Transcript: Twilight in the Desert

THE CNA CORPORATION

ENERGY CONFERENCE

“TWILIGHT IN THE DESERT”


SPEAKER:

MATTHEW SIMMONS,
CHAIRMAN,
SIMMONS & COMPANY INTERNATIONAL



TUESDAY, JUNE 20, 2006
6:00 P.M.

ARLINGTON, VIRGINIA

Transcript by:
Federal News Service
Washington, D.C.

STEVE WEHRENBERG:  If everyone will find a seat.  Two months ago we couldn’t get anybody to network and now we can’t stop you.  It’s wonderful. 

Good evening, ladies and gentlemen.  Welcome to the fourth energy conversation.  We are very pleased that you could all be here this evening.  And of those of you who have hung in for all four, you get a little, like, ribbon at the door on the way out that you can wear.  It says I’ve been to four of these.

We have a distinguished speaker tonight, Matthew Simmons.  And we also have both of our sponsors with us this evening, who I will both – both of whom I will thank real quick.

Terry Pudas from the Office of Force Transformation is right here.  (Applause.)  You just pay for the food.  He seems to be paying for most everything else, so that is kind of the way that works.

And our co-sponsor is Mr. Ken Krieg, undersecretary of Acquisition, Logistics, Technology.  He asked me not to list all of those things because it makes him very scared when he hears all of those things.  So we are very pleased to have him with us this evening.

Our process will be of course – I am going to ask Mr. Krieg to introduce our speaker.  There will be plenty of time for questions and answers at the end.  We pre-positioned three people in the audience with microphones.  If you wait until you get a microphone, we will at least be able to know what you’re saying and put that in the transcript.

I think we have got the transcripts online faster this time.  It looks like we are going to get the audio version online pretty quickly.  We seem to have ironed out the logistics bugs.  The feedback that we are getting on our survey is that it’s getting better, but it could be better, and we will make it so.  So that is just a subtle hint that when you get the e-mail that says do this survey, do that survey.  That is your vote.

Without further ado, I will ask Mr. Ken Krieg to come up.  He asked for a short introduction and that is what he got, so.

KEN KRIEG:  That was perfect, Steve.  That was perfect.  Thanks.

MR. WEHRENBERG:  Thank you.

MR. KRIEG:  Well, I won’t be long up here either because I’m not the – I’m not the show today.

 I want to add my welcome and thanks to all of you for coming out.  In the fourth of our series, the number of – the end on the series is as of yet undetermined, and as the numbers get bigger and more interesting, I guess we probably have to think about that – talking about energy from – and we are trying to bring it from a variety of different angles.

When we first started talking about this – and Congressman Bartlett, who will be here in a minute, spoke about his interest in it.  You know, we all knew that it was an important conversation to have.  The question – and we knew that pulling the variety of threads together, which many of you in this room – you in this room represent many of those threads – pulling those threads together would be challenging.  We knew that we weren’t the only ones seeking a forum, and so getting out there and getting people talking was important.  But we had no idea of how many people would show up, and most importantly, if they showed up once, would they show up twice.

So we are thankful to our speakers who show up.  We are thankful to those who organize and do all of the work.  And we are thankful for the support of Congressman Bartlett throughout this effort.

Today’s speaker is Matthew Simmons, chairman of Simmons & Company International, which is a specialized energy investment banking firm.  You have his resume in your packet; so I won’t go through that, except to note two things.  One, he has put his own money and others’ in this field for a number of years, and so, therefore, when you put your own skin on the line in a business, you better try to understand the facts that lie behind it.  And so I think his work represents 20, 25 years in this business, placing his money at risk, and therefore accumulating a lot of facts to try to understand that.

It is for us an honor to have you here.  Your look at this problem is insightful.  You know, in the business I am in, in defense, as opposed to the business I was in, in the private sector, the search to try to create transparency in data and transparency in knowledge – that which the open market tries most to do to ring out an understanding of what risk is and what opportunity is, is very hard inside the defense sector.  And as I begin to read some of the stuff that Matthew will take us through today, I understood that that is much of the challenge that this sector goes on.

So we are very happy to have you here.  We think it’s important – I think it’s important to put – to extract fact and knowledge to create transparency and an understanding of risk.  And so without further ado, let me get off the stage and introduce Mr. Matthew Simmons. Thank you.

(Applause.)

MITZI WERTHEIM:  Can I ask you to all turn off your cell phones, please?

MATTHEW SIMMONS:  It is a pleasure to be here tonight.

It was a – I was sorely tempted this morning to figure out if I could have an excuse because I have five daughters, and my number-three daughter, who graduated from college a few weeks ago, is actually on a sailboat right now called the Loose Fish in the hundredth running of the Newport Bermuda.  And I just found out when I arrived here that the Loose Fish is now sixth in class of the racing boats and 13th overall.  And she should be pulling into – crossing the finish line at the St. David’s Light House.  So it was a – but I had to be in Washington tomorrow morning anyway, so --

The – it is interesting to look back over the evolution of how I got interested in energy.  And then as I have finally started purging down the management responsibility at Simmons & Company, I had more and more time to do more study, and the problems got worse.  And then I had this incredible curiosity finally about the whole Middle East energy program, and I finally discovered that there was a lot more data than I ever would have imagined, that if you really went hard through the data, it was arguing that we really had an illusion about Middle East energy.

And then that led me to publishing this book, “Twilight in the Desert,” that came out just about a year ago.  In fact, I think I see General Dick Lawson back there.  I think it was a week a year ago this week that we had the book lunch at the National Press Club.  What I didn’t realize a year ago was the intense amount of work that I had ahead of me as a result of having published the book.  And one of the things I asked my assistant to do this afternoon – I just got the answer – I just said, out of curiosity, after I gave the book lunch at the National Press Club, how many times have I spoken?  And it turns out, this is the 75th speech I have given.  And I have taken all of last summer off in Maine.

So it’s been a – but I have learned so much as I have gone around from one audience to another.  And the audiences have varied so enormously from a lot of campuses around the world, to a lot of groups like this, to a lot of energy groups. 

Several weeks ago, I had in rapid order speaking at Midland College in Midland, Texas, which is the capital of the Permian Basin – they had 1100 people that showed up.  And they were basically four generations of people in the oil business.  They were all there in that room that night – and then the next night at Ardmore, Oklahoma, which is sort of the capital city – Oklahoma was a great area – 500 people, from both citizens, farmers, professors, Ph.D.s in geology, and so forth.

But then, now that I’m wrapping down my last – last Monday night was my third-to-last speech before I go to Maine.  Tonight is my second.  And then Thursday, a lunch at the Harvard Business School Global Alumni Conference, will be my last talk.  It was just so interesting to think of these three – a week ago last night, I spoke in Cambridge, Massachusetts, at the Cambridge Forum, and it was held in what is called First Church because it was basically build in 1690, I believe.  And it’s sponsored by WGBH.  And so they have said, please no slides because it’s being on a radio.

And it was really actually fun to not have any slides, but there was sort of a solemn nature to the thing being in this beautiful church.  And I thought, isn’t it ironic that I’m going from here to Crystal City, which I sort of think of as the kind of heart and soul of our military complex, to be able to give the same speech to very different people, and have sort of the same reaction.  So I think that we are all starting to learn a lot more about the nature of energy problems.  And I really applaud this group for what you have done.

The title of my talk probably gives you a pretty good hint of what I’m going to say, is that we don’t have a pending energy crisis; the energy crisis is here.  And I think the importance of this wouldn’t be very important if energy weren’t important.  But the reality is modern energy is truly the elixir of life.  Oil is basically transportation, and 98 percent of all of the things that we do for transportation is oil.  And then the liquids that come out of oil make all kinds of things.  Natural gas creates instant heat.  In fact, it’s the only energy force we have ever found that creates instant heat.  Natural gas liquids create things too like fertilizers and petroleum.

Then you have coal, nuclear, hydro, wind, and solar; they all create light.  Without them, we don’t have any light.  Without these energy sources, we actually lose a lot; in fact, we lose everything we have.  And any energy shortage rapidly morphs into panic, as it should.

National Geographic did a story about the end of scarce oil about a year-and-a-half ago, or maybe it was two years ago.  And this picture I thought was absolutely phenomenal.  This actually doesn’t include anything to do with transportation energy, which is basically about 65 percent of oil; this is the other 35 percent.  This is the list just in case you want to read what they are.  I mean, would you ever have thought of wax paper, or water skis, or umbrellas, or stereos as being an oil product?  But they are.

I introduced at a talk I gave a few weeks ago one of the world’s most expensive oil products, and I basically pulled it out of my pocket.  It was a little tube.  It was a product that was actually patented in 1872 by Mr. Cheesebrough.  It was called Vaseline petroleum jelly.  And I paid $2.59 for this little tube that was three fluid ounces.  And ironically, that is basically a $4660 – $4660-a-barrel product.  And it is still is more widely used today than it was.  So oil became unbelievably important to a number of people.

Before I get into the talk, I thought it was also important to take some of the words that were going to be discussed tonight and just make sure we have some idea what they mean.  I think so many unbelievable problems occur when two ships pass in the night.  And they either hit each other or they miss each other, and terms turn out to mean so many things to so many people.

The energy debate is now getting just vicious enough that I hear a lot of people here say, well, that is just a bunch of satire.  So let’s examine what that is.  And then so many people – well, the energy gurus say – and I’ve never quite known what a guru was so I decided to look it up.  We’re hearing a lot about that guy is a fool.  Well, what are fools?  And then some of the energy optimists that I hear talk literally sort of portray a world that sounds almost like paradise so I thought it may be good to see what that word meant.

Then you get beliefs.  Matt, was your energy belief still the way it was a month ago?  Or, you got your theory, Matt, and then so-and-so’s theories.  And then you have a word called “facts”.  Well, what are facts and what is proof?  And then finally, what is a crisis?

Well, satire turns out to be basically a literally work in which the human vice or folly is ridiculed or attacked scornfully.  It turns that satire turned out to be one of the greatest things in the 1800s and the 1700s to basically take really important people and poke fun at them.  Hans Christian Anderson basically created the Mother Goose tales.  They weren’t for kids.  The goose was the dumbest bird going.  And those were fabulous satires.  So satire has an important role.

A guru.  Well, the guru basically was a venerable Hindu, but basically now it’s sort of a personal spiritual leader or recognized guide, but nowhere there does it say the expert; it just says a leader.

A fool: one deficient in judgment, or sense, or understanding; it does not mean lacking in mental skills.  A member of the – I was – one who acts unwisely – I was a fool to have taken this job; or a member of a royal or noble house who once entertained the court with jest or mimicry; one that can be easily deceived or imposed, a dupe.

Paradise: the Garden of Eden; heaven; an intermediate resting place.  What is a fool’s paradise?  An illusion made by a fool.

What is theory?  Abstract reasoning, speculation, an assumption, a guess, a hypothesis.  I have an energy theory is sort of a religious statement. 

What is a belief?  Something people accept – something believed or accepted by a group of persons.  A fact, though, is something objectively verified, actual, real – very different from a belief or a theory.  And proof is conclusive demonstration proving of something by an experiment, a test, or a trial – very different than a belief or a theory.  And a crisis:  A crisis is basically a crucial or decisive turning point or a situation.  A crisis is basically when you ignore problem for so long that they finally turn really bad.

Someday there will be a book I suspect written about the great energy crisis of 2006 to 2000-and-what.  And basically it will be accurate on the history of the crisis.  Probably chapter one will be how this one crept up; chapter two, what everyone missed; chapter three, the gravity and the crisis; chapter four hopefully will be how we conquered it; and the finally lessons learned as we look back and say that was the great energy crisis that began in 2006.

History is wrought with tragedy and crises.  History actually is primarily a record of grim tales of crises, and most, sadly, were unnecessary.  It turns out that armies only march to overcome crises; the rest of the time they are just training so they will be prepared for crises.  And modern history saw an escalating series of crises.  The old crises were just local things because people couldn’t travel.  But modern crises have become global pandemics.

The value of historical analysis is also interesting.  Historical analysis in my opinion always puts current problems into their proper context.  And it’s also interesting that it’s rare that history ever repeats itself.  And it’s so common that the mistakes leading to crisis are always repeated.  So it wasn’t the crisis itself; it was the mistakes made.  And the best plans – having been in investment banking now for almost 40 years, the best plans we have ever been able to do – we call them models of forecast – they are always anchored on rigid historical analysis.  And the history of crisis is classic study at its best.

So let’s just start with a few examples of some of the crises we have faced.  You can go back to about 1750.  And here in North America, we basically had a real argument with Britain about the fairness of taxes.  And that argument led to the Boston Tea Party, and the Boston Tea Party led to the American Revolution.  And then after the American Revolution we got lazy and didn’t actually address slavery.  And then we had the Missouri Compromise that didn’t work, and then that led to the great Civil War.  And the aftermath was a nation almost destroyed and 600,000 people dead.

Did we learn anything from it?  Not really because in the summer of 1914, we have had all of these cousins that basically ruled Europe.  And they were stomping around and saying my army is better than yours.  And then a duke got assassinated.  And then the Great War started, and the aftermath was 20 to 40 million of the finest we had were dead.

Then we made another grievous mistake.  We failed to settle the Great War; we just ignored the settlement.  And so we had Germany’s famine.  That led to the Nazi march.  That led to peace in our time for 18 months, and then came war.  On December 2, 1939, insanity in Europe exploded in to World War II.  On December 7th, 1941, American finally had its fortress crumbled when the Navy was sunk.  But by May of 1945, Europe and the U.K. were gone, but VE day was here.  And then by August 1945, Hiroshima and Nagasaki are gone, but the war ended.  And all of this could have been prevented.

There are some crises that are also not inevitable.  In the first quarter of 1946, General George Marshall traversed Europe on his way to spend six weeks in Moscow with “Uncle Joe” Stalin, and at the end of six weeks he panicked, and came, and said, “We will soon be back at war.”  And so on June 1946, in one of the most important simple talks even given in the history of the United States, Secretary of State Marshall said at Harvard’s commencement, “America must go back to Europe or the depression will return.”  And between ’47 and ’51, four wise men were wise.  Twenty-five hundred Marshall planners planned, and by the Korean Crisis, rebuilding Europe was almost complete.  So genuine peace in our time this time actually worked because we took it seriously.

Another crisis avoided story.  This is one a lot of you in this room are more familiar.  The Cold War kept the heat of war away.  Nineteen forty-seven, the Iron Curtain created the Cold War; 1948 to 1988, only 40 years, we had an explosion of armies and spies and planning, and technology, and despite some near misses, the Cold War worked.  So by 1989 the Wall collapsed, the Russian illusion evaporated, and billions of wise-spent dollars saved millions and maybe even billions of lives.

Then there is another interesting thing that comes up in this prequel:  These guys are just crying wolf; this is the seventh time.  Is the art of crying wolf a time-honored gift, or a mistake?  As the optimists so often say, they are just crying – well, you could say the bombs never fell; so therefore, why do we have 50 years of spending?  We could say polio did not kill everyone – we have those inoculations.  Sputnik was just a tiny piece of space.  So the all – the unneeded engineers and scientists were wasted.  Or we easily landed on the moon so the space race was wasted.  Or Y2K didn’t shut us down, so we wasted $50 billion.  Or maybe climate change won’t materialize.  Well, we don’t know; it’s too early.  Or maybe the bird flu pandemic might not spread.

The question becomes which battles should we ignore, or basically take them all seriously.  The energy crisis is real, and it could have been prevented.  This too was a crisis we could have solved.  Planning for post-peak oil should have begun in the 1970s because it would have taken us three decades for a safe transition to easily and comfortably happen.

And we were amply warned. Dr. M. King Hubbert gets a lot of credit for the speech he gave in San Antonio in 1956, but it’s more interesting to read the lengthy paper he wrote in Physics Today in 1949 talking about, it looks like we have about 60 years before we will start peaking in global energy.

Or the fabulous group of futures called the Club of Rome who had published in 1972 “Limits to Growth” – basically they said we have 30 years to basically start taking this stuff seriously or it’s probably too late – or what I discovered in doing “Twilight in the Desert,” the remarkable whistleblower within the Aramco companies – almost certainly the chief reservoir engineer at Chevron that sent a bunch of papers to Jack Anderson so that Jack Anderson could expose that something is going on – or The New York Times leaks in ’78, ’79 – had either one of those been taken seriously, we would have known 30 years ahead of time to start planning.  But facts always become crystal clear after the fact, and sometimes at the time it’s just not easy to sort out this is a big deal.

Tragedies also leave a trail of tears, or you could call this the riddle of lost opportunities.  One of the greatest speeches I have ever read and heard on tape was when Winston Churchill – because he wanted to get to Truman – came across the Atlantic and traveled by train to Missouri, and gave his famous “Iron Curtain Speech.”  And his starts out saying how easy it would have been to have never picked up a single gun had we basically taken this seriously in 1932 or 1934.  And as I read that, I remember the chorus of street criers who really cried:  Dr. Colin Campbell, Dr. Jean Laherrere, Dr. Fatih Birol of the IEA, Dr. Kjell Aleklet, Randy Udall, Dr. Herman Franssen, Dr. Ed Morse, Dr. Rober Hirsch.  There have been a lot of people over the last three or four years that had been crying out, that we need to take very seriously.  And how could so many energy medics’ voices have not been heard?  Well, the answer is the laughter drowned out their cries.  I think that is what historians are going to say.

What the optimists who were very optimistic and very well intentioned missed is that we had awful energy data.  And so we dealing with fuzzy data to start out with.  We never had any proof of proven reserves; we just had a word that said proven.  And the word was so nice that people said, well, if it’s proven, it’s proven.  We have had OPEC’s proven reserve game in the ’80s where everybody knew they just made these numbers up.  But by the time, by the ’90s, by 2000, they said those numbers have been in print so long, they must be real.  We had decades of lower exploration success – very well documented – decades.  They said, well, we are just having a patch of bad luck.

There was no proof that reserve appreciation really grew reserves, but we just basically assumed it did.  We had an acceleration of decline curves but it was data we didn’t deem important to gather so people basically ignored it.  And we had real limits to oil field technology while technology was being preached as the solution to the problem, et cetera, et cetera, et cetera.  There were a lot of things the optimists missed, and they badly missed them.

And here is basically why we slept.  Aramco and others really believed that Middle East oil was boundless.  They worried about it that it was so boundless that we wouldn’t even know how to control it.  We basically thought the oil was almost free, and so we thought how in the world do we keep that oil from flooding the world?

There is an unbelievable paper that I discovered as I was doing the SP data (speech ?) written by Dr. Morris Adelman at MIT in December 1969.  It was entitled the long-term price of oil. I have heard a lot of energy economists say Dr. Adelman has always been right.  He certainly wasn’t in December 1969, when he said that a $1.25 a barrel of oil is just too expensive, and the sooner the oil executives realize that that is being propped up to support coal, and let the price drift down to its inherent value of 25 to 30 cents, the better off we’ll be.  That was basically conventional wisdom as we started the ’70s.

And then Dr. Julian Simon in 1980 wrote a book, “The Ultimate Commodity.”  And in the book he said the cost to extract all natural resources falls over time.  And for the next 25 years, lots of economists said the cost of natural resources always falls as we went into not just an oil depression but a natural resource depression.

And all of this built up in people’s minds to such an extent that The Economist, nine months before the millennium -- the Economist, one of the finest magazines in the world had a cover story called “Drowning in Oil.”  And what the cover story was all about was the conventional wisdom of what all of the major oil company executives told this guy, that Saudi Arabia is about to pull a plug and dump so much oil on the market that the $10 price we now have is going to go to five and it will stay there for a decade.

So we finished up the 20th century making the most egregious mistake of all saying that oil prices won’t even stay at 10; they are going to go to five.  And even today as we have so many problems out there – energy crisis?  Phooey.  Who is saying that?  Dan Yergin, Rex Tillerson, John Brown, 2006.  So this is why we slipped.  People didn’t think we had a problem.

Some of the current scoffer statements – and this isn’t to pick on anyone; these are just very visible statements in sort of the last two months:  Ali al Naimi, the petroleum minister of Saudi Arabia, three weeks ago in The Wall Street Journal, when he explained, yes, we are lowering our production in April and May, but no one wants our oil.

John Browne last week, Lord Browne of Mattingly said, well, current oil prices I guess will stay high but then oil will fall to $40 before falling lower.  And then Rex Tillerson, the CEO of ExxonMobil on the Today Show of the first week of May strolled in, towered over Matt Lauer.  Matt Lauer says, will we ever run out of oil?  No, Matt; the world has 10 trillion barrels of oil left.  So you put that together and it’s easy to see why people think we don’t have a problem because they are all very comforting statements.

And then we have price signals.  That is another thing; if we had a problem, we would have a price signal.  Well, that happens to be the price of crude oil on the NYMEX.  And when you see something going from 20 down to 10 and then up to 37 and then down to 25 and then up to 70, you would say I think that was a price signal, but everyone had their eyes wide shut.

And then natural gas – the National Petroleum Council will be meeting tomorrow morning.  I was one of the three co-chairman of a report that came out in late March 2005 that turned out to be wrong in every single aspect.  We said natural gas prices are unlikely to exceed $3 through 2015, and then it took about two months before they basically were at $8.  But when they collapsed, we forgot about it; then it went way up.

That spike you see there in 2003 – I remember getting a call.  I had just gotten back from Beijing having just gotten back before that from Saudi Arabia, and Secretary Evans at the Department of Commerce called.  And he said, just give me an update on what is going on in energy.  And I said, Don, how about $28 wha-hub (ph).  He said, no, but that is natural gas.  I said that’s natural gas prices.  We had a very cold day in Texas and gas prices in Texas went to almost $30, but then they collapsed; we forgot.  But all of the way through this, this volatility was basically also destroying price signals.  So the signals were there; we just didn’t see them.

And then we had no fuel tank.  It’s really interesting the number of times I have asked the audience – anybody here run out of gas, and virtually everybody raises their hand.  And almost everyone ran out of gas not because their gas gage was broken; they just forgot to look.  I’m so stupid; I just didn’t notice it was on empty.  Well, the problem the world has is that we have never invented a real fuel gage.  We don’t have a single town in the United States that has a fuel gage saying we are almost empty, or a city or a region.  We created some rough estimates of petroleum inventory in the OECD and then we used the Energy Information Agency, the EIA, weekly stock reports as a proxy for this gage, saying, oh, look at that data; the market is well served, but that wasn’t the fuel gage; that was just an illusionary fuel gage.

These reported stocks that we get that the traders have an obsession with – you know, tomorrow morning at 10:30, we’ll get the EIA and the API out, and basically it will show that we had a lot of oil.  Last week it showed that we had 345.7 million barrels of oil in the United States.  That number basically doesn’t mean anything.  Total petroleum stocks in the United States in crude oil includes all of the crude and pipelines, all of the crude and tank farms.  And then you have all of the refined products that are a work in process; they are just being cooked at a refinery.  And then you have finished stock. 

Reported stocks are just samples of primary stocks.  What are primary stocks?  That is of 50,000 barrels or more.  And so we take samplings of some of those vats, and then we gross them up, and then we basically assume the rest, and the rest are just educated guesses.  And I’m not at all sure that the reports aren’t just estimations, because to be accurate, at 7:00 a.m. every Friday morning, the reporting companies would have to have someone come out with a dipstick and set them in tanks.  So the whole thing was an illusion.

Then we ended up with the war of weekly reports.  And it was really amazing.  Until about five years ago or four years ago, you had the IPI report coming out – being reported at 5:00 Tuesday afternoon.  And then you had 10:30 Wednesday morning the far more detailed report from the Department of Energy.  The API was repeatedly asked by at least me why on earth why don’t you just wait until you get the DOE data?  We don’t want to do that; we would lose currency.  We get paid by the media to run that in the paper.

And so that became – and those reports basically were far less accurate today because you have simultaneous release.  Almost no one even looks at the API report anymore.    But there is basically no reliability of the EIA reports that they are vaguely written correct.  There has been so many years since we have ever even tried to do an audit of those.  In fact, I think the last audit was done in 1988.  So the whole thing could be basically off by 10 or 15 percent.  But traders jump on these numbers like bookies at a horse race, and that creates the illusion we have a glut; we have a glut.

And then other data and red lights that were missed while we slept:  We missed dwindling drilling rig supply.  We missed an aging workforce.  We missed rusting iron that made up our whole petroleum delivery system.  We missed the fact that our refineries were not new; they weren’t middle aged; they were old and rusty.  We basically missed the evaporating cushion of spare capacity.  We missed accelerating decline curves.  And we missed the end of technology explosion.  The work was all done.  No one is working on oil field technology today; it’s all about and being used. And low prices for too long dissipated what was once a robust industry.  So a happy ending wasn’t in the cards.  We missed all of this for too long.

And so “We Wuz Wrong” turned out to be right.  This was basically the incredible “Drowning in Oil” article.  And what you see there is the story that they wrote in the millennium issue nine months later saying rarely in the history of journalism has there been a bigger blooper.

Well, while powerful voices of optimism are booming, facts are pouring in too fast that “we wuz wrong.”  The facts are things like we are out of capacity, period, for any oil and gas supply cushion.  What is a cushion?  It’s maybe another million barrels a day you could bring on if you needed it.  In theory, we still have a-million-and-half barrels a day, but that theoretical cushion has been static for three years, but it was just a theory. 

We have – another fact is that we have – we are out of capacity for having any supply growth of any magnitude.  We are now out of spare drilling rigs so the drilling rig is now past tense.  So there is going to be a lot of projects that people think they are going to do that will fall by the wayside because they can’t get a rig.  We have no spare refining capacity.  We have a little spare refining capacity that can take light sweet oil and basically turn it into finished products, but we have a dwindling supply of light sweet oil.  And you take heavy oil and make light products, you need complex refining capacity and it’s gone.

We have a shrinking pool of skilled workers.  Now, skilled workers doesn’t have a connotations of Ph.D.s  This is electricians, welders, the whole food chain to create energy got too old.  And we have no access to anything good.  About the only places that basically are – look interesting to go to now are places like the eastern end of the Caspian Sea, Sakhalin I, Sakhalin II.  Gazprom had an interesting story yesterday saying we don’t think we’re going to let any U.S. players bid on Shtokman.  Well, I don’t think any U.S. players are interested in Shtokman.  Shtokman is a natural gas field, is 1100 feet under the Arctic Ocean, inside the Arctic Ocean that hasn’t been discovered yet. 

So another fact that is really unfortunate is that demand is still raging ahead.  And demand for energy can be anything.  Every person has a right to hope.  So could say I demand that the world needs to use 120 million barrels a day by 2020. Well, Alexander Pope in 1733 said that, “Hope springs eternal.”  The problem is that energy physics 101, it rapidly morphs into E&P physics 101.  The energy use always has to equal energy supply.  So that is the problem.  So the caveat E&P 101 is that if you have an energy cushion, that can bridge a small gap; but conversely, if you use up the cushion, you have no bridge left. 

So the formula for how we create an energy crisis is real simple:  Step one, introduce soaring demand; step two, use up the spare cushion; step three, run out of rigs, people, and projects; step four, shrink supply; result: energy shortages begin.  That is what we face in 2006.  We have gone through step one, we have gone through step two, we have gone through step three, and we are entering step four.

One of the great satirical stories that Charles Dickens, who was actually a satirist also, wrote, was the endearing play that we call “The Christmas Carol,” but it was a parody.  And at the end of “The Christmas Carol,” we have the ghost of the future.  And that awful scene that scared me so much when I was a kid, when the fingering skeleton points to Scrooge, and the Scrooge asks, is this the future, or our future unless we mend our wrongful ways.

Well, have we run out of time to mend?  We’re not sure.  Had we awakened in 1974 when the whistleblower sent the material to Jack Anderson, we would have spent three more decades – we would never have spent three more decades believing that oil would always remain cheap because of the Middle East.  Had we taken Sy Hersh seriously in the articles he wrote in The New York Times in 1978 and ’79, he sold us that Saudi oil was a fable, but we thought he was just trying to scare us.  Those articles were ignored because it was that funny Carter administration just trying to scare people into his funny energy ideas.

Had we not destroyed our energy army – who was our energy army?  It was the saga of the 25-year oil depression that basically let things rust away.  We would still be strong.  My grandmother had a fabulous phrase that I remember so dearly – she said all of the time to remind us that basically you can’t base things on hope; you have got to be doing it.  She said, “If wishes were horses, beggars would ride.  If horse turds were biscuits, they would eat until they died.”  Now, I’m not sure she didn’t make up the last one, but –

The Middle East oil is real and it is never going to go away, but the high-quality sweet oil that came out of the ground so fast is pretty well now over.  And the Middle East is not going to bail us out of this.  Boundless Middle East oil was a myth.  It turns out, in reality, between 1927 and 1972, somewhere between 35 and 40 giant oil fields that could produce were found, and that was it.  And after 1972, the only significant discovery of any magnitude was one field in the middle of Saudi Arabia that at its peak, along with four satellite fields, produced 200,000 barrels a day.

All of these fields in the Middle East, not just Saudi Arabia’s fields, are very mature.  That is a nice word in the oil patch – we’re real old – and involve complicated productions like rising water cuts, steadily tight rocks, heavy and more sour crude, rising corrosion problems.  Abundant natural gas in the Middle East was even more mythical, and post-1972, there was a lot of exploration efforts, but there was nothing significant found.

Even Saudi Arabia’s great oil resources are scarce.  Seven key fields produce 90 percent of Saudi Arabia’s oil.  The average life of this produced oil is about 45 to 50 years.  The sweet spots of these fields are almost depleted.  These simple fields, Ghawar, Safaniya, Abqaiq, Beri, Zuluf, Marjan, Abu Sa’fah created 8.6 – 8,060,000 barrels a day of Saudi Arabia’s oil in 1994, and probably basically the same 85, 90 percent in 2006, but instead of eight it’s probably more like six-and-a-half.

Nobody saves the best for last.  It turns out – if I can figure out how to – it turns out this is the Ghawar field.  This is the largest oil field in the world in terms of total production.  Ghawar at its peak was 5.8 million barrels a day.  The United States today, including Alaska stripper wells, deep water, is 5 million barrels a day.  In a 25 mile region called North Ghawar at its peak was producing 5 million barrels a day.  North Ghawar is now pretty well depleted.

There is an increment that came on three months ago called Haradh-3, and it’s the bottom 47 miles, and they hope to get out of the bottom 47 miles, 300,000 barrels a day.  Now, when you go from 5 million barrels a day in the top 25 miles to at best 300,000 barrels a day in the bottom 47 miles, you start to get the reality, that the best has already come and gone in Saudi Arabia.

All giant Saudi oil fields are mature.  Abqaiq’s key producing areas are not pockets of bypassed oil.  Berri appears to be headed for what is technically called a gas blow down.  Strip the gas cap out because it’s more valuable than the remaining oil.  Safaniya, Zuluf, Marjan are losing their great water aquifers and they are also old too.  And Shayba, even though it only came on in 1998 is a very complex series of reservoirs.  And the far smaller Hawtah Trend the one great discovery in 1989 was contaminated by injected water, and now it’s having problems too.

Are there vast areas yet to be explored?  Saudi Arabia has employed state-of-the-art geophysical tools to find new oil sources.  They have done the best that you can do.  And so far the only commercial success was this one field.  The remaining unexplored areas in the Middle East include – in Saudi Arabia, include a strip right along the Iraqi border and the Western Desert, the deepwater Red Sea and the bottom end of the Empty Quarter.  And other than that, it’s pretty well – they have pretty well given up there is anything more.

Saudi Arabia’s real oil future?  Well, the various oil field rehabilitation projects have now all been put on fast tracks.  These are not new discoveries; these are not new fields; they are old fields that didn’t work.  rig activity has tripled in three years.  Each rehabilitation project is very complex and faces risks.  The current decline rates, at their own admission in the last few months, are currently 8 percent per annum.  There is no proof that oil production has grown in the past four years.

The data that is reported in the oil monthly report of the IEA shows oil imports by country of origin between 2002 and the first three months now of 2006, there has been a decline of Saudi light, media, and extra-light oil.  In theory, Saudi Arabia has produced 2 million barrels a day more.  I suspect that some of that is just optimistic, and they would like to have produced it.  And I think what Minister Naimi said, the reason we are cutting our production in April or May is that their production is falling.  “Trust me” provides no evidence or proof.  The future of Saudi Arabian oil is fuzzy at best.

The Middle East will always have more oil, but Middle East production is most likely not going to rise any longer.  If I had to do just an educated hunch on the future declines of Saudi Arabia, Iran, Iraq, Kuwait, the UAE, Oman – those are the – (unintelligible).  These numbers are really off the top of my head, but they are an educated guess, I would say that those countries are now producing 18.2 million barrels a day.  Six years later I would say take it down to 12,6 (12,600).  Six years later I say take it down to 9,3 (9,300).  And I think that is probably sort of realistic, and anything better than that, we should say, wow, we were lucky, and it could be worse. 

How will we know when peaking was real?  Well, you’ll only know after the fact; that is the problem.  There is no crystal ball or some omen in the sky like the Hale-Bopp comet – well that shows you, and facts only lead to a solid hunch -- hunches backed by genuine solid data, which are integrated into intelligence transform real wars into phony wars.  But basically what we really lack is the data to ever try to prove this.

Do we have any time left? Well, not enough to stave off peak – the peak energy use crisis because that has already arrived.  I think the sooner we start assuming that we are realistically -- are probably at the peak – and in fact, if we are close to it, and we go any higher, then it just falls faster.  So the answer is, don’t test your luck.

If we wait it out, basically – then, and we’re wrong – then it’s basically difficult to stay alive without ample energy.  Well, what if we simply go to war?  Well, with what source of energy?  There are a lot of people in this room that know way more about war than I do, but you don’t go to war without sufficient abundant energy.  Do we even know who the enemy is?  Maybe the enemy is us.  And a war without a war plan is almost certain to be a lost war.

So it doesn’t make any sense for our call to arms.  Will a bugle call make a difference?  Well, not sending the alarm lets the fool still dream and not realize the coming pain.  Starting yesterday made far better sense than starting tomorrow.  Better to start late though than not at all is a truism that always is true. 

We have someone in this room, General – four-star General Richard Lawson who in Beijing, in February 2002 told a group of us, “Without ample energy, you can not invent enough generals.”  And at a Harvard Business school program in April 1997 in Hong Kong, Brigadier General George Yeo, Baker Scholar at Harvard Business School said without “Bridges to prosperity, we might as well go home and get into our uniforms.”

So here is an outline of a real war plan of how we survive the energy war that has now begun.  Plan, plan, plan, and fight next.  Get real energy data, even if it takes spies and armed forces to steal the data.  Panics create an instant call to arms, and I think it’s now time to panic.  If we want a day longer – if we wait a day longer, we risk losing everything we cherish by default and then the global lights dim; twilight turns into an era of darkness.

The truth: We have an addiction to oil and addictions are hard to kick.  Kicking the oil habit means using less transportation energy.  It doesn’t mean inventing using more energy; it means using less transportation energy.  The solution is simple but complex to integrate into a forced march out of harm’s way.  We have to start using less transportation.  Stopping the natural gas addiction is what worries me the most because that has no working plan.  Natural gas is our only efficient source of instant heat.  Natural gas is the only way to quickly cool.  Too much heat kills slowly; too little heat kills elderly in 30 minutes or less, and a high percentage of the globe lives outside the moderate zone.  So that is the big problem.

Well, the play is over and 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 could either fight the last military fight and probably lose or can use its honest force to plan, organize, and fight to win the energy war.  The lights are now on, but they won’t be on for very long.

Why do I fear peak oil is here?  Well, I have no verifiable proof, and I will have no verifiable proof until data reform happens, but I can guarantee you that if we insist on data reform, then that is a topic I can spend a lot of time – field-by-field reliable reports, it would take 30 people less than 30 days to prove we have a problem.

There is a wide body of strongly circumstantial proof that does exist that we have a slowing of new discoveries and the new discoveries are also getting smaller.  We have most key regions of the world that are now in irreversible decline.  Most new projects are either heavy oil, deep water, and/or unconventional gas.  Supply for non OPEC/non-Former-Soviet-Union oil has been flat or declining for six years, and demand continues to grow, and the industry is now out of spare rigs, refineries and people.

When twilight sets on the Middle East, and twilight -- the peaking 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-million-barrel-a-day production base could be reduced to 25 million barrels a day.  That number comes of the CEO of Schlumberjay (sp) who says it would appear to us that the average worldwide oil production rate is now 8 percent per year, so get your calculate out – 8 percent – (inaudible) – 80 today, 2020, 25.  So this is a big deal. 

What we have ahead is a clash of ages because we have demand for energy just gathering steam.  The growth for the use of oil outside the OECD was so tiny that in 1970 it was basically about 6 billion barrels a day.  Well, today 75 percent of the growth and energy is coming from the developed world, and the OECD use is still growing every year.  So demand for energy is still gathering stream and the supply got too old.  Decline curves are high now.  They will accelerate.  Too many regions now produce brine stained with oil.

I spoke to a group of Occidental Petroleum technology execs.  It was about six weeks ago.  There were 650 people in the room.  Occi has reinvented itself now.  They have shut off a lot of stuff and say we are just going to slug it out, producing old-material oil fields.  And the head of their EMP operations in the United States at lunch said we don’t really publicize this, but internally, we think of ourselves as a company that now produces – pumps brine that is stained with oil.  That is what old oil is all about.

Is it really too late or was this a bad dream?  Well, the world is probably beyond peak oil and gas, and 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 steering units takes decades.  And meanwhile, the Rust Belt – now, the Rust Belt is not the Midwest; the Rust Belt is our energy infrastructure – needs to be rebuilt.  There is no army of trained personnel or teachers or recruiters of energy students.  So we have to go out and recruit and train and build.  The next war, I’m afraid, will be the last war.

We are now all addicted to oil, and desperate for a fix for gas when it either gets too cold or too hot.  “We” used to be just the United States of America; “we” now encompasses everybody, 6.5 billion people, other than a few tribes in the Amazon or mountains of Papau and New Guinea.  And the big junkies are the OECD who use 50 million barrels a day or 23 barrels per person per year, and the beginners who sample are the rest of the world, the 5.5 billion who use 35 million barrels a day or 2.3 barrels per person per year, and that is the problem.

So 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 we needed.  And the fact that we will say, well, no one saw this coming is the tragedy because it wasn’t gone; it was almost gone.  And the better we – so we better get the armies built up because this is a war we have got to win.

Energy is probably in its twilight era.  So tonight we have had an honest talk about a very real problem: the twilight of fossil fuel.  We all share the unforeseen consequences.  The problems are too long ignored.  And it’s past time for debate; the crisis is here.  The time now is to educate, plan, form an energy army and March, is now.  Thank you.

(Applause.)

MR. WEHRENBERG:  I imagine we have a few questions after that provocative talk.  Okay.

Q:  (Off mike.)

MR. WEHRENBERG: Will you please tell us what your name is and, if you care to, who you represent?

Q:  I’m J.J. Brown.  I work with Senator Hatch.  I do energy with him.

MR. SIMMONS:  I just gave him a copy of my book.

Q:  Did you?

MR. SIMMONS:  Mm-hmm.

Q:  Good, because I was about to as well.  So it saved me giving him my book.  I appreciate it.

I had a – I gave a speech on energy issues down in – at the Little America, Salt Lake.  And one member – I was talking about unconventionals, which Senator Hatch has sponsored legislation promoting shale, sands, coal-to-liquid types of things.  We had a debate there because somebody in the audience said, well, you know, we were talking to Matt Simmons and he said – uses too much natural gas in Canada – I had a great debate with you in your absence and I won.

But I guess my question goes to that.  Your last statement, basically that the world is running out of energy – to me it seems like more accurate – wouldn’t you say it’s more accurate to say the world is running out of conventional oil rather than, say, energy?  I mean, there is a lot of energy in unconventionals still, and some places are proving that they are viable, very economic.

MR. SIMMONS:  You know, the – first of all, the whole statement, “running out,” is a misnomer because the – what we are running out of is the ability to grow.

Q:  Peaking.

MR. SIMMONS:  Peaking, yeah.

But what is also interesting is that the amount of argument going on right now within the industry of this issue, of when you cross the line from conventional energy into unconventional is it energy-intensive or not, is unbelievable.  And too many people make the mistake of saying that it now makes money, to say, therefore, it actually isn’t energy intensive, because they knows those two are totally unrelated.

You know, coming from Utah and having a fairly heavy investment in the GDP of Utah, there is nobody that would be happier to believe that oil shale is right around the corner.  But I can’t imagine how oil shale will ever be more than just an experimental project until we discover something we don’t even know about.

Talking to the Occi people about their steam flooding in Bakersfield – as I said, you know, out of curiosity, how do you do the steam floods.  They said, well, it’s pretty simple.  We use natural gas and we use water from an aquifer and the sun – and that creates the steam.  I said, you mean, you’re destroying natural gas and aquifer water?  They said, yeah, but it’s commercial.

You go up in the Canadian heavy oil, and basically it doesn’t – nothing happens until you use a vast amount of steam.  Now, they are talking – it’s not very popular in Alberta – they are talking about putting in a nuclear plant up there to create the energy so that you don’t have to waste the natural gas we haven’t even found yet and Athabasca River water.  But I run into people that are in the industry that have Ph.D.s that say, Matt, you don’t understand these sources aren’t energy intensive.  I say they have to be.  You can actually see energy intensity. 

But I think part of the problem is we have so little data and we have really bad data that shows conversion, so when we say, well, yeah, we’re not – if you look at the natural gas we’re using to create a barrel of heavy oil in Canada and convert it into a barrel of oil equipment, it’s a very small amount of oil.  I don’t think actually in my opinion it makes any sense to even take a theoretical vapor conversion into a liquid.

So I think this whole area is just unbelievably complicated.  But what isn’t complicated is that if you – Saudi Arabia in its hay day in that North Ghawar, one well could easily produce 40,000 barrels a day.  So two-and-half wells produce 100,000 barrels per day.  Shell oil company is apparently about to toss in the towel now on an expansion they were going to do up north of Edmonton on an expanded facility of their heavy oil that was looking at producing an incremental 100,000 barrels a day.  And it was originally going to cost $4 billion, and when the cost got up to over $7 billion, they said it doesn’t make sense to do it.

So when you go from 2.5 wells at probably $15,000 to produce 100,000 barrels a day to 8 billion to produce you start to see the problem, so --

Q:  They are producing a million barrels a day in Canada and that will be probably 2 million barrels a day – (inaudible) – year-and-a-half.

MR. SIMMONS:  No, no, no.  Well, they don’t think so.  NEB just announced by 2012 as the National Energy Board that they might be able to get up to 2 million barrels a day, but I think most people are really scoffing at that.  They say we don’t have the people; we don’t have water; we don’t have the tires.  So it’s not that they don’t have the reserves, but they are just not – I mean, they are like coal reserves.  In fact, I think one of the mistakes we make is casually calling oil a commodity and start co-mingling heavy oil particularly in the tar sands, so –

Q:  They are producing more than a million barrels a day now.  That is a fact.

MR. SIMMONS:  A million is the number Canada uses.

Q:  It is more than a million right now.  (Inaudible.)

MR. SIMMONS:  I don’t think – anyway, I don’t think so –

Q:  And there was also – I know six different sources that are scientific based that say that the one-to-eight energy balance (?), that is a fact.  Those are facts that – at least the scientists say they are fact.  Those aren’t – I’m not – (inaudible, cross-talk).

MR. SIMMONS:  Yeah, yeah.

Q:  So they are producing – they have gone from being nowhere to being second to Saudi Arabia in reserves, proven reserves, where the Saudis aren’t really proving that these are proven reserves.  What is the problem?

MR. SIMMONS:  They are too energy intensive.

Q:  One-to-eight energy?

MR. SIMMONS:  Well, again, that gets back to this difference between – see, if they get to 2 million barrels a day, it will take about 20 percent of Canada’s natural gas, so then it just kills us.  But if you convert – if you want to get – say, well, that is – I don’t like that number so let’s convert the vapor back into a barrel, all of a sudden it becomes a small amount.  But the problem is that we are talking about natural gas.  This is such a complicated are, but it’s exactly what I meant about the no data.

Q:  That is the whole point, is I think there is data that says one to eight – is that not doable?

MR. SIMMONS:  Well, no – I’m saying in all of my studies, I don’t think there is.  But that is an opinion.

MR.    :  Don’t turn the mike off (?) or anything.

Q:  I should get it on.  It is on, but – there we go.  For the first time when I have had a mike, I’m actually going to take the prerogative of having a mike.

Adam Siegel.  I’m in the Northrop-Grumman Analysis Center.  I’m one of the – on the board for Energy Consensus.

One of the interesting things here was in this whole conversation.  It’s one of the few energy talks I have been to in the past several years, where in the course of the entire time, the externality costs were not raised, which would be global warming, greenhouse gas emissions.  And that is directly relevant to this set of questions because – while Canada has discovered – while Canada committed itself to Kyoto, the only reason they are totally failing on Kyoto is the increased emissions related to their heavy oil, the tar sands, and that the external costs and implications of heavy oil are very significant and should be factored in the cost as well.

MR. SIMMONS:  Yeah, ironically, one of the problems they are having now in the Canadian projects is that there is an enormous tar shortage.  And I have actually never been up there; I’m really looking forward to doing it.  But looking at pictures of these enormous earthmovers, the tires are 13-feet high and six-feet wide, and they apparently last for a matter of weeks, and so we have created a tire – a rubber shortage because of the intensity.  So it’s not even just energy intensity; it’s just an unbelievably intense mining operation.  And so when Canada says we have as much oil as Saudi Arabia, I say, well, it’s mixing -- grossly mixing apples with oranges.

MR.    :  Just a moment.  We’ll get you next.  Hold on just a second.  Go ahead.

Q:  I’m sorry.  I am Gueta Mezzetti.  I am a consultant to the Air Force, and I’m on the Defense Science Board Energy Task Force.

I am very interested in this issue.  I used to work on the Hill.  I know how difficult it is to get industry to come up with the facts.  And you said that it was going to take 30 people 30 days to reform the data and add it from the bottom up.  What is going on?  We don’t have a government right now that asks the hard questions.  So do you really believe that we can get the real data from industry, and not just in terms of how much is left of what, but the economic numbers and the water use and the energy and energy out?  I mean –

MR. SIMMONS:  Well, some of the data takes a long time to get.  Some of the data is simple.  My big data-reform issue has been that all it would take is the SEC to say the publicly traded oil companies that want to be on our exchanges will start producing the last five years, on a quarterly basis, of field-by-field production data, or we will de-list them.  Now, I think it would take about – you would hear unbelievable howls and cries saying that is unfair; that is unfair, but – well, you have 30 days to either do it or you get de-listed.

And then if basically the G-7 or G-8 got together and said, you know, let’s make a conference call to Prince Abdullah, and let’s – and say Prince Abdullah – excuse me, King Abdullah, we really think it’s important for the world to have the last 60 quarters of field-by-field production data from Saudi Arabia.  And we know that you don’t like to do it, but we’re making Exxon do it.  We’re making Shell doing it.  We are making BP do it.  I would bet you they would say, well, okay; we’ll do it.

But right now basically you have no one making the call and very few people say, well, what would you even do with that data.  See, that data would allow – this is me getting back to my investment banking background.  If you have five years of data showing that a company has sales going down, then you have a pretty good sense of how you’re going to project the next three years, that unless there is something dramatic happening they are going to up.

And that data literally – I mean, I think basically if someone produced that data for me, and it could be done in 30 days – because everyone has that data – it would take me a week because I wouldn’t go through all of it; I would take the top 200 fields – it will be about 75 percent of production – and just trim line them out.

The energy conversion data – I have talked to enough people within the academic area. It probably takes maybe three or four years of a bunch of – and then saying maybe we shouldn’t even do this conversion because it’s just amazing when you get to the heart of this how complicated – these conversion tables were created 60, 70 years ago.  No one ever went back and tested them.  So some of the data is hard, some of it is easy.

Q:  Matt, it’s good to see you again.  Adelian (ph) from the Center for Democracy and Human Rights in Saudi Arabia here in Washington, D.C.  I used to work in the same field, as you mentioned, Abqaiq, Ghawar, and all of those places in the late-’60s, and even then we were installing a lot of water and gas injections.  And at the time I didn’t really have a clue what that meant, so I asked some of the people who knew.  And they said we are helping the oil to come up.  And I said, why now?  They said because the oil level is going down.  That was a long time ago.

Knowing the fact that there is uncertain knowledge of what is underground, and you have been talking about this and you write your book about this.  The president of the United States knows that; I am assuming he does.  Why doesn’t he put pressure on the Saudis and say, look, you said you have 400 billion barrels of oil underground; let’s find out.  This is the same question somebody just asked.  Why isn’t that done now while things are not, as you are predicting, very dire?

MR. SIMMONS:  Well, first of all, I’m not a diplomat.  But, you know, I read carefully in the newspaper the report when King Abdullah came to Crawford, Texas, which was six months age – nine months ago.  And according to the newspapers, one of the things that the president asked Prince – King Abdullah to do is be very forthcoming about – let’s not kid each other – those are my words – let’s not kid each other about the state of oil.  I sort of read this is in the paper with Secretary Bodman sort of saying, let’s just make sure when you have another country coming and saying, really, trust me; we don’t have any problems, to say, well, I don’t trust you.  It’s hard to do that – we had a hard time doing that when it was Russia and the United States.

But I think there is at least a lot more – until recently, no one ever even thought it was a question worth asking.  I mean, the embedded wisdom that the Middle East had so much oil was so embedded that they – I know when I first started, just mentioned I was going to do a book, I had some of my own colleagues, please; you’re destroy the reputation of the firm.

Some of this stuff is pretty recent to even start to ask, and I think collectively we haven’t had enough people point out just how urgent the data reform issue is.

Q:  Thank you.  Michael Kane from the Wilderness Publication.

My question is pretty simple.  A few months ago at an energy conference right here in D.C. called Jan Lundberg had put on, John Darnell, who is Congressman Roscoe Bartlett’s energy advisor, had said that he predicts within six to nine months, some sort of short fall or some sort of – within the supply chain, some sort of kink; something that drops off that creates a shock or an event that hits hard, hits the markets hard – I wanted to know what your opinion is of that, if you see a similar type of thing.  It sounds like it, just from the title of your presentation, you would agree, but I would like to know what do you think of that and what do you see transpiring in the next year?

MR. SIMMONS:  Well, first of all, I think that had we had a – had we had the winter in the United States that Europe had, we would have probably had already just a massive, massive shock.  Last October – having a house in Maine, I pay a little bit of attention to Maine weather.  Last October, NEPOOL New England Power pool had just a chilling report out that was finally saying none of our power plants have any guaranteed supply.  And we have a cold snap that lasts for about 10 days, then we are likely to have a massive black out in the winter.  A blackout in the winter, it freezes stuff up.  And, you know, you could quite easily have two, three hundred thousand people die in a blackout in 10 days.

Now, we were bailed out; we didn’t have any winter at all.  So I would say, you know, what is going to happen this summer?  There was an interesting report I read coming from Bermuda today.  The general accounting office were responding to a request by Senator Lugar to say, take a look at Venezuela, and how vulnerable would we be if Venezuela cut us off because Hugo Chavez about every second day says I hate the United States; I’m probably going to cut them off.

And what the geo report was – not a surprise to me – we are exceptionally vulnerable.  We have no plan.  We apparently have no basis to even do a plan, but then ironically if they concluded, if that happened, oil prices would go up $11.  And I made a note; no, oil prices would basically triple if that happened.  Now, I don’t have any idea what Hugo Chavez is going to do this summer.

Mexico is facing election in two weeks, and the big issue that has erupted is what are we going to do about the future of Mexico’s energy, and the big problem they face is that the Cantarell field, which is 2 million of the 3.3 million barrels a day has now finished over a tertiary recovery program.  And a lot of the internal senior people at PEMIC (ph) say the 2 million is going to go to 500,000 in the next five years.  And what is interesting is that the PRI candidate says, you know, we have to basically open up Mexico for investment, and the mayor says, no, no; I won’t do it all.

So that could be another crisis.  Having a Mexican production collapse and a Chavez is just a nightmare for the United States.

I worry a lot about MEND.  How many of you know what MEND is?  MEND is an anachronism (sic) for the Movement to Emancipate Niger Delta.  And what the tribes want to do is kick out the oil companies.  And the reason why they kick them out is that the oil companies have been there for 60 years and not spent any money.  So it’s rusted, the poverty is risen, and it’s become basically a cancer basin.  Well, this is a resumption of the old Biafra War.  And if I had to bet on anybody, I would bet that the tribes would finally win because they are really serious. 

So we could go 40 miles off shore on the Fred Olsen Rig, they kidnapped eight people.  They don’t want to – it’s a – they want the oil companies to leave.  So I think those are all events that could happen before Labor Day.  Now, will they?  Probably not, but should we worry about them?  Yeah.  Any one of those events now would be a (light ?) side issue.

We had another event that happened about eight weeks, or maybe it was 12 weeks ago now.  Two cars for some odd reasons decided not to even stop when they busted through the first gate headed toward the Abqaiq oil processing plan, and the gunfight that ensued for longer than kind of – got the news at the second gate, killed two guards, but killed the people.  So the good news is that we know that there is security around Abqaiq.  Blowing up the Abqaiq oil processing plant would basically take 6 million barrels of extra light oil off the market and my guess is oil prices would go to $500 a barrel, but we would have a shortage.

The straits of Straits of Malacca – General Lawson and I sat in a meeting last summer, and watched a videotape that was being done, that was going to be showed to the heads of SAATO (ph), whatever you call it – of three different potential terrorist events that could happen any time in the Straits of Malacca, which is carrying 10 to 11 million barrels a day of oil from the Persian Gulf to Asia.  That would be a lights-out event.  So you could go on and on and on.  We have too many flashpoints today and no capacity to guard against them.

Q:  Yes, sir.  Mark Bruner.  I am Senator Warner’s defense fellow for the year. 

We have talked a lot about the supply side, and my question goes to the other side of the fence, the demand side.  If there was a top-three list of things we could do to affect the demand side of the argument, where would be the meat of the target where we could get the best bang for our buck as far as conservation?

MR. SIMMONS:  Well, my three favorites are – three favorites I’ll articulate because they are easy to do, and we don’t have any technology – I’m sure there is some better things but they are not easy.

The first thing I would do is go on a program over a five-year period of time to go on a zero-tolerance of using large trucks to ship goods over roads long distances, stop.  To the extent you need to ship goods over long distances, put them on rails to water.  But use the water system.  And think of it like Federal Express.  Use the water system to take goods coming from China that come to San Diego all the way through the Panama Canal, all up the water system to Portland, Maine.  You can basically affect that transport in a shorter period of time, ironically, than trucks, and at 1/35th the amount of oil.  So anytime you get a 35-times improvement, that is a big deal.

We need then to go to an end as quickly as possible to something that sort of crept into our lives in the last 25 years, the compulsion to be able to visualize fresh food, fresh meat, exotic fish in every store where there is prosperity from all around the world 365 days a year; we just stop that.

One of the statistics that – I rewrote the last chapter of my book called “Aftermath,” for the paperback that just came out about two weeks ago.  And one of the interesting facts that I have in there came from The New York Times, December 20th.  And they pointed out that now that the fishing fleet is going into such deep water because we have depleted shallow-water fishing.  The fishing fleet in 2005 used more oil than Holland did.  This compulsion to ship food all over really became energy intensive.  I mean, in Maine, ironically, because Shaws Supermarket have a long-term supply contract, we get blueberries from Chile even during the blueberry season.  It doesn’t make any sense.

The third thing we do really actually is the home run.  And ironically, Houston, Texas, is starting to experiment with this as we speak:  Liberate the workforce, reward companies that actually are the most liberated, and start paying by productivity, as opposed to the social control of having to check in from 9:00 to 5:00.  And that will basically end up letting people work in clusters in villages and walk to work, ride bikes to work.

So I think those three things could actually be done in a five-year period of time, and maybe buy us three or four decades to figure this whole thing out.  I think ultimately we have to reduce globalization, and just get away from this concept that we make things the cheapest place in the world to make them, and then zing them around, but that’s harder.

Let’s see, there was a –

Q:  My name is Sunjin Choi at the Institute for Defense Analysis.  Thank you very much for a splendid talk.

I would like to follow the gentleman’s question – demand side.  Your slide indicated the growth in use outside OECD has just begun.  My question is my understanding is that the past three years, mostly the demand in all supplies, increasing demand coming from India and China – could you offer your views?

And, second, since you are investment banker for energy industry, my question is that at the moment I can see in Europe this increasing protectionism and consolidation European energy industry – U.K., and of course Gazprom indicated there are quite keen to acquire Centrica, and U.K. – DTI have come up with procedure.  Perhaps they are not quite clear on the issue.  In France, Gazprom is trying to team with Suez (?), a French and Belgium company.  In Germany even also indicated acquired company in Spain.  Could you tell me what your views on these issues?  Many thanks.

MR. SIMMONS:  You know, they are two very different issues.  India and China – China now is apparently about to cross two barrels per person per year.  And it wasn’t that long ago they were at one.  India, ironically, is still at one.  So India and China are very different Asian consumers right now, but India wants to catch up.  So they have just finally completed a massive freeway system for the first time so that – so India will catch up fast.

One number that I use from time to time just to scare people because it’s a pretty scary number, is if you ever had India and China freeze the population, grow to the massive energy consumption per capita of Mexico, which is miniscule compared to us – that is about 6.5 barrels a day per person – barrels per year per person, you would have to produce 44 million barrels a day more oil to do that. 

So why we need this new conservation plan is we need to teach India and China and Pakistan and Vietnam how to create a non-intensive society before it’s too late.  Now, that is question number one.

The Gazprom question is a really important issue.  Gazprom’s own gas is in decline.  Urengoy is the Ghawar of Russian gas.  Their production numbers are always in billion cubic meters.  So they basically had kind of a production base of their own gas of 500 billion cubic meters a year.  At its peak, Urengoy was 304, so 60 percent.  That was 1988; 2005 that was 141.  There is a great book out by Jonathan Stern at the Oxford Energy Institute, who is sort of the leading expert there, that says that by 2015, it will be about I think 40 – two other key fields in decline.

So what Gazprom has been doing is effectively extorting gas from Uzbekistan and Turkmenistan saying, well, if you don’t use our pipeline, you have no money.  And so Europe thinks that is Western Siberian gas; it is not.  The reason that this winter Italy got cut off is it got real cold in Russia and they used the gas there.

So I think that basically Europe’s single biggest crisis will be the mistake they made of relying on Russian gas because it’s unreliable.  And there is a big program coming out of the IEA on this in I think the next few weeks to finally point out that – and it wasn’t until finally Gazprom kind of pulled these machinations.  So I guess one of the reasons for things Gazprom is trying to do is come into these countries and buy all of this stuff because they are kind of in desperation in my opinion.

Q:  (Off mike.)

MR.    :  We’ll come back to you, Dave.

Q:  Marv Langston from SAIC.  Thank you, sir, of this pioneering work.

It strikes me that we haven’t had a conversation so far about the optimists or the economists that say, well, when the price of oil goes up, then all of the other inventions will ensue rapidly and will fill in the void.  And the other thing that is related to that is we all throw out numbers – you have used them tonight – that, well, the price of oil will go up to $500 a barrel, assuming that that means something about the solution, but in fact most of the reasons we use oil don’t go away, it doesn’t matter what the price is, right. 

MR. SIMMONS:  Yeah, I think one of the greatest myths that we have is if the price ever went up, the demand would go down.  It wasn’t that long ago – I mean, it was like three or four years ago, that these same economists that are today saying the – if oil prices go to 30, we’ll have a recession, and then if oil prices go to 40, we’ll have a recession; we’ll never use it at 50.  The reality is that oil prices at $75 a barrel are 11 cents a cup.  We don’t sell anything else in the world for 11 cents a cup.  So oil is still remarkably cheap.

Motor gas in the United States at $3.20 a gallon would be – if someone in Europe announced they were selling motor gasoline at $3.20, you would have gas lines as long as you can – till they ran out of gas.  But $3.20 cents a gallon is actually 20 cents a cup, and a lot of that is tax.

Now, a cup of gasoline sounds like a trivial amount, but if you have a car, you can basically get about six people in the car and go a couple of miles for 20 cents.  And I have always argued that if you don’t have any gasoline, and you see a guy coming down the road with a donkey and an old smelly cart, and you say, excuse me, would you take my six buddies, and our five buddies a couple of miles for 20 cents, the guy is going to just laugh at you for being stupid.

So we really got spoiled for too long.  Then I go – we have got a lot of good friends in Norway and we do a lot of business in Norway, and do you know what people in Oslo have been paying the last six months for gasoline, motor gasoline?  Two hundred and ninety dollars a barrel, $6.90 a gallon – so this idea that if you – and you know what, they actually don’t even grumble about it any more.  So it’s all sticker shock.

Yeah.

Q: Dave Kerner (sp), TORI Group.

That was a good setup for my question actually.  We seem to have a systemic problem in that we spent many decades now building a society that requires this energy-intense input.  So I live 40 miles outside the Beltway so I can have a 6,000-square-foot house, drive my Ford Valdez into work in the morning.  I eat my a-thousand-mile Caesar salad for lunch.  So the question becomes, do we have enough energy left to change the structure of our social system, of our transportation network and so on before a total crisis hits?

MR. SIMMONS:  Well, see this liberalizing the workforce is really an important concept because that means that you don’t drive 50 minutes coming in and 50 minutes – you actually find the place, whether it’s in your home, you maybe get some colleagues, you find a place in your village, you get more productive, you cut out meetings, and so forth, and you basically also then have time, because you’re not commuting, to actually start growing food at home, and that is important, too.

So I actually think that this all – I’m still kind of remarkably optimistic.  If someone could figure out how to implement this stuff fast, it’s implementable.  If you had to basically tear up our roads – one of the things we have to do on the transportation, we have to massively repair our water systems – lots of dredging, make our ports more efficient; we have got to rebuild our railroads and so forth, but you know, that actually will be a big construction project that will take some of the sting off energy prices going up two or three times too.

Q:  Hi, Matt; good to see you again.  The question I always ask you when I see you is you already implied –

MS. WERTHEIM:  Your name?

Q:  Oh, Peter Rogue (sp) with Energy Washington.

You have already implied the answer.  I take the SEC is not moving on your data acquisition, five years of data for oil fields.  But what I would like to ask you is there has been a lot of talk about biofuels.  What contribution can biofuels make to moderate price spikes to increase supply in your opinion?

MR. SIMMONS:  Yeah, I’ll comment first about the SEC.  The SEC needs a bigger budget here.  There are two beleaguered guys; they are kind of managing the whole thing.  And they have been unmercifully beat up by Cambridge Energy Research Associates saying, on behalf of the oil and gas industry, saying the SEC is so outmoded and – (unintelligible) – they need to trust technology.  And they said, no, the SEC basically needs to come in and demand this data reform.

So I do think that’s an area that some of you that want to pick up a battle could push for and give them backbone because they are sort of – they don’t want to do something radical.  And what they are being told is, oh, you shouldn’t go there.  I said, no, you should go there.  But the – now I forgot your second question.  Oh, bio-fuels.

Bio-fuels are very complicated in that there are some bio-fuels that basically don’t need to have crops replanted, like switch grass, but there is some cellulose stuff on switch grass that – then you have corn-based ethanol, and corn-based ethanol, unfortunately, is an outrageously energy-intensive crop to grow, and it uses an unbelievable amount of water.  And because corn is corn, it needs to be replanted every year.  And so the fertilizer needs to be done and so forth.

And the people that say corn-based ethanol is not fuel-intensive are basically assuming that all of that energy intensity is done to get kernels off the corn and the rest is all residue.  They say that is not the corn business today.  So I think that – you know, I grew up in a big sugar beet community, and my great-grandfather introduced sugar beets to Canada.  Sugar beets are terrible as an energy – sugar cane in wetlands are fabulous.  In Brazil, guys with a machete walk in bare-feeted, and slice it off, and the next summer, if you ever had bamboo problems, it just grows like wheat.  The minute you rip the beet out of the ground, you get right back into this process and you have got to go very intensive.

So that is the whole problem with the whole bio-fuels.  And then if you do the numbers and say, well, what if we basically made a dent on – you know, we use 85 million barrels a day, 65 percent of it is fuel.  That 60 – that is 48 million – if we basically got half of that, you would have to plant the whole world.  So bio-fuels have a role, but they are a very niche role, and they are not vaguely a solution – the solution is we need to use less fuel.

Q:  It’s on, okay.  I’m Glen Downs with Congressman Walter Jones.

I have two questions.  One is which governments around the world do you sense most thoroughly buy into your thesis?  And the second question is –

MR. SIMMONS:  There is that thesis, again.

Q:  No, no, no, the what you had to say.

And the second question is if the rate of decline of oil production is going to be as rapid and as fast as you guesstimate, that would have implications, a lot of implications, but one of which would be what might be some good investment decisions to make.  Where do you have your money invested? (Laughter.)

MR. SIMMONS:  You know, it was interesting that in Cambridge, Massachusetts, at this lovely church last week, there was – about half-way through these questions, some man stood up and said, well, I hate to do this but I’m going to ask you a really venal question.  And I thought he said venomous.  And so I was looking – he said, what shall I invest in.

But the – your first question – oh, yeah, governments.  You know, it’s interesting, I was at a roundtable in a program in London the former consul general of Houston had organized with quite a few of the best think-tank people in England.  And Iain Murray had spent six years in Houston sort of observing the United States energy policy.  And we basically discussed an interesting question, and we weren’t being facetious:  Is the U.S. way further behind in the dark than the U.K.?  Or is the U.K. way further in the dark than the U.S.?

And we pretty well concluded that both of us are in the dark, that – I mean, and it wasn’t being funny to say this intimation.  The U.K. is the dark for some different reasons, but they are just – they have totally blind-sighted themselves to the problems they have.

I would say that in a striking contrast, I was a tthe University of Limerick in Ireland about the third week in April giving a speech there.  And because Ireland has no energy at all, and they are at the end of the road of European energy, they are petrified about this problem.  And at the University of Limerick, they are doing some unbelievable R&D work, the scientists that brought the pharmaceutical industry in Ireland on some experiments to energize water so that it grows crops twice as fast, and it’s all about photosynthesis and so forth.  And I thought, man alive.

In fact, I was given a water wand by Professor Ardle (sp), and he said, now, take this this summer and use it and – so I gave the captain of the Loose Fish, when he gets back to work, is going to basically – there is two pots.  We started this two weeks ago.  And one pot is regular water, and the other pot is the magic wand water.  And he says that if you basically stick the wand in the water, in the can, and tap it for 10 seconds, your plants will grow twice as fast.  And we’ll see over the summer what it does.  But he said the Kew gardens in the Royal Botanical have already signed off on it.

So there is some fascinating work being done in water in Ireland.  I think Sweden probably is really high on the list.  Dr. Hirsh (sp) and Herman Francen (sp) and I participated on a program there last spring where we were talking to the royal academy of science, the people doing the Nobel Prize on – because they don’t have much energy of their own.

But most of the countries of the world are – I met three weeks ago with a guy that flew up from Mexico City.  He said, I know all three of the candidates running for president in Mexico, and I’ll probably be the informal energy advice to any of the three.  And Mexico is totally blind-sighted to the – they hear the problems of Cantarell and say, oh, they are just to scare us and to give us more money.

And they also think that basically they – even though they don’t have any gas, they are going to get natural gas from the United States.  And I said, well, you know, the United States thinks we are going to get oil from Mexico and get gas from Canada and Canada is in decline.  So in fact you have three countries that don’t get it:  Canada, the United States, and Mexico.

Oh, and investment, I would say invest in people that are involved in the building up of energy again and the energy – trained in the infrastructure.  I’m not sure I would really want to own an oil and gas company.

Q:  Good evening.  Dr. Rath (ph) from Naval Research Laboratory.

Since you touched upon natural gas, I couldn’t check my temptation to ask your comments and opinions on the subject.  So if you look at the total hydrocarbon deposits in the earth’s crust, more than twice of that of all of the fossil fuels, including oil called natural gas on land, are in the form of clathrates or methane hydrates along the continental margins all over the world, in our own waterfronts in the continental margin of the United States, in the Cascadian Margin, Texas-Louisiana margin, and the Blakeries (ph) right here outside of (Maryland/mainland ?) North, and South Carolina– tremendous amount of deposits along the continental margins has methane hydrates.  Some areas the deposits are exceptionally high and can be extracted.  And as I said, the deposits are far, far greater in terms of hydrocarbon compared to that of all of the fossil fuel that we have used from the one.

Would you care to comment why this topic has never been in the vocabulary of any of the great thinkers like the same, or any of the other gurus, as you pointed out, and what is your opinion on the subject of exploiting this particular energy resource?

MR. SIMMONS:  I didn’t mention it tonight, but I have repeatedly.  It is in the same box of it’s an imaginary usable form of energy that is nice to talk about because it’s so big.  What is interesting is that if you talk to any of the operators in the Gulf of Mexico that are doing deep water projects about the horror stories they are having of dealing with methane hydrates – and they describe them to me as, like these – what were these poor (?)  razor blades that the black warriors of Japan would – the ninja warriors or something.  He said they will rip up a pipeline faster than anything, and yet, if you try to basically – I mean, what you want to do is get rid of them, but if you start to raise them, they melt.

Then, interestingly, there is a group of scientists at the Harvard Center for the Environment, headed by Professor Dan Schrag who is a geologist, thinks of himself as one of the sort of really experts in climate change that says next to the glaciers melting in Denmark – I mean, in Greenland, the single greatest risk is what would happen if the Artic Sea warmed up a few degrees and you melted the hydrates, because some people think that that was the big burp that killed the dinosaurs, and that is what – this group of people who – the big burp.

So since – the handful of people that I respected and worked this area, there is some R&D work going on, on the North Slope right now, the Anadarko is – but it’s just – it’s a little test tube. I mean, it’s like going in a laboratory and watching a guy with a beaker.  But since the best brains don’t have any idea how you could tame hydrates and make them usable, and since the people trying to get deepwater oil say our biggest enemies is hydrates, I just don’t think that hydrates sound like a fantastic solution; they sound more like a problem.

But again, I’m not – in some of these technical areas – I am not a technical person at all; I just listen carefully and then think through, okay, if that is the problem.  But I think the IEA’s book on resources to – resources to reserves, and the Clyde Mendel’s (sp) nice preface saying this book is to basically quiet down the doomsayers, and so forth, they have a fabulous section about hydrates, and they say that – they seem to be almost limitless, but we don’t know quite how much, we don’t know quite that much to produce them.  And so they are not usable energy sources yet.  They might be some time, but a lot of R&D would need to be done.

Q:  (Off mike) – from the U.S. Joint Forces Command.

I just came from a China conference where I would say about 50 percent of the conference was on energy security issues.  So this is definitely something that we are starting to think about as a defense issue.

But I wanted to ask you another investment question because you’re an investment banker and not someone that is in the defense industry, if the oil companies have the same information that you have, one would suspect that they would be in the markets right now with synthetic long positions on crude oil.  Is that something that you see where you see in your investment bank, that the oil companies are in the market and they are hedging against this decline in oil?  Thanks.

MR. SIMMONS:  No, for some odd reason, the oil and gas executives, at least in the United States, really basically didn’t ever take time to understand these risk management tools and use them.

I was on Kerr McGee’s board for six years, and a group of us kept saying guys, we are so gun shot on our budgets, and if we are always basically adjusting the cushion – when oil prices are now $10 higher right now than you budget, why don’t you basically lock in that production?  No, we don’t think we should do that.  And it took – finally, Kerr McGee turned out to be one of the first people that started doing that, but only for a short period of time.

So there really aren’t any oil companies of any size that are – that have all surfaced, that really are using that as a synthetic sort of a tool.  The countries that are interesting – or the country that is most interesting from my standpoint to watch really aggressively making energy investment is China.  They are buying every source of usable oil they can find.  And when they go into the Sudan, for instance, they just don’t care about the human rights issues in the Sudan.  They really like the fact that they can lock up a long-term contract because they are trying to create a diversified supply.

Q:  Gene Porter from the Institute for Defense Analysis.

I’m interested in market mechanisms.  And particularly because I’m a fan of waterways and railroads, interested in your estimate of how high the price of diesel fuel would have to go in order to motivate or incentivize freight forwarders to make a significant shift from trucks to railroads and barges.

MR. SIMMONS:  You know, I don’t know the – you know, I think – I don’t know many freight-forwarding people, and occasionally when I talk to one, I try to – I say, now, tell me what you think about it.  And what I get is we think about speed.  We think about how do you – or we think about minimizing inventory because the inventory carry is really important.

So I think that the transportation management industry has to reeducate itself.  And also, so many of them basically think, because they read it, that these prices are temporary.  And so don’t get all excited about talking about your whole system because these prices are temporary.

Then I saw an article recently that Wal-Mart had basically 7100 trucks.  Basically it instituted a new program that they think will basically add a mile-and-a-half per gallon to their trucks.  And what it is all about is it’s a new supplemental air conditioning system, so when the trucks stop, they can turn the truck off.  I never understood why the trucks are always going – is to keep them cool for air conditioning.

But I think that basically we have got to do – we have got to really change the whole mindset – again, because I’m a very close friend with the mayor of Houston, and he is really basically as concerned about all of these issues globally as I am, but since he’s the mayor of Houston, he is trying to do something there.  Bill White is trying to get all of our powers that be to basically reengineer the ship channel so that we use the ship channel not just to bring things in but to take all of the good we are going to send to Mexico and send them to the ship channel.  But it’s really hard to get the entrenched interest to – oh, no, that really wouldn’t work, and so forth on even a program like that.

But I think sooner or later, the fact of the matter is that the cost is going to be so high – and it won’t be the cost; it’s the scarcity.  When you get into allocating is when you’re going to finally have people say, well, we need to do something different.

Q:  (Off mike.)

MR. SIMMONS:  I’m fine.

Q:  I’m Fred Singer (ph).

If we grant that the price of oil is set by supply and demand, demand being consumption – and it is not based on speculation of hording, this means that there must be somewhere in the world, oil producers that are producing just under $70 a barrel, where are these people, where are these wells that are producing right around $65 a barrel that are keeping the price up?

MR. SIMMONS:  Well, first of all, my opinion – every oil producer in the world today is selling every barrel of oil they can produce because they can – this is the best pricing environment they have ever had.  There is no kind of holding back.  And also what is interesting there is – if prices go up another $10, that doesn’t unlock anything that isn’t today being done.  So all of the unconventional stuff that is being done is being done at these prices, and it will be done just as much at another hundred dollars.  It doesn’t do anything.  They will make more money at it if prices go up.

Q:  There must be some reason for the price being at $70 and not t $60 in – (inaudible, cross talk).

MR. SIMMONS:  Well, the reason is that basically everyone thought it should be at 60 or 50, but there is actually just a very tight market.  Now, if we have an instance happen, like a jolt – like, for instance, tomorrow morning the DOE numbers come out and they showed a 15-million-barrel drop in crude oil inventories, I suspect oil prices at the end of the week would be at 80.

Q:  Yeah, but they could also be at 60 because, as I say, the supply curve must be very, very steep right now, and the demand curve is –

MR. SIMMONS:  But see, the demand curve is going like this and the supply curve is going tike that.

Q:  But they are both steep so that intercept sort of like this, which means that a small change in demand or a small change in supply can change the price either up or down.

MR. SIMMONS:  Well, and that is why if you look –

Q:  Extreme volatility.

MR. SIMMONS:  That is why if you look at this rise, it didn’t go like that; it went like this.  And it’s amazing, every time it starts down – the day that the guy in Iraq got killed, oil prices were off $3.  Why?  Well, the guy in Iraq was killed.  It looks like the terrorism is over.  And then about four days later, the price was back to where it was.  So this is the short-term trading guys that are just kind of rolling dice, but in the long term, we actually – say, boy, it’s been a long time since oil was at $60.  I mean, it was like last summer.

MR. WEHRENBERG:  I would like to point out Fred, that you assume away speculation.  Why did you assume away speculation in the – (inaudible) – of your question?

MR. SIMMONS:  See, what is interesting is what you hear from virtually all of the major oil company CEOs is they are explaining away why prices are high is, well, it’s the fear factor.  I mean, when Lee Raymond came to Washington, when the five big oil CEO were – and I winced when I read this – why would do this.  They said, if it weren’t for the fear factor, oil would be $20 less.  And I said, if people were as worried about this as I am, it would be twice as high.  And ironically, the week he said that, the speculators were basically about – had one of their highest short positions in the last three years on crude oil.

Q:  Jan Lundberg with Culture Change.

You talked about the energy war.  It seems to me that it is about your plan B that has been missing.  And you talked about the quicker fixes to the infrastructure that would get us some quick gains in energy savings.  You have alluded to tearing up the roads.  Could you clarify that and tell us more about the energy war please?

MR. SIMMONS:  Well, it’s just the energy war is a euphemism for saying, you know wars get won by armies being organized, as opposed to just saying I’m just going to worry about this until the war goes away.  And so this has to be attacked with the intensity of how you would launch a major war.  And you can’t just basically say I would like everyone to basically quit their job and liberate the workforce.  That is going to be a carefully worked out plan; you have got to help people figure out the economics so that they say, look, over a three-year period of time, we can maybe have 80 percent of the people that used to be here every day do more work.  What do we need to do?  That is the implementation sort of, of what I am talking about.

Just take our railroad tracks.  You know, it was so enlightening to – we recently over the weekend drove from Houston up to Fort Worth and back, and coming back, there were – down along Route 6, it is a single track going to Houston.  And so if a route train is coming up, all of these trains – you should have seen the miles of trains that were stopped waiting for one train to go from Houston north.  And I bet you I must have counted visually at least five miles of ethanol basically being shipped to the Houston ship channel that was not going any place.

So our railway system got taken apart.  We really need to go – if Eisenhower did a rebuild the – build the highway system, we should probably do a let’s see if we could rebuild our railway system in five simple years.  Now, you know, I don’t know anything about even doing that.  But if we just say, well, we can’t use our rail system anymore; it’s too hold then we are really just deepening the hole.

We probably ought to maybe take two more questions and then –

How are you?

Q:  Hi, Matt.  John Darnell with Congressman Bartlett’s office.

Speaking of disruptions, which I was quoted about earlier, I wonder if you comment on the potential for trading of oil in Euros for a potential disruptive event.

MR. SIMMONS:  Yeah, I get asked about that all of the time.  Well, what do you think if they switched from dollars to Euros?  And I don’t – I haven’t thought it through very well, and I’m not even sure I know enough about what you would have to think about.  I don’t think that would be a big deal.  You know, almost all of the Middle East exporters get dollars, and they have done that for years because the dollar was the only currency that could handle that before we had a Euro.  But then, you know, something like I think about over 50 percent of what they then turn around and buy as imports are goods from Europe.  So I would think it probably actually makes sense to re-denominate – maybe have half in Euros and half in dollars, and it wouldn’t be an event.

Q:  Hi.  Mike Pevety (sp) here.

And I keep wondering why we’re not talking about nuclear power.  I mean, there is a lot of oil that makes electricity, which we could do with nuclear power.  Is this a totally taboo subject?

MR. SIMMONS:  No, not with me.  Again, I just – I have used so many nuclear power slides in the course of these 75 talks that I have given, and one thing I started doing is showing what a nuclear pellet looked like because I had never seen one before.  They are amazing.  They are basically this – they are like a multiple vitamin pill.  Five of those pellets fuel a house for a year with its electricity.

Then I discovered – this is the value of giving all of these energy talks; you meet a lot of smart people.  I discovered that if you basically took all of the nuclear – the spent nuclear waste from energy – so you forget about all of the spent waste from the military – and you kept it in these canisters, which take up most of the space, it would fill three football fields about 15-feet deep.

But if you said, hmm, this is too expensive; let’s not do this; let’s strip the canisters off so you get just the spent fuel – one football field.  But then if you said that is a waste, why don’t we be brave like the French were and reprocess it and get some more energy out.  By the time it’s fully reprocessed, yeah, you would have platinum-grade bomb material, but you can higher a million people with guns.  Where would you store it?  You would store it at the end zone of one football field.

So we were just wacky about our paranoia about nuclear energy.  And maybe it was a byproduct of the Cold War, but we ought to get over that as fast as can be.  If Europe – the report I understand it, is coming out form the IEA based on this terrified – we have never figured out the Russian gas thing – is talking about maybe 40 or 50 nukes being built in Europe as fast as can be because if they don’t, there is no way they can basically not face the gas crisis.

Thank you very much.  You have been a great audience.

(Applause.)

MR. WEHRENBERG:  Thank you very much, Mr. Simmons.  That was quite enlightening.  And thank you for all of your questions.  We have – who do we have lined up for our next –

MS. WERTHEIM:  It’s on biomass.  It’s on the program.

MR. WEHRENBERG:  Oh, yeah, okay.  Our next session is on biomass, so we will have an opportunity to explore that in some depth.  I will be sending out a survey to all of you.  There have been some questions about a blog or listserv that would somehow help people opt into a conversation.  We are going to explore that tomorrow when we talk to our web people.  So thank you all very much.  I hope to see you next month.

(END)

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062006 Transcript.pdf