Matt Simmons Ceo of Simmons and Company Internationaland Author of Twilight in the Desert interviewed by Steve Paikan.
March 2009
Matt Simmons continues his discussion on the remifications of Peal Oil. He is quick to point out that the Term Peak Oil is a bit of a misnomer as the term actually relates to Peak flow rates from fields. Engineers frequently wish for a gradual Mesa top for oil production from a particular field meaning a very gradual decline from the peak—while sometimes they get production from a field that resembles the Swiss alps. Very steep on both sides.
Oil at 147 was a 10 year rise from 1998 to 2008 that actually occured all at once and should realistically should have occured more evenly over those 10 years. The price volatility is more of a problem between the mispricing of a “paper barrel of oil” on Nymex versus a wet barrel of oil which is what is actually produced–with all the associated exploration, production and distribution costs attached. Remember the petroleum demand in this time frame increased by 12.6 Million barrels and the petroleum produced only increased by 7.6 million barrels per day. The difference was made up by natural gas liquids, refinery processing gains, synthetic crude and inventory liquidation.
He says that if the price drop from 147 to the low of 2009 was a head fake then look out when the price decides to come back. Long term he believes that it needs to be in the 400 to 600 dollars per barrel range in order to balance out future demand and supply properly and to make the industry work properly. Who payes that right now?—Glad you asked—the Europeans currently pay that based on their tax structure. Keep in mind that even at 147 dollars per barrel that translates into roughly 22 cents per cup—what can you buy for 22 cents a cup in your city that has any value. Hell…bottled water starts at one dollar or more if you buy it in a supermarket.
Would people be mad—hell yes—for a short period then they would get on with their lives. Think about what they are willing to pay for a beer at a sporting event—or for that matter bottled water. They make not a peep about 8 dollar beers yet 22 cent oil per cup is a big deal. Oil is taken for granted even though it is the most consumed commodity in the world. Mathew Simmons puts it very succinctly—people got spoiled on basically free energy.
One fact not widely known is that the US produces over 5 million barrels of oil per day and of that 900,000 barrels come from wells that produce less than 2 barrel’s per day.
I live in Southern Ontario and my father has friends that live about 2 hours Northwest of Toronto who have a few small wells on their property that produce this amount. They were drilled in the 1970’s when oil was climbing in price. Apparently the pump turns on for a short period each day and a truck comes buy every few weeks to collect the oil from a holding tank. That reminds me—maybe I should ask him if they are still producing anything. He mentioned that it was a small annuity for these farmers.
He puts holes in the widely held theories that the Middle East—particularily Saudi Arabia—has virtually unlimited amounts of oil. He believed that at one point until he realized about 5 years ago that no one ever audited these numbers. He discovered that many of the OPEC members dramatically increased their reserve levels in the early 1980’s and he investigated. It turns out that your share of OPEC production is dependent upon your reserves so many countries including Saudi Arabia dramatically increased their reserves during that tine period. What makes it more interesting is that these reserves have not decreased or increased since that time frame. These countries have been producing a depleting resource for an extended period of time and miraculously have found the exact same amount of oil each year to replace production.
A little history lesson here–the US was the world’s largest producer of oil at one time—during WWII they supplied oil to the Allies yada yada yada—in fact in 1970 the lower 48 produced over 10 million barrels per day, This was before Alaska came around and saved their oil producing ass!
Despite the best efforts of the oil companies and the best technology they are now producing a little over 6 million barrels per day of oil and oil equivalents. The equivalents include liquid natural gas. I believe the oil produced is approximately 5 million barrels per day. Ask yourself how realistic the Saudi reserves are now.
Another example close to home. Cantrall in the Gulf of Mexico allowed the Mexican National Oil company Pemex to export several million barrel of oils per day to the US. The peak was in 2005. They are now producing 900,000 barrels per day from that field with a decline rate of 30% per year. Pemex is a state owned oil company whose revenues supply Mexico with over half of the funds for the countries social programs. You think Mexico has social problems now—just wait when they start coming up short on their social spending!
One last comments from Matt Simmons regarding the theoretical possibility of a new electric car coming in and saving the day. He states that Toyota is probably one of the premier manufacturing companies in the world and it took them 10 years to sell 1 million Prius’s. Add 5 years of development and you have a time frame of 15 years. Consider that there are 900 million vehicles on the road and you have not yet made a dent in gas consumption. Matt Simmons comment is that you have a spit in the ocean for a long period of time.
People need to learn how to travel less—a journey of 2 or 3 hours should be something you want to do and not something you have to do—for instance go to work. We need to learn how to stay at home.
We will likely be forced to live in villages again–what is interesting is that it might make for a better quality of life.