[mekrob]

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(Fortune Magazine) -- Matt Simmons is as perplexed as anyone that it has fallen to him to take on OPEC, Exxon, the Saudis, and all the other misguided defenders of conventional wisdom in the oil patch. Why should one investment banker with a penchant for research be required to point out what he regards as the obvious - that from here on out, oil supplies can't meet demand, and if we don't act soon to solve this crisis, World War III could be looming?

Why should a man who scorns most environmentalists have to argue that locally grown produce and wind power are the way of the future? Why should a lifelong Republican need to be the one to point out that his party's new mantra - "Drill, baby, drill!" - won't really fix anything and that his party's presidential candidate is clueless about energy? That the spike in oil prices earlier this year wasn't a temporary market anomaly and the recent retreat in prices is just a misleading calm before a calamitous storm? That we're headed toward $500-a-barrel oil?

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It was on this same porch five years ago that Simmons had the insight that convinced him that the oil age had passed its zenith. During a trip to Saudi Arabia in February 2003 with his friend Herbert Hunt (yes, the son of H.L. Hunt who, with his brother Bunker, almost cornered the silver market in 1980), Simmons had become suspicious of the Saudis' claims about the vastness of their oil supply. In his four decades of working in the oil and gas industry, everyone he had ever talked to had taken it as gospel that the Saudis had enough oil to bail the world out when other supplies ran short. If that wasn't true, Simmons believed, the era of cheap oil was over. Demand for crude was on the rise worldwide, and supplies were getting tighter all the time. If the Saudis were pushing up against the limits of their oil production, the world needed to know.

In his typically analytical fashion, Simmons went hunting for data. He found it in the form of hundreds of technical papers submitted by Saudi oil geologists to the Society of Petroleum Engineers over the past 50 years. Simmons spent the month of August 2003 sitting on his porch in Maine and grinding his way through the minutiae of technical accounts of, for instance, reservoir pressure and water-cut percentages, trying to piece together the challenges that the Saudi geologists had encountered in managing their precious oilfields. In the end, his conclusion was clear. "I finished reading the last paper on a Sunday afternoon," says Simmons, "and I sat back and I thought, Holy crap, this is unbelievable. I've just discovered the biggest energy illusion ever in the world. We're in big trouble. I'm going to write a book."

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Simmons believes that a radical change in the way we live is inevitable. "We should basically be going back to creating a village economy, so that we really reduce the energy intensity of how we live," he says. "We need bigtime conservation, not feel-good conservation. Make things where they're used. You'll end long-distance commuting, and we have the tools to do that now with webcams. Grow food locally. Grow food in your backyard. If they're not commuting, people will have time to do that."

I hate how people get all excited when gas drops 10 cents. It's a distraction from the reality that oil is a finite resource and that we use as though it were infinite. We're seeing this reality right now as oil has jumped 1000% in just a decade. Within another decade, barring a complete economic collapse, we'll see another 1000% jump in the price of oil (after adjusted for inflation).

Even without a financial meltdown, the world economy is screwed due to the dependence on hydrocarbons.

[jigglypottamus]

Its actually not that bad, Matt Simmons is crying wolf and a bit too soon, really. Portfolio had a good article recently highlighting major reasons for the increase in prices that regular journalists just don't write about. I'll see if I can find an electronic copy online and post it here.

[mekrob]

Are you talking about this one? Or this one?

If so, they both miss the mark horribly. It's more of the same - the market can't handle prices this high. I've been reading those articles since WTI cracked $30. At $30, they kept saying that oil would plunge back to $10 or $15. Hey, even when it was below $10, they said it'd go to five and would never pass 10 because of GOM and N. Sea field production. Then when it had hit $50 and Matt Simmons was saying it'd double within 24 months, they predicted it to cut in half. Same thing at $70 and then $80, then $100. Same story. They're always wrong.

These guys always forget a very basic principle: oil is finite. For all practical purposes, it's non-renewable as well. It's not even recyclable like many metals. Once it's gone, it's gone. This guy clamors on about all of this new production in other fields. What he won't tell you is that these fields won't amount of much.

Currently, the world's top 10 oil fields produce half of the world's oil production. Every single one of them is older than you. Ghawar, the world's largest, is older than you and I combined. Ten thousand smaller fields make up the other 50% and their lives will be very short in comparison. Of the world's largest five fields, 3 (N. Sea, Cantarell, Daqing) are in confirmed decline. Cantarell, to our south, is declining at 30% a year and accelerating! Within two years, Mexico, now our 3rd largest exporter, will be a net importer of oil, not a net exporter.

There's simply no way that new fields, conventional or unconventional (shale, sands, deep offshore) can make up for the production declines from our older fields. Aggregate production declines from currently producing fields is more than 5% a year. That means that we have to add about 4-5 million barrels of production each year to the world's oil supply just to keep even. That's equivalent to the hundreds of thousands of oil wells in the entire US. That's equivalent to a new KSA every other year. There's simply not enough oil to get this done. Not a single petro-geologist I've talked to thinks it's possible. The only people who think it is possible are those who've never drilled a well, never produced a single barrel of oil. I'd bet they don't even know what a cross section of a thrust fault looks like.

When oil production falls, there's no way for oil demand to fall at an equal pace, unless there's a financial collapse. If this happens (no fin. collapse), then prices must go up due to supply and demand.

I don't know how you can say that Simmons is crying wolf. He's accurately predicted that prices would rise and continue to rise. It's been the classical economists who've been wrong time after time.

[jigglypottamus]

mekrob said:

Are you talking about this one? Or this one?

Neither.

The rest of your comments certainly didn't take into account Canada's proven reserves, which are 2nd in the world only to Saudi. Estimated reserves are much, much bigger. And don't fall for the supply-and-demand hype, otherwise you've been served.

I'll follow up with more info later on inshallah.

cheers.

[mekrob]

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Neither

Dang. Only ones I could find.

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The rest of your comments certainly didn't take into account Canada's proven reserves, which are 2nd in the world only to Saudi.

I have taken them into account:

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There's simply no way that new fields, conventional or unconventional (shale, sands, deep offshore) can make up for the production declines from our older fields.

Tar sands, which account for 90% of Canada's proven reserves, are unconventional. As I've said, they can't make up for production declines elsewhere. Tar sands are bad because:

1) They destroy the environment, while polluting the water and air.

2) Require vast amounts of water. They're already starting to run into problems with this.

3) Require vast amounts of natural gas. You guys do plan on being able to heat your homes in the cold Canadian winter, right?

4) Unconventional oil sources have extremely long build-up times. For instance, Canada's been working on their tar sands for decades and it still amounts of a couple mpd of production. It's expected, barring any barriers such as water or NG limitations, to increase to 4.5 - 5.0 mpd of production within a decade and half with no development afterwards. During that time, the world will have lost more than half of our current oil production (40+ mpd) conservatively. It's just not a solution to even replacing declining oil production from current fields, let alone increasing production enough to meet future demand, which is expected to hit 100 mpd during that time period. That's going to cause an awfully large price increase.

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Estimated reserves are much, much bigger

Proven reserves are estimated reserves. P1 reserves are "proven", that is they are relatively certain. But certainty in the geology field is something that you'd never run across. It simply means there's not enough data to prove that number wrong.

Ever hear about Shell and their accounting? Twice in the past few years, they'd have to revise their "proven" reserves downwards by double digit percentages. In the 80's, OPEC increased their "proven" reserves by hundreds of billions of barrels literally overnight without a single oil discovery.

"Proven" to a geologist means there's a reasonable chance of that occurring or being the correct number.

[jigglypottamus]

mekrob said:

Ever hear about Shell and their accounting? Twice in the past few years, they'd have to revise their "proven" reserves downwards by double digit percentages. In the 80's, OPEC increased their "proven" reserves by hundreds of billions of barrels literally overnight without a single oil discovery.

yes, I'm fully aware of all that.

Please keep in mind that I didn't say we have enough reserves to last us several more generations - I'm simply saying the man was crying wolf. I absolutely refuse to believe that I will ever see $500 oil in my lifetime.

[mekrob]

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I absolutely refuse to believe that I will ever see $500 oil in my lifetime.

A decade ago (when it was $10/brl), did you ever think we'd see $50, or even $100? Hardly a single energy analyst did - except Simmons. They all thought he was crying wolf back then too. You'll be in for quite a shock if you think the price run-up has even come close to abating. The facts remain that oil is the most energy dense transportation fuel EVER and there's nothing that can replace it nor all of its functions, which means that demand will continue to be strong, thus ensuring higher and higher prices even in the face of dwindling oil production.