Thu Aug 18th, 2005 at 09:41:08 PM EST
I posted a graph not long ago that showed that the utilisation rate of the world refining industry has gone up steadily from 75% in the 80s to above 95% today. When equipment is running flat out 24/7, it breaks down once in a while (even more than in normal use) - and as demand id tight, it is also a lot more noticeable. So I would not put it to any kind of conspiracy - just reality striking back after many years of low investments (because it made no economic sense then).

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Fri Aug 19th, 2005 at 02:42:02 AM EST
[ Parent ]
Jérôme is probably right, but I made the same speculation in one of the previous $100 oil threads - based on an analogy with the so-called California Energy Crisis, when it was PG&E and Enron who did the manipulation.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Fri Aug 19th, 2005 at 05:39:28 AM EST
[ Parent ]
The conspiracy happened in the 80's and 90's. More than half of  all refineries were shut down in the US. Refining had very low profit margins, they were consolidated (bought up) and shut down. I have little doubt that some were outdated as the oil companies claim, but not a great deal more than the ones currently in service.

By limiting the producers and through economies of scale profits have increased. Now, they say that in order to help out the economy and bring on more capacity US environmental rules need to be eased. Bush has helpfully suggested that closed military bases be used as refinery sites. Conspiracy may be a strong word for the "free market" reaction to deregulation, but it sure has worked out well for the usual suspects.

by toad on Fri Aug 19th, 2005 at 01:43:33 PM EST
[ Parent ]
A question.  If prices even started getting close to 300$/bbl, what is the likelihood that governments would try and institute rationing in order to control prices?

The mechanisms for rationing are an entirely different matter of course - a bureaucrat gets to decide who gets the oil instead of the market, but by artificially forcing the demand down, the prices for what you could get would still be affordable.

Then again the oil companies would have phenomenal profits with prices at these levels, and given who runs the country, it seems unlikely that rationing would be instituted.

If oil were really 300$/bbl, I could see either a recession or runaway inflation.  Not sure which right now - right now this is just a sort of a thought experiment for me...

by ericy on Thu Aug 18th, 2005 at 10:02:21 PM EST
is the title of a fascinating diary at DailyKos.  The author simply asked some people, who voted for Bush, and live in the heart of America's oil country, what they think about high gas prices.  Their answers are amazingly honest and sometimes a little scary.
by corncam on Fri Aug 19th, 2005 at 05:00:14 PM EST
I wonder just how much connection the big oil industry barons and share holders have to major western governments. It seems that all government policies are designed to push oil prices up -Iraq war, Iran threats etc - and the only people who benefit seem to be big shareholders in oil companies.
by observer393 on Fri Aug 19th, 2005 at 11:30:22 PM EST


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