Matthew Simmons: “Global crude oil peaked in 2005”

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Matthew Simmons, Chairman of “Simmons & Company International”, is the world’s largest private energy investment banker. Moreover, he is a leading expert on the crucial topic of Peak Oil. In the following interview, Mr. Simmons talks about the on-going recession, explains why we might have reached an end of growth and gives his reading of last year’s oil price spike.

By Lars Schall

Matthew R. Simmons, born and raised in Utah, is the founder and chairman of “Simmons & Company International”, one of the largest energy investment banking groups in the world. As such, he is a prominent oil-industry insider and a renowned expert on the topic of Peak Oil. Mr. Simmons graduated cum laude from the University of Utah and received an M.B.A. with distinction from Harvard Business School. For two years he served on the faculty of Harvard Business School as a research associate. In 1974, he founded Simmons & Company International. Over the past 35 years, the firm assisted its clients in executing a wide range of financial transactions and investment banking projects at a combined dollar value of approximately $58 billion. Since 1993 the firm provides also sales/trading and research on the energy industry to institutional investors. The offices are located in Houston, Texas and Aberdeen, Scotland. Its website is: www.simmonsco-intl.com.

Mr. Simmons’ public presentations and research papers are featured in a variety of publications including “World Oil” and “Petroleum Engineers”. He served as energy advisor to U.S. President George W. Bush and was part of the “National Energy Policy Development Group” headed by Vice-President Richard Cheney in Spring of 2001. At present, Mr. Simmons is an advisor to the Oil Depletion Analysis Centre, based in the UK. Moreover, he is a member of the National Petroleum Council and the Council on Foreign Relations. In addition, he serves on the Board of Directors of the Associates of Harvard Business School and is a past President of the Harvard Business School Alumni Association. In 2005, he published the book “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy”, in which he examined the unreliability of Saudi Arabian oil reserves. For the critically acclaimed film-documentary “Crude Awakening: The Oil Crash” by Basil Gelpke and Ray McCormack, he contributed an comprehensive interview.

Mr. Simmons, before we take a look at the current situation and try to see behind the dim unknown of the future, I would first like to go back with you in time a bit. In the year 1973, when the first major oil crisis occurred, you decided to try your luck in the energy sector and started a year later a banking institution that has become step by step the world’s biggest “independent investment bank specializing in the entire spectrum of the energy industry”, Simmons & Company International, which is based in Houston, Texas. Why did you decide yourself for energy and most of all for oil? What was the special appeal of it to you, in particular under the circumstances of 1973/74?

In March 1969, I met a remarkable entrepreneur, Lad Handleman, who was the founder of a commercial diving company that had grown so fast that they were almost out of money and in desperate need of some capital. So, I agreed to help raise some venture capital for them.  The company, Oceaneering International, grew rapidly as I helped them acquire some of their competition and raise more money.  From January 1969 through the end of 1973, I operated a one-person firm.  I spent 80% of my time assisting specialized oil and gas service companies grow.  After the 1973 Oil Embargo (and subsequent oil price explosion), I decided to move from Boston to Houston and create what has now evolved into Simmons & Company International. Oil and gas “drove” the world and I was determined to seep myself in this industry, which I found so fascinating.

Do you have the feeling that the developments that took place during the 1970’s related to oil are well understood today or do you believe that there are still some misconceptions existing about that period of time?

For 40 years, misconceptions have constantly shaped the behaviour of the oil and gas industry and most of the “experts” who opine on the industry’s future.  The biggest misconception has been the idea that oil would stay plentiful and inexpensive for decades to come, with gluts being a constant threat.

The Technological Revolution was not really well understood.  Solid data on flow rates and decline curves were never properly developed to guide industry planners and help us intelligently navigate the oil world.

Let’s skip fast forward into the year 2009. If one follows the news coverage in mainstream media one could easily have the impression that we’re in a recession right now because of the financial mess only. On the other hand there’s a certain statement that I like to call an “eternal law” of the past, the present and the future. That statement was published by James Baker and the Council on Foreign Relations in April 2001 and it says:

Oil price spikes since the 1940s have always been followed by a recession.”[1]

If this is true is it then any wonder that we’re in a recession after last year’s price rally at the oil market?

The 2008 Recession had nothing to do with the “spike in oil prices.” It was all about the near meltdown in our highly leveraged financial institutions. In my view, high oil prices were helping a significant part of the global economy flourish.

Could you please explain the underlying factors for the price rally of last year? Marshall Auerback stated for example in an interview with me that it was largely a product of speculation”.[2] Do you agree with him?

Speculators had very little to do with a 15-fold increase in oil prices from 1998 to July 2008.  Demand for oil out-paced supply. Speculators only own paper commodity contracts and for every buyer there has to be a seller. In 2006-2008, most hedge funds thought oil prices were too high and were shorting NYMEX oil contracts.

Here’s a statement by Steven Kopits from the New York office of Douglas-Westwood:

”The US has experienced six recessions since 1972. At least five of these were associated with oil prices. In every case, when oil consumption in the US reached 4% percent of GDP, the US went into recession. Right now, 4% of GDP is $80 oil. So that’s my current view: If the oil price exceeds $80, then expect the US to fall back into recession.” 3

Now that we’re about to exceed the $80 limit – is Mr. Kopits right with his prediction in your opinion?

I disagree that our recessions were all caused by high prices. The 1981-82 and 1974 recessions were clearly impacted by oil prices, but the 1991 recession was due to fear of the Persian Gulf War becoming another “Vietnam”.

Under the circumstances of Peak Oil this recession will be different compared with those of the past. Nevertheless, every time I watched CNN International during the last months there was always this trailer saying “The Road to Recovery”. Could you please explain why it is rather unlikely that such a “Recovery” will take place in the long-term and why Peak Oil might be the event that triggers the long-discussed “End of Growth”?

The economy has largely recovered and it has initiated growth in oil demand.  This raises high risk that demand will exceed supply and create shortages somewhere. This, in turn, will trigger an end to growth.

Now some of our readers may say: “Wait a minute, y’all! Who said that Peak Oil already happened?” – My answer would be that this hint was given in the report of 2007 by the Energy Watch Group that said:

“Peak oil is ‘now’.

For quite some time, a hot debate is going on regarding peak oil. Institutions close to the energy industry, like CERA, are engaging in a campaign trying to ‘debunk’ the ‘peak oil theory’. This paper is one of many by authors inside and outside ASPO (the Organisation for the Study of Peak Oil) showing that peak oil is anything but a ‘theory’, it is real and we are witnessing it already. According to the scenario projections, the peak of world oil production was in 2006.

The timing of the peak in this study is by a few years earlier than seen by other authors (like e.g. Campbell, ASPO, and Skrebowski) who are also well aware of the imminent oil peak. One reason for the difference is a more pessimistic assessment of the potential of future additions to oil production, especially from offshore oil and from deep sea oil due to the observed delays in announced field developments. Another reason are earlier and greater declines projected for key producing regions, especially in the Middle East.”4

Can you tell us your opinion on this specific report and also on this modus operandi that the Energy Watch Group was using for its scenario: “The report, rather than make guesses about total world reserves, focused instead on global production data, which it sees as being a lot more reliable.”5

I am not familiar with the Energy Watch Group, but totally agree with their findings. Using “world reserves” is flawed data and has little impact on flow rates or declines in oil fields.  The best data makes a convincing case that global crude oil peaked in 2005.

Mr. Simmons, there is all this discussion for years now about oil reserves and you are known for believing that a thorough assessment of Saudi Arabian oil reserves is the single most important issue of petropolitics: am I just naïve or shouldn’t Peak Oil be the perfect time that all Players agree to ground their expectations on production data instead on believing in the best-case scenario? The RGE Monitor said in their summary of the report by the Energy Watch Group with regard to the most contradictory arguments given by the International Energy Agency (IEA):

“IEA projections are not a very reliable basis for planning the future”.6

What the new IEA leadership is warning is that declines in mature super giant fields will make it necessary to add the equivalent of four new Saudi Arabias over the next two decades just to keep demand flat. They intentionally avoided saying “obviously, this is impossible.”

Another, in my opinion even more crucial point with respect to all this debate about oil reserves, are the records of Richard Cheney’s “Energy Task Force” of 2001, the National Energy Policy Development Group. Those records are hidden from public scrutiny. Michael C. Ruppert argues for the disclosure of those records in his new book “A Presidential Energy Policy”.7 He does so by saying:

Seeing those records now would save a lot of duplicated effort in trying to inventory how much oil there is left”.8

He says also:

“The figures on oil reserves quoted by producing nations and companies are as fraudulent and cooked as the books on mortgages, banking, and even Bernie Madoff. The Saudis cannot hide the fact that they have passed Peak anymore. I prove that in my new book. The world’s largest energy investment banker Matthew Simmons proved it before I did in his book ‘Twilight in the Desert’.9 I have proved the same thing a different way. If Saudi Arabia has passed Peak then the whole world has passed Peak.”10

How do you judge on all of this?

I made this argument as plainly as I could when I wrote Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy in 2004/2005. It is far truer now and more obvious today than it was 5 years ago.

Two specific questions with regard to Saudi Arabia. You’ve stated over the past that the world would need three Saudi Arabias (or three Ghawar oilfields11) just to deal with the decline in crude oil supply. Could you explain this in more precise detail, please?

If the global average decline rate of current oil production is only 5% per annum, we would need approximately 20 million barrels per day of new supply in just five years. Assuming Ghawar’s production is still 5 million barrels per day, this equates to 4 Ghawars! 5% is also probably far lower than the real number.

In April of this year, the Oil Minister of Saudi Arabia Ali al-Naimi said, that his country “is producing less crude than its target and global stockpiles are likely to decline.”12 Is this an admission that Saudi Arabia cannot keep its promise from the past to raise the oil supply almost endlessly?

It is hard to gauge the various sentiments made by Minister al-Naimi. He continues to promise the world that Saudi Arabia can produce 11.5 million barrels per day, if needed. In my view, this is a very shaky assumption.

One final question, Mr. Simmons. There is all this talk about the automobile industry at the brink of disaster. In your opinion what can save the automobile industry from going under in the long run vis-à-vis Peak Oil?

I hope the efforts being made in creating offshore wind into electricity, which in turn, combined with water, creates liquid ammonia (NH3), can help save the automobile industry from a dismal future as conventional gasoline and diesel supplies decline.

Thank you for taking your time, Mr. Simmons!

Sources:


[1] James Baker / CFR: “Strategic Energy Policy Challenges for the 21st Century, quoted in Michael C. Ruppert: “Crossing the Rubicon. The Decline of the American Empire at the End of the Age of Oil”, New Society Publishers, Gabriola Island, 2004, page 31. The report can be downloaded as a pdf under: http://www.bakerinstitute.org/publications/study_15.pdf. See also for this issue “oil price spike – recession” James D. Hamilton: “Causes and Consequences of the Oil Shock of 2007-08.” ABSTRACT: This paper explores similarities and differences between the run-up of oil prices in 2007- 08 and earlier oil price shocks, looking at what caused the price increase and what effects it had on the economy. Whereas historical oil price shocks were primarily caused by physical disruptions of supply, the price run-up of 2007-08 was caused by strong demand confronting stagnating world production. Although the causes were different, the consequences for the economy appear to have been very similar to those observed in earlier episodes, with significant effects on overall consumption spending and purchases of domestic automobiles in particular. In the absence of those declines, it is unlikely that we would have characterized the period 2007:Q4 to 2008:Q3 as one of economic recession for the U.S. The experience of 2007-08 should thus be added to the list of recessions to which oil prices appear to have made a material contribution.” James D. Hamilton : “Causes and Consequences of the Oil Shock of 2007-08“, Department of Economics, UC San Diego, published February 3, 2009, Revised: April 27, 2009, at:

http://www.brooking.edu

[2] compare Lars Schall: “Marshall Auerback: ‘Many years of economic stagnation’”, published September 7, 2009 at:

http://www.mmnews.de/

3 Steve Andrews: “The first peak oil recession”, Interview with Steven Kopits, published September 14, 2009 at: http://www.energybulletin

4 compare “Crude Oil The Supply Outlook”, Report to the Energy Watch Group, October 2007, EWG-Series No 3/2007, published at:

http://www.energywatchgroup/fileadmin/global/pdf/EWG_Oilreport_10-2007.pdf

For the “CERA-Peak-Oil issue” see further “CERA official acknowledges ‘peak oil is here’, published June 9, 2009 at: http://www.energybulletin.net/node/49178.html

5 compare “More on The Energy Watch Group peak oil report”, October 23, 2007, published at: http://www.energybulletin.net/node/36087

6 ibid.

7 Michael C. Ruppert: „A Presidential Energy Policy. Twenty-five Points Addressing the Siamese Twins of Energy and Money”, New World Digital Publishing, Los Angeles, 2009, Chapter Fifteen, Point Four.

8 see Lars Schall: “The Sinking Titanic. An interview with investigative journalist / author Michael C. Ruppert about ’A Presidential Energy Policy’”, May 22, 2009, published at:

http://www.energybulletin.net/node/48990.html

9 Matthew R. Simmons: “Twilight in the Desert. The Coming Saudi Oil Shock and the World Economy”, John Wiley & Sons, Inc., Hoboken, 2005.

10 see Endnote 7.

11 For more details on Ghawar, the biggest oilfield of the world, see Matthew R. Simmons: “Twilight in the Desert”, pages 151 – 179.

12 see Christian Schmollinger and Shigeru Sato: “Al-Naimi Says Saudi Oil Output Below Target; Stockpiles to Fall”, Bloomberg, April 25, 2009, at:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aBL_62gRgvrE&refer=home

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