Chairman, Simmons & Company International and Author of "Twilight in the Desert
"The Canaries Have Stopped Singing"
Transcription of Audio Interview, August 18, 2007
JIM: There have been a number of issues regarding energy over the last couple of years that are warning us something is afoot. Major oil fields from Ghawar to Burgan to Cantarell have peaked. We’ve also seen various reports coming out from government and even international agencies including the Petroleum Council that say energy could be facing a crisis.
Joining us to discuss that topic on the program this week, it’s my pleasure to have Matt Simmons. Matt is Chairman of Simmons International, and author of Twilight in the Desert.
I want to call this All Of The Canaries Have Stopped Singing. And I want to take the significant events of 2005: the Burgan field; Cantarell; talk about Twilight in the Desert. In 2006: Cantarell � worst case scenario; rising demand in the Middle East and Asia; diminishing supply. And then go all the way to majors failing to replace reserves; turn around at the IEA; government reports. So there’s a message here that the market isn’t apparently getting.
MATT SIMMONS: I would go further and say�I don’t know how closely you followed the remarkable National Petroleum Council study that was supposed to be on peak oil and it turned out to be a study called Facing Hard Energy Truths to 2030. And what they did is basically dump on the concept of peak oil. They kept saying � this was the major oil companies � that they’re fine; that the world has unlimited amount of energy resource endowment. [1:56]
JIM: That was the surprising thing. And even the IEA report which would touch upon things like how it’s going to be harder to find, and they even doubt whether OPEC can produce the kind of production or get the production up there to meet demand. But yet they � everybody sort of dances around the topic.
MATT: Yes, Yeah. And in the meantime they’re scared to death to use this unbelievably pejorative term called peak oil as if it makes them some sort of an odd cultist. [2:23]
JIM It’s amazing, Matt, in all the models that you see they assume, for example, that the Middle East is going to provide the fuel. Yet, if you look at the BP Statistical Review which indicates that, for example, between 95 and the year 2006 consumption was up 63% in India; 85% in China; and I think up 63% in the Middle East.
If the Middle East is unable to increase production, doesn’t the fact that their consumption is going up present a problem to the models when demand is outgrowing supply?
MATT: I don’t think it’s a problem. It basically means you have a busted model. You see there’s a big difference between a problem in your model � and the fact that your growth rate needs to be tweaked by 10% � and a busted model that means the thing didn’t work. [3:14]
JIM: Has anybody thought of re-doing the models?
MATT: Well, they can’t, because all the models that anyone does are basically all, by definition, demand-driven. And once you end up with a demand of 120 million barrels per day then you have to go to work and basically figure out where the supply will come from. And it was basically deemed over the last�ever since we started doing serious modeling which is sort of 35 years ago, it was deemed to be heresy to say: well, there’s no supply. So you just basically make up where you think the supply could come from.
I saw � on was it the Today show or some segment on NBC? � the race for energy in the Arctic now that the Russians have planted a flag under the North Pole. And they casually said 25% of the world’s reserves are in the Arctic. [3:58]
JIM: Where do they get that figure?
MATT: They read it from somebody. I mean it doesn’t make any sense. We haven’t discovered any oil and gas in the Arctic. But if you’re modeling and you’re trying to look, you can’t really say Arizona and Nevada because we’ve proven there isn’t any oil there. So you pick an area we haven’t ever been to because therefore there’s no way to prove that it’s not there. [4:18]
JIM: It’s absolutely amazing. And yet, if you look at the BP Statistical Review, you look at the production of major national oil companies, if you read their earnings reports of an Exxon or a Chevron; or you just take a look at, all right, we consumed this amount of oil last year, how much did we discover in each year? We never discover enough to replace what it is that we consume.
MATT: You know, the problem, Jim, is that you and I like to look at numbers. And too many people that call themselves energy experts basically don’t think there’s really a need to look at numbers because they know the answer. [4:52]
JIM: It kind of reminds me of the old Johnny Carson routine. Remember Karnack?
MATT: Yeah. I have people all the time saying, “the major oil companies know what’s going on, don’t they? And this is just a cover?� And I say, “no. They don’t have a clue what’s going on because I argue with them too often.� If it was a wink and a nod, and saying, “Matt, we know you’re right, but God, it would collapse our share price, or it would panic the world oil markets,� and so forth � but what’s scary is they believe they’re right. Dan Yergin who’s with Cambridge Energy Research Associates I’m positive he thinks he’s a hundred percent right, and that I’m just basically an unbelievable crackpot. [5:24]
JIM: And yet, you know, all they give us, Matt, when it comes to the oil-will-be-there are hypotheticals but with no facts to base it.
MATT: Yeah. But it’s a faith-based exercise.
JIM: I mean that’s dangerous.
MATT: Well, it is dangerous if you think energy is important.
JIM: If you look at this, if you look at all of these events � whether you’re looking at Burgan, Cantarell, and even the condition this country found itself in after the hurricanes in 2005 � some people will say, “well, maybe these are exogenous events. A Katrina and a Rita, how often do we get this?� Or is this really a case of failure to connect the dots?
MATT: In my opinion it’s a classic case of failing to connect the dots. You can go on and on and on. I’ve been preoccupied in the last six months trying to get some better data on the issue I call rust. Well, what do you mean: rust?
Well, the fact of the matter is the refineries in the United States it would appear their core units are basically on average are about 85 years old. And an 85-year old man is old. A refinery that’s 85 years old should have been rebuilt. And I don’t care how many times you come in and do a turn around and replace the valves in a refinery, until you finally tear the boilers down and rebuild them you have an 85-year old refinery. Which is why now refineries are blowing up so often. But they’re always called we had an operational failure at the refinery; a fire broke out. And unfortunately, too often, they say three people died. And these aren’t operational things. This is a system that’s grown beyond its original design life. [6:51]
JIM: You know it’s absolutely amazing, I think the BP Statistical Review talked about a refinery capacity at about 17 � million barrels today; and yet our consumption is 21 million barrels a day. So it’s not just the fact that we’re importing oil, it’s the fact that we have to import the refined products of oil.
MATT: Yeah, we’re basically now up to an average import � between crude and finished products � of about 14 million barrels a day. About two of that we export across our borders. And if we didn’t export it across our borders we’d basically have a revolt in Ontario and Quebec, and we’d have a revolt along the border of Mexico. That’s an integral part of our supply. [7:27]
JIM: As you see it, if you were to look back and connect the dots for our listeners, because so many people (I don’t care if you’re watching a cable channel, or you’re listening to a hearing in Washington) they don’t seem to connect these dots. If you were to connect them where would you begin? And how would this story unfold?
MATT: Well, I guess the first thing I would do is remind the hearing attendees � and that’s probably the best format to make up, because in a hearing you’ve got in theory a lot of people that are intently listening because that’s what they call the hearing for. And I would first of all remind people that we really have a bum road map because we have very poor energy data. And unfortunately, we have tons of poor energy data; and the data is so often in numbers that are basically rounded down to a tenth of a decimal point giving the illusion that it’s good data � and that’s in a very important starting place to remind people how little we know.
If you take all those caveats, there are a few things that are basically profoundly true. The first thing that is profoundly true is that about almost two decades ago, as we entered the last decades of the 20th Century, we had a profound view by most of the energy experts that oil demand had basically peaked and would be unlikely to ever exceed 70 million barrels a day.
And in fact, it took until 1995 before oil demand exceeded 70 million barrels a day. So they were directionally correct for two or three years because the collapse of oil demand in the former Soviet Union was wiping out significant growth every place else.
If you then jump ahead to the most recent forecasts � as of last week by the International Energy Agency for 2008 � we will have basically grown by 22 million barrels a day in oil demand in the last 17 years. And it was all by accident. It wasn’t planned. To have 22 million barrels a day of growth come on an unplanned basis is just astonishing. And since it wasn’t planned we didn’t plan on any more refineries; we didn’t plan on any more tankers; we didn’t plan on any more pipelines.
And in fact, we went through a two decade depression where the price of oil was so low, we kept laying off people, we kept skimping on maintenance, and we kept not recruiting the people. And so now we find ourselves in a box of finally people are starting to realize that the growth even in the United States we’ve grown our oil demand significantly over the last 15 years. And the growth in China and India and the Middle East is just getting started.
And so there is a bona fide need for oil demand to grow from 88 million barrels a day next year, to 100, then 105, then 110, and 120 by, say, 2030. The problem is that use and supply will always have to equal out. And the supply of oil � growth � has petered out; and in fact, crude oil supply peaked in the spring of 2005, and it’s now about a million barrels a day lower than it was at that peak. And I don’t think there are very good odds that we’re going to get back to that 74, so we’re bridging the gap by natural gas liquids and refinery processing gains and inventory liquidation. And that basically can’t last. So we’ve got a global energy train that’s headed right towards a brick wall, or a granite mountain, and there’s no tunnel through the mountain. [10:40]
JIM: I guess a question is: once we hit that brick wall can we fix it? Because we know that to go out and find oil, develop it, process that energy takes time and money. And I guess can it be done? Or is it too late?
MATT: I would think the answer is we’ve run out the clock. And I also think that a probable answer that we won’t ever know until 20 or 30 years from now is that there really isn’t a likely place that we know about that you could actually put an armada of rigs � even if you had them � and hope to basically create another North Sea; or three North Seas. And since the North Sea was the last great frontier where they came on in the late 60s and peaked in 1999 at 6.1 million barrels a day; and is now down to about 3 � million in just seven years � and even if we found another North Sea it doesn’t matter. So we’re headed towards a granite mountain. A brick wall you can crash through, and then you don’t have a brick wall. A granite mountain you basically � the train basically wrecks. [11:38]
JIM: The one thing, as we survey the world today, and you take a look at where the reserves are, who’s producing the oil, the major holders and producers of oil and natural gas are the national oil companies. And I guess there may be a problem here in increasing production because the national oil companies don’t have the same objectives or motives that, let’s say, an international oil company has. An international oil company finds oil and they want to produce it out of the ground as fast as they can; where national oil companies may have political objectives that don’t align with the market.
MATT: Well, I think there’s a more profound beginning of thinking in some of the national oil companies; and you can certainly see this if you look carefully at some of the really sensible dialogue going on in Russia. If you’re a country leader, and your only resource to grow your economy is oil and gas, and you can do one of two things. You can produce as fast as you can and to maximize current revenue knowing that at some point it’s going to go into a steep decline � and the faster that you produce it the steeper the decline is. Or, you take a big breath and start cutting back the rate at which you produce so that it lasts for another 50 to 100 years. That in the 60s was called conservation production practices.
And I think you’re going to see more and more of the national oil companies start to realize that this is the only game in town that they do not have a sustainable economy after oil; that oil is peaking; and they’d rather produce two-thirds of what they’re producing now, and have it last longer and create a lot higher prices, than actually just continue to open their valves until they’re in fast decline. You could argue it’s maybe aligning their long term best interests, but it doesn’t have anything to do with a sense of responsibility that “it’s my job to make sure the market’s well-served.� [13:24]
JIM: You know, even if you look at the Petroleum Council report that states that carbon fuels � whether you’re looking at coal, oil, gas � are going to remain indispensable in meeting our future energy demands. Yet I was reading in the Wall Street Journal last week that states are vetoing clean-coal plants. I’m not sure where this leaves us. I mean if we’re not going to use coal, if we haven’t built a nuclear power plant, and we’re relying on the market does it make a lot of sense to build a bunch of natural gas power plants when production is in decline both in Canada and the US?
MATT: I wouldn’t invest in one. One of the core problems that you really keep raising is that the right hand and the left hand don’t actually know each other. The right hand being demand and the left hand being supply, or vice versa. And the things that influence demand are totally unrelated to things that influence supply. And so right now we basically have two ships sort of passing in the night, except they’re on a collision course. And there really isn’t any way to basically tell demand: “why don’t you slow down for a while until we’re really sure the supply train can be refueled.�
And too many energy economists think, “well, the market’s well-served and the free markets are efficient and so we’ll never have a problem because this is in fact too important an area, it would be too untidy if we had a problem.�
I had a long conversation about two years ago with Claude Mandil, who’s still the head of the International Energy Agency in Paris; and he’s a very nice civil servant and he basically said, “you know, Matt, you really are honestly worried about this oil supply scene, aren’t you?� And I said, “I certainly am, Claude.�
And he says, “I just don’t believe that this is too important,� and that “bad things don’t happen to good people.�
And I said, “Claude, do you have any relatives living in France during World War II.�
And I think he was just incensed that I was being so flippant. But I wasn’t. I was basically just saying the idea that bad things don’t happen to good people just defies history. [15:17]
JIM: This is just absolutely amazing. And yet, if you take that IEA report, they’re talking about finding 3 million barrels of oil just to keep up with depletion. Add in a couple of million barrels of new demand and it’s like wishful thinking. Where does the supply come from? What nation, for example, when you look at one nation after another that’s peaked, where’s it going to come from?
MATT: I’ll tell you what the optimists would tell you. And I think they’re just hallucinating. They’ll tell you that first of all, Canada and Venezuela have unlimited amounts of heavy oil and tar sands. And then they’ll tell you that the Middle East has still barely been explored, and that when push comes to shove the Middle East will basically double their production � because it’s in their best interests. And I’ll say, “have you actually ever basically done any study about the reality of Middle East oil? I have. I spent two-and-a-half years doing the best research I’ve ever tried to do in my life, and it’s a very, very scary story.�
And they say, “well, that’s just your opinion.’ And I walk away saying how in the world could you basically ignore someone � unless you think that they’re making it up � that says I’ve spent two-and-a-half years reading carefully through and analyzing 250 technical papers written by the technicians there and have them say, “well, that’s just your opinion.’ [16:34]
JIM: So facts don’t matter.
MATT: No. It really is ironically almost a sort of faith-based exercise. And I say faith-based exercise because we’ve had some phenomenal wars fought over the last two to three thousand years over two peoples’ different interpretations of the same faith. [16:50]
JIM: This is just absolutely amazing, because even if you go back to the IEA report, once again it’s almost like government statistics in many ways � you have something called demand, you know what that is, and as you point out, one hand doesn’t know what the other is doing, because if you take a look at those projections � I don’t care if you look at the year 2010, 2020, 2030 � you’re talking about, for example, oil growing at 1.6 times, coal 1.4, or gas 1.7. I may have those figures a little bit off.
MATT: You’re in the ball park.
JIM: You have to say to yourself, okay, if we were finding North Seas, North Slopes every year, you could say, “okay, there it is. We’re consuming more but look what it is that we’re finding.� I have absolutely found this astounding because it’s almost like inventory: you know if the goods go out the front door, but you’re not bringing in trucks through the back door to fill the warehouse, you know, somewhere down the line you’re going to run out of merchandise.
MATT: Yes, it’s not very complicated. I’ll tell you what else is interesting is these mind-boggling future projected demand numbers are actually conservative, because embedded in them is basically two or three important concepts. One, that demand in Europe and America grinds to a halt � and that hasn’t happened.
And secondly, you get out to 2030, and even though the world is up to 120 million barrels a day (China is still less than Mexico today on a per capita basis and India is about half of China), they really don’t envision that China and India and Vietnam, let alone the Middle East, actually start into real, bona-fide prosperity. And yet the higher the oil prices go, the more the likelihood that those economies finally turn into being highly prosperous.
We had the mayor of Houston and his wife as house guests this weekend, and Bill White just returned from an interesting delegation he led to Moscow. And he said Moscow today is booming beyond the wildest imagination. It is one-third of the Russian economy. Well, that’s all because of higher oil prices. [18:56]
JIM: As you and I have been talking about this, we’re still looking at oil prices today that are above 70, even though January they could be down in the 40 and 50 range.
MATT: If it weren’t for the subprime jitters it would probably be over 80 today.
JIM: If all the canaries have stopped singing � I guess as you look at this, and how important energy is to all economies � what’s plan B?
MATT: We don’t have a plan B. I’ll tell you several things that we could do that create sort of a very viable semi-plan B. But the problem is no one is doing them yet. And they have to take some sort of coordinated effort. Now, I think there’s an enormous amount of things that we could do to significantly reduce the way we drive. There are enormous amounts of things we could do to significantly reduce the amount of food miles embedded in our whole food distribution system. There’s an enormous amount of things we could do to change the way we transport goods and get things on water versus roads. But all those things basically take coordination, and somebody needs to start doing them, and we’re starting to run out the clock on that. [19:52]
JIM: One of the main uses that everybody’s aware of oil is transportation, so it seems like, for example, conservation on this front can go a long way to help mitigate part of the crisis. But you know, Matt, here in California and San Diego where I live we’re finally building another couple of lanes on the freeway; we’re not building mass transit. If you look in the parking lots of stores you see SUVs, Humvees, you know Suburbans, and that’s what we’re doing here. Nobody seems to get this.
MATT: It’s what we’re doing in Maine, it’s what we’re doing in Texas. I’ll tell you though, Houston, Texas of all cities is basically probably one of the leaders in the world in a bunch of work being done to liberate the workforce � Mayor White’s calling it Flex in the City � and to start to basically encourage companies to give flexible work rule hours, and basically start letting people work where they want to and pay by productivity.
That program could sweep the nation in a 5 year period of time. This is a software issue and a mindset issue. And it’ll eliminate in most places long distance commuting and traffic congestion. So there are some things we could do but the problem is that they’re being hindered by so few people understanding that this isn’t a feel good thing or let’s do this to reduce the carbon footprint, which might or might not be an issue. This is basically a crisis because demand can’t basically grow anymore; where demand can grow as much as it wants but use can’t grow.
And so we’re going to be forced into doing some things that we probably should have been doing anyway; or we’ll go to war. And there is no easier way to go into a vicious war than denying somebody energy, and let the bullies get it first. That’s where neighbors start fighting each other, and states start fighting each other, and cities start fighting each other, and ultimately nations do. And its been a long time since we’ve had basically a global war. And we won’t have another global war because we have too many weapons now that will bring the whole thing to an end. So I think the urgency of this could not be any higher. And yet the complacency among our energy leaders is just astonishing; let alone the complacency of the guy in the street. [21:50]
JIM: It’s amazing, in California it’s been hard to bring diesels into the state and I was talking to a Mercedes dealer and they’re going to start bringing in diesels into California on an experimental basis later this fall. And I was saying, aren’t you getting more requests for your customers for diesel. And he said, “no, just the opposite.� He said the people that come in to the showrooms want the ones with the biggest engines. And I go, “you’ve got to be kidding me?� And he said, “no,� and I go, “why?�
MATT: Yes, the problem is that our environmentalists just can’t stand the word diesel, because diesel was really ugly in the 70s. And for some reason or another they’re too myopic to ever go to Europe or the states that have allowed diesel engines and see these unbelievable turbo diesels.
I happen in Houston to drive a 320D Mercedes and on the open road I get 45 miles per gallon. And it’s a more enjoyable car to drive than the 740 BMW I turned in. So diesel’s the way of the future. But it’s too bad that the manufacturer of these diesel engines didn’t change the name and call it clean technology or something like that. But they stuck with this old antiquated name, and diesel just has a bad name. [23:01]
JIM: And yet we know that � what was it? � last year they reduced the sulfur content on diesel and its cleaner than gasoline.
MATT: Oh yeah, diesel is our best fuel, and diesels have way better fuel to ask our refiner to make when the refiner’s having to deal with heavier, and heavier crude. So there’s just a whole bunch of benefits of diesel. But the environmentalists hate it. Don’t ask me why. It’s just stupidity. So for California to say that we’re going to experiment with diesel � they don’t have to experiment with diesel, just send someone to Europe with a camera. Seventy-five percent of the cars in Europe in the last five or seven years have been these turbo diesels. It’s a better engine. [23:34]
JIM: You know, I’ve been telling friends: buy an economy car now, or a diesel. Because I believe, perhaps by the end of this decade that gas rationing is looking more like a reality in the next few years. In fact, in some parts of the country where we’ve had these refinery shut downs, we’ve already seen where you haven’t been able to get fuel at the gas pump.
MATT: We’ve had a surprising number or regional shortages of gasoline, but they just haven’t ever basically become news stories. And it’s always been reported, “well, the period of time in the late spring that about a third of the gas stations in Colorado had at least parts of their pumps out of gas.�
We still aren’t out of the woods from having a gasoline crisis by the end of the summer. Our stocks are still razor thin. And all we need is a hurricane coming into the Gulf of Mexico and I think the odds go to about 75% that we’ll run out of gas. And since we can’t ration gas anymore because we haven’t printed up coupon books, and the old way we did it with odd-even license plates requires a service-station attendant. All it will take is a panic and motorists in the United States topping up their tanks. And it’ll take about 48 hours before we drain the gas pool and it’ll never be refilled. [24:37]
JIM: You know, I was interviewing an author who traced the chain of gasoline all the way from the gas station all the way back to the point where somebody’s drilling for. And she was at � I think it was� a BP refinery in Los Angeles and they had an emergency takedown. And the manager of the refinery was saying that if they can’t bring it down and put it back on line that would have reduced 25% of the supply of gasoline in the city of Los Angeles. That’s how precarious this is.
MATT: Oh yeah. And you could repeat that story in almost every part of the United States. Right after Katrina happened, the Exxon’s single biggest refinery (which is in Lake Charles which was out of harm’s way for Katrina) had to borrow emergency oil from the Strategic Petroleum Reserve because they were down to 4 hours supply. That’s how close to just-in-time supply the system’s pushed itself because it’s really costly to keep inventories. And the theory is we’re so efficient today that we can borrow it from somebody else. [25:36]
JIM: Just-in-time inventory.
MATT: Yup, with no software to back it up.
JIM: Has anybody in the media looked into this issue in-depth and tried to connect the dots the way you did? I mean has anybody come to you and said, “you know, we see a problem here. Help us to understand it.�
MATT: Oh yeah. I think actually in bits and pieces � the Chicago Tribune has a Pulitzer Prize winning journalist , and I wish I could remember the name off the top of my head, a really first rate guy who basically spent nine months working on a story that ran all week long in the Chicago Tribune and then basically they did a documentary on their cable TV station. They were in our office for probably four or five hours. And the guy had just come from spending 10 days working at a service station outside of Champlain, Illinois.
And I said, “no kidding, you actually worked in a service station.�
“Yeah, basically I just wanted to basically make sure I saw how the logistics worked.� There have been some unbelievable well done documentaries; there have been some unbelievably well done newspaper articles, but they tend to sort of get brushed off by the headline news guys. And they are probably, unfortunately, read by people who have already connected the dots.
I’m coming out to your neck of the woods in October as a guest lecturer at Caltech and then at Scripps the next day. And I never thought in a million years that I would be asked to come to Caltech and the University of California, San Diego to talk about energy. [27:01]
JIM: I want to get back to maybe not plan B but some logical choices here which if you take a look at all the oil that is consumed through transportation, it seems like rail or rebuilding the rail system, the barge system is a more efficient way to move goods. And I think some investors�I mean when you’ve got Warren Buffett buying railroads. I don’t know if he believes in peak oil but he does know that at $100 oil�
MATT: I suspect he understands the concept.
JIM: Yeah, because as he pointed out in this year’s Berkshire Hathaway meeting, he said at a $100 oil it’s more efficient to move goods on rail or by barge.
MATT: I don’t know if I’ve ever used the example of barge versus railroad on your program, but it involves San Diego, so let me just quickly tell you. These are approximate numbers but I had several people in the transportation business � Intermodal Transportation helped me do these � if you envision a container ship coming in to San Diego, which I would guess happens coming from China every three or four minutes.
JIM: Just about.
MATT: On that container ship happens to be 340 cargo units. What do you call them? You put them on either trains or trucks filled with goods that are going to northern New England. So Portland, Maine is your destination. That happens to be about the longest city-to-city transportation route in the United States: San Diego to Portland, Maine. If you have one of three options: keep them on the water; putting them on rail; or keeping them on the road.
It’s basically 340 trucks, and basically if you put the goods in the trucks and then you have a convoy and double crews you can do like the pony express, you could be in Portland Maine in about six days; maybe even five days. But that isn’t how trucks travel. They stop in each town and then they get the goods off, and so basically it would take on average about 25 days before the goods would finally show up in Portland.
If you put them on rail and we had a dedicated rail line, it would get there in about five days or four days and you would save about five times the amount of fuel. But we have so much of our rail system now that is one track, and so most of the time the trains are basically on the sidelines waiting for another train to pass them.
If you put them on barges and the barge business is what they call a six-pack which is three barges wide, six barges long, all chained together and pushed by one 11,500 horsepower tugboat. And you went down the Panama canal � all assuming there was no traffic congestion � and then you hugged our inner coastal water way crossing the canal in Florida and going up the East coast you’d be in Portland, Maine in about 13 days and you’d save 35 times the fuel. 35 times. So that’s the future. [29:33]
JIM: Matt, what would you say right now because we hear all kinds of stories: don’t worry about it; you see CERA reports. But what would you say to those who don’t believe in peak oil to convince them? I mean if you take a look at for example, most of the Middle East fields from Ghawar to Burgan to production in Iran and Iraq and Syria, Yemen, Oman are in decline; and the former Soviet Union is in decline; Canada, conventional oil is in decline; Central and South America is in decline; Mexico onshore; Africa. I’m trying to think what am I missing here.
MATT: You know, my experience has been that you address a group of non-biased people, and I’ll use an experience I had right at the end of the spring at the University of New Hampshire where 600 people show up at their community center. And I would say the reaction I got afterwards (and I just had two professors come up and visit me last week to follow up on some of the things that we discussed), I would think 590 of the 600 people all understood what I was talking about.
Conversely, I’ve had a long series of email debates with a couple of just dogmatic energy economists and I’ll go over all the same figures you told me and they’ll say, “well, that’s just basically your opinion.� And I’ll just say give me a break.
Or they’ll say that’s only because we didn’t drill there. If we started drilling we’d find more oil. And literally I’ll say, “do you have any idea what you’re talking about?� “Yes, I know what I’m talking about.� So it’s almost not even worth having the debate with them because basically it’s a religious debate. [31:08]
JIM: It’s amazing nobody wants to look at the numbers.
I want to move on to something that’s even more important for this country that relates to energy security. If we put ourselves into a position where we import more energy from our next two highest importers, and then we get it from let’s say shaky or unfriendly suppliers. Many suppliers are for example, you go back to the Middle East, are one or two months travel time away from the US; and many of our largest cities � I don’t care if you’re talking about New York or states such as California, Florida or Texas � they are heavily dependent on imports. What kind of security is that?
MATT: We don’t have any energy security. We’re more vulnerable today than Japan was in the early 1970s by a factor of maybe two. So I think this whole term of energy security is now an oxymoron. What we should recognize is that we basically have the highest degree of energy vulnerability. And yet, too often there’ll be a seminar talking about how we improve our energy security. And I chuckle and I say that’s an oxymoron. [32:12]
JIM: And yet, if you do take a look at what was it? The Council on Foreign Relations released a report � what was it? � last November; and they talked about our vulnerability. So at least there are some people out there that are starting to recognize that this is an unsound policy.
MATT: In my opinion they are acknowledging it is probably an agenda item, but not a very critical agenda item. I would argue that today � and I literally mean this morning � Hugo Chavez is more of a risk to the United States of America economy than Fidel Castro ever was, and probably all of Eastern Europe ever was at any time since the cold war started. Maybe he’s as big a risk as Russia was at the height of the cold war. And he hates us, and he knows how easy it would be to cut us off at our knees by just stopping our importing of Venezuelan oil. And it would take days before basically our supplies would dry up. That’s just how heavily dependent we are just on Venezuelan oil. And here’s a guy that acknowledges every day that he hates us. [33:12]
JIM: And don’t we get refined gasoline from Venezuela?
MATT: Oh yes, yes � both heavy crude and refined gasoline. A lot of our Gulf coast refineries � in fact most of our Gulf coast refineries � are really geared up to basically use heavy oil from Venezuela and may include heavy crude from Mexico, both of whom are in decline. One is going to be in steep decline with Cantarell, and the other that owns the oil hates us. [33:36]
JIM: If it was just a problem of finding more oil or finding a more stable supplier, but I mean the problem goes beyond that, and I think it’s getting to a topic that you’re working on called rust. If you take a look at our whole energy infrastructure which is in disrepair and aging and it’s not just the structure itself, but I mean the energy working population is aging; and there aren’t a lot of�I mean who wanted to go to school and become a petroleum geologist in the 90s?
MATT: Well, it goes far deeper than that is that there have been some very professional surveys done in the oil patch towns Louisiana, Texas and places like Casper, Wyoming because they had almost 30 years where almost every family in the oil patch had most people in the family being laid off, [being] on welfare rolls, missing too many Christmases because it’s this 24-7 environment � most of this generation in high school have been instructed by their uncles and fathers and grandparents to stay away from the oil patch: it’s an unhealthy place to work. So even if we went through a clarion call and said that everybody basically become a petroleum engineer, or at least a rig-hand and so forth, nobody would do it. And the fear would be so great that the minute they started doing it they’d be laid off. So we dug our own grave. [34:55]
JIM: Do you think that maybe part of the problem and it’s maybe lack of knowledge, but it’s also I think in this case it gets back to faith: it’s a belief in technology; that somehow there will be some new technology that will either bail us out, find a new source of energy or enable us to extract more of what it is that we have in existing fields. That’s because the optimists will always point out, “hey, look, even though production is in decline, our reserves have gone up because companies have been able to get more out of the existing oil fields.�
MATT: It’s because companies grossly overstated their reserves. That’s a little bit easier to do than�The oil field technology theme is the foundation of which Cambridge Energy Research Associates, you know, based all of their studies the last five years. And my most vocal critics would say if Matt knew about oil field technology he would really basically not be such a pessimist. And my response to that is that our investment banking firm did about 90% of all the important investment banking that created oil field technology; and that is actually my strongest suit. And it took 30 years to develop all of the important oil field technology that we’re using today, and there is nothing significant on the drawing board. [36:05]
JIM: And if there is nothing significant so that brings up the question of alternatives. And I know you’re looking at that. What looks most promising to you from an investment point of view, right now?
MATT: From an opportunity standpoint, which is a little bit different from an immediate investment opportunity, I think that the energy in the ocean is going to end up potentially being an unbelievable home run. But right now, that area is so tiny, there are so few people working on so few projects that it’s where offshore oil and gas was 60 years ago. But if I had to pick one area � and it an area that I have picked and I’m doing a lot of work here in Maine to help organize Ocean Energy Institute and ideally have it be the biggest, best think tank that’s ever been created on the litany of the ways you can create energy out of the ocean water and also using the oceans as a super highway of the 21st Century to have massive energy conservation.
When you get into stuff that you can get into today, there are some limited areas of real potential. For a lot of the money going into biofuels I think is going to end up being wasted money. So I think you’ve got to be pretty cautious when you go�I think what’s happening in wind and solar is very exciting but it will basically have very little to do � it will have nothing to do with addressing our oil problems, because wind and solar are electricity. I think nuclear is going to have a big comeback but we’ve got to get real serious about our limitations of, as we know them today, about high quality uranium. So much of our nuclear fuel now is reprocessed spent weapons grades, so I think that the areas of alternative energy are going to have to be exciting but so far it’s fairly discouraging in my opinion. [37:37]
JIM: Is it going to take much, much higher prices to make all of this technology viable?
MATT: I don’t know that it takes a lot higher prices today, but I think the higher the prices go and the more stability you create that these prices aren’t a one shot thing the more efforts you’re going to get of people saying, “okay, now at least I can afford to do something, versus the fear, that as soon as I get something going � and I know what’s going to happen � prices will collapse. And I’ll go bankrupt.� So that the quicker that we have a realization that it’s highly unlikely that we’ll ever go back to 40 or $50 a barrel oil and we’re headed to triple digit oil prices, and that’s good news not bad news, then the better off we’re going to be. [38:14]
JIM: You know, a lot of the new promising technology seems to be coming from the private sector � a lot of new start up companies. Matt, is that where the solution comes from, or do you think we’re going to have to go beyond that? Is this going to require something in terms of let’s say a manhattan project?
MATT: Well, this Ocean Energy Institute that I’m working to help organize up here, we don’t have any plans of going after any public money. It can all come from the private sector. And I think once it’s up and running there’s going to be � once you develop some really good ideas and you’ve found that they can work there’s going to be a vast amount of grant money available for this stuff. I don’t think we know enough about what we do to launch a manhattan project today. I think you launch a manhattan project when you finally figure out a way to commercialize the atomic bomb. Throwing billions of dollars at something kind of randomly is the easiest way in the world to waste money. [39:03]
JIM: Now, you’re in contact with politicians and it seems like Washington�I don’t know, do they get it, or do they not get it? I mean the hot topic right now with politicians is global warming � something that we may, or may not, need to worry about for another 40 to 50 years; where peak oil could be on our doorstep.
MATT: Or is on our doorstep. I would have to say that there are scores of public servants that are now totally up to snuff about how serious peak oil is. There’s a peak oil caucus now in Congress led by congressman Roscoe Bartlett from Frederick, Maryland � an 18 year veteran, PhD in science, Republican. And his co-chairman is Tom Udall who is Stewart Udall’s son, Congressman from Albuquerque and I think they have an equal number of Republicans and Democrats in the caucus. But I think there’s a lot less energy in the Senate today than there is in the House which is � don’t ask me why.
I think that we’re very fortunate right now in that he’s very quiet in the way he moves, but Secretary of Energy Sam Bodman is an absolutely brilliant guy and I can assure you that he understands what peak oil is all about, and is worried about what we do about it. I’m biased here because I’m very close friends with one of the candidates running for president and I know he knows what’s going on. But I don’t see most of the other candidates on either side having any sort of policies making any sense at all on energy, let alone grasping peak oil. [40:27]
JIM: Yeah, that’s the thing that has surprised me in some of the debates. It’s gotten very little attention in the debates. In fact, in one debate candidates were saying they were against coal, they were against nuclear and they want to go to strictly biofuels. I don’t think that does it.
MATT: Biofuels as we know them today are net energy losers. Corn-based ethanol was just a terrible idea. It came sort of at a time when no one really cared about it and Archer Daniels Midland did a fabulous job of lobbying to get corn subsidies, so the corn farmers loved it. And then they were clever enough to call it green energy, so the environmentalists loved it. There is nothing green about corn-based ethanol. It’s a bad product, very low BTU, it’s very corrosive; and basically, it takes at least as much energy to create it as the energy it provides. Maybe it’s 50% more energy in than the energy you get out when you look at the low BTU of ethanol.
And in the conservation front, CAFE standards is where about 90% of the rhetoric are, which are basically raising the fuel efficiencies of cars and there are two or three problems with that. You know, we’re not quite sure we know how to do it, and the car companies are broke, and it would take 30 years to make any impact. So I said why do we waste so much time talking about that when we should be talking about flexible work rules and eliminating traffic congestion. [41:38]
JIM: I know you’ve said it on this program before, and we won’t know in many ways whether we’ve reached peak oil until we look through the rear view mirror in the future, and found out that it finally arrived. But from your best knowledge, from the facts that you have gathered, you’ve used the analogy: is it knocking on the front door, inside the house, or has it gone outside the back door?
MATT: I think it’s gone outside the back door. I take very seriously this table produced every month by the Department of Energy � the EIA � that shows global crude supply, and it started showing a number about 18 months ago that we had an all time record in May 2005 of 74.2 million barrels of crude supply and we’re now basically more than two years beyond that record and we’re basically a million barrels shy of that. And I just think, when you look around the world, and you see the projects that are coming on and you add them up and you take a nominal guess about decline rates and you say: we’re not going to get back over 74. And I think it will probably take about four or five more years before people finally tip their hat and say, “gosh, isn’t that funny, we actually peaked in May of 2005.�
But what’s interesting is the data is right in front of our noses. People just aren’t looking at it. And to be fair, you have to go to the monthly energy report and go back to page 142 before you see this number. [42:56]
JIM: You know, it’s the fact that people are probably upset about higher prices, even in California we’re over $3. But you know, you can still pull into a gas station and you may not like the price but you’re still getting the gasoline and putting it in the tank. Maybe that’s why they don’t see it. Is it coming from alternatives? Is it biofuels and tar sands that are making up the difference?
MATT: It’s natural gas liquids. The crude oil number includes heavy crude. We basically now have about 12 million barrels a day of natural gas liquids and hydrocarbon processing gains. And I can’t off�about 80, 85% natural gas liquids, which primarily come off all the oil fields, because as you give up the gas cap you create more natural gas liquids. It is not a sustainable, high growth area of supply. And then synthetic crudes and alcohol and so forth, make up about half of one percent. And stock liquidation � we’ve drawn down our stock significantly. That’s the way we basically balance our books today.
Now, in the financial world, you call that a deficit and you can continue doing deficits forever as long as you’re willing to print money. It’s hard to print energy. [44:05]
JIM: As you take a look at all of this � and the average guy in the street just knows that gasoline prices are higher, he can still get it at the gas pump � what would you tell the ordinary citizen to do right now? What could they do to either become: one, more knowledgeable and cognizant of our energy situation; and two, what could they do personally?
MATT: I think the starting place is to realize how unbelievably important the use of modern energy, oil and gas and electricity, is; and two, how ridiculously priced it still is. So you don’t basically fall into a financial funk when the price doubles, because it needs to double or triple. And then basically, talk to your neighbors and congressmen to basically get real about energy. I mean I guess people could basically start negotiating flexible work rules and saying, “look, I’d like to basically get off this kick of having to be at the office 9 to 5, let’s figure out a way to work out a new contract.� That’s a very viable personal thing.
I think people can start paying attention to what kind of food they eat; and pay attention to the benefits of eating local foods. And you know, convince your local food suppliers to do farmers markets around the city. It not only tastes better, but the amount of energy you’re saving is enormous. [45:18]
JIM: Is there anything Matt, that you would recommend people read? Are there places that they could go for information for listeners that would maybe like to do their own research, and perhaps start convincing themselves or becoming more knowledgeable on subject.
MATT: Well, there are quite a number of books that have come out in the last couple of years. Several of them that really do a very good job of simplifying this whole story. Just off the top of my head, Lisa Margonelli Oil on the Brain.
JIM: Yes, excellent book.
MATT: Yes, that’s an excellent book. If you go to www.Amazon.com and google on Twilight in the Desert , which I’m biased about because it’s my book, you’ll see a bunch of other books. I’d actually say at the Simmons company website has a whole bunch of energy data on it. And the fact that we had almost 10 million hits last year, says that there are�I just run into people all the time as I travel around the world who say, “oh, my gosh, I find your website so educational to read.� That’s at least a suggestion too. [46:14]
JIM: Well, Matt, I know you’re on vacation but I want to thank you for joining us on the program here, and enlightening us.
MATT: Well, at least you’re always very good � you do a great job of getting right to the heart of some very important questions.
JIM: Well, as always it’s a pleasure to have you on the program. I want you to enjoy the rest of your vacation. And please come back and talk to us again.
MATT: Great, I’ll come visit when I’m in San Diego this fall.
JIM: I would look forward to that.
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