Friday, May 05, 2006

Matthew R. Simmons
Chairman, Simmons & Company, Int'l &
Author, Twilight in the Desert
April 29, 2006

"Tough Times Ahead for Energy"
[Edited for clarity]

JIM PUPLAVA: Well, energy prices are back on the front pages in the news stories today. Some think energy prices will stabilize, maybe they’ll come down a bit, while others think we’re headed for the perfect energy storm. To discuss this issue, joining me on the program is Matt Simmons, he’s Chairman of Simmons and Company International, and he's also author of a best-selling book Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy.

You know, Matt, the last time that we spoke was last August, and little did we know a few weeks later our whole energy infrastructure would be devastated by a good series of hurricanes. I would have thought that our hurricanes would have been our 9/11 or energy wake-up call, and yet I was surprised by the lack of response, and since then we’ve done very little. I believe we still don’t understand the gravity of our energy situation.

MATTHEW R. SIMMONS: You’re precisely right, and ironically you could argue that they were almost the reverse. There was this general sense by too many people that the only reason we have these temporary problems is because of these abnormal hurricanes. I’ll tell you a very odd story. I was on a BBC global radio program and it was the Tuesday afternoon after Katrina. They had a senior professor emeritus from Erasmus University on, who’s written a book called Hydrocarbon in the 21st Century [Peter Odell - Why Carbon Fuels Will Dominate the 21st Century's Global Energy Economy], and he claims we’ll be using twice as much oil in 2100 as we are today because oil in fact is renewable.

And so both of us were asked, since oil prices were at $70, do you think now this is the ultimate oil crisis? And the Professor said, “Oh, no, no, no – this is just a series of exogenous events, and within about 3 months it will all be corrected, and then oil prices will go to 35.” He said, “Mr. Simmons, what do you think?” I said, “first, I don’t know what ‘exogenous’ even means, but I think what Katrina did was actually bomb the Gulf of Mexico the same way [they] bombed Pearl Harbor. And we’re not even through the hurricane season yet and I think we’ll be very lucky if in 3 months we’ll even know the extent of the damage. And I think it will be a miracle if we have everything fixed before the next hurricane season starts in the Summer of 2006.”

And it turns out I was unerringly right, but the fact is that we had very funny oil statistics that came out when all of a sudden people couldn’t drive, and we had no way to count barrels in the areas where most of the storage was, and it created the illusion the high prices had really brought demand down. And so we had a price collapse. [3:12]

JIM: That’s absolutely amazing. Well, let’s move forward if we can to today’s headlines of record gas prices. Matt, how much of this is attributable to new government regulations on let’s say, sulfur content, and last year’s energy legislation requiring ethanol, and of course higher oil prices? I wonder if you could explain these changes and the impact they’ve made on gasoline prices.

MATT: The switch from MTBE to ethanol was, in my opinion, largely overlooked at such an unbelievably complex series of logistics we were putting on the system. And I wouldn’t be terribly surprised if we are basically days away from having gas lines erupt in a lot of key places. But I don’t think, so far, that’s really been the driver. I think the driver of gasoline and diesel prices is crude oil, and the fact that crude oil is back up in the mid-70s. And the reason it’s in the mid-70s, in my opinion, is we’re out of capacity every place. So I think the switch to ethanol and coming right behind it is this unbelievable specification for ultra-clean diesel fuel is probably something that doesn’t work. And that might be the triggering point for the same sort of gas lines we had in '79, but I think in the background is just the serious problem of the fact that this is just exactly where current prices should be if you think there’s nothing abnormal about crude oil being at 75. And every time I’m asked how in the world you could justify $75 price for oil, I say -- it’s in barrels: $75 happens to be 11 cents a cup. [There is] nothing we sell any place in the world for 11 cents a cup other than oil to refineries. [4:58]

JIM: In response, however, to these higher prices over the weekend, we have two Senators, one Democrat Carl Levin of Michigan, and Arlen Specter, a Republican of Pennsylvania, they propose a windfall profits tax, and in Specter’s case anti-trust legislation, and some Congressmen are talking about price controls. What would these proposals do to alleviate our current energy problem, if not exacerbate them?

MATT: Well, the price controls is really stupid because then that basically artificially just encourages consumption. I think at some point I’m a little – I hate to say this because it’s so counter anything I thought I would ever say – but to the extent that the major oil companies can continue to advertise that they’re really not making much money, and that they’re doing everything possible and that these are just temporary, and the cash builds up, and builds up, and builds up, and builds up, the governments of the world are going to basically take it away from them. Now, whether they should or not is a whole different reason, but I think had the companies been more forthright about and maybe they had done their homework a little better and said, “we are in a jam now and we’re not quite sure how we get out of it,” it would be easier to defend these prices. But what they’ve done is exactly the opposite, you know, “and this is just very temporary, oil’s a cyclical thing, what goes up comes down, over 15 years we’ve spent all this money.” And you know it won’t be long before one of the major oil companies has $100 billion of excess cash on the balance sheet. [6:29]

JIM: In the meantime, since Katrina and Rita, and others following – heck, we’re already into a new season…

MATT: Yup, the one thing we’ll know about the new season is that they’ve taken Rita and Katrina out of the hurricane language.

JIM: Since then, looking back however, we haven’t built a refinery, we’re not building wind turbines and we’ve done nothing with the rail system, are we committing energy suicide.

MATT: We’re certainly playing a game of Russian roulette or chicken. Now, both of those games have actually created over the years occasional suicide.

JIM: When you sit, however, and look at the way this is debated, I don’t believe the nation or many citizens understand how critical energy is to the economy, and the lifestyle we enjoy in this country from water, food production, technology to healthcare.

MATT: I’ve had the luxury of actually speaking in quite a few different places around the world over the course of the last 4 months and I would say that don’t just blame the United States for our ignorance, we’re basically just about as educated…last Thursday I spent a fabulous day at the University of Limerick in Ireland, and the question I got repeatedly asked, “why haven’t people come here and told us this story? This is shocking!” And I got the same reaction in New Zealand, and the same reaction in Aberdeen, Scotland. So we basically got 30 years of very, very low prices that got lower and lower because they never rose. So an inflation-adjusted basis really led us into dreaming that we had the right to basically get energy effectively for free and we could worry about other things. [8:12]

JIM: From my chair it almost looks, Matt, that we’re heading into a perfect energy storm. On one storm front you have supply versus demand; on the second, geopolitical issues. And then maybe a third storm front, a lack of a silver bullet, and even if there was something out there, it's the long lead time on alternatives.

MATT: Yes, and then you have all these flashpoints – the fact that the energy infrastructure is too old and it’s rusting away. Each one of these things is a separate issue.

JIM: Describe the origins of this crisis. How did we get into this predicament?

MATT: Well, if you wanted basically to go back and say when the seeds were really started: they were started when I was a kid in the '50s, and the world began believing that the Middle East had unlimited amounts of oil that we had barely just started to find, and its costs were so inexpensive that our biggest problem was basically how do we keep the world from being flooded with too much of it. So we have some sort of diversity of supply. At the same time, we're finalizing atomic energy. There was a debate going on – and this was long before I can remember about it, I’ve just gone and read about it out of curiosity – atomic energy was going to be so free that it didn’t actually warrant creating meters, the meters were way too expensive. Just give it to people for free.

So we kind of laid a foundation of an illusion that we could basically rely on effectively very expensive energy forever, and that the cornucopia of all cornucopias was in the Middle East. What amazes me is that it would appear to me now from a lot of feedback I’ve had that until I stumbled into the curiosity of finding these technical papers, and spent 2 ½ years working on what came out last June, and my book Twilight in the Desert, nobody had actually ever questioned the whole card. We just basically assumed. And so many people assumed it. It was one of those things. There’s no reason to ask how do you know that, because everybody knows it.

And then we made another egregious assumption or mistake – we created satellite TV, and out of that we let the whole world peek on how we lived. As a result China and India and Pakistan and Bolivia said, “I’d really love to live like those people in Canada and the United States do – and Europe. That really looks neat.” So we set the seeds [where] demand is going to grow forever and obviously we’ll be able to supply it because technology is making supply easier and easier to do, and we’ve always got the Middle East. And the problem is that demand was too young and supply was too old and we were giving the energy away for free. [11:03]

JIM: Something that relates to this is I believe that a lot of economists, analysts or forecasters have missed out that by the end of the 20th Century, this energy miracle that we experienced in the latter half of the 20th Century – actually throughout the 20th Century – had become globalized at that point. So now we’re dealing with emerging economic giants such as China and India – this is something that we didn’t have to deal with, let’s say in the '81 recession.

MATT: Oh heavens no. No, you’re absolutely right. And I’ll tell you what I don’t find very amusing is how many of these name-plate economists say, “well, what we all missed was China,” because I love to remind people that I wrote a white paper in the Summer of 1997 called China’s Insatiable Energy Needs, and I predicted that by 2005 that they would basically be using 6 ½ million barrels a day of oil – and that’s exactly what they were. So, all you had to do was actually go to China and have your eyes open. [11:56]

JIM: Matt, if we were looking at the energy situation in the '50s and '60s, things looked pretty bright. Then we got a wakeup call in the '70s. Then in the '80s and '90s, the pendulum swung again to the bright side. Now, I think we’re dealing with reality again, but this time I think it’s more serious.

MATT: The wake-up call we got in the '70s was a fire drill that actually created the illusion that the only thing we have to worry about is a fire in the back office. And what I mean by that is it was basically we need to be careful if these dangerous countries in the Middle East don’t artificially hold oil off the market. And as long as they don’t artificially do that, we’ll never ever have a problem. Whereas the real problem was the fact that basically in about 20 or 30 more years, their oil fields – unless they suddenly found any more – were going to be so old and they were going to go into decline. And no one ever took the time to worry about that. We actually got the classic ‘general fighting the last war.’ [12:54]

JIM: Now, in the '80s and '90s, we experienced an almost two-decade oil depression. How did this reshape the energy landscape and how did it change our thinking? I mean we went from an era of conservation to one of over consumption: cars got bigger and got less mileage; homes got bigger and were built further away from where people worked. How did that change the landscape in the sense of not only what we did economically, but maybe does that explain some of the thinking of oil company executives today?

MATT: Well, first of all, it codified several concepts in the conventional wisdom that turned out all to be wrong. The first was that we had a new suite of technology that was going to allow us to bring oil prices down lower and lower and people could be successful at it. And the technology meant that we had to drill fewer wells, so we didn’t worry about the fact that we let our drilling rigs rust away; and we didn’t worry about the fact that almost no new people came into the industry, because somehow we were going to do it through robotics, and GPS systems, and so forth. And literally there was some whacko people – there are still some whacko people – that are very prominent speakers that talk about digitized oil fields, and GPS systems and you know, satellites and so forth, and they’re just absolutely Buck Rogers – they should become Jules Verne.

And in the meantime, [for] the oil companies the technology created decline curves that were far steeper than they had ever been before because they were basically pulling the harder crumbs out of the ground at a faster and faster rate. And we didn’t find very many things of any size. And then because we were drilling fewer wells, we basically could end up very aggressively doing reserve estimations so you could kind of plug your F&D costs to your peers so you’d get the same amount of bonus. So we really went through a decade of imagining reserve additions. Had there not been this whistleblower at Shell Oil company in February 2004 who sent this big document kit to the Wall Street Journal and the New York Times, we never would have had this revelation that most reserves had been made up. The whole thing turned out to be a very unfortunate two decades where we dug ourselves in a very deep hole based on just one myth after another. [15:19]

JIM: Well, you know, a lot of those myths are still with us because out of the '80s and '90s we developed some pretty strong opinions that still exist today: that demand growth would slow down, that the cost of energy would get cheaper, technology would solve the problem, and we had in reserve non-conventional energy which would become abundant and profitable.

MATT: Yup, and unfortunately non-conventional energy takes an awful lot of conventional energy used up to make it useable, so we’re turning gold into lead.

JIM: Haven’t the facts, though, disputed a lot of these assumptions and yet they still exist?

MATT: Well, you know, the problem is that there really weren’t a lot of people that really had the time and inclination to actually doggedly chase down the facts, and there were an awful lot of people that basically loved to give the same talk because they’d heard it ten times so it must be right. And what’s been going on in the last 2 to 3 years is the beginning of an enormously important debate between what are sort of euphemistically called the optimists and the pessimists. And I know most of the optimists. And I know most of the pessimists. The optimists don’t have any facts. They have some firm hunches and beliefs. And the pessimists tend to be scientists who aren’t necessarily very good communicators. People in the audience tend to want to hear good news anyway and a lot of these optimists are very humorous speakers. They make great jokes and then wise people say, “well, the real answer must be half way between.”

But I have to tell you I am very encouraged over the course of the last year by the way the media has reacted. I think the media is doing fabulous work. I think there are at least 50 times more good speakers than there were two years ago on this subject who have done their homework. I think it helped that we ended up having a seven-fold rise in oil prices to start opening people’s eyes. About 100,000 people have read my book, which I think has opened some eyes. I’ve had so many people compliment me that I’m really humbled by it, saying, “you know, whether you’re totally right or slightly off, at least we’ll never again just merrily assume that the Middle East had unlimited amounts of oil.” [17:38]

JIM: The thing that sometimes surprises me when you turn on some of the financial stations you will hear an anchor saying, “how long will these prices persist?” And it’s almost a belief that maybe the high prices and the spikes that we’ve seen especially recently, are somewhat of an aberration. Remember after Katrina when they spiked at '70, they went down the next couple of months. And every time we seem to have these spikes, they always retreat. So everybody says, “Aha, this is what will happen again.”

MATT: Yup, and the oil bears, which there’s still herds of, come out and say, “OK, I told you so.” So that’s why I’m encouraged by the amount of increase in the dialog – I’m really discouraged that we actually haven’t had anything close to a listening to the alarm ringing, let alone a wake-up call.

JIM: Well given where we are today then what are the real questions we should be asking today, versus where the focus is?

MATT: We should be asking ourselves is it wise to ignore the reality of peak oil until it’s too late to fix it? Then we should ask ourselves if we recognize the problem is either here or approaching the front door, how quickly can we basically work out some sort of a global cooperation agreement so that we really significantly change the consumption of how we use oil in the transportation markets, so we don’t end up having a really awful tipping point. Now, those are the questions we ought to be asking ourselves. [19:11]

JIM: Yet, I get the IEA book every single year, and if you take a look at the government, the EIA [or the International Energy Agency], they all assume that the energy supply will be there to meet future demand.

MATT: I know. They have accidentally become cheer leaders for peace in our time. I’ve gotten to know quite a few of these people, and sadly enough I think they actually believe what they say. I think it would maybe I guess a little bit more comforting if they know that that’s not right, but they are just paid to say that. [19:42]

JIM: You know what’ll happen, and this happens with the optimist camp, they will cite these numbers of where future demand is going to be, and future supply is going to be there as well. And somebody with that kind of authority, you know to somebody that may not be familiar with all of this, that is almost very soothing.

MATT: It’s very soothing. But again, I have to say that I might be hallucinating, but I’m winning the PR war right now.

JIM: Well, you know, the one great thing I would say is [with] books like yours – Twilight in the Desert, which is an eye-opener and if our listeners have not read this book I highly recommend you pick up a copy – there are a plethora of voices however that [say] peak oil is a distant issue, and we’ve seen them on television this week.

MATT: I know all of them, but they’ll probably actually argue that until we go over Niagara Falls. But on the other hand, you know, there are precedents of this. If you go back and look at the history of…what’s really amazing is the weekend before Pearl Harbor, World War II was basically 25% over, and there were still people passionately saying the United States will never be at war, because they didn’t want the United States to be at war, it was inconvenient.

JIM: Just as peak oil.

MATT: Yes.

JIM: But what are executives thinking? I mean, I saw the January automobile shows. I’ve seen General Motors talk about a new lineup of SUVs, and the irony of the recent spike in gas prices they were – I think it was CNBC – interviewing some consumers and here’s a guy putting gas into his SUV and he’s upset about the price.

MATT: Yes, but you know, you’ve got to remember that sticker shock is totally different than prices really being high. And it was so interesting to come back from this trip to Italy and Ireland and see that they’re basically paying close to $7 a US gallon. And they’re kind of annoyed, as we are, because they would think it ought to be $4, which it was a couple of years ago.

But again, I continue to always convert it – because it is just so easy to – back into a cup, because if you go and order coffee, tea or wine or water, you basically buy it by the cup, and when you’re paying $3.20 a gallon in the United States is 20 cents a cup. And 45 cents of the $3.20 is taxes. Can you name me anything you can buy for 20 cents a cup anymore, other than gasoline?

JIM: Nothing.

MATT: And then when you say $75 a barrel – 11 cents a cup – refiners are the only purchasers in the world that can still buy valuable things at 11 cents a cup. I was asked in Ireland, “what do you think oil should sell for?”

“Well,” I said, “for the things that you think are dear. What do you pay for Irish whiskey?” I think basically the answer is on a per barrel basis about $4,000 a barrel.

JIM: If you look at it a six-pack of Coke, it is actually more expensive than if we were to take equivalent of gasoline.

MATT: Yes, a cup of gasoline sounds so trivial, but the reality is if you have access to a passenger car, you can basically get six people in it, some stuff in the trunk, and go two miles for 20 cents. Have you ever tried to negotiate with a guy on a donkey and a cart: “will you take me and my five friends 2 miles for 20 cents.” That guy’s going to swear at you for being stupid.

JIM: Well, why don’t you give us a run down on some of the cold hard facts, and this is something I really want to get to, and you do a good job of this in Twilight, regarding reserve additions and production profiles of the major producing countries because one statistics you will hear the optimists throw out continuously, “well, we have 175 billion barrels in the Canadian tar sands.”

MATT: Yup, it’s too bad we even have reserve data, because it’s so meaningless, and it’s so unreliable, and it doesn’t tell you anything about how much a country or company can produce in the next 2 to 3 years. And any time you start commingling light sweet oil that can come out of a pressurized well bore – one well bore – at the rate of 40,000 barrels a day, or 10,000 barrels a day with heavy oil from Canada [where] it costs you $10 billion per 100,000 barrel a day production, you’re really commingling Maseratis with jalopies, and some are saying, “I have a thousand vehicles.” It’s used all the time by the optimists and they don’t have any idea what they’re talking about.

What’s really also interesting is how little data we have of any quality about how much we have left of high quality sweet oil. And the answer is most of the key crude grades are basically now very tiny in their volumes. What we’ve made it up with is basically a lesser rating quality of crude that has a higher degree of sour properties in them, and poisonous gases and is also heavier. And what we’re doing in the heavy oil is chewing through natural gas primarily as a heat source and potable water too often to create steam to melt it into basically low quality crude. And that’s where I say, “Gentlemen, we have just turned gold into lead.” [25:07]

JIM: You know it was interesting after our interview last August, and having read your book and talking about the very likelihood of peak oil being upon our front door, we saw last year that Kuwait’s Burgan field, and Mexico’s Cantarell field peaking. Aren’t these examples of the first canaries starting to sing?

MATT: The day that the Chairman of Kuwait Petroleum Corporation announced that the great Burgan complex is exhausted that’s six decades of 2 million barrels a day, I said, “that’s the first canary in the mine shaft starting to sing.” Cantarell, that’s a very serious issue for the United States. Because if Cantarell has finished, wrapped up, over its tertiary recovery program, we don’t have a term in the oil for ‘quadrutiary’ recovery. So, it’s over. And if that actually falls to anywhere nearly as low as 500,000 barrels a day by 2009, Mexico will not be exporting oil to the United States, and that puts Hugo Chavez in an unbelievably powerful catbird seat to dictate terms to us as to the conditions under which he will sell us his heavy oil. [26:21]

JIM: The frightening thing about all of this - and you’ve used several analogies about our energy gauges are broken, despite being the largest industry in the world – the energy industry – it lacks transparency, something you have argued for a long time. But most people would be surprised to learn that most petroleum stocks are mostly computer guesses.

MATT: Yes – petroleum ‘stocks’ being inventory versus equities. We don’t have a fuel gauge that basically says, “oh, we’re almost empty.”

JIM: That’s kind of scary. Let’s say if you’ve got your buddies, you have 5 or 6 people in the car and you’re going across the Arizona desert and you have no idea what your fuel gauge is saying.

MATT: Yes, it’s interesting. At various times when I’ve been speaking at fairly large groups I ask a question, “is there anybody in the audience that’s run out of gas, please raise your hand.” It’s amazing but about 75-80% of the people in the audience always raise their hand. Almost everyone has had the indignity of sooner or later forgetting to look at the gas gauge and running out of gas. And you can be driving 75 miles an hour and one second later your car stops. We have gauges, but we forget to look at them. Here we don’t have a gauge. [27:31]

JIM: That’s a real problem if you take a look at any forecast for economic growth whether you’re talking about China, India, the United States, Europe, it’s all based on increased energy consumption. So if you’re talking about everything that we need for the necessities of life whether it’s growing food or getting basic goods to the stores that all requires energy. What happens when that energy isn’t there, or you can’t get enough of what you need?

MATT: Well, what happens is basically what we need disappears. See, that’s the irony. We’ll never run out of oil but we can easily run out of food on the shelves, and cars on the street, and it doesn’t mean we’ve run out of oil. It just means that we have no more useable oil in the system. When you run out of gas in a car, it doesn’t mean there’s no gasoline left. It’s just you don’t have any gasoline in your tank. [28:24]

JIM: Do you think, given these circumstances – I mean if you take a look at energy being on the front pages, the President mentioned it in his State of the Union message and he gave a major speech today – is this a growing recognition by Washington and the politicians that this is a serious issue that’s not going away?

MATT: I certainly think it is. I think history will actually remember President Bush’s State of the Union [where he] mentioned that it is time for America to end our addiction to oil, as one of the really major turning points in the thinking process of the United States of America. I’m not saying that from a partisan standpoint. I’d say the same thing if that had been said by President Clinton. [29:07]

JIM: I want to move on to something that is very difficult to assess or even predict, and that’s an aspect of energy which is geopolitics. I can think of several flashpoints – Middle East, Nigeria, Venezuela, the Straits of Malacca – just how vulnerable are we to a sudden supply disruption?

MATT: If we had 5 or 6 or 10 million barrels a day of spare shut-in capacity, the answer is not really, not very vulnerable. But the fact that we don’t have any spare capacity [makes us vulnerable]. Now the Straits of Malacca shutting down is a showstopper. That’s 11 million barrels a day of oil flows that basically allows oil to go from the Middle East and Africa into the Eastern Asian markets. If MEND [is successful], which is the movement to emancipate the Nigerian Delta, they’ve already shut in 650,000 barrels a day of Nigerian oil, and they’re going for all of Exxon’s next. They’ve publicly announced that. Shutting 2 million barrels a day of Nigerian oil that’s really high quality, light oil and it’s a very short distance by tanker from the Niger Delta to the Gulf of Mexico, so that’s another enormous vulnerability. If Mr. Chavez realizes that Cantarell really is now in decline and he announces, “I just don’t quite like the rich people in the United States. I’m willing to supply the US with oil, but only if they can certify that they’ve given it to the poor.” He’d become so popular throughout Latin America you couldn’t believe it. These aren’t all kind of Stephen King novel events. [30:43]

JIM: I’m never surprised when I turn on the TV. In fact I was reading – trying to think of the gentleman’s book on oil – and he was talking about in the chapter an attack on the Saudi oil facilities in Abqaiq, and the next morning I get up and I turn on the TV and there it is on the news.

MATT: It’s a very vulnerable facility. And what’s interesting is the good news is they killed the people in the cars, but two of the security guards also got killed. And the fact that they apparently breached the first gate was interesting.

JIM: Each kind of event it seems like they’re getting closer and closer.

MATT: Again, let me tell you an event that would be not terribly difficult for some whacko person to pull off, take a pick up truck and fill it with the same sort of energy that the guys did in Oklahoma City, and park it under the Alyeska pipeline. We have so many fragile choke points today that any of them now matter because we don’t have any spare capacity. [31:48]

JIM: Well, given this, how would you describe where we are today in terms of peak oil and gas? Is it approaching the front door, knocking at the world’s door, or is it now inside the house?

MATT: I think now the more I’ve had a lot of time to get educated about this issue, the closer you get to approaching this is the highest we can produce, the more dangerous it is to produce at that rate. And the safest thing to do is lower your rate of production so you actually don’t have a precipitous decline on the other side. On that standard, I would basically say that peak oil is now inside the front room. And peak natural gas is right behind it and is far more serious and will decline faster than oil because gas is a vapor. [32:32]

JIM: Don’t we have a problem of what remains is in stranded areas? In other words, the United States has gotten a lot of its gas through pipelines from the Gulf of Mexico through imports from Canada. But if we were to continue, we would need to liquefy it, put it in a special ship, and create a special loading dock to receive it (or LNG terminals) and we don’t have enough of them.

MATT: Well, most of the stranded gas we have in the world is of the same quality as the almost unlimited amounts of oil in the Middle East – it’s an illusion. It has not yet been discovered, and we should basically not be calling undiscovered gas a usable energy source. You can call it a theoretical energy source, but until you actually drill wells and drill a lot of appraisal wells and then core the wells so you know what the rock properties are, you have no earthly idea of whether you have usable energy or not.

JIM: And yet here in Southern California we’re building an LNG terminal south of us at the border which is the only place you can build them in California.

MATT: It’s a field of dreams: build me a stadium and the team will be there.

JIM: I want to come back to your book Twilight in the Desert where you talk about a lot of the larger producers have all peaked, recent evidence with Mexico and Cantarell, even Kuwait with Burgan. In your research in Twilight you’re talking about this approaching peak, it seems like everybody – whether you’re looking at the EIA or the IEA – looks towards Saudi Arabia, and yet I don’t know maybe they believe this themselves that they’re going out and say, “well, we’re going to invest this much, and we’re going to take our production up to a certain level,” but I get from reading Twilight you doubt if that’s possible.

MATT: Well, first of all, it is not possible. I’ve had the luxury now of an enormous amount of feedback, including some really senior people within Saudi Aramco that have had the guts to say, “I really love reading your book, you accurately described the unbelievable challenges we’re dealing with.” I think part of the problem that some people there have is they’ve heard for so many years through our experts that they can produce 25 million barrels a day, that they say, “Pssht, sure we can, everybody has told us that.” [34:47]

JIM: Whether they can do that and taking a look at their difficulties, but these are some serious assumptions I think that…

MATT: There are some unbelievable assumptions. When you have gentlemen like Dr. Sadad al-Husseini who has his PhD from Brown University, and he was Executive Vice-President of Saudi Aramco in charge of E&P, and Dr al-Husseini and I have been on two programs together in England, and he’s been quoted in the English papers as saying the West is deluded to rely on Saudi oil. He’s basically said, “over 12 million barrels a day, it just isn’t in the cards.” And he was known in the '90s as the brains of Saudi Aramco, and he’s a fabulous human being. [35:30]

JIM: Let’s go to the optimists’ arguments for a minute and just show how serious this is. I wonder Matt if you would give us a quick rundown of the alternatives: tar sands; nuclear power; wind; solar; clean coal; and biofuels – which are in the headlines.

MATT: The first thing that the optimists rely on is that we always have had reserve appreciation, and so fields over time always get bigger. That happened 50 years ago. There’s not a scrap of data to support that concept for the last 25 years. It’s just wrong. The second concept is embrace technology. All you have to do is be a believer in technology. I continue to remind people that all the oil field technology we’re talking about was being invented in the early '70s when our firm started business. It took a decade to invent it, it took a decade to commercialize it, and it took 15 years to spread it around the world and the blackboard’s bare. There is no more technology of any significance that anybody is working on. So then you get into: look at all the unconventional oil we have that is now commercial. You can make money – if you’ve already paid for your facility and written it off – on oil sands, but oil sands are very different from tar sands. The oil sands can be strip mined and they’re still extremely energy intensive, but tar sands need to have these deep mine shafts of steam put in to melt the [tar] – it’s really basically bitumen, a recycle of La Brea tar pits – you chew up such an intensive amount of energy. And what they’re talking about is undiscovered natural gas in Northern Alberta, and potable river water from the Athabasca River, that to use either one as a steam source to create low quality oil is a crime.

And then they basically talk about – assume – all this stuff we’re basically going to discover, and I say, “you know, give me a break, Cantarell in Mexico was discovered in 1975 and 1976, that’s the last giant oil field we’ve ever found. Prudhoe Bay, the North Sea, and Western Siberia were all discovered in 1968, and that’s the last time we found a large or medium onshore oil field in the Middle East.” 1968 was a long time ago. [37:44]

JIM: What about, for example, Mexico announcing that they discovered a giant oil field, though we don’t know much about it.

MATT: They don’t know much about it because there’s been one well drilled and they haven’t yet cored it. You see until you core a well -- which is really basically a very technically tricky process of going down to the level of the earth where you think the oil rocks are productive, and literally cutting a core, and retrieving it and sending it to a laboratory, and saying let’s test the porosity, let’s test the permeability, you don’t know anything about the reservoir rocks and whether they will flow oil or not. Until you flow test the oil, you know nothing about whether it’s highly free flowing or very, very syrupy molasses. So, drilling a well is an important first step, but until you well test and core, you’re basically just guessing. [38:44]

JIM: What about biofuels?

MATT: There are probably some biofuels that are really good potential solutions, but any biofuel that has to be planted every year is by definition taking a lot of nutrients out of the soil. Unless you’re using very, very cheap labor, you’re using a lot of energy in your tractors and a lot of energy in your fertilizer. Now take sugarcane-based ethanol in Brazil for instance. They basically don’t uproot the cane. They have cheap labor with machetes that hack it, so that’s actually pretty energy-intensive. The work that’s being done on switch grass, which is this fabulous grass we sort of plowed up in most parts of the Midwest that covered the Great Plains and at one time fed 100 million buffalo, as long as you’re not grazing it with buffalo, it grows between 6 and 8 feet in the peak of the season. You cut it with hay machinery, so it regrows the next spring. There’s a lot of promise in those types of fuels. But what we’re doing is we’re promoting things basically for the sake of subsidies and being callously ignorant of the energy intensity. What we can’t afford the luxury of is creating a whole new suite of energy products that are net energy losers. [39:55]

JIM: How would you describe corn ethanol?

MATT: Net energy loser – big time.

JIM: And yet that’s what we just passed and that’s the direction we seem to be going in.

MATT: Yes, and the corn lobby is a very powerful lobby. They love the subsidy, but I think it’s time to kind of get off that stuff.

JIM: Given where we are and what you know, what should we be doing now?

MATT: Getting as educated as can be on how serious these issues are. Getting as educated as can be on how inexpensive energy still is. Start thinking through all the ways we can rapidly reduce the intensity of how we use oil and gas, so that we make sure we don’t basically waste it unnecessarily. Go on an R&D program the likes of which we’ve never done to create some new forms of energy. But I think that won’t happen soon enough.

So we really have to adopt a big conservation plan: liberating people to work wherever they want to, and when they want to, and pay by productivity, could be one of the really great sort of social revolution things that we do in the next 5 years and basically eliminate all the people in places like California and Texas, for instance, who are spending upwards of 4 hours a day crawling to work in traffic and crawling home so they’re mad when they get to work, and they’re mad when they get home, and they were mad when oil was free. Eliminating our kind of compulsive obsession with having exotic food from all around the world in our supermarkets every place 24 hours a day, 7 days a week, 365 days a year – it’s too energy intensive. Growing stuff at home and canning it. And what we really need to do is ultimately reverse this concept of globalization and go back to actually living in what are euphemistically called villages close to where we work, which can be downtown, but it’s just not 3 hours commute. [41:42]

JIM: What about the rail system?

MATT: The rail system needs to be totally overhauled and totally rebuilt, and use the rail system to ship goods and people but in shipping goods only do it as far as you can ship goods to water, and then get goods on marine based transportation, barges or vessels, and use our water system as the way we basically deliver goods as close to where the kind of end point is – sort of like Federal Express does. And we can actually do all of this stuff. I mean if we applied this on a global basis with the same intensity as we had to build the war machine for World War II, we could get this done in 5 to 7 years. [42:24]

JIM: Do you think it’s going to take a crisis to launch that?

MATT: Sure it is. Go back again to where we started. If Katrina and Rita weren’t even looked at as they were flashing yellow lights, it’s going to take a crisis.

JIM: That’s what I fear, Matt. I fear we’re heading into this perfect energy storm because it’s like we’re sitting on the shore, and the sky looks blue, the winds are picking up but about 10 to 15 miles offshore, beyond sight, there’s a hurricane.

MATT: At least there are a lot more people in serious places that are starting to think through than there were about by a huge measure a year ago. But to galvanize the whole system, I think we’re going to have to have some form of an energy 9/11.

JIM: Any final thoughts for our listeners? Let’s say if there’s some skeptics in the crowd because you know we hear stories about abiotic oil, and there’s just a naturally gooey center in the middle of the Earth that replenishes every well in the world, I can’t help but think in terms of that argument that if you were ExxonMobil sitting on that cash that if there was a gooey spot in the earth somewhere, you would be going after it.

MATT: If the abiotic oil theory worked, why didn’t it ever refill any of our depleted oil fields? I think that we have basically created a fool’s paradise, and it’s really time for the fools to wake up and get real because this is actually something that could really destroy our lives, and not our kids’ lives, but our lives. But it doesn’t have to happen that way. [43:53]

JIM: It goes back to something you said mid-way in our conversation: it’s not at the front door, it’s inside the house. Matt, your book Twilight in the Desert did a lot to open people’s eyes. When’s it coming out in paperback?

MATT: In about a month, and also exciting for me is in about 2 months, it comes out in Chinese.

JIM: And the 100,000 copies that have sold globally, which is incredible, what are the sales overseas, has it been as popular there?

MATT: I don’t really know, all I can tell you is on Friday afternoon and I went into my favorite bookstore in London Hatchards, and I couldn’t believe as I walked up the stairs to see a ‘hot items’ [list] with Twilight in the Desert at the top, so I introduced myself to the guy at the desk, and he said, “come up stairs and sign the ten copies we have on the shelves,” and we got there and they were gone, and he’d just filled the shelves up on Thursday afternoon. He said, “we’re having people come in and buy this book five at a time. I can’t believe you wrote it.” You know, for a book that came out in the middle of last June, it’s pretty good news to me. Wiley has decided they’re going to continue publishing the hardback even though usually when the paperback comes out publishers sort of wind up the printing effort on the hardback. [45:06]

JIM: All I can say to my listeners is if you want to get educated, Matt’s book is certainly one of the top of the list because it opens up your eyes whenever you hear about oil being bountiful in the Middle East. Matt, I know you’re a busy person and you have to get off, but I want to thank you as always for giving us a good deal of your time and joining us on the Financial Sense Newshour.

MATT: Well, thank you for the opportunity for being on your program. I enjoyed the conversation last Fall, and I enjoyed it again today.

JIM: Alright, and all the best to you Sir, and may you sell another 100,000 copies.