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JIM PUPLAVA: Hello, everyone this is Jim Puplava, I’m joining you from the Denver Gold Forum. Well, we’ve seen oil prices go from $80 down to $60, people are breathing a sigh of relief that the energy crisis is over, while others think this is just a temporary lull in the storm. Joining us this week is Matt Simmons, he’s Chairman of Simmons & Company International, and he’s also author of Twilight in the Desert, the bestselling book which is now available in paperback, and soon in German and Chinese. Matt, I want to begin with the problem that has always faced the energy business in the past which is these wild price gyrations that we’ve seen. We saw it last September after the hurricanes, we saw it leading up to August, but I believe this time it’s different, and unlike the past, prices aren’t going to go much lower from where they are. Your thoughts?
JIM: People listening to this show when they think of energy and oil they think, “Ok, what am I going to have to pay for gas at the pump?” But a while back National Geographic did several issues on peak oil. One of them which caught my attention was a picture of this family on their front lawn with all of the products they make from oil: from shoes to deodorant to aspirin and bandages, to soccer balls. MATT: That was a fabulous article. JIM: I don’t think most people are aware of how integral petroleum is to our daily life. MATT: I think you’re absolutely right. What’s also interesting is that all of those individual things that were on that family’s front lawn, actually only come from about 20% of the oil barrel, and about still 60 to 65% are transportation fuels. But it turns out that about 98% of all our transportation fuels in the world for both trains and boats and planes and vehicles come from oil. [2:59] JIM: A lot of people have been surprised that we’ve stayed at these levels. I mean when it was at $20 oil going to $30, they said it was going back to $20; when it went from 30 to 40, it was back to 30. Matt, how did this crisis creep up upon us? And I guess, what did the experts miss? I mean, we’ve had rising oil prices for about 4 years now, how serious is it and what do we do to fix it? MATT: Well, I think one of the mistakes we made is we ended up with a body of people that we sort of called our oil gurus, which I think is an odd term to start out with. A guru is actually a spiritual guide leading someone in the Himalayas, as opposed to somebody expert. And so many of these experts had only one strong opinion, and that’s where they thought oil prices would be. And I sort of watched this over the last 15 years, and these strong opinions about future oil prices, [and I said,] well, how would they ever know that? In the meantime, I really loved doing analysis of data and as foggy as some of our energy data is there is tons of data out there if you’re willing to dig through it, [and it] basically started to point the way at least a decade ago that global demand for energy was on the march, and there didn’t seem to be anything that would slow it down; and the prices were so unbelievably inexpensive that you couldn’t even start to replace the industry’s aging asset base which was getting very rusty. And at some point, we had the real risk of energy demand exceeding energy supply, and as pressures grew it was pretty clear to me that we should get ready for prices to be way higher than they were 10 years ago, 5 years ago, and ironically today. [4:39] JIM: I would say that if there is good news on this issue the issue of peak oil is certainly getting a lot more public attention these days. I can’t say it has gone mainstream but certainly you see it appear more frequently. On the plane to Denver I was reading Scientific American on, National Geographic, BusinessWeek, and other recent – in fact Bloomberg Markets this month. It seems to me the early peakers are doing a pretty good job of getting the word out, and I think your book helped a lot in that regard. MATT: That’s what I get told a lot and I think the only I can say is what the book did is it detailed in excruciatingly clear documentary data that we were living in a myth that the Middle East had unlimited amounts of oil that would be cheap forever; and that myth should have been popped 30 years ago. And once you get through shattering the belief that the Middle East will always have unlimited amounts of unbelievably inexpensive oil you then just have to do a quick tour around the world to say if it’s not the Middle East where else is it, and the sort of magnitude we’re now using it, and all of a sudden the concept of peak oil is far more easy to get your hands around. [5:48] JIM: You know it’s certainly gotten the attention of the US government, in fact, this November I believe the US Government Accountability Office – the non partisan Congressional watchdog – is due to release a study on peak oil. Matt, what do you believe think this report is going to say? MATT: Well, I know that the guys that worked on it spent about 4 hours in my office, and they really seemed to be a very competent team, and they asked all the right questions. I’m looking forward to seeing what the GAO report says. It’s also interesting that on the 7th of October, a year ago, Secretary Bodman sent a letter to the Chairman of the National Petroleum Council (NPC), Lee Raymond, asking the NPC to gear up and do an exhaustive report on every aspect dealing with this concept of peak oil. And finally, about the middle of June, the NPC sort of got their committees organized and they’re plowing through a report – we’ll probably have a preliminary public release of at the end of the year. And I think they’re basically trying, again, to do a real honest job of saying, “what is this issue all about?” [6:51] JIM: You know you even have, for example, Representative Roscoe Bartlett of Maryland who has formed a Congressional peak oil caucus to sound the alarm. MATT: Yup, he’s a fabulous public policy servant. JIM: I just don’t feel the US is prepared for this. I mean if you look at our transportation system to farming, the US economy – period – runs on oil and very little else. MATT: Yes, we do. Yes we do. But you know we’re not a lot less better prepared – if that’s an awkward way of saying it – than Canada, or England or Europe. The world is unbelievably exposed right now to the fact that oil supply quietly starts to slip while demand still surges ahead, and that ends up sooner versus later leading to shortages – and then we really go haywire. [7:36] JIM: I want to come back to the price gyrations for a moment because we’ve seen a number of reasons why, but the analysts and the economists are already out predicting that the oil prices have peaked, the bubble has bust… MATT: Yep, they did the same thing a year ago. JIM: And then you have wildly optimistic oil projections, for example, one of the questions I got from a lot of my listeners is make sure to ask Matt about this new Chevron Gulf of Mexico find which is optimistically projected to be as much as 15-20 billion. MATT: 3 to 15 billion. I haven’t seen anyone yet jump to 20. JIM: Ok, maybe I was getting too optimistic there. You also have CERA making some very optimistic projections on new oil production coming online in the next 5 years. MATT: Yup. JIM: You know, if you look at that, if let’s say you’re a consumer and you see the price jump up, Ok, it’s coming back down, you hear about these giant discoveries so to speak, it’s not hard to see why, I guess, for many people they don’t take peak oil seriously. MATT: No, particularly when they then see or hear about the discoveries, they read on the news the sound-bites and then they see the oil prices collapse – yeah, it doesn’t take a rocket scientist to say, “wow, I am so relieved that that turned out not to be a problem.” In the meantime, it’s a very dangerous price signal – particularly, let’s go back to the Jack well, which is the name of the Chevron discovery. Chevron did a very professional job in my opinion of laying out the excitement they had that in one test well on a field that they found the presence of hydrocarbons a couple of years ago. They finally figured out how to do a flow test for almost a month, and based on that flow test from that one well they’re willing to go ahead and drill more appraisal wells and they really hope that the Jack field might contain as much as 300 million barrels of oil. How that got translated into another Prudhoe Bay was saying, “gosh, if the 300 mile area of the Gulf of Mexico in this lower Tertiary rock formation that’s never been tested turns out to have about 50 or 60 additional Jack wells, it will be the equivalent of Prudhoe Bay.” JIM: So this is just one extrapolation on top of another extrapolation. MATT: Yes. And in the meantime we have a massive shortage of the type of expensive, complicated deep-water rigs that it would take to basically make even an elementary probing of this 300 mile area of the lower Tertiary. And on sort of a rough count, our analysts think it would tie up about two-thirds of the deep-water rigs of that water depth for about a decade to do that job. So it was a massive over-reaction. [10:12] JIM: And even if, let’s say, it turns out to be just this one Chevron area, how long – when you have to test a well – before you can bring it to completion and then fully into production? MATT: Well, what the senior Chevron guy said as recently as a program we were both on on NPR yesterday morning, is that he would have been basically far happier had they tested the well flowing for a year versus 4 weeks – that they just couldn’t economically afford to do that. And now they are going back to the drawing board and studying very carefully all of the things that they think they learned to figure out where they want to drill the next well. So they’re not basically being irresponsible, they’re being very excited that it shows in this deep formation that there really appears to be at least some presence of hydrocarbon. [10:53] JIM: Well, let’s move on to something I also think is confusing for people, and that is: reserves versus production – because you hear talk about in the Canadian oil sands there’s about 175 billion barrels. Well, on the surface that sounds like another Saudi Arabia but will that turn into 10, 15, or 20 million barrels of production a day? – [that’s] another thing. MATT: You’re absolutely right, it’s amazing how casually senior people in the industry, and senior oil ministers around the world, toss around their guess as to the amount of usable proven reserves we have in the world. There was an oil workshop in Vienna that OPEC sponsored two weeks ago, and there were 4 or 5 people tossing out numbers, “we think there are 5 trillion, 4 ½ trillion, 7 trillion.” And isn’t that amazing, they are talking about an absolute, just total guess. And no one is basically making the differentiation between fabulous, high quality oil flowing from highly pressurized reservoirs where you have the luxury of a single well that produces between 10 and maybe as much as 50 thousand barrels a day, and – let me give you a heavy oil example. It’s one of the great recent stories. Shell Oil Company had a project where they were going to expand their heavy oil sands production by 100,000 barrels a day, and as of about this time a year ago, they thought it was going to be a $4 billion project. And then about 1 month later they announced it looked like it was going to be a $7.3 billion project, and about six weeks ago, they said it looked like about a $12 ½ billion project. And that’s for an upgrade of an incremental 100,000 barrels a day. [12:29] JIM: I’m just going to come at this from a financial point of view, but in its simplest form, isn’t this peak oil issue something similar to an inventory issue? You start with ending inventory, or reserves, you add new additions or discoveries, which gives you the total available, then you subtract from that what you consume. I mean, in its simplest form isn’t it something similar to that? MATT: What I think is far more important to track, and it’s hard to get good data on this, is all of the major oil fields in the world and how much they produced at their peak and how much they are now producing and what the average decline rate has been and is it accelerating or slowing down? And there are only a handful of areas in the world that you can get really good data. The North Sea happens to be the best data in the world. It turns out we still have less than 150 significant fields in the North Sea. And it was easy as can be and took several hours of analysis at best to conclude a decade ago that the North Sea was very nearing a peak and would soon start into a decline. And the denial that came out of the operators of those fields, as I started making presentations on that, was amazing. And it turns out, in 1999, the UK and the region sector of the North Sea peaked at 6.1 million barrels a day; and this Summer they basically hit around 4 million barrels a day. Now that is peaking. [13:54] JIM: When it comes to these new discoveries, last year, we only discovered 5 billion barrels, we consumed – correct me if I’m wrong, but – I think somewhere in the neighborhood of 30 to 35 billion barrels; we haven’t replaced what we’ve consumed for over two decades. That I think should alert even some of the optimists. MATT: You’d think it would, but what’s amazing is they basically don’t seem to actually have time to get their hands around that data. And there are concepts still floating around called reserve appreciation that it turns out once you discover something over time it’s always way bigger. That was a byproduct of the 50s and 60s and early 70s. That hasn’t been around for 2 ½ decades – except the thesis is still alive and well. And then there’s always the hope that we’ve just turned out to have an unfortunate three decade period of bad luck, and around the corner there’s going to be a fabulous new oil find some place, which when something like the Chevron discovery gets announced is why I think so many optimists jump to the conclusion that “wow, we’ve finally unlocked the door we knew was there to begin with.” [14:57] JIM: I was reading the BP Statistical Review for last year, and I believe the countries – if I remember my figures – that were increasing production were somewhere in the neighborhood of 2.2 or 2.3 million barrels. But subtract from that the countries that were declining and their production was 1.3, so you had totally as a globe an increase in production – I think the figure was – 890,000 barrels a day versus demand of 1 million. I mean that’s alarming, that’s an indication. MATT: John S. Harold [ph] in Greenwich, Connecticut just published a fabulous, interesting report last week of the 203 publicly traded companies that report their results, and every year they compile them in the E&P business – exploration and production business. And what they reported was that this group of companies spent $277 billion on their capital expenditures program for exploration and production in 2005, up 31% from what they spent in the previous year. And they basically increased their production by 1% per annum, and increased their total reserves by 2% – at an expenditure of $277 billion. It was also interesting that – these number are off the top of my head, but they are in order of magnitude correct – they spent something like $35 billion collectively on exploration which was the lowest level of exploration in 5 years; and they spent about $65 billion between dividends and stock buybacks. [16:25] JIM: Well, that should tell you something. MATT: That tells you something. JIM: You know something else I think maybe that we don’t understand here sometimes when prices spike and everybody’s after the oil companies – one of the alarming things that I think a recent issue of BusinessWeek pointed out is that I don’t think a lot of Americans understand that for example, 75% of the world’s reserves are held by OPEC countries, another 10% by the former Soviet Union. That means 85% of the world’s oil is outside our control. Now that in itself would be, or seem to be, a strong motivator to look for alternatives. MATT: Yes, but you know, as long as people are willing to think that around the corner we have a return to unbelievably cheap prices, I think we are going to basically remain in denial until we finally have a shortage. [17:15] JIM: A gentleman in the oil camp that is along your thinking in San Diego, Robert Hirsch, a senior energy advisor at Scientific Applications International MATT: I was with him on a program in London last week. JIM: He produced a report for the US Energy Department last year, and according to Hirsch the world needs to embark on a crash program 20 years in advance to prevent peak oil from hobbling the economy. Matt, in your opinion, do we have 20 years? MATT: No. No. First of all, I think Dr. Hirsch has done a fabulous study, he’s one of the more persuasive presenters I’ve ever heard, and what his point is: “Wake up, if it takes 20 years, don’t argue about is the date next year or 5 years from now or 15 years from now, or 20 years from now – start today.” There’s an incredible amount of data that is starting to show that according to the Dept. of Energy’s latest monthly statistical oil report, in December 2005, crude oil production which excludes natural gas, liquids and hydrocarbon processing gains, hit an all time world peak of just under 75 million barrels a day; and in the first 5 months of 2006, it declined every single month, and by May was down almost a million barrels a day. Now, if that trend continues for another 12 months, I think it will be fairly easy for people that want to be realists to say we actually peaked at the end of 2005. [18:39] JIM: You know what I find even more remarkable today is that given how close we are to peak oil is to look how undervalued the energy sector is given the outlook that we may be eventually facing $200 oil – some say $300 oil. I mean where else do you find companies that are selling a product that everybody needs, at a high price, and are selling at 6 and 7 times earnings? I’ve never seen anything like this. MATT: Well, it’s a collective belief that this is all an artificial world that we are living in that reflects those prices – those are unsustainably high prices so they are not really 5 times normal earnings they are 15 times normal earnings 3 years from now. That’s effectively sort of what the market’s assuming. [19:20] JIM: Why do you think in your opinion, Europeans and Asians have been more willing to reduce for example, dependence on imported oil: you had for example the energy crisis in the 70s; you saw France embark on nuclear energy after that 70s oil crisis; the Swiss are currently embracing a concept called 2000 watt society – a program designed to reduce energy consumption. Where are we? MATT: First of all, one advantage that maybe the Europeans had is that basically their governments taxed their energy so much higher than us that they really basically have been paying way higher prices and the prices have worked. It was also a lot easier for those countries to basically create things like mass transportation. Now, with France and its nuclear issue that wasn’t… – but all of Europe basically inherited a very viable railroad system that’s now basically used to transport people. Europe’s Achilles’ heel is their highway system is now clogged with semi-trucks moving goods around Europe because they can’t move on the railroad system. [20:24] JIM: One of the things that I also think is creating a problem, and you’ve written on this numerous occasions and commented on it, is that our energy gauges are broken so that when people hear on Wednesday and Thursday the inventory numbers and you hear the analysts say, “boy, we’ve never had this kind of a supply.” But as you and I have discussed in previous interviews, I mean people aren’t out there with a dipstick each week sticking it in the tank. MATT: Those have got to be almost entirely they’re paying some clerk who’s been given the assignment of “oh, it’s Friday morning, it’s time to basically email to the DOE our stock numbers, let’s see what we think they’ve changed over the last week.” And then we take those numbers, which are at the EIA’s admission sampling of less than 50% of the total holders, and gross them up as an accurate reflection of the United States; and then analysts assume that that’s a pretty good proxy for the world. [21:20] JIM: Equally almost as absurd is how the oil markets trade off that data. You would think that the oil traders – and there’s some pretty smart people on Wall Street – would say, “wait a minute, these numbers, we don’t know if they are real or not.” And yet you can see these large gyrations that we were talking about earlier in the interview all play off just because of some inventory number. MATT: It’s incredible. It’s like a peak at a racing form of a race that hasn’t happened yet. [21:45] JIM: Another issue that if we were to move forward, let’s say we start accepting that peak oil is real – especially if some of the trends you were talking about that have developed this year continue – describe the current state of our energy infrastructure. MATT: Rusty, in a nutshell. The problem with our whole energy system is it got too old, while demand was still very young. Let me just focus on our offshore drilling rigs, because that’s probably the most ‘cannibal’ unit of important assets in the industry, and of workable competitive offshore rigs we have about 500 of them in the world, and on average by the middle of next year they will be 25 years old. The history of using offshore rigs beyond a 25 year life is real skimpy. I know a handful of people, including myself that actually have a 25 year old car, and in our case we’ve really tried very hard to maintain it well because it’s a classic old Range Rover before they got Americanized, and basically it’s a dangerous car to drive because it’s 25 years old. I can’t imagine the industry basically getting comfortable with using offshore drilling rigs that are 30 to 35 years old. And I can’t envision anyway over the next 10 years we can make a dent on replacing even a third of our offshore drilling fleet. [23:03] JIM: And weren’t a lot of these rigs designed for times when the ocean temperatures weren’t as warm so we weren’t getting some of the kind of hurricanes and storms that we’ve seen through the last couple of years? MATT: I don’t actually know the answer to that so I would suspect that’s right, but I think far more importantly they really weren’t designed to envision that you would basically be doing not just into deep water, but then once you hit the drill bit into the earth going into deep formations. So the stress on the drilling equipment is far greater than they ever could have been designed for. [23:35] JIM: Somebody asked – I was debating somebody on peak oil and we were talking about an issue and one statistic, and correct me if these figures are off, but I think it was 1985 we were consuming about 60 million barrels a day; our production capacity was about 70 million barrels. So we had this spare capacity of about 10 million barrels and then refinery utilization was somewhere around 78%. Fast forward 20 years later, 2005, we’re producing oil equivalent of about 83 to 85, production is not much over that, so you’ve got a spare capacity between 1 and 2 million barrels with 92% utilization rate. I mean those are some telling statistics in of themselves. MATT: Another telling statistic that I think is a pretty daunting number is that between 1990 and 2005, global oil demand – exclusive of the collapse in the former Soviet Union which is a one-time event – grew by an astonishing 21 million barrels a day, during a 15 year period of time when most energy experts thought demand was peaking which is why we have no spare capacity anymore. [24:46] JIM: And at the same time our discovery rate and our replacement rate was also declining. MATT: Yes. If a high school senior class teacher just basically sat a class down and said let me spend an hour putting some numbers on the blackboard and you all tell me what you think they mean, I think you would get most people in a senior high school class in an average school in America saying this doesn’t look very good. Which really raises a question, why are so many of our supposed energy experts so smugly in denial that basically these numbers don’t mean anything? My single biggest puzzlement is where are these people coming from because I know what I do almost everyday I look at data and I analyze data? And it wouldn’t appear that most of the great optimists have ever had any time to look at the same [data] because we’re all looking at the same database – it’s not like there are 5 different sets of numbers out there. [25:37] JIM: You have described it, but if you look at this crisis we’ve got soaring demand, we’ve got loss of spare capacity, we’ve talked about shortage in the industry whether it’s rigs, projects to drill, or people, and shrinking supply with depletion. I mean, I don’t think if you look at that I mean that in itself tells you why we’re at where we are today. MATT: It’s interesting to see from my perspective how finally a lot of the supply-side guessers are having to publicly throw some number out as to what they’ve assumed for the average decline rate of the existing production base because anyone hasn’t figured that one out it’s obvious their supply model is wrong. And most of the number that I read today are saying, “well, we think basically the net rate of depletion is 2% a year, 3% a year, 4% a year, maybe 5% a year.” And then the CEO of Schlumberger last Fall comes out with a statement that “we, Schlumberger, believe it’s basically 8% a year.” It could be 10 or 12. We don’t have the data, but it certainly isn’t 2 or 3%. [26:48] JIM: The other thing too is when you take a look at these studies whether you’re looking at the government or the IEA, and one thing I think your book really got people thinking in Twilight in the Desert you talk about the fallacy of Middle East oil bailing us out. Yet, you can read it in the papers, the Saudis still say they can increase capacity. So you have the Saudis saying there will be more oil, you have Exxon-Mobil saying there will be more oil, you have CERA saying there’s going to be more oil coming, and then you also have PEMEX and Chevron discoveries. So Matt, it’s not hard to see why some people just aren’t alarmed or are not taking this seriously. MATT: I’ve been asked more than once, “who are your most vocal critics?” And I’ve said, “oh, gosh, just the CEOs of Exxon-Mobil, BP, Shell, the Oil Minister of Saudi Aramco, and CERA.” JIM: Well, I’ve pretty much covered them in there. MATT: You did. JIM: I guess one of the questions we got that somebody wanted me to ask you, is there anything out there that would change your mind or change your thought that peak is at the front door or inside the house? Is there anything like if you were to see Chevron or an Exxon come out and say, “here’s a Prudhoe Bay,” and then maybe a year later, two years later, BP comes out and says here’s a North Sea. MATT: Well, first of all, if we didn’t have such a chronic shortage of drilling rigs and with the average age of the rigs so old, then you could envision some miraculous series of discoveries, and a fast tracking sort of effort that the industry has never had very much luck at trying to do. Let me basically give you a sort of best, best, best case. In some part of the world, maybe it’s the Jack formation stretched across the Gulf of Mexico we discovered another North Sea. The North Sea basically took 30 years to build from modest production to peaking at 6.1 million barrels a day. And in the next 5 years it’s already off a third. Is it remotely possible to create 6 million barrels a day in a decade from any new area and I’d say the odds of that have to be in the 1 or 2%. And since we don’t have any spare rigs to do that, if you take the rigs that are now doing development wells off to do this new exploration you’re going to have an acceleration of the decline curve. So we’ve sort of run out the clock. I would say that if some announcement we made tomorrow morning in that there was some revolutionary new product that was going to significantly reduce demand, then I’d say well that is actually going to forestall peak oil. If we’re going to have a relief today it’s going to come through demand management as opposed to anything to do with supply in my opinion. [29:40] JIM: So if somebody like Toyota could come out and say we’ve got a diesel hybrid that’s going to get 100 miles a gallon… MATT: Yup, and we have the plant already built, and basically we’re starting to ship them to showrooms next month, and by the end of this year we’ll have sold 40 million cars. I’d say, well, there you go, we’re starting to wean ourselves from oil. [29:59] JIM: I guess have you been contacted? As I look at the peak oil issue if I was General Motors, if I was a Ford Motor taking a look at this issue, peak oil; if I was let’s say Boeing, that’s building jets; or I was an airline – you know, if peak oil is at the front door inside the house you’re talking about some major economic shifts in these kinds of industries. MATT: Yeah, and I think it is probably one of the reasons that all of those energy intensive industries you outlined tend to basically glom onto what the major oil companies say with such a hope they’ve got to be right. [30:39] JIM: Yes, because certainly airline tickets are getting more expensive. MATT: My scenario for where we’re headed with energy prices is literally a nightmare for the auto industry, a nightmare for the airline industry. I’m a little bit surprised since it’s such a bad scenario that those energy intensive industries haven’t kind of reached out with their best analysts to say, “maybe we ought to actually get together with some of these peak oil weird people and see if they have any idea of what they are talking about.” JIM: You know I think it was – is it Bakhtiari? MATT: Yes, Dr. Ali Bakhtiari – a fabulous person. JIM: He’s given a speech to the Australian Senate and talking about this, they were talking in Perth for example, they’re sort of preparing: they’ve got light rail systems; you take a look at how much is consumed in the transportation system. If this government report comes out in November, and let’s say the government comes to the conclusion this is something we need to take seriously, do you think that could spark something that we would do on the demand side to get our energy or let’s say our supply infrastructure changed? MATT: I think it’s going to have to. I’ve made a couple of sort of hunch predictions in the course of the last year, I’ll be glad to share with you: that over the course of the next 12 to 18 months peak oil will actually replace global warming as issue number one that people in the United States and most other countries are worried about; and that the election of 2008 will be determined by which of the candidates has the most coherent strategy for how the world copes with post peak oil. JIM: That is going to be attention getting. MATT: This is one of those issues that have come out of left field and it’s not going away and the data is going to get easier and easier to see, and it’s going to get more and more compelling. In the background there’s a strange issue that is far worse than peak oil – peak natural gas. [32:35] JIM: And yet we’re looking today, I think natural gas traded a little over $4.50. MATT: That’s because we basically had the blessing in the United States of the mildest Winter we’ve had in years and no hurricanes during the Summer, and so we’re going to have the luxury of going into the Winter season with storage comfortably full. But one of the things that worries me about the current way we’ve screwed up our energy markets is we literally don’t know how to use a cushion anymore. And the minute we have any presence of a little bit of a cushion then the analysts call it glut and punish it by a collapse in prices. So it goes back to where we started – high price volatility has basically created virtually a brain-dead industry. [33:14] JIM: Looking forward into this prediction of about 12 to 18 months – and I’m in agreement with you and I think as more and more people see that the price is not going from 60 back down to 30 or back down to 40, and that we’re more likely to be testing 80, and then beyond that – let’s say you were made energy tsar of this country, and you were given a mandate to something similar to a Manhattan project, prioritize if you would the steps that you would take first, number one, then two, three and four, that we should be doing now. MATT: Great question. Basically, the steps aren’t sequential. You have to do them all at once. But the most important step is to basically have a total data reform, and get some form of global governmental agencies to force the real data out of all of the holders, and so we basically once and for all skip to the bottom of this field by field production report. And anybody that basically wants to hide and say that’s our own data, needs to be put on a list as they’re hiding something. I think that’s probably the single most important thing that we can do to end the debate because the longer we debate the more we basically aren’t doing the right things. Then we basically have to attack with a passion all the things we can do to basically help stabilize supply. As for instance, removing the drilling bans around the entire outer continental shelf of North America – that’s an unbelievably important task – so we can start with the arduous task to try and figure out how much more usable oil and gas might we have close to home. Even though it’s going to be a decade or so away. So while you’re doing that we have to do the most amazing, explosive expenditures in energy R&D to try to find some new forms of energy that don’t exist today. And in the meantime, the only thing we can do in a 5 to 7 year period time that’s going to make a difference is an enormous change in how we use energy, and make our society far less energy intensive. And what that’s all about are some simple things like liberating the workforce and starting to pay by productivity, and let people work when they want to, and where they want to. And those that figure out a way to work close to home and get twice as much done get paid twice as much. Step number two, is we need to take a deep breath and look very carefully about our whole food supply and how much of our food today comes from continents away that’s unbelievably energy intensive to deliver and keep it fresh – and it doesn’t taste very good. And we need to start growing food close to where we live; and we need to figure out some ways to basically redesign our buildings so that we’re not using so much energy – basically to heat them in the Winter and cool them in the Summer. And all these things basically have to be done on a simultaneous basis because there’s no single one thing that will make a difference. [36:10] JIM: Now here’s something that I think goes along with this kind of concept, what does this do to globalization? Because you have companies like Dell for example that may order raw materials from Latin America, have them shipped to Asia, they’re assembled in Taiwan, maybe the box gets put together in China, it gets put on a boat, sent to Long Beach here in California, then put on a train and truck and shipped around the country. MATT: Yup, it was a flawed plan. JIM: So you’re talking about bringing jobs back home and more local. MATT: Yes. You know the flaw of the globalization plan – and I’m not talking globalization in the ability to communicate, I’m talking about exactly as you spelled out that we basically take everything that we buy and break it apart into the smallest unit and find the cheapest place in the world where you can build it because people are basically willing to work for 50 cents a day. The flaw of that is that all of those people’s aspirations within a decade to be is to be getting $10 an hour. So that was the first unsustainability of the model; and the second was the fact that we always have unlimited amounts of cheap energy to basically make transportation almost free. So globalization as we designed it just flat doesn’t work. That’s actually going to be the hardest one of the steps first though, because it takes the most time. So that’s why I’m such a fan of liberating the workforce because you can actually affect that in a very short period of time. We’ve created all the tools through the internet and our wireless telephone system and so forth to really basically allow people, in a way high percentage of the jobs that we have today, to work any place they want to and be more productive. [37:50] JIM: You know I guess if you look at peak oil, some people might be alarmed on it, but on a positive side if it brings jobs back home, if there’s a lot of technology going into alternative energy whether it’s more efficient building or rail system this is job creating. And you know it helps the economy. MATT: One of the things that I should have listed in my priorities steps is we basically have about a 5 to 7 year period time also to totally rebuild our energy system before it rusts away. That would represent the largest construction project in the history of the world. And the jobs that would create would be so unbelievable that it would be easy to tolerate triple digit oil prices. The reality is the biggest danger that we have for the world is the sudden collapse of oil prices, and the higher they go the quicker they start to unlock the doors that get us out of this box. [38:38] JIM: So I guess in a positive thing where right now we’re all caught up on global warming and sometimes I call it issues stuck on stupid, that your prediction, by the time we get to 2008 it’s going to dawn on people that peak oil is real and that party which has the most viable or workable energy plan is what’s going to carry. MATT: That’s what it seems to me but I might be wrong. But with every passing quarter the data becomes more visible, and I can’t imagine that by the time we’re speaking the Summer of 2008 that there will still be an awful lot of skeptics about peak oil because I think the data will have been overwhelming. It’s an event that’s either on the doorstep or past tense. [39:22] JIM: Well, Matt, I want to compliment you for putting up the hard fight and getting the information out there, because we need more people like you to bring people these facts. I know that Twilight in the Desert was a bestseller in hardback, it’s now available in paperback. And talk about the international publication since we have an international audience. MATT: Well, I’m pretty excited about the fact that in the first week in December I’ll be in Germany for 7 days with a publishing firm there promoting the book. And then I will be more excited to be spending the second week of January 2007 in China where the book is now finished and a fabulous team of Chinese scholars have done what I’m told is a beautiful job of translating a very complicated technical book perfectly into Chinese – and it will be published by the East China Normal University Press. And that to me will be one of the signal honors of my career. [40:17] JIM: Well, I just want to urge our listeners if you haven’t read Matt’s book, Twilight in the Desert, it’s available both in hardback and paperback. Matt, as always, it’s a pleasure to have you back on the Financial Sense Newshour – I hope again in the future you’ll come back and talk to us. Matthew R. Simmons Interview | April 29, 2006 Interview | April 29, 2006 Transcript ©
2006
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MATHEW
R. SIMMONS:
First of all, I think it’s astonishing that we could have created such
unbelievable volatility in the world’s largest natural resource, and
in a system that we’ve all gotten to believe was so transparent and
efficient we should have sort of a perfect market. And yet to have these
wild fluctuations in oil prices – and natural gas prices, which make
oil prices look modest – is very dangerous and in my opinion has
destroyed any sense of price signaling that’s one of the basic
premises of efficient markets at work. And I think we’re going to find
ourselves in the near future right back to the same unbelievable
tightness that we had 8 weeks ago because the market is as tight as a
drum. [2:06]