Peak Oil: The End -- An Interview with Matt Simmons (via FTW)

Jay: Thank you so much for coming on our show. I really appreciate it. The term “peak oil” is a very common term among investors these days, thanks in no small part to your work and your book Twilight in the Desert, but just to make sure that everyone listening to the show understands, exactly what you mean by peak oil. Can you define the term?

Matt: Sure. It’s a term that gets widely misunderstood, thinking that the peak oil people said, “we are about to run out of oil,” and we will never run out of oil. What we are running out of is high quality oil that flows easily out of the ground. What we have already passed is a peak sustainable crude oil flow, and that happened five years ago, and we are now going to get further and further behind. So the idea of actually catching back up is becoming pretty remote.

Jay: So that was five years ago, about the time you published the book Twilight in the Desert.

Matt: Yes, just purely by happenstance.

Jay: You noted then that your major concern was, there was a great deal of complacency at the time about the lack of ability to continue producing more and more oil to meet the world’s growing demands, and specifically you thought there was too much faith put in the ability of Saudi Arabia to produce oil. You still feel that way?

Matt: Yeah. Actually not just Saudi Arabia, it was in the Middle East. We somehow created an illusion that the Middle East was a giant sea of oil laying into the sand that was almost inexpensive to produce, it would last forever. And there was never any basis for that; no one ever went back and actually dug into the data and said there is only handful of fields that were ever found, and they are all old.

Jay: Well you did do some digging in the data I think –

Matt: I spent so much time between the spring of 2003 and up till a month before the book came out, I’ve never done so much research in my life.

Jay: Well your source, I think, largely was the Society of Petroleum Engineers’ technical papers that were written by the people who would know those projects the best.

Matt: Right.

Jay: Okay. So, about that time, if I am correct about this, Saudis were producing about 10 million barrels of oil a day. I seem to recall you saying somewhere that they were projecting 50 million barrels day and then they cut it back to about 12, 12.5 million barrels a day. Have they been able to reach that level of production? Are the Saudis putting out anything like that now as far as you know?

Matt: Well, it depends on who you listen to. If you listen to the pronouncements from the Saudi Petroleum Ministry, they have the ability today to produce about 12.5 million barrels a day. If you listen to some of the insiders, they sound like they are struggling to stay close to 8.

Jay: Wow.

Matt: In my opinion, this is first time we ever had no spare capacity.

Jay: So, we had of course a very dramatic drop in the oil price after the Lehman Brothers collapsed in September/October 2008—from $147 of a high to $40 or something.

Matt: 31 and change

Jay: Wow. That would have been, in retrospect, quite a buying opportunity.

Matt: Yeah.

Jay: So, we are back up at what, $70 or $80 now.

Matt: I think 85-86.

Jay: Okay. To my way of thinking, it’s very difficult to say where the price of oil or any commodity is going to in the future because, quite frankly, we have a measuring stick that isn’t very dependable. [I mean] the U.S. dollar. For example, we are creating enormous amounts of money out of thin air to finance all manner of bailouts and government expenditures for one thing or another, so where do you think the price of oil can go?

Matt: Well, first of all we have really basically done away with easy projects, so all of our future projects are going to be very expensive. We have an industry that basically has an asset base largely beyond its original design life, it needs to be rebuilt. If we rebuild 60% of the oil and gas infrastructure globally, it would probably cost at least $100 trillion. So prices need to go way up, where we just won’t get anything done. I am not sure we are working with the people to do that.

Jay: You mean the technicians who know how to do that?

Matt: Yeah, about two-thirds. There are too many studies, way overdue, that are now finally being done that show in the next five to seven years about two-thirds of the energy workforce will retire.

Jay: Okay. You don’t see a pool of new talent coming into the market?

Matt: No, no. We just barely got started when we had our financial collapse, and then all the new pool got fired.

The collapse turned out to be a really cruel hoax of thinking that we’d solved our oil problems and that it’s amazing how fast we bounced back. The problem is we are bouncing back too fast, and we can’t supply it.

Jay: Well, the demand side for oil of course is coming from the Far East—China, India. In India, where we have large numbers of people who for the first time in their lives are starting to enjoy what we have taken for granted here in the West: sort of middle-class comforts, people going from bicycles to cars or from walking to motorbikes, whatever, and this is of course a massive new growth in demand.

The Chinese are very active in various parts of the world—in Africa and places like that—but let’s talk a little bit more about the declining production. I mean, you paid a lot of attention to data from Saudi Arabia; what about Iran?

Matt: Iran’s fields are even older than Saudi Arabia’s and really in a mess. There is a new theory that somehow Iraq is going to come to the forefront and I read analysts’ forecasts that within five or six years Iraq will be producing 16 million barrels a day. Realistically, they will be very lucky to produce what they are doing today because their field is too old.

Jay: What is their current production about?

Matt: It’s about 1.8. We don’t have anything on the horizon that really basically works and we have demand now that you can’t stop. So demand has become a runaway train.

Jay: So staying on the supply side of the ledger, we have a declining level of production, a very rapid decline in Mexico from what I understand, and have a decline in Iran.

Are you saying that these declines are natural and it wouldn’t matter whether we had technical talent or not, they are in decline no matter what? Or would some technical expertise make some difference? Would it help someone?

Matt: Oh! Yeah. What you are really talking about is mitigating the extent of the collapse as opposed to turning an older oil field back into a young field. What also has happened is we’re really quickly running out of light sweet crude, essentially.

Most of those great crude streams have basically disappeared and what we are doing is substituting a steady rise in crude grades that are heavier and sourer, more metallic, and they are just very hard to be refined into finished products, and they’re energy intensive and extremely water intensive.

Jay: And in terms of the refining capability, I guess that’s another issue.

Matt: Refining capabilities in the United States are almost 85 years old and enormously expensive to build if you can even get permitting to build them.

Jay: So what are we going to do?

Matt: Well, that’s a problem. We have a water scarcity and we have a 10 million barrel fossil fuel scarcity, particularly in the form of transportation energy. And then there is an unbelievably interesting and almost totally ignored interdependence between the amount of water it takes to create modern energy, and the role of energy in creating water. It turns out the average gallon of motor gasoline in the world requires about three gallons of water at the refinery; in the cooling towers, 40% of America’s fresh water is used for power generation.

Jay: Is that right?

Matt: Yes. So, shortage of water.

Jay: Another big problem looming over the horizon.

Matt: The problem is already here; one we have ignored far more than peak oil is the interrelation between the two. Most of our remaining usable water comes from Aquifers , so it takes a pump to get it out of the ground. So if you don’t have energy, you can’t get the water out.