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ECONOMICS -
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"We could be looking at $10-a-gallon gas this winter."

Posted in the database on Friday, September 30th, 2005 @ 17:23:18 MST (1310 views)
by Jeanne Klobnak-Ball    From The Wilderness  

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Matt Simmons Issues a Wake Up Call

Like the terrorist attacks of 9/11, Hurricane Katrina stands to become a defining moment in our nation's history. While the precise meaning of such moments remains to be interpreted, Matt Simmons believes the natural disaster may well be remembered as the start of "our great energy war." "We're almost at the verge of having real energy shortages," Simmons said last Friday, when he issued a wake-up call to a standing-room only audience at the Center for the Arts. "We could be looking at $10-a-gallon gas this winter."

Author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy and founder of Simmons and Company International, a Houston-based energy investment banking firm managing over $60 billion in assets, Simmons is also an energy advisor to President Bush. During his lecture ­ which kicked off a two-day lecture series on the future of energy sponsored by the University of Wyoming's Ruckelshaus Institute of Environment and Natural Resources ­ Simmons reviewed circumstances leading up to the current energy crisis.

Tipping points and false assumptions

Until recently, President Bush has said little about global oil and gas consumption outpacing supply, but, even before hurricanes hit the Gulf Coast, consumption was hovering near 99.8 of the world's percent ability to produce, refine and distribute transportation fuels. Katrina, considered the worst natural disaster ever to hit the oil and gas industry, further weakened domestic supply, tipping the entire global energy market on its collective head. "The storms have shown how fragile the balance is between supply and demand in America," Bush recently said to CNN, "We can all pitch in by being better conservers of energy ­ people need to recognize the storm has caused disruption." Although pump prices rose quickly in Katrina's aftermath, they remain well below what Simmons considers reflective of the resource's true scarcity. Conventional oil discovery peaked in 1960, he said, after which no reserves of greater amounts were found. Simmons joins other energy analysts in claiming we are now at or very near peak production, after which no greater amount of conventional oil can be produced. Despite this geologic imperative, global oil demand escalates at a rapid pace.

"Peak Oil is the single most important issue of the 21st century," Simmons asserted. "The hurricanes, Katrina and Rita, may well be remembered as the start of our great energy war, just as Fort Sumpter was the beginning of our Civil War. "Fort Sumpter was the tipping point of a pending war over slavery that John Adams predicted we were going to have to finally resolve two weeks before he passed away, on the 50th anniversary of the founding of the United States," Simmons noted, adding that it became such a profound crisis because the problem was ignored and left to linger. "Likewise, our energy crisis didn't begin with Katrina or worsen with Rita, it got under way years ago as we laid one false assumption on top of another." The first and perhaps most egregious falsehood was basing the price of oil on political expediency, Simmons said, ignoring its true cost and creating what he lamented as a "false concept of cheap oil forever." Precious resources were wasted as other false assumptions were made. "Our best quality natural gas was simply flared in the 1930s and '40s, seen as having no use," Simmons said. In 1956, Dr. King Hubert, senior scientist for Shell Oil, warned that the U.S. would likely start to exceed peak oil production by the early 1970s. But by 1970, Hubert's reputation was in shatters. "Too many papers were written about 'remember that old geezer who said the United States was gonna run out of oil? Look, we've never produced more.' That was the very year we peaked," Simmons said.

When the U.S. did peak in 1970, oil was still being sold for $1 a barrel, 2 cents a gallon, one-tenth of a cent per cup, Simmons noted. By the early 1970s, another false assumption arose, he said. Conventional wisdom assumed that the Middle East's 38 super giant oil fields, discovered after World War I, could easily produce almost unlimited amounts of oil from a small number of fields and wells. Middle East experts hitched their carts to the promising vastness of the region, without stopping to ponder if oil could exist outside the original area of discovery. Further, Simmons claimed, no one ever understood the logic concerning what influences energy demand or how large it could grow. During the 20th century, most investors worried about how energy would be used without creating a glut. "There was this worry about glut, how we handle glut, that always preoccupied people," Simmons said, "as opposed to looking closely at what was really happening to supply."

Shockwaves

In 1950, oil demand was 10 million barrels a day globally. By 1970, it was 50 mbd, but while demand grew five-fold, price stayed constant; oil was still selling at $1 a barrel. When U.S. production peaked in 1970, Saudi oil prices soared 18-fold between Jan. 1, 1970 and mid-June 1979, as demand grew another 15 mbd. "So for the concept that high prices quickly killed demand, there was never any supporting data," said Simmons. Iran's and Kuwait's oil production peaked in 1972, but no one noticed. "People continued to have this concept that there's oil in the Middle East and it's going to last forever," Simmons said. The second oil shock hit in 1979, when prices suddenly shot up from $18 to $40 a barrel, or about $105 per barrel in 2005 dollars. As a result, the U.S. finally curbed oil demand for about four years, Simmons said. Between 1979-1985, "We rolled out nuclear power and our coal plants got upgraded so they could operate at 100 percent," Simmons said. "To produce electricity from coal was vastly cheaper than using oil. In one short period of time we backed out oil as a feed stock for boiler fuel and electricity once and for all." At the same time, the U.S. exported "a big chunk of heavy manufacturing to Europe and Japan." The combination above resulted in four years when world demand actually fell, "prompting a great many people to say, 'Whoops, it just goes to show that if prices ever get high, demand just gets cannibalized,' " Simmons said. "Yet there was never any data for that."

Connecting the dots - 'glut' to blackouts

Siberian oil was discovered in 1967, Alaskan North Slope oil in 1968, and the North Sea in 1969, the last great frontiers to come on line.

"It took a decade to bring all these fabulous sources into production," Simmons said, "creating an enormous last amount of brand new oil, but all three peaked years ago, and are all now in steady decline."

Due to low prices, the decade between 1982-1992 crushed the oil industry into a massive depression, according to Simmons. "We put the oil contractors and drilling industry through a giant paper shredder, in which 90 percent of the industry participants collapsed during this sad, tragic 10 years, all based on the concept that there was a massive overhang of too much oil and so much natural gas that it would never have much of a future. Job losses and bank closures ensued due to a perceived glut that was, at best, 10 to 15 percent of demand," Simmons said.

Growth reemerged in fits and starts in the mid-1990s only to run up against a lack of drill rigs. By early 1999, as oil hung around $10/barrel, Simmons said, the perception among industry leaders was that this would never hold, but rather would drop down to $5/barrel and stay there for about a decade. "The Economist published an infamous cover story called 'Drowning in Oil' only four days before the price of oil finally took off," Simmons recalled. "Eighteen months later, prices were so high that we had to take 30 million barrels out of the strategic petroleum reserve to cool off the market." Gas prices, which in 1999 were deemed to never exceed $3 per million cubic feet until at least 2015, by December 2000 were at $10 per mcf. California experienced blackouts, just as New York and New Orleans did the previous summers, but few people connected these dots, Simmons said.

"By 2004, my worry of energy dots had connected so tightly that the future of energy looked extremely dark to me. The North Sea peaked in 1999, and was rapidly falling. North America peaked, and a record drilling boom couldn't even stabilize supply." Non-OPEC suppliers flattened out for seven years, with no production surge in sight. Meanwhile, oil demand "became like Jack's bean stalk: It grew and grew and grew," Simmons said. In 1985, demand was 65 mbd. By 1995, it was 75 mbd. This year, it's roughly 85 mbd. Despite supply peaks against a backdrop of growing demand, Simmons said industry stuck to its guns, arguing that technology would bring on supply, demand would drop due to high prices, and the Middle East would turn on its taps.

"The world based its future prosperity on an energy myth," Simmons said.

In direct opposition to the Bush administration's energy projections earlier this year ­ which assumes Saudi production, now at 10 mbd, would increase another 12.5 mbd ­ Simmons said, "The likelihood of Saudi Arabia being able to produce 20 to 25 mbd is so low that it should almost be deemed impossible. The likelihood that they could hit 12 mbd and keep this up for 20 years, let alone 50 years or more, is not very high. "We are in a deep energy hole," he concluded. "We must create a Plan B to ensure the future of energy, or we won't have a future of energy."

Plan B

Simmons's Plan B begins with a reform of energy data, which would mandate that all key oil and gas producers compile field-by-field production reports on a timely basis. Such data would include the number of average wellheads, so that "for the first time analysts can do reliable supply forecasts."

Simmons next calls for rebuilding and modernizing the globe's aging energy infrastructure, lest it should decay and become unusable. "Supply on the ground won't matter if it can't get to where it needs to go," he said. Thirdly, "We need an R&D program that hasn't been tackled in 100 years to start inventing some new forms of energy that don't exist today."

Finally, Simmons advocated establishing a conservation plan to determine ways to do more with less. "We need to address the shipment of goods," he said, "which is by far the single worst way we use energy. Public Enemy Number One is ironically not the SUV; it's large trucks going long distances over our highways." To increase efficiency and cost savings, railroads and freight cars are preferred transport modes.

"One final word about Katrina and Rita," Simmons concluded. "They were our Fort Sumpters, but we needed a wake-up call."



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