In his 2005 book, "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy," Matthew Simmons reaches some downright scary conclusions.
A member of the National Petroleum Council, Simmons is an investment banker who specializes in oil; simply put, he's an analyst. He crunches numbers to find solid investments. He looks for truth and reality through quantifiable data.
While meticulously analyzing the Saudi oil fields one by one, Simmons found major discrepancies between Saudi claims and actual production potential. In essence, world demand has steadily increased and Saudi Arabia, the world's #1 oil supplier, does not have the resources to keep up. The world is running out of oil, and our current way of life is due for a rather dramatic change.
Simmons analyzed the technical papers of the Society of Petroleum Engineers to reach his conclusion; we have reached "peak oil" production and are on the downward slope. This is a very frightening scenario. Oil field fileds in Texas, Alaska, the North Sea and Russia were previously known to have peaked. The revelation about Saudi Arabia is a tipping point.
Worldwide oil exploration has been extensive; experts on the subject note there are no new major oil fields to be discovered. It's important to note that reserves and recoverable reserves are not the same, and that the quality and usefulness of oil is not uniform; light, sweet crude is very different from lesser grades of oil that are much more expensive to refine.
In his book "Beyond Oil: The View from Hubbert’s Peak" (2005) Kenneth S. Deffeyes warned that "peak oil" had been reached as of November, 2005.
www.theoildrum.com is written by a group of academics in the US, Canada, Europe, Australia and New Zealand who devote themselves to this topic. In March, The Oil Drum announced that "peak oil" had been reached in 2008. Naturally, the site predicts price hikes in the near future.
Simmons is quite specific in his prediction; he sees an oil shock in as little as three to nine months, and $300 oil a distinct possibility.
The effects of such an outcome would be devastating to the world economy, even more so than the current economic downturn. It would create supply disruptions, leading to instability and panic. Transportation and shipping would be severely impacted. Food prices would spike around the world.
Cambridge Energy Research Associates issued a report in March which found that the global slowdown has caused oil companies to slash investments, cancel or postpone expansion plans, or delay drilling in many parts of the world. The end result could be a decline of nearly eight million barrels per day in the world's oil supply.
Before the recession, worldwide capacity was only two percent above demand, a very slim margin. There is no room for retrenchment.
Last year, Cambridge projected total supplies at 109 million barrels per day by 2014; they have now reduced that projection to 101.4 million barrels. The French oil company Total is even more pessimistic, projecting the total won't even break 90 million barrels per day. Either way, this will put huge inflationary pressure on the price of oil.
Even in the US, the number of rigs tapping new oil supplies has been cut in half since last summer. Lower prices have put an end to efforts to squeeze more oil from aging fields or tap new resources.
Indeed, analysts expect supply shortages and another significant price run-up. The cutback in drilling will prevent energy producers from responding to increasing demand in coming years, particularly as developing nations continue to emerge. Oil has already shot up from $46 in March, breaking $70 during trading this week. That's in just three months.
The decline in worldwide investments has Russia backing the Saudi oil minister's warning that the price of oil could surge to $150 within two to three years. Last summer's high was $147, resulting in gas prices north of $4 per gallon. Russia is currently out-producing even Saudi Arabia, and oil is the lifeblood of its economy. Oddly, the Russians have refused to cut production along with OPEC, even though they have a stated goal of seeing oil at $75 per barrel. Their goals and actions do not seem to be in harmony. But I digress.
His work has been featured in various magazines, newspapers, and on-line sites.
As gas prices have fallen, Americans have forgotten about the cost of oil. After all, a gallon of gas is cheaper than a gallon of milk, water, or Pepsi. However, oil is purchased in dollars on the world market. With our mammoth debt, continued deficit spending, and a dollar that is "seriously overvalued", according to a new study by the Peterson Institute for International Economics, we have a recipe for a devastating price spike.
For these reasons, the Russians have suggested that oil should no longer be traded in dollars on world markets. And even China has recently spoken of a desire for a new global reserve currency. If this were to occur, the US's purchasing advantage would immediately vanish.
The bottom line is that, even with the worldwide economic downturn, energy supplies will not be able to keep up with demand for very much longer, and the respite we've had from the heavy burden of oil prices will be short-lived.
There are more than enough reasons, and experts, for us to recognize this reality and take the necessary precautions. We need to immediately begin conserving, lessening our overall dependence on oil, and preparing for the reality of peak oil, massive price hikes, and a life after total oil dependence.
Copyright © 2009 Sean M. Kennedy. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed without the author’s consent.
An L.A-based freelance writer, Sean largely focuses on money, business, economics, energy and health policies.
His work has been featured in various magazines, newspapers, and on-line sites.
recommend this
email
print
link to this page
Comments: 6
This is nothing new for me. I read the book when it was published in 2005 (not 2006). I've done what I can with limited resources and abilities to adapt myself to the future economy.
What I'm wondering, is what you have done or are doing or are planning to do (if you're new to PO), to mitigate its effects upon yourself? I see that you live in LA, which has to be one of the worst places in America to be in a post-peak oil (PPO) world given the environmental, ecological and transportation issues at hand.
Very well written Sean,
I have heard the threat of peak oil since the 70's and I suppose the dire predictions are now coming true.
Right now the price of fuel in New England where I live has started going back up daily two to four cents a gallon and sometimes we see price rises twice a day, it started back up in late April and it looks like it will not be stopping anytime soon.
Most people I talk to think this is happening because the fuel companies are just taking advantage of the vacation season to boost profits.
I think the Saudis have been pulling the wool over our eyes for a long time about their reserves.
I could be wrong but I think what is driving the price of oil up now is speculation just like it did last winter.
I think the problem with America struggling to supply our energy needs is political not reserves. Iraq (in Wolfowitz words) sits on a "sea of oil," one of the biggest reserves in the world. Iran also has large oil reserves. Venezuela has large reserves just now being taped. America has large untapped oil reserves as well as big natural gas reserves off the East coast that will have to be used in time.
Their is also the fact that we are supposed to be weening our self off carbon based fuels to clean up the environment and although we have the technology to do this we still continue to fight wars to control the worlds carbon energy sources.
I do not make mention of the huge coal reserves because as far as i'm censened the sooner coal burning is stopped the better.
depressing.
Simmons says the rate of decline of the world's ageing oilfields is as much as 20 percent a year and only high levels of investment can reduce that to single digits. Yet, due to the drop in prices, oil companies have not sustained previous levels of investment in new production.
The International Energy Agency is concerned that the OPEC production cuts have left oil inventories dangerously low, leaving little room for manoeuvre when oil demand recovers.
According to Simmons, "Unless oil demand falls by 10 or 15 percent per annum, which it is not going to do, then we don't need to wait for oil demand to come back before we have a supply crunch."
This just adds to the reasons we should start going green.
That's one reason why I'm in no hurry to get a driver's liscense, the bicycle will be my primary source of transportation. So many peopel drive their cars to nearly places when walking or biking would suffice.