Twilight at the Fed: Subliminal Parallels
by Rob Kirby, Kirby Analytics. August 8, 2005
I couldn’t help but get a sense of déjà vu all over again with Jim Puplava's interview of Matt Simmons this weekend, Aug. 6, 2005, on the Financial Sense News Hour. That would be Matthew Simmons - Chairman of Simmons & Company International and author of "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy." Specifically - what got my goat, so to speak, was Matt's revelations regarding two years of service he put in on an energy supply workshop a few years back – at the behest of energy analysts at the CIA – whose purpose was to "model" or predict world oil output/supply by geographical region going forward.
Simmons reveals the methodology employed by the other 9 experts on that panel as it related to China's future oil production. These experts had Chinese oil production rising with demand in future years. That Chinese oil production would increase - was simply assumed! This prompted Simmons to ask questions like; how anyone knew for a fact that China could increase supply? And could anyone making these claims even identify the top two or three oil fields in China? As you might have already guessed, no one had answers to these questions. There was no provable basis for the assumptions that China would be able to increase oil production. This got Simmons thinking more about the bigger picture and he wanted to know if there existed a list of, say, the top 20 largest oil field in the world? He was astonished to learn that no such list had ever been compiled.
This led Simmons, in 2001, to begin compiling a list of the largest oil fields in the world. In doing so, he arbitrarily used 100,000 barrels of production per day as a cut off point as to what large is. His study found that there is roughly 120 oil wells in the world that meet this description and together they constitute roughly 49% of the world's oil supply [approx. 84ish million barrels per day]. Furthermore, the top 14 of the illustrious 120 wells that produce more than 500,000 barrels per day constituted 20% of the world's supply and the average age of these magnificent 14 wells was in excess of 50 years. Then, when focusing on Middle Eastern oil producers, he found that each producing country had somewhere between 3 and 5 major wells that accounted for approximately 90% of its production.
The fact is, contrary to much opinion, that the Arabian Peninsula has been very heavily explored for oil using the most sophisticated technologies known to man. At the end of the day, the Arabian Peninsula has 5 super giant oil fields that account for 90% of current production [approx. 8 – 9 million barrels per day] – most of which have been in production for 50 years or more. Furthermore, 60% of Saudi output [5 million or so barrels per day] comes from one field alone – Ghawar. The fact is there have been virtually no new discoveries since 1980 that are capable of producing more 250,000 – 300,000 barrels of oil per day.
Prior to conducting this research, Simmons had mistakenly assumed that the Middle East was "littered" with "scores" of producing oil wells. The other thing that stuck out like a sore thumb regarding these significant wells was their age. It is a given fact that as oil wells age, their flow rates first peak and then as their reserves are diminished or depleted, their flow rates lessen - hence the term "Peak Oil". To put this into context, oil was discovered in the 1960's in the North Sea, Alaska and Siberia [Russia]. North Sea production of crude peaked at 6 million barrels per day in 1999 and is now approx 4.5 million. Alaskan oil output peaked in the 1990's at 2 million barrels and is now approx. 900,000, and Siberia peaked at 9 million and is currently producing about 5 million barrels per day.
Saudi oil production has historically swung between, say, 5 million barrels per day on the natural "let nature take its course" flow rate to about 10.5 million barrels per day utilizing technological methods such as sea water injection – which metaphorically allows one to "milk the cow faster." As such, Saudi Arabia is often referred to within OPEC as the "swing producer." It should be noted and understood that utilizing these technological methods to increase flow rates from existing wells ultimately speed up the time frame over which the well's reserve will exhaust itself – since a cow only has so much milk to give. Simmons generalizes the practices of increasing flow rates as "sweeping the cupboards bare."
What Jim Puplava points out, is that all oil supply modeling done in the world today is largely predicated on the notion that Saudi Arabia, currently producing at close to full bore, has vast resources of "cheap" oil to still be tapped and can do so in a timely fashion as demand increases. Simmons points out the amazing thing about these assumptions; they have been made without any supporting data. The scenario above makes it clear just how "wishful thinking" these rosy assumptions are. The cheap easy flowing oil is in increasingly finite supply and this makes the world more and more dependant on heavier, more expensive, slower flowing / thicker grades of crude. So while oil supplies will never run out altogether, new supply is likely to be comprised of much more expensive oil which by its very nature will not be available at ample flow rates commensurate with existing stocks that are quickly depleting.
As Simmons points out, pundits who are optimists make claims that over the next 5 or so years, in response to higher prices, another 16 million barrels per day of production will come on stream – collapsing the price of oil once again. Simmons' views regarding Peak Oil are still not universally accepted, to say the least. Among his detractors is none other than Michael Economides of the University of Houston, who on a recent appearance on CBC television claimed that – while he respects Simmons work, increases to Saudi oil output are possible because in his words,
"I've done the numbers."
What Simmons aptly points out, dear reader, is that,
"There are no numbers to do."
As Simmons suggests, you wouldn't suppose that Mr. Economides has as a client in his consulting practice Saudi Aramco – would you? Who to believe? Now that's what I call a conundrum! Simmons goes on to point out that meaningful oil reserve stats are closely guarded state secrets of Saudi Arabia – a country that has been pumping 5 – 10 million barrels of oil per day for the past 35+ years without any draw down on their official reserve estimates – in fact they've only increased. The amazing thing, dear reader, until Matthew Simmons came along – no one had ever bothered compiling and analyzing oil data in the manner in which he did – and the world simply assumed that cheap Saudi and Middle Eastern Oil was limitless and would last forever. This assumption had simply never been challenged – or so we would be led to believe.
Simmons reveals that closed Senate hearings took place in the U.S. in both 1974 and again in 1979 – where high level oil executives were subpoenaed and questioned about the validity of what amounts to "the crux of the Saudi peak oil debate." The materials garnered through subpoenaed submissions of oil execs in the 1979 hearings were apparently so full of such potentially explosive findings - they were put under seal by the Senate committee for a period of 50 years. In essence, by connecting a few dots we can more or less assume that the peak oil problem was known to politicos some 35 years ago, and the whole issue was hushed and given a big deep six.
If world demand for oil grows to say, 86 – 88 million barrels per day this winter heating season [from its current 83 - 84] without a corresponding ramp in supply, Simmons reckons the price of crude could spiral up in the magnitude of 5 or 10 times.
I have gone on enough about oil, but did so because in many regards, I feel the oil story parallels the same type of unsustainable structure we are currently facing in the world's fiat money regime. Too much un-backed money and credit is being produced for currency to maintain its value. Amazingly, there has been no credible audit of the U.S. sovereign gold reserve alleged to be largely stored at FortKnox, West Point and the Denver Mint – for 50 years, coincidence ehh? The bulk of mainstream economists and media "have always assumed" the Wizard – Easy Al Greenspan has everything under control and the Federal Reserve is really an inflation fighting do good organization. Great efforts are made on the part of officialdom to marginalize folks who challenge these long held views. Gold bugs contend that officialdom is selling gold - rigging its price to perpetuate an unsustainable fiat money system that is doomed to fail and obscuring their actions through obfuscation including everything from creative accounting to fudging numbers to outright lies and deceit. The claims from officialdom center on their proclamations that "they too have done the numbers and everything looks fine" – with official reports of a strong economy, low unemployment and low levels of inflation. If the bugs are correct, officialdom has done the number alright, and the Achilles heel in the illicit rigging game is officialdom's bleeding stocks of physical metal required to perpetuate the game. If history is a guide and the fiat game plays out in the same manner as the oil game, officialdom will sweep the gold cupboard bare – right to the last bar – before they say uncle. If this is really what is happening, by the time the game is over, the price of gold will categorically go up geometrically. Count on it.
Equity markets began the week mixed with Japan's Nikkei Index gaining 12.5 ending at 11,778.98. Meanwhile North American markets stumbled with the DOW down 21.10 to 10,536.93, the NASDAQ off 13.52 to 2,164.39 and the S & P off 3 to 1,223. NYMEX crude oil futures added 1.64 to finish the day at 63.95.
The U.S. dollar index closed down .13 to 87.82 with the YEN at 112.07, the EURO at .8091, the GBP at .5597, the CAD at 1.2142, the YUAN at 8.1140 and the RUBLE at 28.40.
In the interest rate complex, benchmark 10-year bonds sold off a few basis points ending the day yielding 4.42% with the 5-year bond closing at 4.28%.
Precious metals closed broadly lower with COMEX gold futures losing 2.30 per ounce to 434.80 while COMEX silver futures lost .14 to close at 6.99 per ounce. The XAU gold bug index dropped .83 - closing at 94.04 while the HUI index lost 2.72 closing at 203.18.
On tap for tomorrow is the all important FOMC [Fed Open Market Committee] meeting where the Fed is widely expected to raise short term interest rates [the Fed Funds Target Rate] .25 basis points to 3.5. Also on tap tomorrow we should see the Bureau of Labor Statistics [BLS] release preliminary Q2 productivity numbers at 8:30 a.m. – expected to be +2.0% vs. a prior +2.9%. Then at 10:00 a.m. the Census Bureau is due to release June wholesale inventories – expected +.2% vs. a prior +.1%.
That's the day that was; have a pleasant evening and an even better tomorrow!
© 2005 Rob Kirby