The Breaking Point
The largest oil terminal in the world, Ras Tanura, is located on the eastern coast of Saudi Arabia, along the Persian Gulf. From Ras Tanura's control tower, you can see the classic totems of oil's dominion -- supertankers coming and going, row upon row of storage tanks and miles and miles of pipes. Ras Tanura, which I visited in June, is the funnel through which nearly 10 percent of the world's daily supply of petroleum flows. Standing in the control tower, you are surrounded by more than 50 million barrels of oil, yet not a drop can be seen.
The oil is there, of course. In a technological sleight of hand, oil can be extracted from the deserts of Arabia, processed to get rid of water and gas, sent through pipelines to a terminal on the gulf, loaded onto a supertanker and shipped to a port thousands of miles away, then run through a refinery and poured into a tanker truck that delivers it to a suburban gas station, where it is pumped into an S.U.V. -- all without anyone's actually glimpsing the stuff. So long as there is enough oil to fuel the global economy, it is not only out of sight but also out of mind, at least for consumers.
I visited Ras Tanura because oil is no longer out of mind, thanks to record prices caused by refinery shortages and surging demand -- most notably in the United States and China -- which has strained the capacity of oil producers and especially Saudi Arabia, the largest exporter of all. Unlike the 1973 crisis, when the embargo by the Arab members of the Organization of Petroleum Exporting Countries created an artificial shortfall, today's shortage, or near-shortage, is real. If demand surges even more, or if a producer goes offline because of unrest or terrorism, there may suddenly not be enough oil to go around.
As Aref al-Ali, my escort from Saudi Aramco, the giant state-owned oil company, pointed out, ''One mistake at Ras Tanura today, and the price of oil will go up.'' This has turned the port into a fortress; its entrances have an array of gates and bomb barriers to prevent terrorists from cutting off the black oxygen that the modern world depends on. Yet the problem is far greater than the brief havoc that could be wrought by a speeding zealot with 50 pounds of TNT in the trunk of his car. Concerns are being voiced by some oil experts that Saudi Arabia and other producers may, in the near future, be unable to meet rising world demand. The producers are not running out of oil, not yet, but their decades-old reservoirs are not as full and geologically spry as they used to be, and they may be incapable of producing, on a daily basis, the increasing volumes of oil that the world requires. ''One thing is clear,'' warns Chevron, the second-largest American oil company, in a series of new advertisements, ''the era of easy oil is over.''
In the past several years, the gap between demand and supply, once considerable, has steadily narrowed, and today is almost negligible. The consequences of an actual shortfall of supply would be immense. If consumption begins to exceed production by even a small amount, the price of a barrel of oil could soar to triple-digit levels. This, in turn, could bring on a global recession, a result of exorbitant prices for transport fuels and for products that rely on petrochemicals -- which is to say, almost every product on the market. The impact on the American way of life would be profound: cars cannot be propelled by roof-borne windmills. The suburban and exurban lifestyles, hinged to two-car families and constant trips to work, school and Wal-Mart, might become unaffordable or, if gas rationing is imposed, impossible. Carpools would be the least imposing of many inconveniences; the cost of home heating would soar -- assuming, of course, that climate-controlled habitats do not become just a fond memory.
But will such a situation really come to pass? That depends on Saudi Arabia. To know the answer, you need to know whether the Saudis, who possess 22 percent of the world's oil reserves, can increase their country's output beyond its current limit of 10.5 million barrels a day, and even beyond the 12.5-million-barrel target it has set for 2009. (World consumption is about 84 million barrels a day.) Saudi Arabia is the sole oil superpower. No other producer possesses reserves close to its 263 billion barrels, which is almost twice as much as the runner-up, Iran, with 133 billion barrels. New fields in other countries are discovered now and then, but they tend to offer only small increments. For example, the much-contested and as-yet-unexploited reserves in the Alaska National Wildlife Refuge are believed to amount to about 10 billion barrels, or just a fraction of what the Saudis possess.
But the truth about Saudi oil is hard to figure out. Oil reservoirs cannot be inventoried like wood in a wilderness: the oil is underground, unseen by geologists and engineers, who can, at best, make highly educated guesses about how much is underfoot and how much can be extracted in the future. And there is a further obstacle: the Saudis will not let outsiders audit their confidential data on reserves and production. Oil is an industry in which not only is the product hidden from sight but so is reliable information about it. And because we do not know when a supply-demand shortfall might arrive, we do not know when to begin preparing for it, so as to soften its impact; the economic blow may come as a sledgehammer from the darkness.
Of course the Saudis do have something to say about this prospect. Before journeying to the kingdom, I went to Washington to hear the Saudi oil minister, Ali al-Naimi, speak at an energy conference in the mammoth Ronald Reagan Building and International Trade Center, not far from the White House. Naimi was the star attraction at a gathering of the American petro-political nexus. Samuel Bodman, the U.S. energy secretary, was on the dais next to him. David O'Reilly, chairman and C.E.O. of Chevron, was waiting in the wings. The moderator was an éminence grise of the oil world, James Schlesinger, a former energy secretary, defense secretary and C.I.A. director.
''I want to assure you here today that Saudi Arabia's reserves are plentiful, and we stand ready to increase output as the market dictates,'' said Naimi, dressed in a gray business suit and speaking with only a slight Arabic accent. He addressed skeptics who contend that Saudi reservoirs cannot be tapped for larger amounts of oil. ''I am quite bullish on technology as the key to our energy future,'' he said. ''Technological innovation will allow us to find and extract more oil around the world.'' He described the task of increasing output as just ''a question of investment'' in new wells and pipelines, and he noted that consuming nations urgently need to build new refineries to process increased supplies of crude. ''There is absolutely no lack of resources worldwide,'' he repeated.
His assurances did not assure. A barrel of oil cost $55 at the time of his speech; less than three months later, the price had jumped by 20 percent. The truth of the matter -- whether the world will really have enough petroleum in the years ahead -- was as well concealed as the millions of barrels of oil I couldn't see at Ras Tanura.
or 31 years, Matthew Simmons has prospered as the head of his own firm, Simmons & Company International, which advises energy companies on mergers and acquisitions. A member of the Council on Foreign Relations, a graduate of the Harvard Business School and an unpaid adviser on energy policy to the 2000 presidential campaign of George W. Bush, he would be a card-carrying member of the global oil nomenclatura, if cards were issued for such things. Yet he is one of the principal reasons the oil world is beginning to ask hard questions of itself.
Two years ago, Simmons went to Saudi Arabia on a government tour for business executives. The group was presented with the usual dog-and-pony show, but instead of being impressed, as most visitors tend to be, with the size and expertise of the Saudi oil industry, Simmons became perplexed. As he recalls in his somewhat heretical new book, ''Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy,'' a senior manager at Aramco told the visitors that ''fuzzy logic'' would be used to estimate the amount of oil that could be recovered. Simmons had never heard of fuzzy logic. What could be fuzzy about an oil reservoir? He suspected that Aramco, despite its promises of endless supplies, might in fact not know how much oil remained to be recovered.
Simmons returned home with an itch to scratch. Saudi Arabia was one of the charter members of OPEC, founded in 1960 in Baghdad to coordinate the policies of oil producers. Like every OPEC country, Saudi Arabia provides only general numbers about its output and reserves; it does not release details about how much oil is extracted from each reservoir and what methods are used to extract that oil, and it does not permit audits by outsiders. The condition of Saudi fields, and those of other OPEC nations, is a closely guarded secret. That's largely because OPEC quotas, which were first imposed in 1983 to limit the output of member countries, were based on overall reserves; the higher an OPEC member's reserves, the higher its quota. It is widely believed that most, if not all, OPEC members exaggerated the sizes of their reserves in order to have the largest possible quota -- and thus the largest possible revenue stream.
In the days of excess supply, bankers like Simmons did not know, or care, about the fudging; whether or not reserves were hyped, there was plenty of oil coming out of the ground. Through the 1970's, 80's and 90's, the capacity of OPEC and non-OPEC countries exceeded demand, and that's why OPEC imposed a quota system -- to keep some product off the market (although many OPEC members, seeking as much revenue as possible, quietly sold more oil than they were supposed to). Until quite recently, the only reason to fear a shortage was if a boycott, war or strike were to halt supplies. Few people imagined a time when supply would dry up because of demand alone. But a steady surge in demand in recent years -- led by China's emergence as a voracious importer of oil -- has changed that.
This demand-driven scarcity has prompted the emergence of a cottage industry of experts who predict an impending crisis that will dwarf anything seen before. Their point is not that we are running out of oil, per se; although as much as half of the world's recoverable reserves are estimated to have been consumed, about a trillion barrels remain underground. Rather, they are concerned with what is called ''capacity'' -- the amount of oil that can be pumped to the surface on a daily basis. These experts -- still a minority in the oil world -- contend that because of the peculiarities of geology and the limits of modern technology, it will soon be impossible for the world's reservoirs to surrender enough oil to meet daily demand.
One of the starkest warnings came in a February report commissioned by the United States Department of Energy's National Energy Technology Laboratory. ''Because oil prices have been relatively high for the past decade, oil companies have conducted extensive exploration over that period, but their results have been disappointing,'' stated the report, assembled by Science Applications International, a research company that works on security and energy issues. ''If recent trends hold, there is little reason to expect that exploration success will dramatically improve in the future. . . . The image is one of a world moving from a long period in which reserves additions were much greater than consumption to an era in which annual additions are falling increasingly short of annual consumption. This is but one of a number of trends that suggest the world is fast approaching the inevitable peaking of conventional world oil production.''
The reference to ''peaking'' is not a haphazard word choice -- ''peaking'' is a term used in oil geology to define the critical point at which reservoirs can no longer produce increasing amounts of oil. (This tends to happen when reservoirs are about half-empty.) ''Peak oil'' is the point at which maximum production is reached; afterward, no matter how many wells are drilled in a country, production begins to decline. Saudi Arabia and other OPEC members may have enough oil to last for generations, but that is no longer the issue. The eventual and painful shift to different sources of energy -- the start of the post-oil age -- does not begin when the last drop of oil is sucked from under the Arabian desert. It begins when producers are unable to continue increasing their output to meet rising demand. Crunch time comes long before the last drop.
''The world has never faced a problem like this,'' the report for the Energy Department concluded. ''Without massive mitigation more than a decade before the fact, the problem will be pervasive and will not be temporary. Previous energy transitions (wood to coal and coal to oil) were gradual and evolutionary; oil peaking will be abrupt and revolutionary.''
Most experts do not share Simmons's concerns about the imminence of peak oil. One of the industry's most prominent consultants, Daniel Yergin, author of a Pulitzer Prize-winning book about petroleum, dismisses the doomsday visions. ''This is not the first time that the world has 'run out of oil,''' he wrote in a recent Washington Post opinion essay. ''It's more like the fifth. Cycles of shortage and surplus characterize the entire history of the oil industry.'' Yergin says that a number of oil projects that are under construction will increase the supply by 20 percent in five years and that technological advances will increase the amount of oil that can be recovered from existing reservoirs. (Typically, with today's technology, only about 40 percent of a reservoir's oil can be pumped to the surface.)
Yergin's bullish view has something in common with the views of the pessimists -- it rests on unknowns. Will the new projects that are under way yield as much oil as their financial backers hope? Will new technologies increase recovery rates as much as he expects? These questions are next to impossible to answer because coaxing oil out of the ground is an extraordinarily complex undertaking. The popular notion of reservoirs as underground lakes, from which wells extract oil like straws sucking a milkshake from a glass, is incorrect. Oil exists in drops between and inside porous rocks. A new reservoir may contain sufficient pressure to make these drops of oil flow to the surface in a gusher, but after a while -- usually within a few years and often sooner than that -- natural pressure lets up and is no longer sufficient to push oil to the surface. At that point, ''secondary'' recovery efforts are begun, like pumping water or gas into the reservoirs to increase the pressure.
This process is unpredictable; reservoirs are extremely temperamental. If too much oil is extracted too quickly or if the wrong types or amounts of secondary efforts are employed, the amount of oil that can be recovered from a field can be greatly reduced; this is known in the oil world as ''damaging a reservoir.'' A widely cited example is Oman: in 2001, its daily production reached more than 960,000 barrels, but then suddenly declined, despite the use of advanced technologies. Today, Oman produces 785,000 barrels of oil a day. Herman Franssen, a consultant who worked in Oman for a decade, sees that country's experience as a possible lesson in the limits of technology for other producers that try to increase or maintain high levels of output. ''They reached a million barrels a day, and then a few years later production collapsed,'' Franssen said in a phone interview. ''They used all these new technologies, but they haven't been able to stop the decline yet.''
The vague production and reserve data that gets published does not begin to tell the whole story of an oil field's health, production potential or even its size. For a clear-as-possible picture of a country's oil situation, you need to know what is happening in each field -- how many wells it has, how much oil each well is producing, what recovery methods are being used and how long they've been used and the trend line since the field went into production. Data of that sort are typically not released by state-owned companies like Saudi Aramco.
As Matthew Simmons searched for clues to the truth of the Saudi situation, he immersed himself in the minutiae of oil geology. He realized that data about Saudi fields might be found in the files of the Society of Petroleum Engineers. Oil engineers, like most professional groups, have regular conferences at which they discuss papers that delve into the work they do. The papers, which focus on particular wells that highlight a problem or a solution to a problem, are presented and debated at the conferences and published by the S.P.E. -- and then forgotten.
Before Simmons poked around, no one had taken the time to pull together the S.P.E. papers that involved Saudi oil fields and review them en masse. Simmons found more than 200 such papers and studied them carefully. Although the papers cover only a portion of the kingdom's wells and date back, in some cases, several decades, they constitute perhaps the best public data about the condition and prospects of Saudi reservoirs.
Ghawar is the treasure of the Saudi treasure chest. It is the largest oil field in the world and has produced, in the past 50 years, about 55 billion barrels of oil, which amounts to more than half of Saudi production in that period. The field currently produces more than five million barrels a day, which is about half of the kingdom's output. If Ghawar is facing problems, then so is Saudi Arabia and, indeed, the entire world.
Simmons found that the Saudis are using increasingly large amounts of water to force oil out of Ghawar. Most of the wells are concentrated in the northern portion of the 174-mile-long field. That might seem like good news -- when the north runs low, the Saudis need only to drill wells in the south. But in fact it is bad news, Simmons concluded, because the southern portions of Ghawar are geologically more difficult to draw oil from. ''Someday (and perhaps that day will be soon), the remarkably high well flow rates at Ghawar's northern end will fade, as reservoir pressures finally plummet,'' Simmons writes in his book. ''Then, Saudi Arabian oil output will clearly have peaked. The death of this great king'' -- meaning Ghawar -- ''leaves no field of vaguely comparable stature in the line of succession. Twilight at Ghawar is fast approaching.'' He goes on: ''The geological phenomena and natural driving forces that created the Saudi oil miracle are conspiring now in normal and predictable ways to bring it to its conclusion, in a time frame potentially far shorter than officialdom would have us believe.'' Simmons concludes, ''Saudi Arabia clearly seems to be nearing or at its peak output and cannot materially grow its oil production.''
Saudi officials belittle Simmons's work. Nansen Saleri, a senior Aramco official, has described Simmons as a banker ''trying to come across as a scientist.'' In a speech last year, Saleri wryly said, ''I can read 200 papers on neurology, but you wouldn't want me to operate on your relatives.'' I caught up with Simmons in June, during a trip he made to Manhattan to talk with a group of oil-shipping executives. The impression he gives is of an enthusiastic inventor sharing a discovery that took him by surprise. He has a certain wide-eyed wonder in his regard, as if a bit of mystery can be found in everything that catches his eye. And he has a rumpled aspect -- thinning hair slightly askew, shirt sleeves a fraction too long. Though he delivers a bracing message, his discourse can wander. He is a successful businessman, and it is clear that he did not achieve his position by being a man of impeccable convention. He certainly has not lost sight of the rule that people who shout ''the end is nigh'' do not tend to be favorably reviewed by historians, let alone by their peers. He notes in his book that way back in 1979, The New York Times published an investigative story by Seymour Hersh under the headline ''Saudi Oil Capacity Questioned.'' He knows that in past decades the Cassandras failed to foresee new technologies, like deep-water and horizontal drilling, that provided new sources of oil and raised the amount of oil that can be recovered from reservoirs.
But Simmons says that there are only so many rabbits technology can pull out of its petro-hat. He impishly notes that if the Saudis really wanted to, they could easily prove him wrong. ''If they want to satisfy people, they should issue field-by-field production reports and reserve data and have it audited,'' he told me. ''It would then take anybody less than a week to say, 'Gosh, Matt is totally wrong,' or 'Matt actually might be too optimistic.'''
Simmons has a lot riding on his campaign -- not only his name but also his business, which would not be rewarded if he is proved to be a fool. What, I asked, if the data show that the Saudis will be able to sustain production of not only 12.5 million barrels a day -- their target for 2009 -- but 15 million barrels, which global demand is expected to require of them in the not-too-distant future? ''The odds of them sustaining 12 million barrels a day is very low,'' Simmons replied. ''The odds of them getting to 15 million for 50 years -- there's a better chance of me having Bill Gates's net worth, and I wouldn't bet a dime on that forecast.''
The gathering of executives took place in a restaurant at Chelsea Piers; about 35 men sat around a set of tables as the host introduced Simmons. He rambled a bit but hit his talking points, and the executives listened raptly; at one point, the man on my right broke into a soft whistle, of the sort that means ''Holy cow.''
Simmons didn't let up. ''We're going to look back at history and say $55 a barrel was cheap,'' he said, recalling a TV interview in which he predicted that a barrel might hit triple digits.
He said that the anchor scoffed, in disbelief, ''A hundred dollars?''
Simmons replied, ''I wasn't talking about low triple digits.''
he onset of triple-digit prices might seem a blessing for the Saudis -- they would receive greater amounts of money for their increasingly scarce oil. But one popular misunderstanding about the Saudis -- and about OPEC in general -- is that high prices, no matter how high, are to their benefit.
Although oil costing more than $60 a barrel hasn't caused a global recession, that could still happen: it can take a while for high prices to have their ruinous impact. And the higher above $60 that prices rise, the more likely a recession will become. High oil prices are inflationary; they raise the cost of virtually everything -- from gasoline to jet fuel to plastics and fertilizers -- and that means people buy less and travel less, which means a drop-off in economic activity. So after a brief windfall for producers, oil prices would slide as recession sets in and once-voracious economies slow down, using less oil. Prices have collapsed before, and not so long ago: in 1998, oil fell to $10 a barrel after an untimely increase in OPEC production and a reduction in demand from Asia, which was suffering through a financial crash. Saudi Arabia and the other members of OPEC entered crisis mode back then; adjusted for inflation, oil was at its lowest price since the cartel's creation, threatening to feed unrest among the ranks of jobless citizens in OPEC states.
''The Saudis are very happy with oil at $55 per barrel, but they're also nervous,'' a Western diplomat in Riyadh told me in May, referring to the price that prevailed then. (Like all the diplomats I spoke to, he insisted on speaking anonymously because of the sensitivities of relations with Saudi Arabia.) ''They don't know where this magic line has moved to. Is it now $65? Is it $75? Is it $80? They don't want to find out, because if you did have oil move that far north . . . the chain reaction can come back to a price collapse again.''
High prices can have another unfortunate effect for producers. When crude costs $10 a barrel or even $30 a barrel, alternative fuels are prohibitively expensive. For example, Canada has vast amounts of tar sands that can be rendered into heavy oil, but the cost of doing so is quite high. Yet those tar sands and other alternatives, like bioethanol, hydrogen fuel cells and liquid fuel from natural gas or coal, become economically viable as the going rate for a barrel rises past, say, $40 or more, especially if consuming governments choose to offer their own incentives or subsidies. So even if high prices don't cause a recession, the Saudis risk losing market share to rivals into whose nonfundamentalist hands Americans would much prefer to channel their energy dollars. A concerted push for greater energy conservation in the United States, which consumes one-quarter of the world's oil (mostly to fuel our cars, as gasoline), would hurt producing nations, too. Basically, any significant reduction in the demand for oil would be ruinous for OPEC members, who have little to offer the world but oil; if a substitute can be found, their future is bleak. Another Western diplomat explained the problem facing the Saudis: ''You want to have the price as high as possible without sending the consuming nations into a recession and at the same time not have the price so high that it encourages alternative technologies.''
From the American standpoint, one argument in favor of conservation and a switch to alternative fuels is that by limiting oil imports, the United States and its Western allies would reduce their dependence on a potentially unstable region. (In fact, in an effort to offset the risks of relying on the Saudis, America's top oil suppliers are Canada and Mexico.) In addition, sending less money to Saudi Arabia would mean less money in the hands of a regime that has spent the past few decades doling out huge amounts of its oil revenue to mosques, madrassas and other institutions that have fanned the fires of Islamic radicalism. The oil money has been dispensed not just by the Saudi royal family but by private individuals who benefited from the oil boom -- like Osama bin Laden, whose ample funds, probably eroded now, came from his father, a construction magnate. Without its oil windfall, Saudi Arabia would have had a hard time financing radical Islamists across the globe.
For the Saudis, the political ramifications of reduced demand for its oil would not be negligible. The royal family has amassed vast personal wealth from the country's oil revenues. If, suddenly, Saudis became aware that the royal family had also failed to protect the value of the country's treasured resource, the response could be severe. The mere admission that Saudi reserves are not as impressively inexhaustible as the royal family has claimed could lead to hard questions about why the country, and the world, had been misled. With the death earlier this month of the long-ailing King Fahd, the royal family is undergoing another period of scrutiny; the new king, Abdullah, is in his 80's, and the crown prince, his half-brother Sultan, is in his 70's, so the issue of generational change remains to be settled. As long as the country is swimming in petro-dollars -- even as it is paying off debt accrued during its lean years -- everyone is relatively happy, but that can change. One diplomat I spoke to recalled a comment from Sheik Ahmed Zaki Yamani, the larger-than-life Saudi oil minister during the 1970's: ''The Stone Age didn't end for lack of stone, and the oil age will end long before the world runs out of oil.''
Until now, the Saudis had an excess of production capacity that allowed them, when necessary, to flood the market to drive prices down. They did that in 1990, when the Iraqi invasion of Kuwait eliminated not only Kuwait's supply of oil but also Iraq's. The Saudis functioned, as they always had, as the central bank of oil, releasing supply to the market when it was needed and withdrawing supply to keep prices from going lower than the cartel would have liked. In other words, they controlled not only the price of oil but their own destiny as well.
''That is what the world has called on them to do before -- turn on the taps to produce more and get prices down,'' a senior Western diplomat in Riyadh told me recently. ''Decreasing prices used to keep out alternative fuels. I don't see how they're able to do that anymore. This is a huge change, and it is a big step in the move to whatever is coming next. That's what's really happening.''
Without the ability to flood the markets with oil, the Saudis are resorting to flooding the market with promises; it is a sort of petro-jawboning. That's why Ali al-Naimi, the oil minister, told his Washington audience that Saudi Arabia has embarked on a crash program to raise its capacity to 12.5 million barrels a day by 2009 and even higher in the years after that. Naimi is not unlike a factory manager who needs to promise the moon to his valuable clients, for fear of losing or alarming them. He has no choice. The moment he says anything bracing, the touchy energy markets will probably panic, pushing prices even higher and thereby hastening the onset of recession, a switch to alternative fuels or new conservation efforts -- or all three. Just a few words of honest caution could move the markets; Naimi's speeches are followed nearly as closely in the financial world as those of Alan Greenspan.
I journeyed to Saudi Arabia to interview Naimi and other senior officials, to get as far beyond their prepared remarks as might be possible. Although I was allowed to see Ras Tanura, my interview requests were denied. I was invited to visit Aramco's oil museum in Dhahran, but that is something a Saudi schoolchild can do on a field trip. It was a ''show but don't tell'' policy. I was able to speak about production issues only with Ibrahim al-Muhanna, the oil ministry spokesman, who reluctantly met me over coffee in the lobby of my hotel in Riyadh. He defended Saudi Arabia's refusal to share more data, noting that the Saudis are no different from most oil producers.
''They will not tell you,'' he said. ''Nobody will. And that is not going to change.'' Referring to the fact that Saudi Arabia is often called the central bank of oil, he added: ''If an outsider goes to the Fed and asks, 'How much money do you have?' they will tell you. If you say, 'Can I come and count it?' they will not let you. This applies to oil companies and oil countries.'' I mentioned to Muhanna that many people think his government's ''trust us'' stance is not convincing in light of the cheating that has gone on within OPEC and in the industry as a whole; even Royal Dutch/Shell, a publicly listed oil company that undergoes regular audits, has admitted that it overstated its 2002 reserves by 23 percent.
''There is no reason for any country or company to lie,'' Muhanna replied. ''There is a lot of oil around.'' I didn't need to ask about Simmons and his peak-oil theory; when I met Muhanna at the conference in Washington, he nearly broke off our conversation at the mention of Simmons's name. ''He does not know anything,'' Muhanna said. ''The only thing he has is a big mouth. We should not pay attention to him. Either you believe us or you don't.''
o whom to believe? Before leaving New York for Saudi Arabia, I was advised by several oil experts to try to interview Sadad al-Husseini, who retired last year after serving as Aramco's top executive for exploration and production. I faxed him in Dhahran and received a surprisingly quick reply; he agreed to meet me. A week later, after I arrived in Riyadh, Husseini e-mailed me, asking when I would come to Dhahran; in a follow-up phone call, he offered to pick me up at the airport. He was, it seemed, eager to talk.
It can be argued that in a nation devoted to oil, Husseini knows more about it than anyone else. Born in Syria, Husseini was raised in Saudi Arabia, where his father was a government official whose family took on Saudi citizenship. Husseini earned a Ph.D. in geological sciences from Brown University in 1973 and went to work in Aramco's exploration department, eventually rising to the highest position. Until his retirement last year -- said to have been caused by a top-level dispute, the nature of which is the source of many rumors -- Husseini was a member of the company's board and its management committee. He is one of the most respected and accomplished oilmen in the world.
After meeting me at the cavernous airport that serves Dhahran, he drove me in his luxury sedan to the villa that houses his private office. As we entered, he pointed to an armoire that displayed a dozen or so vials of black liquid. ''These are samples from oil fields I discovered,'' he explained. Upstairs, there were even more vials, and he would have possessed more than that except, as he said, laughing, ''I didn't start collecting early enough.''
We spoke for several hours. The message he delivered was clear: the world is heading for an oil shortage. His warning is quite different from the calming speeches that Naimi and other Saudis, along with senior American officials, deliver on an almost daily basis. Husseini explained that the need to produce more oil is coming from two directions. Most obviously, demand is rising; in recent years, global demand has increased by two million barrels a day. (Current daily consumption, remember, is about 84 million barrels a day.) Less obviously, oil producers deplete their reserves every time they pump out a barrel of oil. This means that merely to maintain their reserve base, they have to replace the oil they extract from declining fields. It's the geological equivalent of running to stay in place. Husseini acknowledged that new fields are coming online, like offshore West Africa and the Caspian basin, but he said that their output isn't big enough to offset this growing need.
''You look at the globe and ask, 'Where are the big increments?' and there's hardly anything but Saudi Arabia,'' he said. ''The kingdom and Ghawar field are not the problem. That misses the whole point. The problem is that you go from 79 million barrels a day in 2002 to 82.5 in 2003 to 84.5 in 2004. You're leaping by two million to three million a year, and if you have to cover declines, that's another four to five million.'' In other words, if demand and depletion patterns continue, every year the world will need to open enough fields or wells to pump an additional six to eight million barrels a day -- at least two million new barrels a day to meet the rising demand and at least four million to compensate for the declining production of existing fields. ''That's like a whole new Saudi Arabia every couple of years,'' Husseini said. ''It can't be done indefinitely. It's not sustainable.''
Husseini speaks patiently, like a teacher who hopes someone is listening. He is in the enviable position of knowing what he talks about while having the freedom to speak openly about it. He did not disclose precise information about Saudi reserves or production -- which remain the equivalent of state secrets -- but he felt free to speak in generalities that were forthright, even when they conflicted with the reassuring statements of current Aramco officials. When I asked why he was willing to be so frank, he said it was because he sees a shortage ahead and wants to do what he can to avert it. I assumed that he would not be particularly distressed if his rivals in the Saudi oil establishment were embarrassed by his frankness.
Although Matthew Simmons says it is unlikely that the Saudis will be able to produce 12.5 million barrels a day or sustain output at that level for a significant period of time, Husseini says the target is realistic; he says that Simmons is wrong to state that Saudi Arabia has reached its peak. But 12.5 million is just an interim marker, as far as consuming nations are concerned, on the way to 15 million barrels a day and beyond -- and that is the point at which Husseini says problems will arise.
At the conference in Washington in May, James Schlesinger, the moderator, conducted a question-and-answer session with Naimi at the conclusion of the minister's speech. One of the first questions involved peak oil: might it be true that Saudi Arabia, which has relied on the same reservoirs, and especially Ghawar, for more than five decades, is nearing the geological limit of its output?
Naimi wouldn't hear of it.
''I can assure you that we haven't peaked,'' he responded. ''If we peaked, we would not be going to 12.5 and we would not be visualizing a 15-million-barrel-per-day production capacity. . . . We can maintain 12.5 or 15 million for the next 30 to 50 years.''
Experts like Husseini are very concerned by the prospect of trying to produce 15 million barrels a day. Even if production can be ramped up that high, geology may not be forgiving. Fields that are overproduced can drop off, in terms of output, quite sharply and suddenly, leaving behind large amounts of oil that cannot be coaxed out with existing technology. This is called trapped oil, because the rocks or sediment around it prevent it from escaping to the surface. Unless new technologies are developed, that oil will never be extracted. In other words, the haste to recover oil can lead to less oil being recovered.
''You could go to 15, but that's when the questions of depletion rate, reservoir management and damaging the fields come into play,'' says Nawaf Obaid, a Saudi oil and security analyst who is regarded as being exceptionally well connected to key Saudi leaders. ''There is an understanding across the board within the kingdom, in the highest spheres, that if you're going to 15, you'll hit 15, but there will be considerable risks . . . of a steep decline curve that Aramco will not be able to do anything about.''
Even if the Saudis are willing to risk damaging their fields, or even if the risk is overstated, Husseini points out a practical problem. To produce and sustain 15 million barrels a day, Saudi Arabia will have to drill a lot more wells and build a lot more pipelines and processing facilities. Currently, the global oil industry suffers a deficit of qualified engineers to oversee such projects and the equipment and the raw materials -- for example, rigs and steel -- to build them. These things cannot be wished from thin air or developed quickly enough to meet the demand.
''If we had two dozen Texas A&M's producing a thousand new engineers a year and the industrial infrastructure in the kingdom, with the drilling rigs and power plants, we would have a better chance, but you cannot put that into place overnight,'' Husseini said. ''Capacity is not just a function of reserves. It is a function of reserves plus know-how plus a commercial economic system that is designed to increase the resource exploitation. For example, in the U.S. you have infrastructure -- there must be tens of thousands of miles of pipelines. If we, in Saudi Arabia, evolve to that level of commercial maturity, we could probably produce a heck of a lot more oil. But to get there is a very tedious, slow process.''
He worries that the rising global demand for oil will lead to the petroleum equivalent of running an engine at ever-increasing speeds without stopping to cool it down or change the oil. Husseini does not want to see the fragile and irreplaceable reservoirs of the Middle East become damaged through wanton overproduction.
''If you are ramping up production so fast and jump from high to higher to highest, and you're not having enough time to do what needs to be done, to understand what needs to be done, then you can damage reservoirs,'' he said. ''Systematic development is not just a matter of money. It's a matter of reservoir dynamics, understanding what's there, analyzing and understanding information. That's where people come in, experience comes in. These are not universally available resources.''
The most worrisome part of the crisis ahead revolves around a set of statistics from the Energy Information Administration, which is part of the U.S. Department of Energy. The E.I.A. forecast in 2004 that by 2020 Saudi Arabia would produce 18.2 million barrels of oil a day, and that by 2025 it would produce 22.5 million barrels a day. Those estimates were unusual, though. They were not based on secret information about Saudi capacity, but on the projected needs of energy consumers. The figures simply assumed that Saudi Arabia would be able to produce whatever the United States needed it to produce. Just last month, the E.I.A. suddenly revised those figures downward -- not because of startling new information about world demand or Saudi supply but because the figures had given so much ammunition to critics. Husseini, for example, described the 2004 forecast as unrealistic.
''That's not how you would manage a national, let alone an international, economy,'' he explained. ''That's the part that is scary. You draw some assumptions and then say, 'O.K., based on these assumptions, let's go forward and consume like hell and burn like hell.''' When I asked whether the kingdom could produce 20 million barrels a day -- about twice what it is producing today from fields that may be past their prime -- Husseini paused for a second or two. It wasn't clear if he was taking a moment to figure out the answer or if he needed a moment to decide if he should utter it. He finally replied with a single word: No.
''It's becoming unrealistic,'' he said. ''The expectations are beyond what is achievable. This is a global problem . . . that is not going to be solved by tinkering with the Saudi industry.''
It would be unfair to blame the Saudis alone for failing to warn of whatever shortages or catastrophes might lie ahead.
In the political and corporate realms of the oil world, there are few incentives to be forthright. Executives of major oil companies have been reluctant to raise alarms; the mere mention of scarce supplies could alienate the governments that hand out lucrative exploration contracts and also send a message to investors that oil companies, though wildly profitable at the moment, have a Malthusian long-term future. Fortunately, that attitude seems to be beginning to change. Chevron's ''easy oil is over'' advertising campaign is an indication that even the boosters of an oil-drenched future are not as bullish as they once were.
Politicians remain in the dark. During the 2004 presidential campaign, which occurred as gas prices were rising to record levels, the debate on energy policy was all but nonexistent. The Bush campaign produced an advertisement that concluded: ''Some people have wacky ideas. Like taxing gasoline more so people drive less. That's John Kerry.'' Although many environmentalists would have been delighted if Kerry had proposed that during the campaign, in fact the ad was referring to a 50-cents-a-gallon tax that Kerry supported 11 years ago as part of a package of measures to reduce the deficit. (The gas tax never made it to a vote in the Senate.) Kerry made no mention of taxing gasoline during the campaign; his proposal for doing something about high gas prices was to pressure OPEC to increase supplies.
Husseini, for one, doesn't buy that approach. ''Everybody is looking at the producers to pull the chestnuts out of the fire, as if it's our job to fix everybody's problems,'' he told me. ''It's not our problem to tell a democratically elected government that you have to do something about your runaway consumers. If your government can't do the job, you can't expect other governments to do it for them.'' Back in the 70's, President Carter called for the moral equivalent of war to reduce our dependence on foreign oil; he was not re-elected. Since then, few politicians have spoken of an energy crisis or suggested that major policy changes are necessary to avert one. The energy bill signed earlier this month by President Bush did not even raise fuel-efficiency standards for passenger cars. When a crisis comes -- whether in a year or 2 or 10 -- it will be all the more painful because we will have done little or nothing to prepare for it.
Frequent reference is made t Matthew Simmon's book "Twilight In the Desert: The Coming Saudi Oil Shock and the World Economy" -a bargain at twice the price. I highly recommend it.
JIM PUPLAVA: Joining me on the program is Matthew Simmons. He’s Chairman and Chief Executive Officer of Simmons & Company International, a Houston-based investment bank that specializes in the energy industry. Mr. Simmons serves on the boards of Brown-Forman Corporation, The Atlantic Council of The United States, he’s also a member of the National Petroleum Council and The Council of Foreign Relations. He has an MBA from Harvard University. And he’s here to discuss his new book Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy.
Matt, I want to start out the discussion from the back of your book in Appendix B. Several years ago you did a study of the world’s major oil fields. What did you find?
MATTHEW SIMMONS: It was really an incredible exercise of trying to collect the data no one had ever actually thought of doing before, and that’s, what are the top oil fields in the world – field by field. And the background for me doing this is that I’ve participated 2 years in a row in an energy supply workshop, conducted by the energy analysts of the CIA in Washington, where they got about 10 of the best oil experts together, and we’d spend a day doing a discussion of all the key countries, and how much oil capacity they had in place over the course of the coming 3 years. I sat there listening aghast at all of these experts with their laptops that kept looking at their supply models, and it’s how China will be producing 3,217,000 barrels/day this year, and 3,281,000 barrels/day. And I basically said: “how do you all even know that. What are the 3 or 4 top fields in China?” And no one had any answers.
So I decided it would be interesting and educational to see if you could actually put together a list of the top 20 oil fields by name. And I thought somebody must have done this before, and the more I dug the more I realized that no one ever had. So I basically decided – arbitrarily – 100,000 barrels per day [bpd] production was my cutoff of what constituted a giant oil field and all Fall of 2000, I believe this was, I basically took data from various areas and kept trying to hone in on the total list, and I decided once I got it done, I would circulate it widely to the 4 or 5 or 6 hundred people who really ought to know the areas a lot better, and that would flush out the real data. What I came up with was finding that there are about 120 oil fields in the world that still produced over 100,000 bpd, and that they collectively were 49% of the world’s oil supply. What I also found is that the top 14 fields that still produce over 500,000 bpd each, were 20% of the world’s oil supply, and on average they were 53 years old. The next thing I found was that in the Middle East you had basically, somewhere between 3-5 oil fields in each of the major Middle East oil producers that made up about 90% of their supply – and until I did that I had just assumed the Middle East had hundreds of oil fields – and all these oil fields were old. And then what I found was – because we made it clear that anyone who wanted a copy could get one, but the caveat was that if you have any better information, let me know – I probably shipped over a thousand of these copies out to people and I had about 5 responses of “here’s a field you missed, here’s a field you misspelled or here’s a field you said it was producing X, and I believe it’s probably producing Y.” Only about 5 responses, out of over a thousand people who got this. What I got from hundreds of people was “this is amazing, I’ve never thought about this before.” And these aren’t just sort of random people, these are people that are all passionate energy analysts. So that gave me the background, when I finally had my only trip I’ve ever taken to Saudi Arabia. I knew ahead of time that they had these 5 key fields that must still be producing 90% of their oil, and it was that knowledge and data that allowed me to just peer into presentations we were having, so that I came away saying, “you know I really wonder whether in fact we’re sitting on an illusion that Saudia Arabia has all this vast amount of producible oil.” And I also then had an idea of what issues I should start trying to research, and within months I had discovered this phenomenal database of technical papers at the Society of Petroleum Engineers, that I spent all Summer, two years ago in Maine, plowing through, and it was at the end of that exercise that I decided I was going to write a book. [5:24]
JIM: It’s incredible, because every energy supply model starts with the assumption that Saudi oil is plentiful. It’s inexpensive to produce and supply can expand to meet demand. I mean, whether you’re looking at the IEA or the USGS, that’s not necessarily the case.
MATT: Yes. What’s interesting is that we’ve based all of this assumption on no data. [5:46]
JIM: That is amazing!
MATT: I mean, it would be like someone assuming General Electric could basically grow by 30% per annum, and that by 20 years from now they’d have a company that was bigger than the economy of the United States, because they needed to do that to support their stock price, and no one ever saying, “Wait a sec, how could a single company ever grow beyond the economy of the United States.” But this is far more important in the unforeseen consequences: that we’ve effectively built a world economy on the illusion that Middle East oil would last forever at inexpensive cost. [6:22]
JIM: You know last year, Matt, the Saudi Oil Minister announced they could expand their oil reserves by 77% to 461 billion barrels. Is that a political statement, because their doesn’t seem to be – from looking at your data in terms of how their reserves were compiled – where do they get that number?
MATT: They assume it! What’s really astonishing is that I had a suspicion 2 years ago, when I’d finished going through 150 of these technical papers, that I might well have done an exercise no one in the world had ever done before, and that’s piece together these individual study-area problems and put them together until you had basically done a forensic pathology of their oil system. And I wondered whether anyone in Saudi Arabia had ever actually done the same amount of research. And now it turns out, I was apparently the first person in the world to ever actually challenge the assumptions of the unlimited amount of their oil supplies. And it hit a nerve I would never ever have expected because I wasn’t a household name – I think I am today in Saudi Arabia – I was just an investment banker in Houston. It was the same sort of reaction if someone went to the Vatican and said, “I hate to tell you all this, but there really isn’t a God, and there isn’t a Pope.” And out of that came a massive public relations campaign by the senior management of Saudi Aramco, the state oil company, and the Petroleum Ministry that effectively has said, “we can produce 10 million or 12 million or 15 million barrels a day for 50 to 100 years. Our 260 billion barrels of proven reserves, there’s this conservative number we can easily add another 200 billion, and we can still add another 200 billion we have yet to discover”. And I actually think that they believe that, which is far more dangerous than “it’s just a political statement.” [8:18]
JIM: Now the thesis of your book is Saudi production is very near its peak...
MATT: I decided that this book was going to be so controversial that I really tried my darnedest to avoid a bunch of very specific conclusions that people could shoot holes in them: “how would you know that?” But I’ve had enough time now to reflect on everything I wrote about, and also feedback from lots of technical people that said, “you know what, what you triggered in the memory of what was going on in the 70s”, and etc, etc. I think it’s highly likely that they’ve actually exceeded sustainable peak production already. And I think at the current rates they are producing these old fields, each of the fields risks entering into a rapid production collapse.[9:03]
JIM: If this is indeed the case then, by assumption, we have to assume global peak is at hand then.
MATT: Absolutely. Once it’s clear that Saudi Arabia cannot sustain increases in its production on a sustained basis, then in my opinion, with a certainty of 99.9% the world has actually passed sustainable peak production. Because one of the reasons all of these supply models always have Saudi Arabia producing 25 million bpd by 2025 is that there isn’t another country on earth that has the potential to raise their production more than 1 or 2 million bpd at best. [9:41]
JIM: Why is it, do you think, there’s only been 2 groups that have been concerned with this: you have the oil company executives, because they are obviously looking around the globe and they’re not finding major elephants on a yearly basis; and then we’ve had environmentalists who have also been concerned about this. Those have been the main 2 groups, but aside from that, you have a third group, the economists, who basically just say, “as the prices of oil goes up the production goes up to meet it.”
MATT: Yes, and they say it with a passion and a vengeance. What I’ve also found so interesting is that the concept of peak oil which is finally getting some serious traction as a discussion item gets scorned by economists – energy economists. What they hear is the world is running out of oil, they don’t understand the concept of peak oil. And I continue to remind people that the difference between oil supply peaking and running out of oil is as profound as someone saying, “I’m getting a little bit hungry,” and someone saying, “I have about 2 more minutes to live before I starve to death.” And we will never run out of oil, in our lifetime, our children’s lifetime, our grandchildren’s lifetime. But by 2030 we could easily have a world that can only produce 10 or 15 or 20 million barrels per day, and the shortfall from what we thought we were going to produce is only a modest 100 million barrels per day. So this is really a major, major, major global issue. [11:10]
JIM: It’s not only a major issue, but if you look at Wall Street, the day you and I are speaking, oil is over $62/barrel and the standard response is – in fact, one of the questions given to one of the analysts this morning is “when is it coming down?”...
MATT: “Why is it so high and when is it coming down?” [11:31]
JIM: You gave an analogy in terms of how cheap oil is at $60/barrel, I wonder if you might share that with our listeners?
MATT: Sure. Because every time I get into a discussion now about the future of oil I always get asked, “well, where will oil prices be?” And my response is, “I don’t have any idea where they’re going to be, other than the fact I think on a secular move, we are still at a very, very cheap level of oil prices.” And that immediately gets a response, “Cheap?! Oil’s at $60 a barrel!” And one of the things I’ve observed is that people don’t really understand what a barrel is. They can kind of conceive what a barrel might look like. But when you put it in terms people can understand, I say “what $60 per barrel is, is 18 cents a pint.”
And then I get a response, “How did you do that?!”
“Well, you divide 60 by 42, to get a gallon of oil, and you divide a gallon by 8 to get a pint of oil, and that just happens to be 18 cents a pint.”
And then they say, “ Oh, that’s really cheap, isn’t it?”
And obviously it’s cheap. I don’t know what’s the next cheapest liquid we actually sell in any bulk is, that has any value. I suspect there are places around the United States where municipal water costs more than 18 cents a pint. And yet for some reason, we created a society that was built on a belief that oil prices in a normal range were some place in the $15-20 level. It turns out $15/barrel, which is the average price of oil – in 2004 dollars – it sold for, for the last 140 years, is less than 4 cents a pint. So we’ve basically used up the vast majority of the world’s high flow rate, high quality sweet oil at prices that were effectively so cheap, you basically couldn’t sustain an industry. And now we’re left with lots of oil. But it’s heavy, gunky, dirty, sour, contaminated with various things oil, it doesn’t come out of the ground very fast, is very energy intensive to get out of the ground and we’re going to pay a fortune for it. [13:42]
JIM: Why don’t you take us back, as we talk about this peak in oil in Saudi Arabia, to when oil was first discovered. Give us a little bit of background about Saudi Arabia, because up until 1930 there really wasn’t an issue in Saudi Arabia. How did they emerge as a global energy power?
MATT: First of all, just a real quick history of oil because I think it’s actually interesting to put into present context.
A year before the Civil War, Col. Drake effectively was the ‘Thomas Edison’ of discovering oil in Western Pennsylvania. But the oil fields there were tiny oil fields, and the stuff didn’t come out of the ground very fast, but it was fabulously high quality. You know, Quaker State motor gasoline oil quality. So simple refining processes could make it usable. And over the course of the next 40 years oil was effectively a substitute for kerosene and coal gas as a way to create lamp oil. And then in 1901, we discovered the great Spindletop field in Beaumont, Texas, and that was the world’s first giant oil field that could produce vast amounts of oil; and after that and a few years later we discovered the Golden Alley in Mexico; we discovered oil in Iran. And by 1930 we had a concept – we had just discovered the great oil field in Kirkuk, in Iraq, ironically about 2700 yards from the burning oil fires that were mentioned in the Bible, in the time of Nebuchadnezzar – and in 1934 Abdul Azziz, who had just finally consolidated the kingdom that became known in 32 as Saudi Arabia, who’s the father of King Fahd who was buried yesterday, granted a concession to Standard Oil Company of California to begin looking for oil in Saudi Arabia. And in 1938, when the world economy was so fragile that we were still closing banks, they were just about to shut down their efforts after a very disappointing series of dry holes, when they hit discovery of Prosperity Well #7, and ushered in the oil kingdom of Saudi Arabia. By 1970, Saudi Arabia was producing 3 million bpd; by 1974 they were producing 8 million bpd; by 1980 – because of Iran collapsing and then the Iran-Iraq war – they hit their peak at 10 ½ million bpd and by then they were terrified they were producing oil at rates that couldn’t be sustained, and were going to destroy these great fields, because it was coming from 4-5 fields. And yesterday was not just the day we buried King Fahd. Yesterday was also, ironically, the 15th anniversary of when Saddam Hussein invaded Kuwait. Did you all remember that? [16:38]
JIM: Sure do.
MATT: And it was that event that actually started to profoundly change the world, because within a week of that invasion – and the Republican Guard poised on the Saudi Arabian border to hit the South and to do the same thing to Saudi Arabia they’d just done to Kuwait – President Bush and his chief advisors decided to embargo Iraq and Kuwait, and they convinced King Fahd to station troops in Saudi Arabia to prevent the Republican Guard from taking over Saudi Arabia. Because had that happened, by the end of August, 15 years ago, Saddam Hussein would have controlled 15 million barrels of oil per day and would have been the emperor of the world. So this was really a profound series of changes. And then everyone in the world had to ramp their oil supplies up. And Saudi Arabia took great pride, as they saw, in 90 days, they could go from five back to eight million bpd, and stabilize the world oil markets to keep oil prices from going to $100.
And out of that decision came an accidental move back into a concept that they had no rate-sensitive production, and that is when all of the water problems that were starting to worry them so profoundly in the 70s started coming back. And they’ve effectively spent the last 15 years trying to fight these problems, and figure out how to get out of this box, while they were pretending to each other that their oil fields had no rate-sensitivity of how they were being produced, and what they did for 70 years they could do for another 70 years. So I thought the irony of burying the King yesterday, on the 15th anniversary of Saddam’s move into Kuwait happening at the same time, was really unbelievable. [18:17]
JIM: As we take a look at some of the facts as we know them today, the Arabian Peninsula – as you pointed out in your book – has been very heavily explored, contrary to opinions otherwise.
MATT: Using the very best technology known to man. [18:32]
JIM: We’ve got 5 fields that are super giants that account for 90% of the oil. Of these fields, many of them have been in production 50 years or more, and there’s been very few fields discovered since 1980 that produce more than 250-300,000 bpd.
MATT: In fact, the record actually is, that in 1967 they discovered the last great field that has ever been discovered in Saudi Arabia. And the only field of any significance since then, has been in 1989 the Hawtah field – the Hawtah field and 5 satellite fields – peaked at 200,000 bpd. Now, some of the people that are skeptical of my views say, “how could you say 200,000 bpd isn’t a great oil field?” Well, 200,000 bpd in Saudi Arabia, as the best you’ve done in 35 years, is a very scary number.[19:23]
JIM: Why don’t you give us a bit of a history, because I don’t think most people realize we may be driving around here in Southern California with a gallon of gasoline in our tank that came from one of these fields.
MATT: Of the 10-11 million bpd that we import into the United States, 1.5 of that is Saudi Arabian oil, so statistically there is probably a pretty good likelihood that 1 out of 10 motorists in California have Saudi Arabian oil in their tank. [19:52]
JIM: Matt, give us a bit of a history, because most people know oil wells don’t last forever, but some of these in Saudi Arabia have been around for 50 years. I like the analogy that you use of the chess board and I wonder if we might start with that analogy, as we get to the Saudi fields.
MATT: Yes. The French Petroleum Institute did a major study a couple of decades ago, about the distribution of oil fields by basin. And what they found was that what seems to happen with phenomenal regularity is that within about 5-7 years of moving into a new area of prospective hydrocarbon, you tend to find the queen first, which is the second largest field you’re going to find; you then calibrate in on the knowledge of how you found that and within a handful of years you find the king; and then over the next decade, you find there too, the next 8-10 lords. And once you’ve found the royal family, the rest of everything you’ll ever find are basically peons in size.
And if you then say, “how did that work in Saudi Arabia?” In 1940 they basically found Abqaiq which was the best, in reservoir quality and quality of oil, field they’ve ever found, and Abqaiq peaked at about 1.2 million bpd in 1972. And then they had a hiatus during World War II when they really weren’t exploring. So had they not had a hiatus, they would probably have fast-forwarded this 4 years. In 1948 they discovered Ghawar which is the world’s largest oil field. In 1951, Ghawar came on production. In 1951 they discovered Safaniya which is basically the largest offshore oil field ever, and in terms of output was bigger than Abqaiq, but basically 40% of Ghawar. And then over the course of the next 15 years they found the rest of the royal family. And from 1967-2005 they’ve actually found an accumulation of little deposits they’ve never produced, even though they were always worried about too little diversification of supply. But for some reason or other they just couldn’t produce these fields. Now they’re going back and trying to rehabilitate a bunch of fields that were crummy fields in the 60s and 70s, that couldn’t ever sustain much production, and they’re claiming these fields can easily get up to 500,000 bpd and last 30-50 years. There is no technical support that that can be possible. You can’t say it’s impossible, but the fact that these fields couldn’t produce in the 70s gives rise to real caution that basically they’re deluding themselves that through the use of modern oil field technology they will be able to do something no one in the world has been able to do. [22:42]
JIM: In the history of Saudi oil exploration there’s certainly been a great effort, they’ve used great technologies – state-of-the-art technologies – but simply the oil hasn’t been there to the extent they were discovering it in the 40s, 50s and maybe early 60s.
MATT: All the great fields, ironically too, were discovered by eyesight, as opposed to seismic.[23:04]
JIM: Now, if we take a look at Saudi oil production at 3 million at the time that US oil production peaked in 1971 – you know, Matt, as I look at energy over the centuries we’ve been very lucky as a human race: we’ve had wood as a source of energy; that was replaced by coal; then we had oil that replaced coal and gave us our industrial society – but more importantly, as US oil production peaked in 1971 Saudi Arabian oil production was able to take off and take our place. There’s nothing out there!
MATT: With fabulous ease too. Also ironically in the last 3 years of the 1960s, we discovered the last 3 great provinces of brand new oil when we found oil in Alaska in 1967,68; we found oil in Siberia about the same period of time; and we found oil in the North Sea in 1969. And Siberian, Alaskan, and North Sea oil, effectively combined to produce: the North Sea peaked in 1999 at a little over 6 million bpd, it’s already down 25%; Alaskan oil peaked in the 1990s at 2 million bpd it’s now at about 900,000 bpd; Siberian oil peaked at about 9 million bpd and it’s about 5 million bpd. And we haven’t basically found another province since the late 60s. [24:31]
JIM: How are we able to keep production up, because if you take a look at the increase in demand now coming from emerging countries such as China and India, oil production has increased for decades? How are we able to do that with many of these fields going into decline?
MATT: Well, we continue to pull more and more out of the North Sea, and then we found deep water which was a fabulous last shot from the basins we already had shallow water production. And we took the Middle East oil back up to unsustainably high levels of production. So probably, we’re sweeping the cupboard bare. People looked at the way we were able to do this and thought, “wow! this is actually easy,” without realizing what we were actually doing was totally non-sustainable. [25:23]
JIM: If I was to use the analogy to advances in technology, were we just using bigger straws in effect to get the oil out?
MATT: Absolutely. But so many oil experts got giddy, by seeing the return to high flow rates, they started believing that we were actually now finally getting a vastly higher amount more oil out of these fields than we could produce before, and therefore we were headed to an era of unbelievably plentiful oil, at unbelievably low prices. And I’ll tell you, as we speak right now, ironically the same week that Twilight in the Desert began shipping, Cambridge Energy Research Associates, Daniel Yergin, who, I think, a lot of people think is one of the more respected – or maybe most respected – oil analysts on Earth, began producing a report saying effectively – and there was a big editorial piece in the Washington Post this Sunday – that the world, between now and 2010 – which is not very long away – is going to add 16.4 million bpd more oil, and create a massive oil glut, and collapse the price again. Now, I’ve read carefully through Daniel Yergin’s detailed field-by-field bottom-up report, and basically, it is a really flawed piece of analysis in my opinion. But the fact that they obviously believe it’s correct – they’re doing talk shows – shows you the depth of limitation of people that really understand how serious this is. Cambridge Energy Research Associates also, in 2001, were unbelievably pooh-poohing the idea that the United States had now entered a major natural gas crisis. But by 2004 they got the religion. I expect by 2009 they’ll issue a magnificent tome saying, “gosh! it looks like the world is now past sustainable peak oil supply.”
But what’s dangerous is how many of the optimists really believe we won’t ever have any oil problems. I hope I’m actually wrong in my dire predictions, but I hope people actually take them seriously and figure out a way to prepare for them, since if we do that we win either way. [27:24]
JIM: Let’s talk about this, especially the downside of Saudi oil production which is increased to meet some of the demands in this new century. How is it achieved, and then, I’d like you to address the dangers of over production in terms of what they’re doing today?
MATT: What Saudi Aramco effectively pioneered in the 60s was a method of injecting water into the flanks of these highly pressurized reservoirs, so that every time you produced a barrel of water you injected a barrel plus. So you never had reservoir pressure declines. And what they were effectively doing, if you could visualize this on a sort of 3D screen, is that the injected water was basically a giant battering ram, squeezing the oil column up higher and higher, preventing the reservoir pressure from ebbing, and also secondarily, sweeping the oil from the flanks of the field to the center. So the water was basically creating the drive to get the oil out, at very high flow rates, without having to resort to artificial lift. And over the years the amount of water injection has risen to where today – this is again one of those numbers that’s a state secret but you can backend to the fact where, now – to get 8-9 million bpd out of the ground, they’re injecting somewhere between 14 and 18 million barrels of highly salinic water into the oil fields to maintain that rate.
Once the sweep is finished, and they get all of the easily recoverable oil out, the reservoir pressures will collapse just like clockwork – you just don’t know when they’re going to collapse – and once oil pressures collapse, the production of fluids might stay the same, but the vast amounts of fluid will be water as opposed to oil. And then they’ll go into the era of the relentless challenge of pulling oil that is still there out of the ground through artificial lift, just like the United States had to do once we peaked. And the majority of what they will be lifting out of the well bores will be water, not oil. And that statement is just as basic as a doctor saying, “you know, these 70 year old people, twenty years from now, will be a lot older, and most of them will be way, way slower in their physical movements and the quality of life will have diminished, and the cost of life will have risen, but we’ll still have them alive.” [29:58]
JIM: Talking about the dangers of over production, there was this Senate hearing in 1974 with various Aramco executives, later Seymour Hirsch at the Washington Times talked about the significance of this. I wonder if you might explain the smoking gun?
MATT: It is a really interesting footnote of history, that almost nobody knows anything about. And I actually had a little bit of understanding, and the book was already at John Wiley & Sons as a finished manuscript, when I finally got the reference points to go back and find that these Senate hearings, and all that’s been in papers, has been residing in the Library of Congress for the last 35 years.
What happened was right at the height of the 73 oil crisis, in early January 74 – when we had gas lines, people were just panicked – Jack Anderson, one of the leading muckrakers of the day published in the Washington Post three back to back articles, saying that he was in possession of secret papers from someone within the Aramco companies, that they had made the conscious decision to convince Saudi Arabia that the fields could be produced at any rate, so that they could get every saleable drop of oil out; and at the rates they were now producing, they had such massive problems that they were going to have to throttle back their oil, and the embargo let them off the hook.
And the Washington Post articles caused enough of a sensation in Washington that the Senate Committee on Foreign Relations, who had a subcommittee they had just recently created, called the Subcommittee on Multinational Corporations and Their Influence on US Foreign Policy, decided to ask Jack Anderson to come in on closed hearings and describe what this was all about. So, on January 28th 1974, the hearings commenced and Jack Anderson asked to be sworn in, and then he begins his hearings by saying, “I want to tell you all that I asked to be sworn in so that everything I tell you is under oath, because Aramco is already saying I am just making this stuff up.” He tells the stunning story about the whistleblowers who have given these papers because they think the Aramco companies are now operating against the best interests of the United States of America. And because he won’t disclose who his sources are - déjà vu the sort of current reporters’ confidentiality - they decide to go ahead – they being five key senators: Frank Church, Ed Muskie, Stuart Symington, Chuck Percy, and Clifford Case – and subpoena all four of the Aramco companies – this is Exxon, Chevron, Texaco, and Mobil – and out of that come a sheaf of papers and memos, that if you know how to properly analyze this stuff effectively said this was a true story. But because the hearings go on – there are 4 hearings, the last hearings on June 20th, where they have 7 or 8 of the senior executives of the oil companies come in. And only one guy, Bill Messick [phon.] who’s the chief reservoir engineer at Chevron, who under oath says: “absolutely we were over producing these fields. We could never have sustained these rates. And yes, we were damaging the reservoirs.”
The rest all disagree with him, “No, there weren’t any problems. No, this is unbelievable. No, we didn’t worry about getting nationalized.”
And what’s amazing when you read through the memos these people were sending to each other, they either didn’t understand what they were writing, or they were fibbing to the United States Senate. Then, in 1979, an event happened. And this is where it gets into more hearsay, because of the fact that the only documentation out of the 1979 subpoenas is a very odd staff report from the same Senate subcommittee, that’s 33 pages long, that effectively documents that Aramco has just lowered their production targets from what used to be 20-25 million bpd, then it was 16 million bpd, then it was 12 million bpd, because they’ve lopped off 70 billion barrels of proven reserves as unrealistic. They said, “if we produce 9.8 million bpd for the next decade and a half, in the early 90s, North Ghawar, Abqaiq and Berri, the finest oil Saudi Arabia has ever produced, it’s 75% of the oil production, will go into irreversible decline.” And what’s interesting is that this 33 page staff report is very garbled. You have to really almost take notes and piece this stuff together. The subpoenaed papers they got from these were basically, for some reason or other, deemed to be so sensitive they were put under lock and seal for a 50 year period of time. And there was a debate about what material to disclose, and so they decided to produce this staff report and dummy it down. Had that gotten the attention it deserved, the world would have known 30 years ago, or 35 years ago, that the Middle East didn’t have unlimited amounts of oil, and we would have had a totally different long term energy plan in place today. And instead, we operated for the next three decades under the illusion that was intentionally created in the early 70s, that the Saudi Arabian oil fields would last forever.[35:16]
JIM: Speaking of that period of time, you have a different take on the oil crisis in 1974. You believe that the brief oil embargo was not the problem. It was the lack of spare oil capacity while demand was a runaway freight train between, let’s say, 69 and 78, where we went from demand of 45 million bpd to 65 million bpd – that’s a 44% increase.
MATT: Yes. We ran out of capacity, and when we started creating shortages then motorists in particular hoarded, and that creates a run on the bank – and if you ever have a run on the bank, banks can’t keep money or cash on hand to equal the deposits they hold – and so the shortages begat more shortages, and that’s what created the 73 crisis and the 79 crisis. [36:09]
JIM: Isn’t that where we are, in effect, today. Demand has gone up once again, it has increased, even since the beginning of the new century. There aren’t any notable new sources of supply.
MATT: Let me give you some really interesting déjà vu numbers that I pulled out earlier this morning while I was thinking about the irony of the 15th anniversary of Kuwait’s invasion by Iraq. I had just produced a paper called the Coming Domestic Oil Embargo – and it got enough notoriety that Forbes magazine was in preparation for doing a major article that came out a week after Saddam’s invasion, called the Coming Domestic Oil Embargo, and they had a fabulous illustration of Uncle Sam filling up his car at a gas station and accidentally stepping on the hose – and what the story was all about was my concern that unless we started a totally different energy policy of using less energy, or a policy of expanding our oil supply through removing the drilling bans in the inner Continental Shelf, and finding a way to jumpstart creating more drilling rigs, and bringing more people back in, we’d wake up some day – and I never thought it would be that day, or anytime in the 90s, but I knew it would take 10 years to make this happen – we would find we had actually embargoed ourselves.
Let me tell you what the numbers were all about, because I had not thought about this until yesterday and today. In 1990 the United States was still producing 7.3 million bpd of crude oil, today it’s 5.1; the 7.3 was after a drop over the previous 5 years of 1.6 million bpd; our refineries only needed to run at 13 ½ million bpd; and we only needed to import 5.8 million bpd of crude oil imports to balance our system. Today we have to run our refineries at 100% or we have major product shocks; today, we have to import 10-11 million bpd, or we lose crude oil stocks; we have to basically create almost 3 million bpd of finished product imports; we have to run the system on a 24-7, all Summer long. And we still liquidate stocks.
So we have actually now created a pending domestic embargo, and we’re going to be lucky to get through the Summer without some periodic shortages. We probably will, but the odds are probably as high we will have some shortages, and then if we get through the Summer we have a fabulous respite from Labor Day to Thanksgiving, until we hunker to try to figure out how the world gets through the Winter of 2005 and 2006 because oil demand globally could easily go to 86-88 million bpd during the Winter, and that could easily exceed supply by 2-5 million bpd.[38:53]
JIM: If that was to happen we would almost be looking at $75-80 oil, I suspect.
MATT: No, no, no. Oil prices could easily go up 5-10 times.
JIM: Wow! Matt, let’s take people on a sort of trip to the past, and I want you to explain Aramco. What was Aramco, how did it start? And then from Aramco becoming the Saudi Aramco, explain how reserves increased substantially without oil discoveries, and they remained there the same.
MATT: First of all, Aramco used to be called Casco, when it was 100% owned by Chevron, and then they brought in Texaco as a partner, and that’s actually when they changed the name to the Arabian American Oil Company – Aramco – and Texaco came in as a partner as more of a marketing arm, to help them get rid of this Saudi Arabian oil because Saudi Arabia didn’t need any oil. And then after World War II they invited Exxon and Mobil to come in as partners. And so those were the four owners of Aramco, with Saudi Arabia being the host government getting production sharing payments – sort of rents – for this oil. Then in the early 70s the Saudi Arabians took over 25% ownership, even though everyone said, “No, they’ll never take us over.” But by the end of 1979 they had bought out the four owners. And that’s when they kept the name Aramco until, I think, 1988-89. But from 1980 on, Aramco was basically run by the Saudi Arabian petroleum ministry.
In 1979, when these Senate hearings were being held and under subpoena, what the last year Aramco was being managed by the best technicians within Exxon, Texaco, Mobil, they told the Senate investigators that under proven reserve methodologies required by the SEC, Saudi Arabia had 110 billion barrels of proven reserves, but interestingly enough they said 61% of those, say 65 billion barrels, were coming from the 4 fields that created 87% of the production. And the other 39% were the other 13% of production, which raises in my mind how valid the 110 even was. Probably overstated. They said that if you add proven and probable together you get to 177 billion barrels. And if you take proven, probable and possible you get till 246 billion barrels.
By 1987 those same fields’ proven reserves had escalated to 260 billion barrels and they’ve stayed there ever since, and they found only one other significant field. Now, what I found amazing is, there are quite a few people that basically tell me with some conviction that they really believe the 260 billion barrels is a real number – conservative – and they real believe somehow or other, regardless of how much oil Saudi Arabia has produced over that period of time, they’ve found a way to just continue to add because these fields are so big. I happen to think there is very, very good, solid evidence, to say that the guys doing reserve estimation in 1979 were far more knowledgeable about how the art-form is needed to do that analysis, than the new generation of computer jocks who just enter assumptions into a computer and the computer does the thinking for them. So, I would suspect that the real, easily recoverable high quality proven reserves were probably about 70 billion barrels in 1979, and that they’ve now produced 55 billion of those, which gives rise to one more triangulation of the fact that we should be prepared for, and not totally surprised when the five key fields of Saudi Arabia go into irreversible collapse. And they could fall over a 30 month period of time by 50-70%. Hopefully, that’s a draconian estimate but the fact that that has at least a 35-40% probability shows you how unbelievably dangerous it became to have no data and such strong beliefs. [43:09]
JIM: One of the things that struck me about reading your book is once the Saudi government took over Aramco they immediately increased the reserves, without any oil discovery to back that. And then in 1988 – I believe this was all done politically – there was another significant increase in reserves so...
MATT: They jumped from 110 to 160, from 1979-1980, and then at the end of 87, starting with the number they reported in 88, the 160 became 260. They were called paper barrels at the time. [43:42]
JIM: And wasn’t that the case with a lot of OPEC countries, that all of a sudden, overnight, everybody increased their reserves.
MATT: They all got into arguing that they should have production quotas based on the number of proven reserves. And so Kuwait, and Iraq, and the UAE went from 30 billion each to 90 billion, and actually, to give Saudi Arabia credit, they were the last to fall in line of the Middle East producers and also triple their reserves. But why anyone ever believed it is what I find so amazing. Any time you see a static number for twenty years, people should obviously start saying, “that obviously isn’t a real number.” [44:20]
JIM: This is surprising too, because what does OPEC produce, anywhere from 22 million to what, 27 or 28 million?
MATT: If you include all of OPEC today they basically produce somewhere between 27 and 31. And the fact that we don’t actually know that is scary.
JIM: And yet they’re producing 27-31 million bpd...
MATT: Of the world’s 85.
JIM: And there reserves never go down. And nobody questions it?
MATT: And knowledgeable people! I was on Canadian broadcasting Corporation’s morning radio program yesterday and they quoted a friend of mine that they’d interviewed the day before, Professor Michael Economides of the University of Houston, and Michael said something to the tune of, “I have a high degree of admiration for Matt, but he is totally wrong on his views of Saudi Arabian oil. I’ve done the numbers and the 260 billion barrels is very conservative, and they can easily add another 200 billion barrels, and adding 5 or 6 million bpd for the next 50 years is very easy for them.” And I thought to myself, “How does a person actually say, ‘I’ve done the numbers’, when there are no numbers to do.” But he obviously believes them, otherwise he wouldn’t have been quoted on Canadian Broadcasting Corporation. He’s written a book called the Color of Oil, and he was a Schlumberger technician before he became a Professor at Texas A&M, and then U of H. So you know he’s not a shoeshine guy or a novice, he obviously believes that it’s a conservative number. I don’t have any idea how he comes up with that concept. [45:50]
JIM: Well, the same is true, is it not, of Daniel Yergin, where they came up with the same kind of story?
MATT: The presumption I have is, if you actually ask them the pregnant question, “tell me, within your top 5 clients, does Saudi Aramco happen to be one of them. I think you’d have both of them, if they were telling the truth, say ‘Oh, yes’.” [46:08]
JIM: Now in your view and study of these oil fields, you believe – and we need to emphasize again that many of these fields have been around 45,50 years producing oil – that a lot of these major fields are close to tipping points.
MATT: Yes. And I also believe that – Ghawar, for instance, which is really the whole 9 yards, because that is 60% of their production – that North Ghawar, which is the top 20% of the field, has a productivity index that is about 25 times the productivity index of the rest of Ghawar, and that’s the area that is almost depleted now. And when that drops, you could basically see Ghawar go from 5 million down to 2 million bpd in a very short period of time. [46:55]
JIM: So, based on your study – and in fact you state this in your book – you believe there is no way that Saudi Arabia is going to be able to produce 20-25 million barrels.
MATT: No, that’s impossible. What’s interesting is that now there are a number of people within Saudi Arabia that are starting to say publicly, “No, that’s impossible.” Dr. Sadad Al-Husseini who was eased out of being Executive Vice-President of Saudi Aramco a year ago February, because I’m told, he was actually starting to scold people for being naive about how much they could produce, has been on record in several different places as saying that Saudi Arabia could never produce over 12 million bpd. It is just not in the cards. And he was known by everyone who counted as the brains of Saudi Aramco. So we should be listening carefully, and I’m going to be very curious to see in the new regime change whether there’s some jobs that start to change, because I have a sneaking suspicion that my book is going to educate some people in Saudi Arabia to what the real issues were. And maybe some heads were going to roll – not literally – of people that have been promoting this concept of ‘don’t worry about our oil’. And we’re going to go back to a return to the conservationists within Saudi Arabia, and see them lower their rates of production, so they can sustain it for a longer period of time. And if that happens, I think I’ve done Saudi Arabia a great favor because I’ve given them grounds to do that, without the world thinking, “these crazy people in the Middle East are trying to blackmail us.” [48:30]
JIM: Let me throw something that typically comes out – and maybe this is just a natural phenomenon being an American – is our great belief in technology, Matt, and anytime you talk about oil shortages, or higher oil prices, the technology factor comes to the forefront and, “Hey, we’ve got all this great technology, we have better technology today than we had a decade ago and this technology is going to save us.” But you don’t believe that’s the case.
MATT: I know it’s not the case. The one thing our firm is really good at is understanding the oil services industry, that’s the one part of the oil energy investment business we’ve really had a dominant investment banking position. During the 80s, when the industry was under such duress and struggling to survive, we got involved in so many of the rescue projects of these companies, that it really effectively ended up saving the day for horizontal drilling, multilateral well completion, 3D seismic, subsea completion systems, and I know that stuff inside out, as to what it really actually does, because we had to, to get our jobs done. I watched with utter amazement in the decade of the 90s, one oil company after another, starting to go to conferences and say, “the rig of today is like 8 rigs of the past, because it’s new technology. 3D seismic has eliminated the need to drill dry holes. We are now recovering twice as much oil as we used to get out.” These guys are hallucinating. They have no idea what they’re talking about. In 1995-96, I started talking about giving speeches in Aberdeen and Stavanger at the North Sea Oil Show saying, the North Sea is just about to peak and go into irreversible decline and I get these astonished looks by senior executives of the major oil companies saying, “Matt, you don’t understand technology.” Well, it turned out that I didn’t ever say 1999, I said in the next two or three years. 1999 was the high water mark for the North Sea, and it is already down 25%. So it turned out everybody that started using these tools got mesmerized by the high flow rates that got created at the well head, and thinking that they had discovered the fountain of youth. And that’s just what’s going on inside of Saudi Arabia today. They are going through the same hallucinatory process that all our major oil companies did 5 years ago. [50:46]
JIM: Based on reading your book, and the extensive studies – as you said many of these major oil wells are now at tipping points – we’re likely to wake up one day and find out that oil is over $100/barrel, we can’t meet...
Matt: It’s still cheap at $100!
JIM: Yeah, at $120 it’s 36 cents a pint, which is still cheap.
MATT: What the economists ought to be trying to figure out is: what constitutes a fair price for oil versus their belief that oil prices are really expensive today. I would argue that probably a number in the $5-10/gallon is a real bargain. [51:24]
JIM: Matt, what comes afterwards? One day, as I mentioned, we’re going to wake up and find out that peak oil is here, we’re going to be dealing with it. Do we go to oil rationing? Do we go to a major, national conservation program? And I guess even more importantly than that, given the high demand on oil today – not only just from the United States and Europe, but India and China – how do we ration oil without going to war?
MATT: We have to figure out a way to do that because if we go to war, it will actually be the worst war we’ve ever fought. And if we don’t address the problem, we will be in an energy war. What I find interesting is I actually think we can solve this problem, but I also think if we ignore it, you can’t create a scenario that is too awful. What we have to do is first of all, long term, create some new forms of energy that don’t exist today. That might or might not be possible. I suspect that actually it will be possible because we haven’t worked on it for a hundred years. While we’re doing that though, we have to figure out a way that allows the world to prosper and not shrivel up while we’re using a lot less oil per capita. And figure this out quickly enough so we educate the China and India’s of the world on how to create a sustainable society so they don’t build a society like ours. Because it’s going to be easier for them to do some of these things than it is for us.
And I’ll give you just a quick shopping-list of some of the things that we are actually going to need to do. In the shipment of goods, we use worldwide about as much, or a little bit more, diesel fuel than we do motor gasoline, and most of the diesel fuel is used by the truck fleets moving goods. If you could wave a magic wand and in a 5 year period of time and get all of the goods off the highway system going long distances by trucks, and put them on either railbeds or water transportation: on the railbeds – railroads – as long as you have long distance transportation, and long trains versus short trains, and short distances, you can get an energy efficiency savings of somewhere between 3 and 10 times – that’s not 3 and 10%, that’s 3 and 10 times; if you can get them on boats versus trains, it has an additional energy efficiency savings of another 2 to 5 times. So by getting trucks off our highway system we have a major impact on removing traffic congestion. And traffic congestion is public enemy number 1 through 5 on passenger car fuel efficiency. So it’s a real win, win, win.
At the same time we have to alter our distribution of food. You know, the average thing we eat today comes from, I believe, an average of 1500-2000 miles. But there are a lot of items, like the first time I ever heard of this concept of food miles was a speaker in London, last Spring, who pointed out that in the Summer in the UK ,almost all the apples come from New Zealand, and they have embedded in them 22,000 miles of travel of a vessel, half coming from New Zealand, and the others going back. When they’re onboard the vessel they’re refrigerated. So it’s a very energy intensive process. We actually can grow stuff close to home in most parts of the world. We just got lazy and thought it was really fun to just go into a grocery store and see all this produce: it doesn’t taste very good, but it looks nice.
And then finally we can basically go to distributed work. Because I found being in Maine in the Summer is a lot more pleasant than being in Houston, I taught myself 10 years ago how to be up here and be more efficient than when I’m in Houston. I think there are lots of corporations that have a thousand people working together; there’s no need for a thousand people to be working together, other than the fact it was just a historical coincidence. We now have the technology that people can actually either work at home or work in their village, and by saving 2-4 hours of commuting they will be far more productive. And then we basically end globalization as we know it today, which is effectively a really flawed plan of breaking manufacturing components down into their smallest parts, and finding the cheapest place in the world to manufacture the parts, and then zinging them around the world to be assembled into bigger, and bigger units, until they finally arrive on the showroom as a piece. If you make stuff close to home, you can have a major savings in fuel efficiency. That sort of a plan put in place over 5-7 years would take a lot of coordination; not a single one of those things are impossible to do. We could literally end up cutting oil consumption by 20-40%, by doing all of those. [56:04]
JIM: You know, the only problem with that, Matt, as we speak right now, with $62 oil, we have, as you say in your book, no plan B.
MATT: Nope. While we’re doing Plan B by the way, we jumpstart the largest energy R&D program ever envisioned, and just pray that over 5-7 years it has the same impact as when people got serious about developing radar, and developing nuclear power, so that we could actually win World War II. But if we don’t do these things, then this really ends up being a very dark world – no pun intended. [56:40]
JIM: The problem is, even as you and I are speaking today, we still have, you know, Economides saying there is plenty of oil that Saudi Arabia can produce...
MATT: Yup, Dan Yergin says we are going to have an oil flood. But you know what, I really love the study of history, I think you can learn so much about history, and on August 3rd 1939, we were down to 28 days left before we officially entered World War II. Basically, Hitler had conquered a whole bunch of places, and yet there was still one loud voice in the world, Winston Churchill, saying, “this is madness!” 99% of the other people that observed were basically saying, “You know, I’m so glad we never ever going to have a war again because war is so awful that we should just never have another war again.” And we got a rude awakening on September 1st 1939, that in fact we were at war. And in a 6 year period of time – 5 ½ year period of time – England, Canada, the United States, Australia and New Zealand built a war machine that was so powerful we destroyed Europe and Japan. And I think if we take this as seriously, when we have a wake-up call, that we can actually end up with not having to basically destroy the world as we know it today before we rebuild it, but doing it before it gets destroyed. [58:02]
JIM: What is it going to take to get us to that point? Is it $100 oil, gas lines...
MATT: A shortage. I hate to say it, but I just think if we are where we are today – where things are so unbelievably crystal clear for me – there was a program in Washington, DC where 5 of us spoke at the Hart Senate Office Building for 2 ½ hours, from 2:30 to 5:00 in the afternoon on peak oil. And of the 5 of us, I was the only one who didn’t have a Phd. And the first one who spoke was Roscoe Bartlett from Maryland, who has his Phd in science, became a Congressman when he was 66 years old, has 40 or 50 patents to his name, and he gave the most impassioned speech I ever heard anyone give on peak oil being the biggest risk the world has ever faced. And you know, this conversation should have happened a decade ago, but thank heavens it’s happening today. But I also think we’re going to have to have a shortage before we realize that this was effectively Poland being invaded by Hitler. [59:05]
JIM: Matt, what has been the response to your book – not only in Congress, but also let’s say in the White House – because it’s going to take leadership from the top down to get this country moving in that direction?
MATT: First of all, I don’t know and I haven’t tried to call people and say, “How did you like the book!” I know from being in Washington twice last week, a lot of people in government are in the middle of reading the book. It’s not a hard book to read, but it’s not a book you sit down in the evening and say I’m going to do this from cover to cover. And so my guess is – what I was told yesterday by the publishing firm, they just did their July wrapup, they are now in their third printing, it has sold 44,500 copies, which is a really tremendous amount of books in their experience for a book that has not had really a ton of publicity yet – I think it will be Labor Day before I start getting really good, widespread feedback. But from the letters and emails I’ve had so far, which range in the hundreds, I’d say 1 out of 20 people are raising questions or suggesting I should’ve done something different, and about the other 19 are saying the nicest compliments I could ever imagine. I would’ve actually thought, getting closer and closer to the publication date, that by about 6 or 8 eight weeks into it, somebody would have launched an attack of some argument I would never have thought of, to really try to discredit the effort. But so far the arguments have been a handful of people who work for Aramco as clients, and all saying the same thing, “technical papers are a stupid way to do analysis because they just deal with problems; investment bankers don’t know how to read technical papers; and they’ve technically proven they don’t have any problems by their ‘trust me’ statements.” [1:00:53]
JIM: Matt, if you were to talk to a reader of your book, and have that reader walk away with one important concept, what would that be?
MATT: That we’ve probably exceeded sustainable peak oil, and read the book and you’ll see why. When I finally realized I had about one more day to make any last changes in the book and then it was going to go print, I read through one more time and I thought, “you know, I actually sort of feel like I now have just submitted the briefing papers to the Supreme Court, as a lawyer for some really important issue. And I think I’ve actually said it the best I can. And now we’re going to basically see what world opinion and how they digest this stuff.” [1:01:33]
JIM: Perhaps a final question. Having read your book what is it that we can do as individuals right now.
MATT: We can all clamor for energy data reform. That’s the one thing that can happen before the end of this year, and where are mandated field by field quarterly production reports, and the number of well bores each of those fields have; some data on proven reserves we don’t even need. That’s the only thing we can do and effect in 2005, and that system being mandated would allow less than 30 people in less than 30 days to come up with a realistic supply assessment over the next 3 years, and pretty well prove or disprove we’ve actually now exceeded peak oil, or it’s right ahead of us. That’s the one thing that every person in the world has a role in demanding that happen. And if people say, “Naw, that’s not important,” we fully deserve every bit of pain we’re going to get. [1:02:29]
JIM: When you look forward into the future, 5 years out, 10 years out, are you optimistic or pessimistic?
MATT: Yes, I am. I am optimistic that we’re going to figure this out, and we’re going to go to plan B and plan C and that 7-10 years from now we’re going to say, “look at all the fundamental changes we’ve made.” And we’ll have a better economy, and we’ll have resolved all these nasty, nasty fights between modern energy producers, and people that have called themselves environmentalists. And actually have a better quality of life. And we’ll be paying very high prices for energy which we should have been doing for the last 100 years. [1:03:00]
JIM: Well, I’ll tell you, it’s a very thought-provoking book, and I think it is a book that is very timely, especially now for anyone listening to this program, just turn on your TV or pull into a gas station and take a look at the price of oil.
MATT: And remember: 18 cents a pint. [1:03:17]
JIM: Yes, 18 cents a pint, but it’s gotten people’s attention.
Matt, I want to thank you for joining us here on the Financial Sense Newshour and giving up part of your vacation time. One of the best books I’ve read on energy, and I’ve read a lot of them, and I think very timely. I commend you on the work you’ve done and I think you’ve done us all a great service.
MATT: Thank you very much. I appreciate being on the program.