By Lars Schall
Mr.Simmons, before we take a look at the current situation and try to see behindthe dim unknown of the future, I would first like to go back with you in time abit. In the year 1973, when the first major oil crisis occurred, you decided totry your luck in the energy sector and started a year later a bankinginstitution that has become step by step the world’s biggest “independent investment bank specializing inthe entire spectrum of the energy industry”, Simmons & CompanyInternational, which is based in Houston, Texas. Why did you decide yourself for energy and most of all for oil? Whatwas the special appeal of it to you, in particular under the circumstances of1973/74?
In March 1969, I met a remarkableentrepreneur, Lad Handleman, who was the founder of a commercial diving companythat had grown so fast that they were almost out of money and in desperate needof some capital. So, I agreed to help raise some venture capital for them. The company, Oceaneering International, grewrapidly as I helped them acquire some of their competition and raise moremoney. From January 1969 through the endof 1973, I operated a one-person firm. Ispent 80% of my time assisting specialized oil and gas service companiesgrow. After the 1973 Oil Embargo (andsubsequent oil price explosion), I decided to move from Boston to Houston and create what hasnow evolved into Simmons & Company International. Oil and gas “drove” theworld and I was determined to seep myself in this industry, which I found sofascinating.
Do youhave the feeling that the developments that took place during the 1970’srelated to oil are well understood today or do you believe that there are stillsome misconceptions existing about that period of time?
For 40 years, misconceptions haveconstantly shaped the behaviour of the oil and gas industry and most of the“experts” who opine on the industry’s future. The biggest misconception has been the idea that oil would stayplentiful and inexpensive for decades to come, with gluts being a constantthreat.
The Technological Revolution wasnot really well understood. Solid dataon flow rates and decline curves were never properly developed to guideindustry planners and help us intelligently navigate the oil world.
Let’s skipfast forward into the year 2009. If one follows the news coverage in mainstreammedia one could easily have the impression that we’re in a recession right nowbecause of the financial mess only. On the other hand there’s a certainstatement that I like to call an “eternal law” of the past, the present and thefuture. That statement was published by James Baker and the Council on ForeignRelations in April 2001 and it says:
“Oilprice spikes since the 1940s have always been followed by a recession.”[1]
If this istrue is it then any wonder that we’re in a recession after last year’s pricerally at the oil market?
The 2008 Recession had nothing todo with the “spike in oil prices.” It was all about the near meltdown in ourhighly leveraged financial institutions. In my view, high oil prices werehelping a significant part of the global economy flourish.
Could youplease explain the underlying factors for the price rally of last year?Marshall Auerback stated for example in an interview with me that it was “largely a product of speculation”.[2]Do you agree with him?
Speculators had very little to dowith a 15-fold increase in oil prices from 1998 to July 2008. Demand for oil out-paced supply. Speculatorsonly own paper commodity contracts and for every buyer there has to be aseller. In 2006-2008, most hedge funds thought oil prices were too high andwere shorting NYMEX oil contracts.
Here’s a statementby Steven Kopits from the New York office of Douglas-Westwood:
”The US has experienced six recessions since 1972. At leastfive of these were associated with oil prices. In every case, when oilconsumption in the US reached 4% percent of GDP, the US went into recession. Right now, 4% of GDP is $80 oil.So that’s my current view: If the oil price exceeds $80, then expect the US to fall back into recession.” 3
Now thatwe’re about to exceed the $80 limit – is Mr. Kopits right with his predictionin your opinion?
I disagree that our recessionswere all caused by high prices. The 1981-82 and 1974 recessions were clearlyimpacted by oil prices, but the 1991 recession was due to fear of the PersianGulf War becoming another “Vietnam”.
Under thecircumstances of Peak Oil this recession will be different compared with thoseof the past. Nevertheless, every time I watched CNN International during thelast months there was always this trailer saying “The Road to Recovery”. Could you please explain why it is ratherunlikely that such a “Recovery” will take place in the long-term and why PeakOil might be the event that triggers the long-discussed “End of Growth”?
The economy has largely recoveredand it has initiated growth in oil demand. This raises high risk that demand will exceed supply and createshortages somewhere. This, in turn, will trigger an end to growth.
Now some ofour readers may say: “Wait a minute, y’all! Who said that Peak Oil alreadyhappened?” – My answer would be that this hint was given in the report of 2007by the Energy Watch Group that said:
“Peak oil is ‘now’.
For quite some time, ahot debate is going on regarding peak oil. Institutions close to the energyindustry, like CERA, are engaging in a campaign trying to ‘debunk’ the ‘peakoil theory’. This paper is one of many by authors inside and outside ASPO (theOrganisation for the Study of Peak Oil) showing that peak oil is anything but a‘theory’, it is real and we are witnessing it already. According to thescenario projections, the peak of world oil production was in 2006.
The timing of the peakin this study is by a few years earlier than seen by other authors (like e.g.Campbell, ASPO, and Skrebowski) who are also well aware of the imminent oilpeak. One reason for the difference is a more pessimistic assessment of thepotential of future additions to oil production, especially from offshore oiland from deep sea oil due to the observed delays in announced fielddevelopments. Another reason are earlier and greater declines projected for keyproducing regions, especially in the MiddleEast.”4
Can youtell us your opinion on this specific report and also on this modus operandithat the Energy Watch Group was using for its scenario: “The report, rather than make guesses about total world reserves,focused instead on global production data, which it sees as being a lot morereliable.”5
I am not familiar with the EnergyWatch Group, but totally agree with their findings. Using “world reserves” isflawed data and has little impact on flow rates or declines in oil fields. The best data makes a convincing case thatglobal crude oil peaked in 2005.
Mr.Simmons, there is all this discussion for years now about oil reserves and youare known for believing that a thorough assessment of Saudi Arabian oilreserves is the single most important issue of petropolitics: am I just naïveor shouldn’t Peak Oil be the perfect time that all Players agree to groundtheir expectations on production data instead on believing in the best-casescenario? The RGE Monitor said in their summary of the report by the EnergyWatch Group with regard to the most contradictory arguments given by theInternational Energy Agency (IEA):
“IEA projections are not a veryreliable basis for planning the future”.6
What the new IEA leadership iswarning is that declines in mature super giant fields will make it necessary toadd the equivalent of four new Saudi Arabias over the next twodecades just to keep demand flat. They intentionally avoided saying “obviously,this is impossible.”
Another,in my opinion even more crucial point with respect to all this debate about oilreserves, are the records of Richard Cheney’s “Energy Task Force” of 2001, theNational Energy Policy Development Group. Those records are hidden from publicscrutiny. Michael C. Ruppert argues for the disclosure of those records in hisnew book “A Presidential Energy Policy”.7 He does so by saying:
“Seeing those records now would save a lot of duplicated effort in tryingto inventory how much oil there is left”.8
He says also:
“The figures on oil reserves quoted byproducing nations and companies are as fraudulent and cooked as the books onmortgages, banking, and even Bernie Madoff. The Saudis cannot hide the factthat they have passed Peak anymore. I prove that in my new book. The world'slargest energy investment banker Matthew Simmons proved it before I did in his book‘Twilight in the Desert’.9 I haveproved the same thing a different way. If Saudi Arabia has passed Peak then the whole world has passed Peak.”10
How do you judge on all of this?
I made this argument as plainlyas I could when I wrote Twilight in the Desert: The Coming Saudi Oil Shockand the World Economy in 2004/2005. It is far truer now and more obvious todaythan it was 5 years ago.
Two specificquestions with regard to Saudi Arabia. You’ve stated over the past that the world wouldneed three SaudiArabias (orthree Ghawar oilfields11) justto deal with the decline in crude oil supply. Could you explain this in moreprecise detail, please?
If the global average declinerate of current oil production is only 5% per annum, we would needapproximately 20 million barrels per day of new supply in just five years.Assuming Ghawar’s production is still 5 million barrels per day, this equatesto 4 Ghawars! 5% is also probably far lower than the real number.
In Aprilof this year, the Oil Minister of Saudi Arabia Ali al-Naimi said, that his country “is producing less crude than its target andglobal stockpiles are likely to decline.”12 Is this an admission that Saudi Arabia cannot keep its promise from the past to raise the oil supply almostendlessly?
It is hard to gauge the varioussentiments made by Minister al-Naimi. He continues to promise the world that Saudi Arabia can produce 11.5million barrels per day, if needed. In my view, this is a very shakyassumption.
One final question,Mr. Simmons. There is all this talk about the automobile industry at the brinkof disaster. In your opinion what can save the automobile industry from goingunder in the long run vis-à-vis Peak Oil?
I hope the efforts being made increating offshore wind into electricity, which in turn, combined with water,creates liquid ammonia (NH3), can help save the automobile industry from adismal future as conventional gasoline and diesel supplies decline.
Thank you for taking your time, Mr.Simmons!
Sources:
[1] James Baker / CFR:“Strategic Energy Policy Challenges for the 21st Century“, quoted in Michael C. Ruppert: “Crossing the Rubicon. The Declineof the American Empire at the End of the Age of Oil”, New Society Publishers, Gabriola Island, 2004, page 31. Thereport can be downloaded as a pdf under: http://www.bakerinstitute.org/publications/study_15.pdf.See also for this issue “oil price spike – recession” James D. Hamilton:“Causes and Consequences of the Oil Shock of 2007-08.” ABSTRACT: “This paper exploressimilarities and differences between the run-up of oil prices in 2007- 08 andearlier oil price shocks, looking at what caused the price increase and whateffects it had on the economy. Whereas historical oil price shocks wereprimarily caused by physical disruptions of supply, the price run-up of 2007-08was caused by strong demand confronting stagnating world production. Althoughthe causes were different, the consequences for the economy appear to have beenvery similar to those observed in earlier episodes, with significant effects onoverall consumption spending and purchases of domestic automobiles inparticular. In the absence of those declines, it is unlikely that we would havecharacterized the period 2007:Q4 to 2008:Q3 as one of economic recession forthe U.S. The experience of 2007-08 should thus be added to thelist of recessions to which oil prices appear to have made a materialcontribution.” James D. Hamilton : “Causes and Consequences of the Oil Shock of2007-08“, Department of Economics, UC San Diego,published February 3, 2009, Revised: April 27, 2009, at:
[2] compare LarsSchall: “Marshall Auerback: ‘Many years of economic stagnation’”, publishedSeptember 7, 2009 at:
3 Steve Andrews: “The first peak oil recession”, Interview with StevenKopits, published September 14, 2009 at: http://www.energybulletin
4 compare “Crude OilThe Supply Outlook”, Report to the Energy Watch Group, October 2007, EWG-SeriesNo 3/2007, published at:
http://www.energywatchgroup/fileadmin/global/pdf/EWG_Oilreport_10-2007.pdf
For the “CERA-Peak-Oil issue”see further “CERA official acknowledges ‘peak oil is here’, published June 9, 2009at: http://www.energybulletin.net/node/49178.html
5 compare “More onThe Energy Watch Group peak oil report”, October 23, 2007, published at: http://www.energybulletin.net/node/36087
6 ibid.
7 Michael C.Ruppert: „A Presidential Energy Policy. Twenty-five Points Addressing theSiamese Twins of Energy and Money”, New World Digital Publishing, Los Angeles, 2009, ChapterFifteen, Point Four.
8 see Lars Schall: “The Sinking Titanic. Aninterview with investigative journalist / author Michael C. Ruppert about ’APresidential Energy Policy’”, May 22, 2009, published at:
9 Matthew R. Simmons: “Twilight in the Desert.The Coming Saudi Oil Shock and the World Economy”, John Wiley & Sons, Inc.,Hoboken, 2005.
10 see Endnote 7.
11 For more details on Ghawar, the biggest oilfield of the world, seeMatthew R. Simmons: “Twilight in the Desert”, pages 151 - 179.
12 see Christian Schmollinger andShigeru Sato: “Al-Naimi Says Saudi Oil Output BelowTarget; Stockpiles to Fall”, Bloomberg, April 25, 2009, at:
