Re: Matthew Simmons on Oil

From: Rich Blinne <rich.blinne@gmail.com>
Date: Wed Aug 24 2005 - 11:15:57 EDT

On 8/24/05, Glenn Morton <glenn_morton@yahoo.com> wrote:
>
> Don is correct, there will come a point when the recession and
> conservation cut demand. But, in a market where the product availability is
> constantly declining, such dips in the price can not last as long as they
> did in the 90s when the supply of oil continued to go up, prolonging the
> period of low oil price. Post peak, the situation will be different.
>

The NYT Magazine article also does a good job of explaining the economics
here. Up until now maximum production rates outpaced global demand. Thus,
the OPEC cartel could control prices by restricting supply. If the Saudis
thought the prices were too high they would open their spigot and the prices
would drop. But note the following AFP story from December 2004:

 The market steadied as Organization of Petroleum Exporting Countries (OPEC)
> president Purnomo Yusgiantoro said the cartel's target price band might be
> increased to 28-30 or 32 dollars per barrel, from its current 22-28 dollar
> range, to reflect higher prices.
>
> "We will review the price band. The fair level would be around 28 dollars
> to 30 or 32," Yusgiantoro, who is also Indonesia's energy minister, told
> reporters in Jakarta.
>
> OPEC meets in Cairo on December 10.
>
> OPEC ministers are unlikely to cut output yet but they may hint at a
> reduction for the second quarter of 2005 as spring arrives in the northern
> hemisphere, traders said.
>

The Saudis were not able to keep the price of oil at $28 per barrel. They
were able to keep the price low in the '90s. The difference? Total possible
supply outpaced demand in the '90s. Now it is not true. The Saudis are now
pushing a rope. As noted by myself and others extraction technology has and
will undoubtably still continue to improve and new fields will be exploited
and discovered. But note our resident expert. The pace of both of these
activities is too slow and some of the extraction techniques carry a risk of
ruining the oil fields. If you don't believe Glenn how about Sadad
al-Husseini, the retiring head of exploring and production for Aramco (Saudi
Arabia's state-run oil company)?

From the NYT Magazine article:

So whom to believe? Before leaving New York for Saudi Arabia, I was advised
> by several oil experts to try to interview Sadad al-Husseini, who retired
> last year after serving as Aramco's top executive for exploration and
> production. I faxed him in Dhahran and received a surprisingly quick reply;
> he agreed to meet me. A week later, after I arrived in Riyadh, Husseini
> e-mailed me, asking when I would come to Dhahran; in a follow-up phone call,
> he offered to pick me up at the airport. He was, it seemed, eager to talk.
>
> It can be argued that in a nation devoted to oil, Husseini knows more
> about it than anyone else. Born in Syria, Husseini was raised in Saudi
> Arabia, where his father was a government official whose family took on
> Saudi citizenship. Husseini earned a Ph.D. in geological sciences from
> Brown University in 1973 and went to work in Aramco's exploration
> department, eventually rising to the highest position. Until his retirement
> last year -- said to have been caused by a top-level dispute, the nature of
> which is the source of many rumors -- Husseini was a member of the company's
> board and its management committee. He is one of the most respected and
> accomplished oilmen in the world.
>
> After meeting me at the cavernous airport that serves Dhahran, he drove me
> in his luxury sedan to the villa that houses his private office. As we
> entered, he pointed to an armoire that displayed a dozen or so vials of
> black liquid. ''These are samples from oil fields I discovered,'' he
> explained. Upstairs, there were even more vials, and he would have possessed
> more than that except, as he said, laughing, ''I didn't start collecting
> early enough.''
>
> We spoke for several hours. The message he delivered was clear: the world
> is heading for an oil shortage. His warning is quite different from the
> calming speeches that Naimi and other Saudis, along with senior American
> officials, deliver on an almost daily basis. Husseini explained that the
> need to produce more oil is coming from two directions. Most obviously,
> demand is rising; in recent years, global demand has increased by two
> million barrels a day. (Current daily consumption, remember, is about 84
> million barrels a day.) Less obviously, oil producers deplete their reserves
> every time they pump out a barrel of oil. This means that merely to maintain
> their reserve base, they have to replace the oil they extract from declining
> fields. It's the geological equivalent of running to stay in place. Husseini
> acknowledged that new fields are coming online, like offshore West Africa
> and the Caspian basin, but he said that their output isn't big enough to
> offset this growing need.
>
> ''You look at the globe and ask, 'Where are the big increments?' and
> there's hardly anything but Saudi Arabia,'' he said. ''The kingdom and
> Ghawar field are not the problem. That misses the whole point. The problem
> is that you go from 79 million barrels a day in 2002 to 82.5 in 2003 to
> 84.5 in 2004. You're leaping by two million to three million a year, and
> if you have to cover declines, that's another four to five million.'' In
> other words, if demand and depletion patterns continue, every year the world
> will need to open enough fields or wells to pump an additional six to eight
> million barrels a day -- at least two million new barrels a day to meet the
> rising demand and at least four million to compensate for the declining
> production of existing fields. ''That's like a whole new Saudi Arabia every
> couple of years,'' Husseini said. ''It can't be done indefinitely. It's not
> sustainable.''
>
> Husseini speaks patiently, like a teacher who hopes someone is listening.
> He is in the enviable position of knowing what he talks about while having
> the freedom to speak openly about it. He did not disclose precise
> information about Saudi reserves or production -- which remain the
> equivalent of state secrets -- but he felt free to speak in generalities
> that were forthright, even when they conflicted with the reassuring
> statements of current Aramco officials. When I asked why he was willing to
> be so frank, he said it was because he sees a shortage ahead and wants to do
> what he can to avert it. I assumed that he would not be particularly
> distressed if his rivals in the Saudi oil establishment were embarrassed by
> his frankness. [emphasis mine]
>

Note the emphasized paragraph. We don't have enough new discoveries to keep
up with our depleted reserves let alone rising demand from emerging nations
such as China. The Bush Administration is correct to the extent that
conservation alone will not get us out of this problem. What we can do as
Christian scientists and engineers is to apply our talents and abilities to
get us to a post-carbon economy as quickly as possible. I am afraid we don't
have much time.
Received on Wed, 24 Aug 2005 09:15:57 -0600

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