(Radio Host, Brian Lehrer - (BL) : Hurricane Katrina came along at just the wrong time, for a country already experiencing high oil prices, but as a temporary interruption in some refineries work, it might turn out to be the least of our oil worries, the biggest worry may be the long term relationship between supplies and demand, maybe you heard about the new book “Twilight in the Desert - The Coming Saudi Oil Shock and the World Economy” by Matthew Simmons (MS), it inspired that New York Times magazine cover story this month and has economists and the oil industries buzzing if not always agreeing, let’s talk to the author, “Twilight in the Desert - the Coming Saudi Oil Shock” is published by Wiley, Matthew Simmons is an economist who advices energy companies on merger and acquisition, Mister Simmons, thanks so much for coming on, welcome to WNYC.
(MS) : I’m glad to be on, I’m actually an investment banker, not an economist.
(BL): Ok, forgive me.
(MS) : I don’t want to be an economist, and I’m not trying to pretend on something I’m not.
(BL): And I guess, actually, one who advises energy companies, on merger and acquisition, would be an investment banker.
(MS) : I would hope so.
(BL): Let start with some basic figures for our curious listeners, how may barrels of oil does the world consume, a day, and how fast does that has been rising in recent years?
(MS) : Well, that’s a good question, we should average pretty close this year to 85 million barrels a day. What astonishing is that 10 years ago, most energy economists, somewhat smugly, where discussing the fact that it appears the world demand were peaking at about 68 million barrels a day, and might never hit 70. And a decade later, by this winter we should basically see global oil demand creep toward 87 or 88 million barrels a day.
(BL): And how much of that oil is consumed in the United States?
(MS) : We consume about 21.5 million barrels a day at peak in the summer.
(BL): Do you know the purcentage of oil consumed by the U.S. and whether that has been changing much?
(MS) : Well, it actually hasn’t, let see, 21 as a purcentage of 85, it’s 25%, I think, if you went back 40 years ago, we were still 25%.
(BL): So we have 5% of the world population and we consume 25% of the oil (MS: Yes, yes), what is pushing the consumption up so much, I know everybody is going to think right away about S.U.V.'s and computers, is that what it is?
(MS) : It’s not computers, actually oil used to be an important component of making electricity, but that pretty well ended back in the late 70’s when nuclear power came on stream and oil prices was so much higher than coal prices, so that about the only thing we don’t use oil for, 70% of the oil barrels in the United States and ironically also in the world are used for transportation fuel and about 98% of all transportation fuel are created by oil, so it’s cars, and trucks, and buses, and trains, and planes, and boats, if you think about why the United States is where the oil demand grew, we basically have an economy that creates the need for somewhere between 15 and 18 million vehicles a year added to our system. And about 2/3 of the oil that is not used for transportation becomes the feedstock for the petrochemical industries that creates the chemicals industries, that creates the plastics industries, that creates a large portion of the pharmaceutical industries, it’s just amazing how many elements of our economy have an important building block in their creation stemming from a by-product of oil.
(BL): So everything from S.U.V.'s, to medication, to packaging.
(MS) : Yes, large trucks, turned out to be, ironically, the single most energy inefficient thing we have, so many people focused on S.U.V.'s as the culprit, no, no, it’s not S.U.V.'s, it’s actually large trucks that clog up our highway system, moving goods at about somewhere between 3 & 6 miles per gallon.
(BL): Is there a more efficient way to ship?
(MS) : Absolutely, if you basically switch goods to the railroad system versus trucks depending on the length of the travel and the length of your trains you can get an energy efficiency saving between 3 and 10 times.
(BL): So, how much of this oil, for the U.S. and the world comes from Saudi Arabia?
(MS) : Well, about somewhere between 8.5 and 9.5 million barrels a day, it’s actually not all that significant when we’re using 85 million, the significance is, it’s the single largest oil producer on earth, and also it’s the one country that we all assumed over the last 30 years, as far as oil demand grows, Saudi Arabia will always be the swing producer, virtually in all the key models, they all assumed, by then Saudi Arabia will be producing between 20 and 25 or 30 million barrels a day, and until I started doing some serious research two years ago, as to why we believe this, it appeared that no one actually looked at the whole card and said: 'are we sure, it’s going to happen?', I think the likelihood of that is somewhere between 1 and 10% at best.
(BL): And I gather the seed of this book, was planted by what was supposed to be a routine Saudi government tour for people like yourself and the oil industries two years ago, that was supposed to leave you feeling all warm and fuzzy about the Saudi’s oil industries, but didn’t, is that right?
(MS) : Yes, I came away, saying: 'there is something that doesn’t meet the smell test', because I heard, for years, I heard so many people say that the Middle East had inexhaustible oil and basically, we barely explore for oil in the Middle East and what I knew before I went on this trip, was that 5 keys oilfields basically made up 90% of Saudi Arabia oil supplies and they were all excessively old. A I heard these various technical explanations, to what they were doing, I thought: 'if they really have 90 years of proven reserves supplies, why will they be spending so much money?', so I came back and starting reading technical papers and after a summer of reading technical papers about 3 feet thick, I finally realized, I might have actually just done research that no one else has ever done, and it seemed to me the likelihood of them producing the current amount of oil they are now producing, for the next 20, or 30 or 40 years, let alone double it, was exceedingly low.
(BL): Why?
(MS) : Because the fields are all too old, they’re coming to the end of their fabulously high productivity oil flow, and at some point each of these 5 great mainstay fields are going to go in production decline that could actually represent production collapse.
(BL): How do you know that it’s happening, one of the main point in your book, about Saudi Arabia, is that it’s oil industry is owned by the government, which keep secret what ever it may know about whether they are approaching this peak oil breaking point, so what makes you convinced that it is?
(MS) : Well, in the bibliography of the book, are 235 technical papers that were really the mainstay of my research and I would argue that anybody that wants to take the time to download these technical papers, join the society of petroleum engineers, they cost $5 a paper to download, and carefully read them, will basically come to the same conclusion that I came to, is that each one of these fields are exceedingly old, that they are basically being intensively produced and they are coming to the end of their hard productivity oil flow, once the high productivity oil flow is going to decline, they still will have billions of barrels of oil left, but it will start coming out at far far less amount, and the need for far far greater will rise, and it is why the U.S. peaked in 1970 as an oil producer, and it is the North Sea peaked some 6 years ago, it’s why oil field gets old.
(BL): We would like to hear from other people in the industry, with your reactions to this, reactions in term of believing his hypotheses, agreeing with it, has been mixed, you or anyone else. Yourbook has been generating all this debate, among others, in and around the oil industry, and you have some who agree with you, but it turned out, a lot of pretty respected people who disagree with you, for example Daniel Yergin who we had on the show for his scholarly book on the oil industry has written that your book represent about the fifth time the world was about to quote 'run out of oil', and each time the doomsayers turned out to be wrong, why should this time be different or why would so many other experts beginning it wrong in their scepticism about you?
(MS) : First of all, I have to say that I have known Dan for over 20 years and I think Dan is a fabulous historian, I will also say that his energy forecast has been among the worst in the last twenty years, and so, I don’t think that his track records of predicting energy stuff has been nearly as good as his fabulous ability to be a good energy historian.
(BL): But he is just one example I took, because some of our listeners might know his name, for what I read, the majority of people involved in the business disagree with you.
(MS) : Actually, I have to say, that now that the book has been out in about 10 weeks, the commentaries that I have received, both by E-mails and written letters and so forth, is about almost a 1000 people saying it has been a fabulous contribution and about 10 people taking issue with it, so maybe the other 1000 just didn’t have time to respond, what’s also interesting, is that almost all the people who has been vocal skeptics, seem to have one thing in common, they have a consulting client by the name of Saudi Aramco.
(BL): Interesting, let take a phone call, Steve in Brooklyn, you are on WNYC.
(Caller: Steve): I wanted to ask, every time we heard on the news, about how, we have limited refining capacity in the United States, like for instance, the President had said that he may released some of the strategic petroleum reserves and then other people were saying that it wouldn’t really matter because we don’t have the ability to refine it, why do we have such a limited refining capacity and why doesn’t anybody simply add some?
(MS) : Well, that’s a good question, we are out of refining capacity, that's an absolute forgone conclusion, so we might still have to release oil out of the strategic petroleum reserve just to keep the refineries that we have that can operate, operating, we haven’t basically built a new refinery in the United States in 35 years and the handful that were built in the previous 10 years were fairly small refineries, I don’t know why we didn’t do this, but first the refineries business for 35 years was an awful business, terrible margins, so even if you didn’t have environmental restrictions I don’t think anyone want to built a refinery, and most energy economists started believing that we were peaking in oil demand, so we didn’t need anymore refineries.
(Caller: Steve): Well, are there other countries, that have excess capacity?
(MS) : No, no, the world is out of complex refining capacity, the world is basically now out of refineries that are complex enough to take heavier sour oil, which is the majority of the oil we now produced and try turned into light finished products.
(Caller: Steve): So we cannot even outsource this, if we wanted to.
(MS) : No, no, we’re basically out of refining capacity, globally.
(BL): Why is that the case, why wouldn’t the market see the construction of more?
(MS) : Well, again, it goes back to the terrible mistake, that energy economists like Dan Yergin, and again I don’t want to pick on Dan, but I think that the whole fraternity of these guys got this so utterly wrong when they started basically predicting 10 years ago, that oil demand was peaking at less than 70 million barrels a day, and it didn’t, it misbehaved, and that additional 18 million barrels growth that we had, chewed up all of our excess capacity in the world and since we didn’t think the Gulf was going to happen, no one actually started building in advance.
(BL): Speaking of refining capacity by the way, just something from today’s news, President Bush is considering releasing some of the strategic petroleum reserves because of hurricane Katrina, but I heard one commentator say that the problem isn’t the lack of oil, Katrina affected the refineries, so what is really limited by the storm is the ability to process the oil, and there might not even be any buyers if he does release oil from the strategic reserves, do you agree with that ?
(MS) : Yes, I think we don’t have any ideas yet, of the extent of body blow damage that Katrina did, we won’t know until probably tomorrow morning what damage we have done to the Gulf of Mexico to the production platforms and pipelines. Itwas interesting, I just saw on the Dow News Hour, about 20 minutes ago, the governor of Florida, lieutenant governor of Florida was warning motorists not to drive over the Labor Day weekend, because of the likely gasoline shortage.
(BL): Really !
(MS) : Until electricity is restored throughout the Gulf coast, I don’t believe there is any chance of getting the refineries up and running.
(BL): We have to take a break, but when we come back, I want to follow up on that, and ask you more about what you think the implications of the storm will be for Americans on their daily life with respect to oil, people who don’t live down there, and we will talk of course more about the book: “Twilight in the Desert” with author Matthew Simmons.
(break)
(BL): Matthew Simmons, let’s pick up where we left off, just before the break, you were taking about something you read on the Dow Jones wire, indicating the lieutenant governor of Florida, was warning Floridians not to drive over Labor Day weekend, because there could be gasoline shortages as a result of Katrina, if that’s true, do you think that is a regional problem or this is going to spread out nationally, because of potential damages to the refineries?
(MS) : While you were on your break, I just glance to some other E-Mails that I have been sent, and Shell Oil just announced, that they are going to allocation across the United States of their motor gasoline supplies.
(BL): What does that mean?
(MS) : They're going to limit the amount they can ship to each of the service stations.
(BL): So, are we looking at 1973 style gas lines?
(MS) : Probably so.
(BL): Nationwide?
(MS) : Well, again, the problem is, once people start to panic, human nature is to horde, and if motorists, this is what really basically caused our 73 and 79 gas lines, peoples just got in line and tried to top up their tanks, we had an awful lot more supply of gasoline inventories 30 years ago, when we had the two gas lines, than we do today, we went in to the last weekend, with gasoline stock, on a day’s usage basis at so much lower that we ever been before, that basically we were asking for an emergency to happen, and I suspect that Katrina might well be the wake-up call that was inevitable, that is was going to happens sooner or later.
(BL): How well, do you account for this year's price spiking, I think as recently as 6 months ago, we had oil prices that were practically at record low, when adjusted for inflation, didn’t we?
(MS) : Well, the winter of 1999, the oil prices were below $10 a barrel, and almost all the major experts in the oil business thought we were going to $5 and stay there for about a decade, now, I happen to be so outspoken that we will destroy the oil industry with prices that low, and this glut that was so widely being talked about was all a bunch of hype, but why oil prices then roused so much, is that we've basically been skirting on a supply-demand squeeze, for the last 6 years, and every time we got close, some events where sort of bailed us to the system out, but we got closer and closer to the edge, and I think now we’re going finally see what happens when demand exceed supply.
(BL): Now, wasn’t this the position that Dick Cheney had when he was with Halliburton, before he was Vice-President, that he was arguing that oil prices were actually too low, and there wasn’t enough profit for the oil companies to expend refining capacity as a result? And that’s your position now.
(MS) : Yes, and governor Bush when he was running for President, I spend a lot of time helping put together all the most accurate oil statistics and natural gas statistics that were available, to make sure that there was a plan that he could put forward, that basically addressed to the extent that is possible, the energy problem that he inherited the day he became President.
(BL): So, you think he is doing a good job, with respect to oil?
(MS) : I think he must be so frustrated that it was so utterly hard, for this first 5 years in office, to get Americans even vaguely concerned about the energy problem that we have at our door step.
(BL): Of course, there are lot of critics of the President who say they’re frustrated that it has been hard to get him concerned about an energy problem that we’ve had on our door step, that we just depends on place like Saudi Arabia.
(MS): Well, you know, I think what’s interesting, is you can go back over the last 50 years of U.S. history, and it pretty well documents 50 years of continuous energy mistakes we made, with this fabulous belief that we deserve almost free energy for ever, so I actually think, this is a pretty bi-partisan problem we created.
(BL): Are you saying that the recent surge in energy prices, gasoline prices at the pump in particular, before Katrina, is a good thing in a long run?
(MS): Yes, I think so, absolutely, I think that it is absolutely bizarre that Americans started thinking that $60 or $65 for a barrel of oil was outrageous, when in fact it’s 10 cents a cup. One of the problems in the industry is we haven’t come up with the term that- people don’t just really understand what they ever mean, the idea that crude oil is just another commodity, that became sort of a mantra that people kept talking about, in fact the difference between light sweet oil and heavy sour oil is the difference between a Rolls-Royce and a beat-up old jalopy. And to think that we will call 10 cents a cup for oil, expensive, it’s just astonishing, the motor gasoline at $3.20 a gallon, turned out to be 20 cents a cup, and a cup of gasoline sounds pretty trivial, but will actually take you a 1.5 miles in a passenger car in about 2 minutes, and you can have between 4 and 6 people in the same car, try to get a rickshaw or try to get somebody driving by with a horse driven car, and say: 'how about taking me 1.5 miles for 20 cents?'. And after about half of that agony, you will probably pay $5 and feel you were lucky to get transported, because it is easier than walking.
(BL): And Mike in Westchester, you’re on WNYC, hello. (Caller: Mike): About two years ago, you had a segment, it was concerning an article in Discover Magazine called: “Anything into oil”, do you recall that?
(BL): Yes it was a segment about how technology, would allow…, it was also like an alchemy article, right?
(Caller: Mike): They were converting turkey guts and agricultural waste into number 2 light crude oil, and that got me interested, I went and looked up the article and look at the company on-line and there was a lot of plague given to this and it seemed like it was a legitimate industry and since that time, it sort of disappeared off the radar, and I guess what I’m calling about, is your guest seems to know a lot about the oil industry, and I wonder if he can comment about any of this, that or any alternative means of producing energy?
(MS): Yes, I think that we’re going to end up being forced to create a whole new industry in bio-fuel and other things that can actually start to substitute for the light end of the oil barrel, but what is interesting, is that we barely have any understanding about what’re the things that work and what don’t work, it turned out that the one thing that has been the most heavily promoted, corn based ethanol, is an unbelievably bad product to produce, it’s very very energy intensive. When you then mix it in the motor gasoline to get your additive level right, and it ever touches water, it explodes, so what we did in the bio fuel of the earth was actually turn to the wrong thing, so what we need to do, is to go back to some basic research in the bio-fuel that clearly works and you’re going to be forced to doing that, not because it will create a cleaner environment, because we will basically be in world shortage of enough available motor gasoline for the consumers to use.
(BL): Mike, thanks you for your call, but let me go back to the premise of your book, that Saudi Arabia is approaching what you called, peak oil, and there going to be shortage after that one, people were predicting that we were running out of oil in the past, wasn’t that mostly technological fixes that saved us, just better ways of extracting oil from the rock?
(MS): No, no, there are lot of people who believe that, but really basically, what saved us, 35 years ago, in the late 60’s, we discovered the North Sea, we discovered oil on the north slope of Alaska, we discovered oil in Siberia, and those three last grand sources of oil, all of them which now peak, really basically stem the big problems which we would probably would had started to have happen 30 years ago, so what technology did, would basically allow us to pull oil out of the ground far faster, but it also created decline curves that were not possible to think 30 years ago.
(BL): Stephan in Brooklyn, you are on WNYC.
(Caller: Stephan) Thanks for taking the call, Mr. Simmons as an insider of the oil industry, do you have a perspective on whether the oil companies themselves see a peak in a near term and if they do, what are they doing anticipated, are they investing?
(MS): Interestingly, about four weeks ago, Chevron launched an unbelievably extensive advertising campaign, in almost all the major media outlets, two page color ads: “A letter from Dave”, and a lot of people who saw that, thought maybe this the first of the major oil company to acknowledge that we are approaching peak oil, I read in the Asian Wall Street Journal this morning, Dave O’Reilly the chairman of Chevron was giving a talk at a conference in Jakarta today and he basically said that $50 oil is far too high and can’t be sustained, let alone $60 or $70 oil and also he was asked about his reaction to my views on Saudi Arabia, and he said: “Well, I have read Matt’s book and I also read another lengthy report that takes exactly the opposite view”, which I suspect he meant Dan Yergin’s 50 page study, so he said: “I think the answer is probably half way between”, so I don’t think the major oil company actually, anyone of them, see a problem coming, but you know, they never have.
(Caller: Stephan) Thanks very much.
(BL): Thank you for your call, what do you think, if anything, the government is doing, or should be doing, to anticipate this decline in Saudi Arabia capacity to keep up with oil demand?
(MS): First of all, I don’t the government was doing anything about it, because literally, until I published this book, there wasn’t anybody that was even talking about the issue, and what was so interesting is that conventional wisdom became that the Middle East had unlimited amounts of oil and the only thing we had to worry about was geopolitical stability in the Middle East, why we all believed that, I think historians will scratch their heads on, but it became one of these so widely held beliefs that no one ever wondered whether it was true or not.
(BL): So, what should the government be doing?
(MS): I think the governments around the world, need to be preparing the blue print for how we cope for when we clearly exceed sustainable peak oil production, because we have created an economy that literally required an insatiable increase in the demand for oil, and that's not going to be possible.
(BL): What do you think should be in that blue print?
(MS): I think we have to address transportation, because that’s 70% of the oil use, and I think in a 5 to 7 year period of time, do a massive restructuring of how we transport goods, rebuilding our railway system to make them competitive, putting as much goods on the water versus the rail system, which is another stepwise increase. I think, we are going to teach ourselves how to actually live in the village and keep our same job, the idea that large companies need to have 5 or 10,000 people all at the same facility, so we can communicate, 99% of the people don’t even know each other. I think there are some actual adjustments we are going to be forced to do, that aren’t nearly as draconian as some people will think, and we will basically end up with a far less energy intensive society 10 years from now, not because we thought it was a good idea, but because we had to do it, and it will actually probably allow the world to be a better place to live in.
(BL): Estelle in Highland Mills, you are on WNYC.
(Caller: Estelle) Thanks for taking my call, President Carter started a department of energy, back when he was President, put millions of dollars into it, to set up other alternative energies, I know there was one home that did solar panels, and got a discount and credit, windows, if you changed all the windows in the house, you got credit from the energy company, as soon as Reagan got elected, he dismantled that department, now you just made a statement, that no one ever look at that situation in the last 50 years, I think Carter was President within that 50 years.
(BL): Estelle, thank you for the question, Matthew Simmons, what do you think?
(MS): Actually, we still have a department of energy, Reagan did basically, that was one of his wish list to get rid of the department of energy and he actually appointed Dennis from South Carolina, Mr. J.B Edwards to be his first energy secretary, but I think quickly realised that was a non-starter.
(BL): But, I think, she is making a larger point, that there is a liberal approach to the presumption of an eventual oil shortage, which is to conserve more, and there is a conservative approach, which says that’s chicken little thinking and we can grow our way out.
(MS): I’m sort of agnostic, I’m in the middle of thing, we have to do everything on earth to basically try to increase supplies while we do everything on earth to reduce our energy intensity and then get busy on the most major R&D project to create new forms of energy.
(BL): What do you consider the biggest uncertainty in your own theory?
(MS): The timing of when the oil fields are going to decline.
(BL): And what’s the range?
(MS): Between it’s already happened and 5 years from now.
(BL): How do we know that …, I mean why wouldn’t we know if it’s already happened?
(MS): Well, we don’t have any idea how much oil Saudi Arabia is producing today and they adamantly refuse to basically have any sort of independent audited report to how much they produced and where the oil is coming from, the comment in the New York Times Sunday Magazine article: 'we’re like the federal reserve', you can ask the Federal Reserve how much money they have, but you say we want to send someone to count it, they say: 'absolutely not', that basically is a terrible attitude for someone that is the world’s most important supplier of oil, good sound supply chain management that should demand some better visibility and transparency, until we have that we will just someday be caught by an enormous surprise, when it’s clear that they basically passed sustainable peak production.
(BL): Michael, you are on WNYC.
(Caller: Michael) I just have one question, Mr. Simmons, you mentioned that big trucks, the impression I got, they are the most wasteful of the fuel, how do you come to that conclusion?
(MS): The energy intensity of big trucks, the big large semis that are on the road get between 3 and 6 miles per gallon, and S.U.V.’s get somewhere between 16 and 20 miles per gallon.
(Caller: Michael) Ok, but referring back to the big trucks, they get 3 to 6 miles to the gallon, but there’re loaded, they have maybe 20 tons of milk.
(MS): But what’s interesting, if you get the statistics that are fairly readily available, of transferring that same load onto a railroad, depending on the length of the travel …
(Caller: Michael) … Correct me, but rails cannot delivered door to door, so …
(MS): No, no, no, long distance transportation, we’ll still going to have door to door, but shipping goods a 1000 miles on a large truck, this is ironically where Europe is infinitely more wasteful on their energy than the United States.
(Caller: Michael) Ok, I’m quite aware of that, why to use the word wasteful, like you said, after you figured, pound for pound, big trucks are not more wasteful.
(MS): The important issue, is, if we have to figure out a way to get along with less, there’s no question that shipping by rail beat shipping goods on the roads by a big factor and then if we can transfer good from rails onto water based transportation, it’s another stepwise change.
(BL): Thank you for your call, Michael, we have about a minute left, what do you think of the recent energy bill?
(MS): I’m glad we passed it, because at least we got about 100 issues done, that probably won’t make a lot of difference and now we can get busy at addressing the really serious energy problems.
(BL): You described in the book the nature of oil fields, maybe mostly people think of them as thick black oily lakes that we zip the oil out of, with a high tech straw, but you say it’s the wrong analogy, what are oil fields really like?
(MS): Basically oil fields are invaluable hydrocarbons trapped in rock that are often times, between a mile and two miles underneath the earth, if they have fabulous pressure, then we basically can control the flow by a well head valve until the pressure is gone and when the pressure is gone the oil, a lot of oil is still left in the ground but it is very very hard to extract and most of what you extract is water.
(BL): That’s why it’s so hard to get it in, do you have a stake in this, does it benefit you or your company if you’re right or wrong?
(MS): For 35 years we have been an energy investment banking firm, and I guess you can say: am I calling for the demise of the industry we're concentrated in, I think our whole firm had concentrated real hard on trying to provide honest energy advice whether it’s popular or not and let the chips fall where they may.
(BL): It has been fascinating, thank you very very much.
(MS): Thank you very for having me on.
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