When oil prices have doubled to $80 and a second Great Depression threatens global political stability, our president will assemble a 9/11-style commission to explain the intelligence and policy failures that led to the crisis. The verdict will be familiar: The stunning blow to the world economy brought about by the sudden, unexpected depletion of fossil fuel should have been anticipated and prevented. When that day comes -- in five years or perhaps 20, who knows -- many of the key exhibits will have been penned by Matthew Simmons, a Houston energy analyst and banker at Simmons & Co. International. Simmons is now shouting from the rooftops -- writing think-tank white papers, giving speeches and finishing a book set for publication next year -- that the world is quickly running out of affordable oil and gas, and that no amount of Middle Eastern pumping can bail us out. While much of the so-called "peak oil" story is well known, what's news is Simmons' startling claim, based on personal analysis, that Saudi Arabia's pumping capacity is in decline. Aramco, the company in charge of Saudi oil operations, disputes Simmons' assertion and has debated him in public policy forums. But Simmons isn't easily dismissed, as he's no antiestablishment crank. In addition to his role as chief executive of a major energy-focused investment bank, which counts Halliburton ( HAL) and the World Bank among its clients, he's a member of the Council on Foreign Relations and was an adviser to President Bush's election campaign and Vice President Dick Cheney's infamous energy task force.
In a nutshell, peak-oil advocates note that U.S. oil production -- once the highest in the world -- topped out in 1970, while natural gas production topped out in 1973. Both are now in decline. With world oil consumption at about 1 billion barrels every 12 days, oil companies have pressed hard to find oil and gas in other parts of the globe. Indonesia's fields are old and declining, as are Russia's and Canada's. Simmons and others say that most of the world's easily obtained large oil reserves have already been located in remote areas such as Arctic Alaska, the deepwater Gulf of Mexico, deepwater West Africa and the North Sea, and that new reserves being brought on line offer only marginal amounts. As an example, ExxonMobil ( XOM), ChevronTexaco ( CVX) and Petronas of Malaysia have teamed with the World Bank to develop the Doba oil fields in landlocked Chad at a cost of $1.5 billion, and to build a shipping facility on the coast of neighboring Cameroon at a cost of $2.2 billion. Yet Chad has only an estimated 900 million barrels of reserves, and the field will pump just 50,000 barrels a day, an amount that would boost the local economy tremendously but barely make a dent in world production. Technology will help make many old fields more productive, but the amounts are again relatively tiny. New field production worldwide is moreover limited by safety concerns. U.S. environmentalists have blocked the exploitation of the Arctic National Wildlife Refuge, a 19-million-acre section of northeast Alaska sometimes described as America's Serengeti, and shut down exploration off the Pacific, Atlantic and Florida Gulf coasts. Supporters, including Simmons, argue that modern drilling techniques will minimize the environmental impact on the Arctic's coastal plain, but even if it's exploited, he notes that it would generate only 300,000 to 1.5 million barrels of oil a day and natural gas for 10 to 20 years before depleting.
Simmons says it's worse than that. Much like the biggest problem in the Enron fiasco was that analysts always trusted Enron managers' declarations about the strength of its financial assets, he says that the world has always taken Saudi Arabia at its word for its oil assets. He now believes that it cannot be trusted. He notes that the six major oil fields in Saudi Arabia, all discovered between 1940 and 1967, produce about 95% of Saudi oil. The Saudis produce 10% of the world's oil from them at the world's lowest prices, and the Saudis are the only serious provider of "spare" capacity on the planet. A single field, Ghawar, which is the world's largest, was discovered in 1948 and produces up to 60% of the kingdom's total. He believes that production at these mature fields has peaked. While that doesn't mean they'll run out tomorrow, they're becoming much harder and more expensive to exploit efficiently. It's like a person getting older and suffering from arterial sclerosis: They slow down and become increasingly less capable. The Saudis are now using intense water-injection techniques to improve production, he says, a technique that can ultimately lead to catastrophic pressure failure. Aramco disputes his claim, but Simmons notes correctly that its principal answer comes down to an Enron-like "Trust me." There's no solid independent data source of Saudi oil production. "A lack of verified data leaves the world in the dark," he told the Hudson Institute.
Simmons is calling for a "new era of transparency" -- timely, field-by-field verified data -- so the world can really see what the Saudis have. They need to abandon their old practices of secrecy and lead OPEC on this. Without better assurances, he says, the lack of a valid Plan B could be catastrophic to world economic progress. Of course, Simmons has a pony in this race. The more the world needs to build new fields, the more his investment bank can finance. But his views demand attention nonetheless, especially in light of the Saudis' recent lack of forcefulness in adding capacity to push oil prices down today.