Analysis of Simmons January 14, 2009 Brief

You'd better sit down.

Things are really bad. Worse than anybody ever imagined.

Allow me to strongly suggest you visit Matthew Simmons' January 14, 2009 briefing on Peak Oil.

My summary analysis is as follows:

1) The 2008 oil price "spike" was not really a spike but just the culmination of a multi-year rise in oil prices due to fundamental changes in the oil industry.

2) 2008 high price was NOT due to speculators!

3) Recent new oil discoveries were unfortunately small and deep. (inadequate to compensate for crashing production from existing fields).

4) IEA's November 2008 WEO (World Energy Outlook) "yanked the covers" off the naked truth of some very ugly facts about the world's 800 largest oilfields and revealed (confirmed) the fact that most of them are in irreversible decline.

5) Cheap oil/energy is OVER!

6) "Hard data" now confirm that Global Oil Production PEAKED IN 2005!

7) Oil prices are way too low!

8) Oil should be at least $150.00 per barrel with a permanent pricing "floor"

9) The world is facing the reality of the "twin cancers" of the oil biz, people and rust.

The "People" problem is due to the upcoming retirement of the bulk of the oil biz

The "Rust" problem is due to the fact that the world's oil infrastructure is built out of steel and is way too old and must be replaced immediately

10) Even at just an 80% replacement rate the rust problem is bigger and more complex than World War 2!

11) Obama does not know what is going on.

12) The world cannot adjust given the current "blueprint" of oil dependency

There obviously is a lot to discuss here.

If it turns out to be true that Global Oil Production has already peaked in 2005......we don't have enough time to fix the problems.

I want to make it clear that I am not attacking President Obama just for the sake of attacking somebody. I have always had great respect for the commander in chief.

But on a daily basis I talk to people who seem to think that Obama's concept of "change" is the magic potion that will wipe away the current inconvenience and bring back the heady days of cheap energy. It won't.

And, most importantly, many experts are warning us that Obama does not have a PLAN!

Look, don't be pissed at me as if I am calling your favorite football team names. We mean that Obama does not have a plan that is SCALED UP big enough to deal with the huge energy gap!

Obama's recent speech, as analyzed professionally here on The Oil Drum might sound good to a layperson. It sounds good to "double" the alternative energy in three years. But that is nowhere near enough to avoid massive problems. It is too little, too late.

Please don't confuse realism with pessimism. I'm not particularly pessimistic. But the reality of the Peak of Oil production is very, very real.

It is very important for as many people as possible to instantly develop an AWARENESS of the SCALE of the problem.

That is the most important concept. The scale.

This is very difficult for most people. Thinking about really big numbers doesn't mean that much to people on a day to day basis. A million here, a billion there. What does it matter to somebody working for an hourly wage at Wal-Mart?

I think the thing that scares me the most is that Obama doesn't even use the term Peak Oil in every paragraph. I'm talking about "mindshare." Not enough mindshare.

Forget about the "terrorists" and everything else. Peak Oil is the enemy within. We are killing ourselves.

How much of the new Obama "Stimulus Package" is dedicated to the estimate 100 TRILLION dollars we need for oil infrastructure replacement?

Doesn't anybody understand that all the stuff we built back around World War 2 has now rusted away? It's so simple.

Just take a walk near any refinery or pipeline or oil field or port and you can see for yourself that everything is in really bad shape.

Making just a "down payment" on fixing the economic crisis is not going to solve the CAUSE of the economic crisis, Peak Oil.

I don't even have the courage to try to discuss the last point. "The world can't adjust" is too negative, too extreme. Even for an old hang glider pilot like me :-(

Sniffing for the Peak

My dog used to be able to smell the ocean from one hundred miles away. She would sleep in the back of the truck in relative boredom while we did the ski expedition to Colorado or Utah from California.

But as soon as we started down the Cajon Pass and that salt air from the Pacific was blowing against the mountains of the LA basin, that dog would pop up and start whining and barking like crazy. She knew we were going back to the beach.

That crazy dog used to follow me when I surfed Rincon. I would catch a wave on the outside point and ride it all the way into the bay and she would run along barking and howling the whole way. I don't know how she could tell which surfer was me, but she could.

Just like I still don't understand how that dog could sniff the slightest little bit of salt air and tell that the beach was not far away. She just could.

Lots of people are sniffing for the Peak in oil production right now. The game is on. And it's an interesting question. What pieces of data will be the definitive sign that world production has peaked and entered irreversible decline? Nobody knows.

During my almost daily discussions of Peak Oil with clients, they often ask how they will be able to tell we have reached the Peak? The usual answer is to paint a picture of the graph of world oil production. Go back 150 years to Drake and move forward to 87 million barrels per day in June 2008. Maybe 1.3 Trillion barrels total produced over the last 150 years, maybe about the same left. Plotted on a graph with one year tick marks makes it pretty tough to tell that global production is dropping off at all. As Simmons has pointed out, the numbers are pretty coarse and most are highly political. As a matter of national security, what country is going to release info that reveals a Peak? Nobody!

Hubbert said that it took about 3 years to definitively reveal the Peak in US production back in January 1971. And the global production curve is bigger and therefore by definition more coarse. And everybody knows that statistics are routinely manipulated to support various politics and policies. Maybe a "1987 Black Monday" can be readily identified on a chart but the Peak of global oil production is not expected to be anything so dramatic. That's the problem.

So, we wait. And wonder. Sniffing the air for the first scent.

How about this? When you turn on the evening news, meaning mainstream American propaganda at it's finest, and the talking heads are babbling about a Saudi Aramco executive who has just admitted that production in the Ghawar oilfield has Peaked, then you will know that global production has peaked. Simple. As Saudi goes... so goes the world. Do I expect that to ever happen? No, of course not. There would be a panic.

The follow up question to "How do I tell that oil has Peaked" is, "Will there be an economic crash?" Well, think it through for yourself. Consider the Strategic Petroleum Reserve in the US. Why is there such a thing? Well, the August 2006 US GAO report on the SPR clearly states that "even small disruptions in supply can cause large increases in [oil] price." What the GAO report does not discuss is a permanent "disruption in supply." Like from Peak Oil. The SPR was designed to guard the economy from disruptions like a Hurricane or a closure of the Strait of Hormuz. It cannot possibly guard the economy against a permanent decline in global production! 

Will that lead to an economic collapse? Well, it depends. Do you believe that governments or corporations can implement a scaled-up replacement energy supply in an extremely short time? If you do, then I would have to ask you why we are waiting? Why would any government or corporation take even a slight risk of something as serious as a large scale, perhaps global economic collapse? This is a real life disaster flick that we all are going to having a starring role!

Meanwhile, back at the ranch, some of us are sniffing for the Peak. Is that barking that I hear?

667 Reasons Oil is Worth $800.00 Per Barrel

Don't you love those lists filled with some outrageous number of reasons why something is a certain way? I guess people are stupid enough to believe that stuff. It all comes from the idea that more is better.

If I come up with more reasons, it must be better. Hmmm......

Bigger, better, faster, longer, higher, stronger. Whatever.

I thought of 667 reasons for you today.

It's just all a corollary of "the secret." You know. The Secret. The secret Secret.

Of course the secret is that there is no secret. It is just plain greed.

By the way, did you notice that all the people involved with last year's secret book scam are all suing each other? I guess the secret thing didn't work out so well for them. Did they really think you could buy philosophy in a can?

It's sorta like when they say something is free. You know. Free. Free! FREE.

Free bonus. Buy one get one free.

But what if it was true? What if there really were 667 reasons that oil will soon rise to $800.00 per barrel?

That would be impressive. Oil was trading today at $133.64 according to one of my little widgets. So a rise to $800.00 per barrel would be a 498% gain!

I told my clients last year when oil was $65.00 per barrel that it was going up. Way up.

I think it was Steve Forbes and other wall street gurus along with various talking heads in government that insisted that oil was going back down to $30.00 per barrel. We will have to wait to a later blog to discuss the Venezuela factor in all that.

I wonder if any of those wall street wonder boys drink coffee? Not buy coffee. Not commodities or futures trading or options or anything exotic like that. Just coffee. A cup of joe.

Actually I don't drink coffee and I probably would be really out of touch with the whole coffee culture if I didn't agree to meet new clients at coffee shops sometimes.

But I do remember that coffee used to be ten cents a cup. Back in the sixties when I was a little snow skiing devil I would be forced back into the ski lodge by my not so very tough lowlander surfer buddies who couldn't stay out in the cold like I could.

They would order a hot cup of coffee and I would get a nice hot chocolate. And I remember the coffee was cheaper than the hot chocolate. I guess it was the cost of the sugar.

Remember the way things were before the Starbucks orgy? At the very most a cup of really great coffee was about a buck. $1.00. One dollar. Plus tax. Say 6% percent for many municipalities. A dollar six. Not too bad.

So if a cup of coffee is worth one dollar, even if it isn't worth 4 or 5 like today's "gourmet" prices, what about a cup of oil?

You see that's the genius I see every time I listen to Matthew Simmons. Simplicity.

What is a cup of oil worth?

A buck? $1.06? $1.10? How about $1.20? Those pennies don't seem like much but they compound quickly don't they?

Just $1.20 a cup is $800.00 per barrel!

See, there are 667 cups in a barrel of oil.

That is a pretty big multiplier. I think you would agree it is a significant multiplier.

This is just sort of barnyard logic. Informal math. Back of the napkin stuff.

But look how easy it is to get to $800.00 per barrel!

Soon I will take us through a few other similar exercises..... stay tuned and please subscribe

Matthew Simmons video-2007

Still not sure if global oil production is "peaking?"

Check out this video of Matthew Simmons, world-respected oil industry investment banker and expert on Peak Oil.

This was from last year. 2007. When oil was $65.00 per barrel.

Did you catch the number there? Yes, that was $300.00 per barrel.

On May 13, 2008 oil was trading for $127.00 per barrel already.

I am advising my clients that we will hit $200.00 by the end of 2008 if not sooner.

That would probably equate to somewhere around $6.29 a gallon for gasoline, maybe more for diesel.

Have you developed a strategy for living in a world of higher energy costs?

Many of my clients are already working hard on various lifestyle changes and investment strategies to adapt to Peak Oil.

More to come....