Get Ready for Saudi Oil Shock
Photo Courtesy MATTHEW R. SIMMONS
In his new book, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy (John Wiley & Sons, 2005), Matthew Simmons (MBA ’67) sounds an alarm about a finite resource that he believes is running dry. Based on his analysis of more than 200 technical papers catalogued by the Society of Petroleum Engineers, the book refutes optimistic projections by the Saudis and offers the public the first detailed examination of that country’s largest oil fields. He knows the business well, as the chairman and CEO of Simmons & Company International, a Houston-based investment bank that specializes in the energy industry. The future oil shortage, he says, is a problem we should address right now.
Based on your research, how soon will we feel the effects of the diminished Saudi oil supply?
The big risk is at the current rate in which Saudi Arabia is producing its oil, each of the five or six key field that are still around 90 percent of their production are in real danger of a pending production collapse. You might see the production from any one of these fields drop by as much as 75–80 percent in 24–60 months.
Is it possible the Saudi Arabian oil supply could be made up in other parts of the world?
I would argue very strongly that once Saudi Arabia’s oil goes into decline the world’s oil supply has very likely peaked. The reality is that in the last five years it’s been almost impossible to find an oil field large enough to start replacing declines in almost any of the producing basins around the world.
How will this shortage affect the U.S. and world economy?
The price of oil and gas is going to have to go way up. Sixty dollars a barrel for crude oil is a preposterously cheap price for a scarce, invaluable, irreplaceable natural resource. All sorts of smart people will state categorically that $60 oil will basically destroy the world economies. Give me a break!
It would be a good thing for oil prices to go up?
It would be a wonderful thing for the world economy for energy prices to get to a level that they probably should have been at for the last 50 years. It starts opening doors to rationalize a new economy that isn’t as dependent on oil as the economy we created.
What steps should we take now to prepare for an oil shortage?
You’ve really got to go to a sort of war footing mentality and say, “This is not something that would be nice to do. This is something we now have to do.” Probably the single biggest impact we can make is to take all the long haul movement of goods off the highways of the world and get them on either boats or rail. Once you get the big trucks off the highway system, you have an amazing impact on traffic congestion, which is public enemy number one on passenger car fuel efficiency. The second thing we could do is address our agricultural food distribution system. If we went back to localized farming, it’s amazing how we could change the transportation use of moving food. I also think we could reorder the way a lot of corporations work today. Instead of having 1,000 people in the same office, create localized offices or give people a budget to create an office at home. In doing so, you would significantly improve the quality of people’s lives and have a real impact on the amount of transportation fuel used.
What about alternative sources of energy?
Reducing the use of oil is the way we get through the next ten years. At the same time, we should go on the greatest explosion of R&D in the history of the world. The Holy Grail is to come out with a whole host of new sources of energy that don’t exist right now.
How confident are you that policymakers will take your warnings seriously?
I think it’s just human nature that we’re going to wait till we’re over the edge. But I actually think we’re going to be over the edge so soon that it’s really important once we start seeing demand significantly outpace supply that people understand what’s going on. I think if we don’t, we could have an unbelievably awful global tipping point. If the odds are 20 percent I’m right, why wouldn’t you do these things? Because if it turns out I am right, it’s every bit as awful as if we had assumed after World War II that we’d never have thermonuclear war.
What do people in the oil industry think about your book?
I’ve heard criticism that it’s preposterous we have any problems. We’ve been doing this for 70 years, and we’ll do it for another 70 years. My response to that is: I’m 62 years old and the only time I’ve spent overnight in the hospital is when I was born. I don’t think that has any predictability about the next 62 years.
– Lewis I. Rice
