Extracted from a recent Mathew Simmons PDF presentation
"The Energy Crisis Has Arrived"
Energy Conversation Series
Department of Defense
June 20, 2006 By Matthew R. Simmons
Modern Energy: Elixir Of Life Oil is "transportation" energy.
Oil’s liquids make all kinds of things.
Natural gas creates instant heat.
NGLs create things, too (fertilizers and petrochemicals).
Coal, nuclear, hydro, wind and solar all create "light".
Without these energy sources, we lose a lot.
Any energy shortage morphs rapidly into PANIC!
More Products Made From Oil…
Adhesives, air-conditioners, ammonia, anti-histamines, antiseptics, artificial turn, asphalt, Asprin, balloons, bandages, boats, bottles, bras, bubblegum, butane, cameras, candles, car batteries, car bodies, carpet, cassette tapes, caulking, CDs, chewing gum, combs/brushes, computers, contact lenses, cortizone, crayons, cream denture adhesives, deodorant, detergents, dice dishwashing liquid, dryers, electric blankets, electrician’s tape, non-natural fabrics, fertilizers, fishing lures, fishing rods, floor wax, footballs, glycerin, golf balls, guitar strings, hair coloring, hearing aids, heart valves, heating oil, house paint, ice chests, ink, insect repellent, insulation, jet fuel, life jackets, linoleum, lip balm, lipstick, loudspeakers, mascara, medicines, mops, motor oil, motorcycle helmets, movie film, nail polish, oil filters, paddles, paint brushes, paints, parachutes, paraffin, pens, perfumes, petroleum jelly, plastic furniture, plastic wrap, plastics, refrigerators, roller-skate wheels, roofing paper, rubber bands, rubber boots, rubber cement, running shoes, saccharine, seals, shoe polish, shoes, shower curtains, solvents, spectacles, stereos, sweaters, table tennis balls, tape recorders, telephones, tennis rackets, thermos, tires, TV cabinets, computer ribbons, umbrellas, upholstery, vaporizers, vitamin capsules, volley balls, water pipes, water skis, wax, wax paper, etc. etc.
Defining Some Key Words
Mistakes occur when "two ships pass in the night."
"Terms" means different things to different people.
Some important terms for tonight’s talk:
THE GREAT ENERGY CRISIS (2006 – 20??)
How this one crept up
What everyone missed
Gravity of crisis
How we conquer it
The History of Crisis
History Is Wrought With Tragedy And Crises
"Hi-story" records grim tales of crises.
Most were unnecessary (sadly).
Armies only march (vs. train) to overcome crises.
Modern history saw escalating series of crises:
– Old crises were mostly local
– Modern crises became global pandemics
Value of Historical Analysis
History always puts current problems into context.
Historical events rarely re-occur.
Mistakes leading to crises are often repeated.
Best plans usually anchored on rigid historical analysis.
History of crisis is "Classical Study" at its best.
We Faced Many Crises
Division of tax fairness
The Boston Tea Party
The American Revolution
The Missouri Compromise:
The Great Civil War(Aftermath: A nation almost destroyed - 600,000 - DEAD)
The vanity of the "Royal Cousins"
A Duke’s death:
The Great War (Aftermath: 20 to 40 million of "the finest we had" – DEAD)
Great War Recess Morphed Into Tragedy
We failed to settle the Great War
The Nazi march
Peace in our time (18 months)…Then came war:
September 2, 1939: Insanity in Europe explodes into WWII.
December 7, 1941: US Navy sinks – America’s fortress crumbles.
May 1945: Europe/UK are gone, but VE Day is here.
August 1945: Hiroshima and Nagasaki are gone, but war ends.
IT ALL COULD HAVE BEEN PREVENTED
Crises Are Also Not Inevitable
1stQ 1946: General George Marshall traverses Europe, spending six weeks with "Uncle Joe". He panics… "We will soon be back at war." "America must go back to Europe or the Depression will return." (Marshall Plan announced at Harvard)
Result: The Four Wise men were wise!
June 1946: 2,500 Marshall Planners planned.
1947 – 1951: By Korean Crisis, rebuilding Europe was almost complete.
Genuine Peace In Our Time Worked
Another Crisis Avoided Story…
The "Cold War" Kept The Heat Of War Away
1947: Iron Curtain created "Cold War."
1948–1988: Explosion of armies, spies, planning and technology. Despite many "near misses" the Cold War worked.
1989: The Wall collapsed. The Russian illusion evaporated. Billions of wisely spent dollars saved millions of lives
The Art Of Crying Wolf: A Time Honored Gift or Mistake?
"The bombs never fell" (50 years defense spending - wasted).
Polio did not kill everyone (inoculations - wasted).
Sputnik was tiny piece of space (all the unneeded engineers and scientists – wasted).
We easily landed on the moon (the space race – wasted).
Y2K did not shut us down (approx. $50 Billion – wasted).
Maybe climate change won’t materialize (too early to tell).
Bird "Flu pandemic might not spread (too early to tell).
WHICH BATTLES SHOULD WE IGNORE?
The optimists like to say "They are just crying wolf!"
The Energy Crisis Could Have Been Prevented
We were amply warned:
– Hubbert’s cry (1949)
– Club of Rome (1972)
– Aramco’s Whistle Blower (1974)
– The NYT "leaks" (1978-79)
Facts always become crystal clear…after the fact
This, too, was a crisis we could have solved.
Planning for post-Peak Oil should have begun in 1970s.
It would take three decades for a "safe transition."
Tragedies Often Leave A Trail Of Tears (Or, The Riddle Of Lost Opportunities)
"How easy it would have been to never pick up a single gun…" Winston Churchill in Missouri 1947 (aka "His Iron Curtain Speech").
"Remember the chorus of street criers who cried?"
Dr. Colin Campbell, Jean Laherrere, Dr. Fatih Birol, Dr. Kjell Aleklett, Honorable Randy Udall, Dr. Herman Franssen, Dr. Edward Morse, Dr. Robert Hirsch.
How could so many energy medics’ voices have not been heard? (Answer: The laughter drowned their cries.)
What The Optimists Missed
Awful energy data.
No proof of "proven reserves."
OPEC’s proven reserve game (1980s).
Decades of lower exploration success.
No proof that reserves still grow.
Acceleration of decline curves.
Limits of oilfield technology.
Etc., Etc., Etc.
Why We Slept
Aramco and others believed Middle East oil was "boundless."
Economists believed oil prices would steadily fall:
– "$1.25 oil is too expensive." M. Adelman (Dec. 1969)
– "Cost to extract all natural resources falls over time." J. Simon (1980)
– "Drowning in Oil – Oil prices are falling to $5 for a decade" The Economist. (March 1999)
– Energy Crisis? Phooey! – Yergin, Tillerson, Browne (2006)
Current Scoffer Statements
"No one wants our oil – even our light oil." (Saudi Arabian Petroleum Minister, June 2006).
"While current prices will stay high, oil will then fall to $40 before falling lower." (Lord Browne of Mattingly (BP), June 2006).
"The world has 10 trillion barrels of oil left." (Rex Tillerson (ExxonMobil) on Today Show, May 2006).
We Had No Fuel Tank
Can’t run out of gas when fuel gauge is "empty."
World never invented a real fuelgauge for: – A town, city or region
We created rough estimates of OECD "stocks."
We used the Energy Information Agency (EIA) weekly stock report as a proxy for a gauge.
"Reported Stocks" Are Merely Samples Of "Primary Stocks"
Reported "stocks" are samples of "Primary Stocks."
Primary stock is storage exceeding 50,000 barrels.
Rest of stocks (secondary, tertiary) are probably greater amount.
Estimates are "educated guesses of samples."
Total petroleum stocks include:
– Crude in system (pipelines, tankers and tank farms)
– Refined products work in process
– Finished stock
The War Of "Weekly Reports"
American Petroleum Institute (API) issued their reports first (until 2003).
No enforcement of EIA’s sampler reports.
Few historical revision adjustments were seen.
No evidence on physical testing ever performed.
Traders jump on EIA/API numbers like bookies at track.
Other Data/Red Lights Missed (Whilst We Slept)
Accelerating decline curves.
End of technology – work all done.
Low prices dissipated a once robust industry.
A happy ending was not in the cards
"We Woz Wrong" – The Economist
While powerful voices of optimism boom, facts are pouring in too fast.
Fact: Out of capacity for:
- Oil and gas supply cushion
- Oil and gas supply growth
- No spare drilling rigs
- No spare refining capacity
- Shrinking pool of skilled workers
- No access to anything good
Fact: Demand still raging ahead
Demand Can Be "Anything"
Use = Supply
"Any person has a right to hope," even demand.
"Hope springs eternal." – Alexander Pope, 1733.
Energy Physics 101 (EP101)
Energy Use = Energy Supply
Caveat to EP101:
"Energy cushion" can bridge a small gap
The Formula For An Energy Crisis
Step 1: Soaring demand.
Step 2: Use up all spare cushion.
Step 3: Run out of rigs, people and projects.
Step 4: Shrink supply.
RESULT: ENERGY SHORTAGES BEGIN
One Of Charles Dickens’ Great Satires
Is this the future or our future unless we mend our wrongful ways?
The Ghost of the Future
Have We Run Out Of Time To "Mend"?
Had we awakened in 1974, we never would have spent three more decades believing oil would always remain cheap because of the Middle East.
Had we taken Sy Hersh seriously in 1978/79: He told us Saudi Oil was a fable but we thought he was just trying to scare us.
Had we not destroyed our energy army, the saga of the 25 year oil depression, we would still be strong.
"If wishes were horses…"
Middle East Oil Will Not Bail Us Out
Boundless Middle East Oil was a myth.
35 – 40 giant fields were found (1927 – 1972).
All are now "very mature" and involve complicated production:
– Rising water cuts
– Steadily tight rocks
– Heavier and more sour crude
– Rising corrosion problems
Abundant natural gas was even more mythical.
Post 1972, exploration found nothing significant.
Even Saudi Arabia’s Great Oil Resources Are Scarce
Seven key fields produce 90%+ of Saudi Arabia’s oil.
Average "life" of this produced oil is 45 to 50 years.
The sweet spots of these fields are almost depleted.
Field 1994 Production (B/D)
Abu Sa’fah 150,000*
Nobody Saves The Best For Last
‘Ain Dar/Shedgum = 2 million barrels per day.
All Giant Saudi Oil fields Are "Mature"
Abqaiq’s key producing areas are now "pockets" of by-passed oil.
Berri appears headed for a "gas blow down."
Safaniya/Zuluf/Marjan are losing their great water aquifer and are all old, too.
Shaybah is a very complex to produce reservoir.
Far smaller Hawtah Trend was contaminated by
Are There Vast Areas Yet To Be Explored?
Saudi Aramco has employed state-of-the-art geophysical tools to find new oil sources.
So far, the only commercial success was in Hawtah Trend (200,000 barrels per day of extra light oil).
The remaining unexplored areas:
– Iraq’s southern border
– Deepwater Red Sea
– Bottom end of Empty Quarter
Saudi Arabia’s Real Oil Future?
Various old field rehabilitation projects have all been put on a fast track.
Rig activity has tripled in 3 years.
Each "rehab" project is complex and faces risks.
"Current" decline rates approx. 8% per annum.
No proof that oil production has grown in past 4 years.
The future is "fuzzy" at best. "TRUST ME" provides no evidence or proof!
The Middle East Will Always Have Oil
Middle East oil production will not rise any longer.
My educated hunch of future decline:
2006 2012 2018
Saudi Arabia 8,000 5,000 3,500
Iran 3,200 2,200 1,500
Iraq 1,800 1,200 800
Kuwait 2,200 1,600 1,200
UAE 2,200 2,100 2,000
Oman 800 500 300
TOTAL 18,200 12,600 9,300
Crude Oil Only
How Will We Know When Peaking Was Real?
You only really know after the fact.
There is no crystal ball or "omen in the sky."
Facts only lead to a solid hunch.
Hunches, backed by genuine, solid data which are integrated into "intelligence," transform real wars into phony wars.
Do We Have Any Time Left?
Not enough to stave off peak energy use crisis. The crisis has arrived.
If we "wait it out" difficult to stay alive without ample energy.
What if we simply "go to war?"
– With what source of energy?
– Do we even know the enemy?
– A war without a plan is almost certainly "a lost war."
Does It Make Sense To "Call To Arms"
"Will a bugle call make a difference?" Not sounding the alarm, lets the fools still dream and not realize the coming pain.
Starting yesterday made far better sense.
Better to start late than not start at all is a truism.
"Without ample energy, you cannot invent enough Generals." (Four star General Richard Lawson in Beijing, February 2003)
"Without bridges to prosperity, we might as well go home and get into our uniforms!" Brigadier General George Y.B. Yeo, Harvard Business School Alumni Association. April 1997.
An Outline Of A Real War Plan, "How to Survive The Energy War"
Plan, plan, plan and fight next.
Get real energy data even if it takes spies and armed forces to steal the data.
Panics create instant "call to arms."
If we wait a day longer, we risk losing everything we cherish by DEFAULT and then the global lights dim…twilight turns into era of darkness.
A Truth: Addictions Are Hard To Kick
Kicking the oil habit means using less transportation energy.
Solution is simple but complex to "integrate into a forced march out of harms way."
Stopping "natural gas addiction" has no working plan.
Natural gas is our only efficient source of instant heat.
Natural gas is only way to quickly cool.
Too much heat kills slowly.
Too little heat kills elderly in 30 minutes or less.
High percentage of globe lives outside "moderate zone."
The "Play" Is Over… The Lights Go On!
Tonight’s energy discussion had no intended humor or happy ending.
I used war terms to connote how real the energy war is. The attack was silent, but it happened nevertheless.
Our military can either fight the last military fight (and probably lose) or:
– Use its honest force to plan, organize and fight to win the energy war
– The lights are now on… but not for very long
Why Do I Fear The Peak Is Here?
No "verifiable proof" until data reform happens.
Wide body of strong circumstantial proof does exist:
– Slowing of new discoveries all getting smaller
– Most key regions are now in decline
– Most new projects are heavy oil, deepwater and/or unconventional gas
– Supply for non-OPEC/non-FSU has been flat or declining for 6 years
– Demand continues to grow
– Industry is now out of spare rigs, refineries and people
When Twilight Sets On Middle East
Twilight (peaking of Middle East oil) marks twilight for the world!
No region in the world is ever likely to replace this gap.
Finding several North Sea replicas will take decades.
By 2020, the current 80+ mb/d base could be reduced to 25 mb/d.*
THIS IS A BIG DEAL!
*Schlumberger’s 8% per annum estimated global decline s 8% per annum estimated global decline
A Clash of Ages Is Just Ahead
Demand for energy gathering steam:
– Growth in use outside OECD has just begun
– OECD use still growing every year
Supply got too old:
– Decline curves are high now
– They will accelerate
– Too many regions now producing "brine stained with oil"
Is It Really "Too Late?" (Or Was All This A Bad Dream?)
The world is probably beyond peak oil and gas.
If we are still close, turn around and retreat.
Finding new oil and gas takes decades.
Building a new energy army of rigs, boats, pipes, tankers, refineries, wireline trucks, seismic fleets, geo steered drilling units, etc., take decades.
Meanwhile, the Rust Belt needs to be rebuilt.
There is no army of trained personnel or teachers or recruiters of energy students.
"The Next War" Will Be The "Last War"
"We" now are all addicted to oil and desperate for a fix of gas when it gets either too cold or too hot.
"We" used to be the U.S.A.
"We" now encompass everybody (6.5 billion everybody) other than tribes in the Amazon or mountains of Papua New Guinea).
The Big Junkies: OECD = 50 million barrels per day or 23 barrels per person per year.
The beginners who sample: Rest of world (5.5 billion bodies) = 35 million barrels per day or 2.3 barrels per person per year.
Houston, We Have A Big Problem
The earth’s energy has peaked and its use will start to disappear.
It will never "be gone" but will soon be "far less than needed."
"No one saw this coming!" (at least almost no one)
Better get the armies built up.
This war must be won.
Energy’s Twilight Era
Tonight we had an honest talk about a very real problem: The twilight of fossil fuel.
We all share the unforeseen consequences of problems too long ignored.
It is past time for debate, the crisis is here.
The time to educate, plan, form an energy army and march is NOW!!