Chairman, Simmons & Company International
and Author of "Twilight in the Desert"
"The GAO Report on Peak Oil"
TRANSCRIPT OF AUDIO INTERVIEW
JIM: In February of this year the General Accounting Office released a report on crude oil. Uncertainty about the future oil supply makes it important to develop a strategy for addressing a peak and a decline in oil production. Joining me on the program this week is Matt Simmons, he’s Chairman of Simmons Intl.
Matt, when I saw this report I thought: finally, somebody in Washington is taking this issue seriously. I found that at least encouraging.
MATT SIMMONS: Yeah, I did too. I knew that the report was going to be released in a press conference last Thursday. Congressman Udall, and Congressman Bartlett, I think are two really remarkably great Americans. Bartlett’s basically an 18-year veteran Republican from Frederick, Maryland, and a PhD in science. And Tom Udall is a Democratic Congressman from Albuquerque. He’s the son of Stewart Udall, probably the last great Secretary of the Interior. So these are two very special people. They happen to also be the co-chairmen of the Peak Oil Caucus. And I felt it was like basically finally the first real official cannon going off saying we really screwed up. [1:35]
JIM: What I find fascinating is the range of estimates that they used in their study. It was as wide as the Grand Canyon. If you take a look at some of the optimistic side which says peak is not reached until 2040, yet we get more evidence – I don’t care if it’s hearing about Burgan, Cantarell; and especially, we knew that Cantarell had peaked but the decline that they announced earlier this year is much greater than expected; Ghawar. You know, that seems to me to point out that this is closer than we think.
MATT: Well, also, if you look at the GAO table that they have where they have 20 different groups that basically gave them their sort of forecast, most of them don’t have a single point in time (which is probably wise) – they have a range. Two or three have a range of 40 years, so you say why even have them in, other than to say they obviously don’t have any idea. But it’s interesting you can turn that around and say that if you draw a line down with now being the start of 2007, eleven of the twenty have their peak oil arriving within a timeframe that’s within now. So the now actually has far heavier weight than 2037 – it’s just that basically the outlier was 2037. And so I think they appropriately said that they also said that it takes so long to basically prepare for what we do after that, that even if it turns out that it’s 2037, America is remiss at not having a Plan B in place today.
But they also said is that the reason for the uncertainty is that the data is so fuzzy – of course, this has been a hot-button issue of mine for the last five years – that unless we have urgent data reform and start getting field-by-field production reports then we’ll actually discover peak oil the old-fashioned way through the rear-view mirror. And the fact they say there are 14 entities within the government, spread out across the face of the government, that are sort of collecting bits and pieces of the sort of data you need to have – so one of the strong recommendations to the Secretary of Energy is pull all of those together in one tight coordinated monitoring and look at this like a hawk because it’s going to happen. [3:40]
JIM: They talked about peak oil being dependent on multiple factors: they talked about the amount of oil still in the ground; how much can be recovered; technology costs; environmental challenges; and global demand. However, they are not getting at – in terms of how much we’re consuming and how much we’re finding – what is the present rate of depletion. I would have expected to see more in that vein.
MATT: Well, the problem is: to do a good job – I mean, I know the team of three people that were working on this came down to Houston and spent really pretty well all afternoon in my office and they had a long, long list of things, and we had a long serious discussion, and I applauded them for having their questions so well thought through – but to do an honest job they’ve got to plow through Exxon’s people, and the USGS’ folks, and Cambridge Energy’s folks. And I think they were bewildered as they started putting it together by what…I mean people are all over the map on this. But what I find so increasingly interesting is that all the people that have data come to the same conclusion. All the people that basically pooh-pooh the idea have a bunch of fabulous theses but they don’t have any data. [4:46]
JIM: Wishful thinking.
MATT: Yeah, it’s really wishful thinking. And it starts right at the very top of the CEOs of virtually all the major oil companies, but they have no data. They just have a really pleasant feeling that bad things don’t happen to good people. [4:59]
JIM: What I also found fascinating – they alluded to the fact and highlighted how much we, as a country, are spending for gasoline each year. I think they pointed out like one year we spent 38 billion more. In California, right now, Matt, super is at $3.52. However we’re still making assumptions that that present consumption trends will continue. For example, in this report they are talking about 118 million barrels a day will be required by 2030, but no real answer as to how we get there.
MATT: Well, the International Energy Agency and their World Energy Outlook 2006 book had one page that was hand-written by Fatih Birol, the Chief Economist, who shares with me the belief that this is the worst issue of the 21st Century. The fact is that we don’t have the most important missing ingredient in the supply outlook which is what the average decline rate is of the existing fields today. And they say that we think it ranges probably from 2 or 3% in some fields or areas, to 11 or 12% in others. In their models showing that you go basically to 118 million by 2030, they assume an average of 8%. If you take that through a calculator, what it assumes is that the current 85 is down to 10. So we only have to find 105 million barrels a day between now and the next 23 years to get there, which has a statistical likelihood of happening of zero. [6:26]
JIM: It’s amazing when you consider the size of this country and the amount of energy that we consume.
MATT: How about the size of the world. It’s not just this country – this is a global issue.
JIM: They talk about how vulnerable we are now because we are importing 66% of our energy needs – and that figure is only going to get worse.
MATT: Yes, and I’ve been saying for quite some time that basically the United States was so energy secure in 1970, the year we peaked in our oil supply, and the country that was held out to dry turned out to be Japan. Well, we’re Japan of 1970, in circa 2007. In that short period of time the United States has become far more energy vulnerable than Japan was – because we consume so much. [7:09]
JIM: One of the difficulties I think that we have when we discuss the peak oil issue is they talk about the amount of oil that is left in the ground, and it ranges from one trillion to three trillion. Isn’t the real problem that we have here is equating reserves with production? For example, they use figures like there’s 170 billion in reserves in the Canadian oil sands, but the Canadian oil sands are never going to produce at the rate that Saudi Arabia does.
MATT: If the Canadian oil sands ever got to 3 million barrels a day, you would have basically destroyed Alberta. It is so unbelievably energy intensive and water intensive to do that. That’s why we should just toss – reserve data is now so worthless that it’s meaningless. You mentioned Cantarell. I spent a week ago yesterday, pretty well all day at his request, visiting with the new Director General of Pemex, and Mexico thought they had 50 million barrels of oil 7 years ago – they now think they have 13. And what they now know because it’s happening in front of their eyes is that the world’s second largest producing oil field, Cantarell – that has accounted for 6 out of every 10 barrels of oil that Mexico’s produced for the last 40 years – finally went into a tertiary recovery program. They went from 40 producing wells to 440 producing wells. The 40 producing wells from 81 to 96 produced a million barrels a day without a hiccup. They now have 440 producing wells and they nitrogen injected the gas cap which was like stepping on a tube of toothpaste, and it ramped the production all the way up to 2.2 million barrels a day. And all of a sudden it’s in decline, and it’s declined by 20% the first year. They are hoping that the decline rate slows down to 14% - but it’s just a hope. And my commentary was if you look at the production profiles of all sorts of publicly available data on giant producing fields that have now done sort of the most aggressive sweep of their oil, it doesn’t slow down until you’re down to about the last 10%. Then it slows way down when you manage the tail. [9:08]
JIM: Yet the remarkable thing, as you’re describing what’s happening with the second largest oil field, there are similar problems with the world’s largest oil field.
MATT: There are similar problems with the world’s third largest; there are similar problems with the world’s fourth largest. You can go down the top twenty producing oil fields and there might be one or two that are still in their ascendancy – but the rest are all in irreversible decline. That’s what makes it so hard for me to fathom why some people can so casually say that peak oil is an event that won’t happen for decades, and then we’ll have an undulating plateau for decades. And I say, “give me a break, where are they coming from?” They have access to the same data I do. [9:44]
JIM: Is it just something that is optimistic because I mean if you take a look at – and this gets back to the reserves data – and you look at, okay, we have the tar sands, and maybe we have shale oil, we have deepwater oil, and the assumptions out there that we have all this stuff, maybe not in the conventional form, and we’ll just substitute that stuff.
MATT: Yeah, that’s exactly what they are doing. And Dan Yergin at CERA, along with Exxon, have probably become the two loudest voices that we have no problems. He basically loves to go back and remind people over the last one hundred years we’ve had several times when we were basically worried that it seemed like we had run out of things to find – he always said “run out of oil” but it’s never been that, it’s run out of things to find – and then, bingo, we find a new oil basin. Well, he’s actually correct, as we started from no idea what was there to now we’ve basically swept the world. What he is basically assuming is if you do that for one hundred years you can do it for another hundred years. And it’s a terrific economist sort of thesis – but you can also go back and say that Cantarell in 1975, 76 was the last oil field that we’ve ever found that basically produced over a million barrels a day; and the North Sea fields were the last fields that we ever found that produced over 500,000 barrels a day. And now we basically have Thunder Horse may be coming on in 2009, as opposed to 2005, that may be it will produce 250,000 barrels a day – that’s the biggest deepwater field we’ll ever do. And so the average new field today – you know, giant field – produces about 40- or 50,000 barrels a day for a couple of years and then goes into rapid decline. That’s just real numbers. [11:25]
JIM: I guess I see one of the real challenges here, as we’re talking about these statistics, is developing alternatives as soon as we can but the alternatives are going to depend on the price of oil remaining high. But yet, Matt, I watched a program this morning where you had a bunch of economists and they were talking about, “well, the US economy is going to slow down, as that happens we’re going to have demand destruction and the price of oil is going back below 50.”
MATT: Yeah, they’re crazy. As a group they are so flippant, they’ve been so discredited on the price of oil is going to go back. It was going to go back at 25, go back at 30, going to go back at 40; $30 oil creates a recession – everybody weighed in on that. We blew through $30 like a warm knife through butter. Interestingly today, this morning when the Iranians said we’re going to let the sailors go, oil prices collapsed by a dollar. Well, at the end of the day, I just checked spot prices around the world, and Tapis grade (which is South East Asia’s light sweet grade) is basically $73.75 today – cash market. Cusiana is $71 – that’s Colombian light sweet crude; Mayan crude in Mexico is $51. So there’s a $20 spread today between heavy oil and light oil. So we’re back to $70 a barrel, it’s just basically not there in WTI even though the forward price it got, the price crossed 70 for December crude. All we need is just a little bit of a hiccup – a little bit of spurt in demand and supply not growing – and we’re likely to have the same thing that happened yesterday in Colorado where a lot of service stations ran out of gas. And that’s a temporary problem because one of their refineries in the Rocky Mountains had some maintenance problems and so they are out of gas. But the world is right on the verge of being out of – run out of oil. But we’re in basically have demand outstrip supply. [13:11]
JIM: You know, I think one of the problems that we have here, Matt, and especially in this country we were so fortunate to have large oil reserves. We were self-sufficient and when our oil ran out we just simply went overseas and bought it from somebody else. So all these economic models that they talk about – the financial guys, the economists, and the Wall Street people – well, typically that held true: if you went into a recession in the past, demand would go down, the price of oil would come down. But we’re not there anymore.
MATT: Yeah, it’s just all the old formulae got thrown out the window. And to basically say, “well, this will be just like the 70s, we’ll have a spike, and then go down.” I say, that’s like somebody saying at the outbreak of World War II, “well, this is just going to be like the Civil War.” It turned out basically it was about the same length, and it was just as awful in its region, but it had nothing to do with the Civil War. [14:01]
JIM: As I went through the GAO report, another problem is that – as they address – a lot of these government agencies they spoke with in putting this report together, their efforts were not specifically designed to address peak oil. In fact, the Department Of Energy said there is no formal strategy for coordinating and prioritizing Federal efforts dealing with peak. And right now, the hot topic in Washington is global warming. It’s like putting the cart before the horse.
MATT: It’s amazing how this one report from the United Nation’s study group, and Al Gore’s movie, finally just put the icing on the cake that, “oh my gosh, let’s all acknowledge global warming’s here.” And I say that climate change is probably a very important issue. I do not pooh-pooh that at all. I think we need far better data to understand the implications of whether it’s CO2, or methane for instance. There’s a lot of data in that same report that methane is three times more lethal – it’s just that we don’t know how to capture it, and so it’s easier to pick on CO2. But peak oil is far more real. The data is far more compelling, and the impact on our lives in the next three years is utterly awful if we ignore it and it happens. [15:14]
JIM: It surprises me, and maybe it’s because of these old paradigms we’re asking the wrong questions. I mean, I am still to this day floored every week when they report these inventory numbers on Wednesday and Thursday. I think something more meaningful might be: what is happening to the depletion rates of the oil fields – as you mentioned; what is happening to car sales in China – some of those things; and how much did we find last year compared to what we consumed? That seems to me more relevant.
MATT: I couldn’t agree with you more. And then the pundits that follow the inventory reports like they’re racing forms don’t have any idea how to properly read the data. You can have ten million barrels more inventory than you did five years ago, but if your demand is way up on a day’s supply you’re in the hole. So we’re operating right now as close to a just-in-time supply as you could possibly get. I’ll tell you what’s most alarming – I’ll go back to Mexico for a minute – is that if it turns out that the 20% decline rate is correct, that it doesn’t moderate (and there’s no earthly reason that it would moderate in my opinion other than just phenomenal good luck), then sometime between now and 2010, Mexico fails to be able to export any oil. And from a US Gulf coast refinery standpoint that is basically a Pearl Harbor day event. And then it puts us unbelievably at the mercy of Hugo Chavez in Venezuela – other than the fact that his oil is basically probably in as big a disarray, other than the synthetic crude projects that he just nationalized. So we have some problems right now that are on our doorstep that are not decades away – they are basically between now and 2010. [16:49]
JIM: One of the things I think should get more coverage in the press – one thing that strikes me – is despite spending tens of billions of dollars in Saudi Arabia they’ve been unable to really increase their production.
MATT: Moreover, there are now a growing number of oil sleuths who are plumbing through…I don’t know if you’ve ever gone on The Oil Drum, which is the most sophisticated energy blog on the internet?
JIM: Sure do.
MATT: They’ve had some fabulous exchanges of guys who basically have gone back and lined up all the right data you can get on these new fields that came on in Saudi Arabia, and the fact that they didn’t basically increase production. They did come on. So what we don’t know is where is Ghawar today – is it basically under four, is it under three? We don’t have any idea. Is Saudi Arabia producing nine or eight? We don’t have any idea. What they say is they have 11 million barrels a day of productive capacity, but if we have oil prices up in the 80 or 90 or $100 a barrel this summer because we have too high a demand, they are going to look awfully silly if they basically say, “well, we have 11 million barrels a day but no one wants our oil.” [17:54]
JIM: I was going through the report they were talking about our deepwater oil, and they estimate that will peak in 2016. But if you really boil it down – and this relates back to Saudi Arabia – they conclude that US demand for oil will need to be fulfilled by increases in production from the rest of the world. But here, Matt, you and I are talking about the largest producer in the world, and they can’t increase their production.
MATT: The reality – it would be nice to think otherwise – but the reality of the Middle East oil is that there were 35 giant fields that were discovered, and they were all discovered in a very narrow area. If you sit in the EXPEC center of Saudi Aramco in Dhahran and watch this really well put together 3D movie, the movie starts out with a depiction of the earth cracking and the creation of the Rift Valley and the Red Sea; and what they show is that basically effectively scraped the whole Arabian Peninsula of several thousand feet of what was once rich swampland over until it hit the Zagreb [phon.] mountains – and that’s why these 35 fields are lined up perfectly North to South like they are tankers on a radar screen coming out of the Straits of Hormuz. That’s all the oil that basically got created in the Middle East because of that one event.
What I found out to my unbelievable amazement as I went back and read some SPE papers about Cantarell before going to Mexico last week, was that in the mid-90s they discovered the most amazing fact that they basically through magnetic surveys the largest meteorite crater that’s ever been discovered was this meteorite they believed hit earth 45 to 60 million years ago and created a ten-by-ten mile crater – that’s the Bay of Campeche. Within that crater floor is every giant oil field of Mexico.
So two acts of God created two of the most prolific basins the world has ever known. And yet for a half a century we sort of assumed oil was kind of dispersed around the world equally, and if we just had two million rigs at work we’d basically be producing 200 million barrels a day. No one ever quite said that, but that was sort of the implication of the architecture that we created for the world we now have. [19:57]
JIM: Another issue I find absolutely fascinating in this whole debate, and I’ve interviewed authors who think peak oil is a myth, some think it is far out in the distance, but when I take a look at it and you boil it down, you’ve got about 75% of the world’s oil lies within OPEC, and another 10% in Russia – their reserves are unaudited, so how do we know what they have are real? They increased by 300 billion in the 80s with no major discovery. Then many OPEC countries, their reserves remained constant.
MATT: Well, they produced another 350 billion barrels of oil.
JIM: Yeah. And you know, the government report even acknowledged this. They said, “wait a minute, Kuwait has not changed its reserves in the last two decades, and yet we know that they produced 8 billion barrels of oil.” The fact that nobody questions this is just remarkable.
MATT: I find it so utterly naïve for people to just say, “you’re stupid, just look at the 265 billion barrels that Saudi Arabia has.” And I say, yes, I know because of the research I did that the senior executives at Aramco under oath told the same GAO entity that there were basically 110 billion barrels in 1979 (of proven reserves under SEC standards) and basically since then they’ve produced down to where that same number would be probably today 18 to 20 billion left. And yet they say they have 265 billion, and they have another 200 billion sitting in reserves if we ever need it. And people say, “thank you, I didn’t realize that.” I can tell you on your program that, trust me, my net worth will exceed Bill Gates’ by 2030, and you’d be a fool to believe it unless Bill Gates had a terrible financial collapse. There’s nothing illegal about me telling you that. I can want that – and that’s kind of what the world has done. [21:52]
JIM: But see – they talk about the US government’s assessment of world oil regions and they talk about there’s the potential there for 2.3 trillion; and they’re talking about 890 billion current; and then a 1.4 trillion potential to be added. Where does it come from? I mean, is there a place we haven’t looked at?
MATT: Yeah, there are – the Arctic and the Antarctic.
JIM: But how do we get it?
MATT: Well, we don’t. But if you want to basically be optimistic, it’s like me saying I’m going to be as wealthy as Bill Gates. There is nothing illegal about me wanting that. And that’s the same reliability of these numbers of the USGS. The USGS is a fine group of computer modelers, and there are some trained geologists there. But unless you drill for oil and find something there have been estimates all the time and through the history of the industry of an area that has so much oil, and the sad history of the industry is that most of the new field wildcats we have drilled have always been dry holes. No one has ever intentionally drilled a dry hole. It was just basically an optimistic assessment that went wrong. [22:53]
JIM: You know the other issue too I think that even if you talk about unconventional oil, deepwater oil, the tar sands and shale, is nobody is estimating, for example, the amount of energy input compared to the energy output, which is the real issue I think I have with ethanol. Right now, it’s a real net energy loser.
MATT: We just didn’t ever develop any data to be able to do that. And for years it wasn’t very relevant. Here’s an interesting number that I got out of a really well done report of The Future Of Geothermal Energy by MIT. There are nine producing states in the United States that produce 4.8 million barrels of oil, but those same wells produce 128 million barrels of brine. So basically the United States has gone from the world’s biggest oil producer to the world’s biggest producer of brine stained with oil. We’re just pretty good at getting the stains out. And these are real facts. [23:47]
JIM: Let’s talk about something that surfaced last year that everybody was very optimistic – let’s talk about that Jack well by Chevron. I don’t think people realize that when you get to deep water, oil, number one, how expensive it is – you’ve got drill ships in the Gulf today that are costing companies half a million dollars a day; and then you have that Jack well as I recall, wasn’t it close to 100 million to drill that well?
MATT: I think it was probably closer to 150 million because they hydraulically frac the well which is the only way on earth that it would have any way to flow because those reservoir rocks of the Lower Wilcox are very, very tight rocks – they just don’t produce unless you frac them. The folly of the Jack well hype is they could only afford to flow test it for 30 days. Well, you talk to any oil operator that’s drilled in tight, deep formations where you have to do a very expensive hydraulic fracture – and they only stay open for so long until the pressure cracks the proppings and they are tight again. So what we don’t have any idea is because they couldn’t have afforded to let that well flow with an expensive meter going on of a very, very expensive rig – so they basically hardly know anything about the Jack reservoir. And Chevron basically says it probably maybe 300 million barrels, or 500 million barrels. But how that got translated within a day to, “oh, we found a new Prudhoe Bay,” is saying, “well there are 180 miles of lower Tertiary trend and if you found 60 Jack fields, you’d be at Prudhoe Bay.” I say we don’t have any idea yet realistically whether the Jack field will ever be produced. [25:24]
JIM: Given the things that we are talking about here, not only the difficulty that Saudi Arabia and other countries are having keeping up – having to run faster to keep up with demand – Matt, we haven’t even discussed the political risk factors because if you take a look at the majority of the world’s oil it’s inaccessible and held in very unstable, political areas of the world. For example, Hugo Chavez may not have the same incentive as Exxon to develop Venezuela’s oil reserves. So you have 85% of the world’s oil reserves in countries with medium to high investment risk; and three countries – Saudi Arabia, Kuwait, and Mexico – that prohibit foreign investment.
MATT: There’s also an issue that as the visibility of the Cantarells of the world, and how fast they can decline becomes reality because there’s such good transparency within Pemex because it’s so utterly important for the Mexican economy, that you’re starting to see for the first time loud, important musings by some of the oil producers – and this is Russia, in particular – who are saying: “We don’t think it would be prudent to actually continue producing oil even at our current rate. Until we have discovered a new generation of oil fields – which we haven’t had happen since the late 60s – why don’t we basically lower the rate of these fields’ production so we don’t risk becoming Cantarell too.” And that is a very legitimate issue. If I were Mexico today – as painful as this would be temporarily – I would lower Cantarell’s production rate to about 800,000 barrels a day, and keep the other sister fields next to it from going into a nitrogen injection – or do the nitrogen injection but then don’t let those oils flow as fast as they can. Cap it – and let it last at a lower rate for 10 years while they try to figure out what in the world do we do once we are basically no longer a major producer because otherwise they have no Plan B, just like we have no Plan B. [27:16]
JIM: And speaking of Plan B, as we look at alternatives, one fact as the GAO report talked about, their development – and let’s assume we start this right away – are dependent on not only high oil prices but they are only going to be part of this solution. The best case scenario under the GAO is they would only make up 34% of our needs by 2025 – and I don’t think we have till 2025.
MATT: Yeah, I don’t think we have till 2010. It’s a pretty grim picture. Now, I can turn around and turn into a very optimistic person saying that the minute we acknowledge peak oil is an enormous risk, it might have already happened, we need to have oil prices go way up from where they are today. We’re still giving this stuff away. And $65 a barrel, I keep reminding people – I know I’ve said this on your show before – is 10 cents a cup. Anybody that thinks 10 cents a cup [is reasonable] for an irreplaceable, extremely capital intensive resource is stupid. So if we basically end up having very high oil prices and we unleash the biggest wave of technology we’ve ever done, to try to invest in some sustainable biofuels (which is not corn-based ethanol), and some forms of energy that actually scale (which is not wind and solar – they are going to be fabulous but they are going to be very limited in their scope) it’s possible over the next five to seven years that we actually open the door to some forms of energy. I’ve spent a lot of time over the last year and a half working on trying to better understand the broad concept of ocean energy which is about nine forms of energy that come in our oceans and we sort of tap those. That’s the one thing we know that we’ll never run out of which is sea-water. And I think it’s amazing how little we’ve ever done in some of these areas that aren’t even vaguely as capital intensive as fuel cells or corn-based ethanol, but we haven’t worked on them. If we basically use very high oil prices to take our rusty infrastructure and totally rebuild it the next 10 years we’ll have the best economy we’ve ever seen. But if we sit on our duffs and keep saying, “oh, don’t worry about it, we have plenty of oil,” then we’ll basically have the worst collision you can ever imagine. [29:23]
JIM: That was something that they reached in their conclusions. They said what happens as peak oil arrives will depend on our preparedness, and also if it comes without warning, and it comes sooner, we’re in deep trouble.
MATT: Yeah. That’s why I thought the GAO report was such an important first step – I mean it was a baby step in a lot of senses, but at least it’s the first step, and it’s going to be hard to basically just ignore that. And I’m sure that Sam Bodman who’s our Secretary of Energy, who’s a very smart guy, well, he actually had read it and endorsed it. Congressman Bartlett and Congressman Udall are now just getting started in trying to really just wake the Congress up to saying this is really a serious issue. The UK, the European Union are finally saying it looks like this is an unbelievably serious issue. It’s too bad we didn’t start ten years ago. [30:11]
JIM: I heard you say this before, and you said it last time you were on the program that your prediction in the next year and a half, right now, Washington is abuzz with global warming – that’s the hot political topic du jour but as we move past $80 a barrel and maybe towards $100, peak oil becomes the number one issue. Do you still hold to that prediction?
MATT: Yeah, I sure do. It sounded a lot more outlandish when I said that a year and a half ago – I think it was maybe first on your program.
JIM: I can remember that. I think it was 2005 when we talked about Twilight.
I want to talk about something that to me is ignored, and to me is part of the solution and can offer a wonderful opportunity for Americans in terms of jobs – let’s talk about the energy infrastructure because whether you’re looking at drilling rigs, our pipeline system, gas plants, the condition and age of our refineries, our coal and nuclear plants, let’s talk about where we stand there, and what the opportunities are.
MATT: Well, first of all, the one thing that we know about this is everything that you can visibly see, it might have a nice paint job, and oftentimes it does, but if you scrape behind the paint it’s very rusty old iron. And iron doesn’t last forever; and iron in contact with oil corrodes because oil is a very corrosive agent. When you get brine combined with oil it’s basically one of the most corrosive things and we barely have anything that’s new because for thirty years we couldn’t afford anything that’s new – other than a few new pipelines going to areas that we didn’t have any before. But 95% of the world’s energy infrastructure my guess is – from refineries to rigs to tankers to pipelines – basically beyond it’s original design life. If we don’t start to replace that then with a very high likelihood because we are basically racing against the clock, ten years from now we can easily have the indignity of finding that our oil and gas production is down to 80% of what it is today – but our delivery has basically pushed it down another 30 to 40%. That would be an inconvenient truth. [32:22]
JIM: I’ve asked you this before but given the fact that we now have this report coming out of the General Accounting Office – so it’s getting visibility – if you were made energy czar: number one, what would you do right now, what would you start today; and number two, given what you know is going on in Washington, is there anything along the lines that you’re thinking that they are working on?
MATT: What I would do today – I would only take the job of energy czar if I basically had that with total authority for a week around the world because it’s not a US deal anymore. And the first thing I would do is order all of the owners of the top 250 producing oil fields to cough up within a week their historical field-by-field production over the last 60 quarters (5 years) to some global supply office, and start reporting that every 45 days. And anybody that basically wants to stay in the dark and hide under the veil of “we don’t want transparency,” if they want to export their oil outside their host country, or particularly inside the member countries of the IEA, I would slap a $10 a barrel transparency fine on the oil and use that fine to basically create an army of people to basically go figure out what the real answer is anyway. Because without that data we can basically argue and argue and argue on what is the average decline rate, and how much longer, and how much unconsumed oil. And the next thing I would do – that would be day one.
Day two would be to organize a group of people to start in to creating the finest oil basin the world will ever actually create and that field is called conservation. And this is basically a plan to attack the way we transport people and goods because 70% of the oil barrel does that; and liberate the workforce and let people work when they want, and where they want and pay by productivity; and stop shipping goods long distances by truck and put it all on water; and ultimately, figure out a way to end what we casually call globalization which is taking parts and finding sweatshop economies where there are people willing to work at 50 cents a day and having parts made and then zigging them all the way around the world, and zinging food all the way around the world. That’s how we actually consume 85 million barrels a day of oil. And if we put together a sort of plan that has some teeth in it within five-to-seven years we could theoretically lower the energy intensity by maybe a third – maybe even slightly higher. We’ll never do that by a new suite of even more fuel efficient automobiles – it takes 30 years; we’ll never get there by turning all our light bulbs off because that doesn’t have anything to do with oil use in the first place. And then I’d basically retire and go back to basically speaking out on energy issues and how healthy the economy is going to be seven years from now if we get the job done. [35:05]
JIM: Well, let’s take the first issue you would have done which is 85% of the world’s oil is non-transparent and it seems like there’s an incentive for that 85% to keep it that way.
MATT: Well, there isn’t an incentive because nobody gets hurt by producing the data. They might get embarrassed – they don’t get hurt. In the North Sea it’s been a mandatory requirement that we have field-by-field production reports monthly – it still didn’t prevent all the operators from missing the fact that they were peaking because they didn’t look at their own data. But at least we had the data. I could figure it out ten years ago, and publicly spoke out and wrote written reports that I can go back and point to that said the North Sea is likely to peak between 98 and 2000. And I threaded the needle pretty well because it peaked in 99 because we had field-by-field production data. And anyone that wants to hide behind the transparency can basically pay a transparency fine – even make it $20 a barrel. If you get the fine high enough they’ll cough the data up. [35:57]
JIM: Why do you think they’re reluctant to do so. I mean what do they have to gain by doing it – just avoiding embarrassment?
MATT: I don’t have any idea, other than embarrassment. The public companies don’t want to do it because they say, “God, if people knew how old our oil fields were they’d basically sell our shares.” And I basically say to the contrary – if they know basically that we’re going into production decline that means prices are going way higher. Your stock price will probably go up, guys. [36:19]
JIM: And is it maybe revealing for like Saudi Arabia to say, “well, gosh guys, we don’t have 260, it turns out we maybe only have 25 and 30 left.”
MATT: It would be embarrassing, but it doesn’t mean Saudi Arabia loses their stature in the world. It basically means that we’re basically being more poignant about how fragile the supply is. Right now by posturing that they have 265 billion barrels they make people madder than hell. Why don’t you lower the damn price then. So I think they have caught themselves in their own rhetoric in kind of a nasty corner. But it’s not my problem.
JIM: How do you see this realistically unfolding. I mean we are having some people in Washington that are more cognizant of the issue; we have some very heroic figures like Udall and Bartlett who are moving to educate Congress in this area. But it seems to me like we’ve gone beyond avoiding a crisis; it seems like a real crisis is what’s going to help get us to the area where we start thinking about conservation and start thinking about the way we run our economy.
MATT: Yes, and you know a real crisis is likely to be just around the corner because take 2007 for instance, I think it is really, highly unlikely that we will have any significant supply increase in 2007. And I can’t imagine that demand isn’t going to basically jump another million or two million barrels a day; and we’ve taken our usable inventories down to such a low level that there’s a high risk that basically demand outstrips supply and usable inventory – and that spells shortages. And you know, when I saw the news yesterday and a significant amount of service stations in Colorado were now out of gas because one refinery went down, it just reminds you we are living on the edge of basically a precipice. And so a crisis could happen any day – we just don’t know the day.
If you go back to two of the great crises the United States has been involved in – I’d actually argue probably the two greatest – they were the Civil War and World War II. You could have said with great certainty, within two or three years of both events, that if you were looking at the big picture correctly that war is inevitable – we just don’t know when it’s going to start. [38:24]
JIM: If you were addressing a group of our listeners in a room today regarding this issue, where would you tell them to look, what would you tell them to do, what would you tell them to read?
MATT: Well, I would basically say that just clamor for energy data reform so we get this field-by-field production data. You know, tell your Congressmen that it’s the most important thing; tell your mayors it’s the most important thing. I would basically try to get each community to prepare a contingency plan for what are you going to do when oil peaks. What I wouldn’t do is sit and home and mope. I would basically become a very loud advocate. I would probably avoid reading all of the optimistic reports zigging around because they just make you feel good – they don’t have any good data. I’d go on some of these unbelievably informative blogs like The Oil Drum. And let me focus on YouTube. I didn’t even know what YouTube was other than remembering that Google paid a fortune for whatever this thing is. I was on CNBC last Thursday afternoon to talk about the GAO report, and I was surprised when someone informed me to go on YouTube the next morning and they had the 10 minute interview live on YouTube, and there were 676 people that had seen it. Last night I checked and there were almost 10,000 people that had seen it. People are listening. [39:38]
JIM: Absolutely amazing. Well, Matt, as we close why don’t you bring us up to date on Twilight. I know last time I talked to you it was being printed in Chinese; it’s out in paperback form; and in German.
MATT: Yup. It’s been really remarkable. I guess it was 9 weeks ago now that I spent four days in Beijing for the book launching and I couldn’t believe the elegant job that the East China Normal University Press had done. And the praise it got within some really senior people in China, as being maybe the most beautifully translated book from English into Chinese, was really unbelievably neat. I was told last week that it has now sold 3700 copies in the first 6 weeks, and that almost every senior energy planner has read the book. The praise I got for basically doing this, and then helping the Chinese translators make sure that they properly was just unbelievable for a country that has a lot to lose by missing this. And I found to my surprise that some of their senior energy people were far more alert to peak oil. There was a program on the Saturday I was there at the Chinese Academy of Social Science, and after I spoke, Professor – somebody – I should remember his name, it was in Chinese, gave a talk in Mandarin that was simultaneously translated. And towards the end of his talk he said, “two hundred years ago, Mozart created this unbelievably beautiful music that we still love listening to today.” I thought, “where is he going with this?” And he said, “the reason for that is that it was so perfectly harmonious. There is nothing harmonic about peak oil. Its high notes are too shrill.” [41:11]
MATT: That’s a really profound statement. I think the English copies – I’ll get a report at the end of April – but I think we’ll probably cross 100,000 books which I didn’t realize how few books ever do that. So the book in German through an intermediary was delivered to Pope Benedict the 16th. I have a lovely framed letter now from the Secretary of State’s Assistant to the Vatican thanking me for the efforts of alerting the world to peak oil. That’s pretty neat stuff.
MATT: That’s something to be really proud of. Well, Matt, I appreciate you joining us on the program, and I appreciate the efforts you put in to alerting the world to this very issue because as we started this conversation I think it will be one of the defining issues of the 21st Century.
MATT: Well, I thank you for the time you’ve taken on your program – your articulation of the issues is fabulous.
JIM: Well, once again I want to thank you for joining us on the program and please come back and talk to us again in the future.