This post briefly reviews a new presentation by investment banker Matthew Simmons, author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy (2005). He is one of the best known of the experts warning about peak oil. IMO he is one of the best of them. As this analysis shows, that is not good enough.
This post does not criticise Simmons, who does the best he can — working on his own time, on his own dime — to warn up about the serious threat of peak oil. This analysis shows the gap between what we have and what we need. It illustrates two problems frequently discussed on this site:
- The poor quality of America’s research — the observation and orientation phases of the OODA loop.
- The poor quality of research in the peak oil community.
(1) America’s vision problem
America is great and powerful, but prefers to be blind. On important issues – from energy to geopolitics to climate change – our national machinery to do research and analysis just do not work well. Fixing this systemic problem should be high on our national agenda.
At the end are links to posts giving many examples of the inspired guessing that mostly substitutes for energy research. We have too little data, and too little analysis of what we have. As I have said so many times:
We know astonishingly little about our available energy resources, consumption patterns, and alternatives. Nor has the available information been collected, analyzed, and used for models and simulations — the foundation of good planning. News reports said that the recent satellite interception by the USAF cost $125 million; one-tenth of that could fund a multi-disciplinary project that would help plan a sound future for America’s energy supply. Instead we rely on inspired guessing.
See the links at the end for many examples of this problem.
(2) The poor quality of research in the peak oil community
“Why” is the most difficult of questions, because causes of group behavior are complex and murky. Still, here are two guesses why the usually well-educated and brilliant people writing about peak oil produce so often produce such flawed work.
- The power-point culture
- Advocates do not like to criticize other members of the team
By PowerPoint I mean presentations without a firm written analytical foundation. Slides and brief Internet posts are powerful presentation devices, but shallow and lack of depth. Advocates too-often focus their energy on marketing (broadly defined), since they tend to believe they already understand the threat. For more on this I strongly recommend reading Edward Tufte’s monograph The Cognitive Style of PowerPoint (32 pages, the best $7 you will ever spend).
The other problem is that advocacy communities tend to lack the intense self-criticism that distinguishes the best of the academic sciences. Linked arm-to-arm in a crusade to save the world, advocates seldom ruin the parade — cracking their solidarity — my criticism of their fellows work. The peak oil community shows the unfortunate price paid: loss of credibility, as the movement is discredited by the low average quality of its research. (The Oil Drum is a poster child for this problem, great work indiscriminately mixed with arrant nonsense. For examples see here and here.)
With that background, I suggest reading Simmons presentation full. It is only 48 slides, with Simmons’ typically clear organization and exposition.
About Simmons’ new presentation
- “Has Oil and Gas Collapse Sealed Fate of Peak Oil?“, Matthew Simmons, Presentation to the Society of Petroleum Engineers, 21 April 2009.
Like all of his work, this presentation has much interesting material. Since it is just slides — no links or citations — we don’t know if it is correct.
Simmons has told some whoppers in the past. My favorite is “Well, the fact of the matter is the refineries in the United States it would appear their core units are basically on average are about 85 years old.” (From “All the Canaries Have Stopped Singing“, transcript of an interview posted at Financial Sense, 18 August 2007. Also see slide 39 of this presentation, stating that the average age of US refineries is 70-85 years. The land, perhaps.).
The first two dozen slides provide an excellent review of the case for a early peak oil (as opposed to 10 or 20+ years from now). I recommend close attention to slides 28 – 38, about the world’s unconventional petroleum reserves. These are vintage Simmons at his best: important material, clearly presented.
Some aspects of the rest appear questionable. Since this post is already too long, I will give just 5 examples — illustrations of common problems in the peak oil literature.
Slide 5: “Athabasca Oil Sands expansion cost $20+ billion to add 100,000 B/D.”
Peak oil presentations are littered with things like this, powerful but unsupported factoids. If the gross profit from the well (after operating costs) is $100/b (very high assumption), and the well operates 100% of the time (365 days/year), at a 10 1/8% cost of capital it requires 8 years to break even. Something seems wrong with Simmon’s numbers –or with the managers running the project!. Actual projects show better rates of return. Suncor’s Voyageur project in Ft McMurray will cost $21 B and add 200,000 b/day by 2012; it is now on hold. Shell’s Athabasca expansion will cost $14B and add 100,000 b/d.
Slide 41: “The entire infrastructure to deliver oil and gas from the well bore to the consumer is too old and needs rebuilding.”
Whenever I meet an oil industry executive, I ask about Simmons’ ‘rust” theory. Everyone have meet so far has considered this false with regard to the developed nations and well-managed OPEC nations (e.g., Brazil, Saudi). Some infrastructure is old, much is new. Almost all is maintained adequately. Simmons mentions this often, but has never provided a shred of supporting evidence. His specific assertion (mentioned above) about US refineries is bizarre, unless he defines “core units” in some idiosyncratic way.
Slide 41: “Core of industry’s employee base is ‘just as rusty.’”
This staple of peak oil warnings is probably false. The population of petroleum engineers is just moving East. For more about this see Myths about Peak Oil – part I: There are not enough petro-engineers! , 15 November 2007 .
Slide 42: “Cost to Rebuild Infrastructure Is Huge”
- To replace 6 million miles of oil and gas pipeline and gathering systems would exceed $15 trillion.
- Replacing 20% of world’s refinery capacity would cost $2 trillion.
- And costs would soar as equipment scarcity sets in.
Warnings of aging and rusty infrastructure are one of Simmons’ main themes. What evidence is there that this is a substantial problem? Even more important, what evidence is there that it need be done so quickly that costs would soar? If this things are so, there should be some articles in the industry press about the problem. But I’ve never seen any supporting evidence in the peak oil literature for this oft-repeated claim.
Slide 43: “World Faced Big Supply Problem When Oil Prices Were ‘High’ … It did not induce replacement programs to build new rigs or any other assets.”
Another false factoid, so far as I can determine. As capital expenditure increased, many new rigs and other assets were built. Now that production is slowing, older equipment is being scrapped. That’s how business cycles work. Perhaps Simmons’ has some context in which this is correct, such as what he computes as the needed replacement level. But on its own this looks wrong.
The above questions are IMO a serious part of the energy problem. Too many of the people warning about Peak Oil not only make consistently incorrect forecasts (e.g., Simmons forecastsof imminent peaking of North American natural gas production), but often get their facts wrong. In fact, Simmons is in this respect one of the best in the Peak Oil community — his reports are both valuable and mostly accurate. Compare his with presentations at the ASPO conferences, many of which are almost science fiction (in terms of unsubstantiated wild speculation).
Robert Hirsch is IMO the only consistently reliable voice I’ve found warning about Peak Oil. To see his work, as well as a wide range of other quality energy research, see the FM reference page about Science & nature – studies & reports.
Other articles warning that low oil prices today mean far higher prices in the future
- “Crude mathematics“, Michael Meacher, op-ed in The Guardian, 28 November 2008 — “A plunging oil price means cheaper petrol now – and no fuel later as industry investment shrivels.”
- “Oil supply crunch in 2010?“, Reuters, 16 February 2009 — “The International Energy Agency says that when the economy regains strength, demand for crude will pick up.” The slides of the IEA’s executive director’s presentation are here.
- “Energy-Investment Cuts Spark Talk Of Next Price Spike“, Wall Street Journal, 9 April 2009
- “Oil Prices: OPEC Secretary Warns of Darkening Crude Supply“, Wall Street Journal, 24 April 2009
If you are new to this site, please glance at the archives below. You may find answers to your questions in these.
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For more information from the FM site
To read other articles about these things, see the FM reference page on the right side menu bar. Of esp relevance to this topic:
Posts on the FM site about the quality of America’s energy research:
- When will global oil production peak? Here is the answer! , 1 November 2007
- More answers about Peak Oil! (or just better phrased questions) , 5 November 2007
- Links to articles and presentations of some A-team energy experts , 11 November 2007
- The “Oil Shockwave” project: well-funded analysis of the obvious , 10 April 2008
- Euphoria about the Bakken Formation , 10 April 2008
- The Internet makes us dumber: the Bakken euphoria, a case study , 15 April 2008
- Peak Oil Doomsters debunked, end of civilization called off , 8 May 2008
- Spreading the news: the end is nigh! , 8 May 2008
- The secret cause of high oil prices , 6 August 2008
- How does the long-term trend of peak oil affect us, in terms of short-term events?, 30 August 2008
- An urban legend to comfort America: our massive reserves of unconventional oil, 29 August 2008
- An urban legend to comfort America: crash programs will solve Peak Oil, 5 September 2008
- An urban legend to comfort America: oil is oil, even if it is not oil, 10 September 2008
- An urban legend to comfort America: alternative energy will save us, 16 September 2008
- Another example showing how energy research is just inspired guessing, since America prefers being blind, 23 September 2008