PsychoticDan
05-05-2006, 21:40
This guy has to be my favorite speaker because he's got the authority. He's the president and founder of the world's largest energy investment bank and has advised presidents on energy policy. This president doesn't really listen to him, though. His clients include Haliburton, Kerr McGee, The World Bank, GE, the biggest of the big. Here's some out takes:
MATT: The switch from MTBE to ethanol was, in my opinion, largely overlooked at such an unbelievably complex series of logistics we were putting on the system. And I wouldn’t be terribly surprised if we are basically days away from having gas lines erupt in a lot of key places. But I don’t think, so far, that’s really been the driver. I think the driver of gasoline and diesel prices is crude oil, and the fact that crude oil is back up in the mid-70s. And the reason it’s in the mid-70s, in my opinion, is we’re out of capacity every place. So I think the switch to ethanol and coming right behind it is this unbelievable specification for ultra-clean diesel fuel is probably something that doesn’t work. And that might be the triggering point for the same sort of gas lines we had in '79, but I think in the background is just the serious problem of the fact that this is just exactly where current prices should be if you think there’s nothing abnormal about crude oil being at 75. And every time I’m asked how in the world you could justify $75 price for oil, I say -- it’s in barrels: $75 happens to be 11 cents a cup. [There is] nothing we sell any place in the world for 11 cents a cup other than oil to refineries. [4:58]
MATT: Well, the price controls is really stupid because then that basically artificially just encourages consumption. I think at some point I’m a little – I hate to say this because it’s so counter anything I thought I would ever say – but to the extent that the major oil companies can continue to advertise that they’re really not making much money, and that they’re doing everything possible and that these are just temporary, and the cash builds up, and builds up, and builds up, and builds up, the governments of the world are going to basically take it away from them. Now, whether they should or not is a whole different reason, but I think had the companies been more forthright about and maybe they had done their homework a little better and said, “we are in a jam now and we’re not quite sure how we get out of it,” it would be easier to defend these prices. But what they’ve done is exactly the opposite, you know, “and this is just very temporary, oil’s a cyclical thing, what goes up comes down, over 15 years we’ve spent all this money.” And you know it won’t be long before one of the major oil companies has $100 billion of excess cash on the balance sheet. [6:29]
MATT: Oh heavens no. No, you’re absolutely right. And I’ll tell you what I don’t find very amusing is how many of these name-plate economists say, “well, what we all missed was China,” because I love to remind people that I wrote a white paper in the Summer of 1997 called China’s Insatiable Energy Needs, and I predicted that by 2005 that they would basically be using 6 ½ million barrels a day of oil – and that’s exactly what they were. So, all you had to do was actually go to China and have your eyes open. [11:56]
MATT: Yes, a cup of gasoline sounds so trivial, but the reality is if you have access to a passenger car, you can basically get six people in it, some stuff in the trunk, and go two miles for 20 cents. Have you ever tried to negotiate with a guy on a donkey and a cart: “will you take me and my five friends 2 miles for 20 cents.” That guy’s going to swear at you for being stupid.
MATT: Yup, it’s too bad we even have reserve data, because it’s so meaningless, and it’s so unreliable, and it doesn’t tell you anything about how much a country or company can produce in the next 2 to 3 years. And any time you start commingling light sweet oil that can come out of a pressurized well bore – one well bore – at the rate of 40,000 barrels a day, or 10,000 barrels a day with heavy oil from Canada [where] it costs you $10 billion per 100,000 barrel a day production, you’re really commingling Maseratis with jalopies, and some are saying, “I have a thousand vehicles.” It’s used all the time by the optimists and they don’t have any idea what they’re talking about.
What’s really also interesting is how little data we have of any quality about how much we have left of high quality sweet oil. And the answer is most of the key crude grades are basically now very tiny in their volumes. What we’ve made it up with is basically a lesser rating quality of crude that has a higher degree of sour properties in them, and poisonous gases and is also heavier. And what we’re doing in the heavy oil is chewing through natural gas primarily as a heat source and potable water too often to create steam to melt it into basically low quality crude. And that’s where I say, “Gentlemen, we have just turned gold into lead.” [25:07]
MATT: The first thing that the optimists rely on is that we always have had reserve appreciation, and so fields over time always get bigger. That happened 50 years ago. There’s not a scrap of data to support that concept for the last 25 years. It’s just wrong. The second concept is embrace technology. All you have to do is be a believer in technology. I continue to remind people that all the oil field technology we’re talking about was being invented in the early '70s when our firm started business. It took a decade to invent it, it took a decade to commercialize it, and it took 15 years to spread it around the world and the blackboard’s bare. There is no more technology of any significance that anybody is working on. So then you get into: look at all the unconventional oil we have that is now commercial. You can make money – if you’ve already paid for your facility and written it off – on oil sands, but oil sands are very different from tar sands. The oil sands can be strip mined and they’re still extremely energy intensive, but tar sands need to have these deep mine shafts of steam put in to melt the [tar] – it’s really basically bitumen, a recycle of La Brea tar pits – you chew up such an intensive amount of energy. And what they’re talking about is undiscovered natural gas in Northern Alberta, and potable river water from the Athabasca River, that to use either one as a steam source to create low quality oil is a crime.
And then they basically talk about – assume – all this stuff we’re basically going to discover, and I say, “you know, give me a break, Cantarell in Mexico was discovered in 1975 and 1976, that’s the last giant oil field we’ve ever found. Prudhoe Bay, the North Sea, and Western Siberia were all discovered in 1968, and that’s the last time we found a large or medium onshore oil field in the Middle East.” 1968 was a long time ago. [37:44]
Link (http://www.financialsense.com/transcriptions/2006/0429simmons.html)
MATT: The switch from MTBE to ethanol was, in my opinion, largely overlooked at such an unbelievably complex series of logistics we were putting on the system. And I wouldn’t be terribly surprised if we are basically days away from having gas lines erupt in a lot of key places. But I don’t think, so far, that’s really been the driver. I think the driver of gasoline and diesel prices is crude oil, and the fact that crude oil is back up in the mid-70s. And the reason it’s in the mid-70s, in my opinion, is we’re out of capacity every place. So I think the switch to ethanol and coming right behind it is this unbelievable specification for ultra-clean diesel fuel is probably something that doesn’t work. And that might be the triggering point for the same sort of gas lines we had in '79, but I think in the background is just the serious problem of the fact that this is just exactly where current prices should be if you think there’s nothing abnormal about crude oil being at 75. And every time I’m asked how in the world you could justify $75 price for oil, I say -- it’s in barrels: $75 happens to be 11 cents a cup. [There is] nothing we sell any place in the world for 11 cents a cup other than oil to refineries. [4:58]
MATT: Well, the price controls is really stupid because then that basically artificially just encourages consumption. I think at some point I’m a little – I hate to say this because it’s so counter anything I thought I would ever say – but to the extent that the major oil companies can continue to advertise that they’re really not making much money, and that they’re doing everything possible and that these are just temporary, and the cash builds up, and builds up, and builds up, and builds up, the governments of the world are going to basically take it away from them. Now, whether they should or not is a whole different reason, but I think had the companies been more forthright about and maybe they had done their homework a little better and said, “we are in a jam now and we’re not quite sure how we get out of it,” it would be easier to defend these prices. But what they’ve done is exactly the opposite, you know, “and this is just very temporary, oil’s a cyclical thing, what goes up comes down, over 15 years we’ve spent all this money.” And you know it won’t be long before one of the major oil companies has $100 billion of excess cash on the balance sheet. [6:29]
MATT: Oh heavens no. No, you’re absolutely right. And I’ll tell you what I don’t find very amusing is how many of these name-plate economists say, “well, what we all missed was China,” because I love to remind people that I wrote a white paper in the Summer of 1997 called China’s Insatiable Energy Needs, and I predicted that by 2005 that they would basically be using 6 ½ million barrels a day of oil – and that’s exactly what they were. So, all you had to do was actually go to China and have your eyes open. [11:56]
MATT: Yes, a cup of gasoline sounds so trivial, but the reality is if you have access to a passenger car, you can basically get six people in it, some stuff in the trunk, and go two miles for 20 cents. Have you ever tried to negotiate with a guy on a donkey and a cart: “will you take me and my five friends 2 miles for 20 cents.” That guy’s going to swear at you for being stupid.
MATT: Yup, it’s too bad we even have reserve data, because it’s so meaningless, and it’s so unreliable, and it doesn’t tell you anything about how much a country or company can produce in the next 2 to 3 years. And any time you start commingling light sweet oil that can come out of a pressurized well bore – one well bore – at the rate of 40,000 barrels a day, or 10,000 barrels a day with heavy oil from Canada [where] it costs you $10 billion per 100,000 barrel a day production, you’re really commingling Maseratis with jalopies, and some are saying, “I have a thousand vehicles.” It’s used all the time by the optimists and they don’t have any idea what they’re talking about.
What’s really also interesting is how little data we have of any quality about how much we have left of high quality sweet oil. And the answer is most of the key crude grades are basically now very tiny in their volumes. What we’ve made it up with is basically a lesser rating quality of crude that has a higher degree of sour properties in them, and poisonous gases and is also heavier. And what we’re doing in the heavy oil is chewing through natural gas primarily as a heat source and potable water too often to create steam to melt it into basically low quality crude. And that’s where I say, “Gentlemen, we have just turned gold into lead.” [25:07]
MATT: The first thing that the optimists rely on is that we always have had reserve appreciation, and so fields over time always get bigger. That happened 50 years ago. There’s not a scrap of data to support that concept for the last 25 years. It’s just wrong. The second concept is embrace technology. All you have to do is be a believer in technology. I continue to remind people that all the oil field technology we’re talking about was being invented in the early '70s when our firm started business. It took a decade to invent it, it took a decade to commercialize it, and it took 15 years to spread it around the world and the blackboard’s bare. There is no more technology of any significance that anybody is working on. So then you get into: look at all the unconventional oil we have that is now commercial. You can make money – if you’ve already paid for your facility and written it off – on oil sands, but oil sands are very different from tar sands. The oil sands can be strip mined and they’re still extremely energy intensive, but tar sands need to have these deep mine shafts of steam put in to melt the [tar] – it’s really basically bitumen, a recycle of La Brea tar pits – you chew up such an intensive amount of energy. And what they’re talking about is undiscovered natural gas in Northern Alberta, and potable river water from the Athabasca River, that to use either one as a steam source to create low quality oil is a crime.
And then they basically talk about – assume – all this stuff we’re basically going to discover, and I say, “you know, give me a break, Cantarell in Mexico was discovered in 1975 and 1976, that’s the last giant oil field we’ve ever found. Prudhoe Bay, the North Sea, and Western Siberia were all discovered in 1968, and that’s the last time we found a large or medium onshore oil field in the Middle East.” 1968 was a long time ago. [37:44]
Link (http://www.financialsense.com/transcriptions/2006/0429simmons.html)