THE LONG GOODBYE

REF: "Ignore the Optimists. Peak Oil is Real". by Mathew R. Simmons 9.04.09

“Last week, four of the world's most outspoken oil aficionados waded into the controversy of peak oil, publishing articles packed with myth and distortion. This "Gang of Four" all claimed the issue was silly, moot, or simply a myth. The four pieces were Pulitzer Prize-winning author Daniel Yergin's seven page article in Foreign Policy, energy analyst Michael Lynch's three page article in the New York Times, analyst Edward Morse's essay in Foreign Affairs, and scholar Amy Jaffe's paper published by the Baker Institute at Rice University.”

There is a lot of misunderstanding about oil, reserves and decline. Also there is a lot of misrepresentation about remaining reserves, undiscovered fields deep reservoirs, tar sands,

etc.

Matt Simmons, CEO of Simmons & Company has been at the forefront of the peak oil discussion, having written the world awakening “Twilight in the Desert”. He found that prior to his extensive investigations, no one had seriously looked at the world reserves and that the IEA, and U.S. DOE, were woefully equipped to accurately tabulate the remaining world reserves, since they were using outdated information and frequently deliberate misstated data.

Mr Simmons further states in the referenced article:

“First, alarming data from the International Energy Agency and the U.S. Department of Energy shows that the flow of global crude oil peaked in 2005 and is now sliding steadily. The world will never "run out of oil," but its flow is in decline. There may still be ample oil reserves left in the ground when oil flows fall to half of today's use. But these remaining reserves are all either very low-quality heavy oil, which is difficult to process, or tainted with toxic elements that make it hard to refine into usable petroleum products.

It would be comforting if some vast new oil frontier existed that would recreate the 20th century's oil miracle, but almost five decades have now elapsed since the last great super-giant oil fields were discovered and the last frontier basins were found.

Second, while global oil demand is growing far beyond what can easily besupplied [emphasis added], countries like China and India are still in relative economic infancy and their per-capita oil use is tiny when compared to the prosperous OECD countries. Demand is insatiable, but oil use can only match oil supply -- this is an irrefutable law of nature.

It is true that a steadily increasing number of financial players now bet on the price of oil. These speculators created the highest volatility that oil prices have ever experienced. The Gang of Four seems to think this is good for oil markets, but as a seasoned investment banker to the energy industry, I believe this volatility is a cancer that will ultimately destroy it. It shouldn't have been surprising that oil prices plummeted from $121 a barrel on Sept. 22 to a low of $31 a barrel on Dec. 22. It happened because hedge funds decided to short the oil contract. But the Gang saw this as normal price changes as folks realized the oil bubble had burst, although this doesn't sufficiently explain the size of the price swing that occurred.

When oil prices sunk to $31 a barrel, the oil industry was no longer financially viable, despite the fact that major oil-company CEOs considered this price "fair" only a year or two earlier.

All four oil experts made the same general argument, though stated in slightly different terms. None of them had any hard data on existing oil reserves to share with their readers because no hard data is available, only firm beliefs.

The final topic the Gang discussed was the rapid advances in oilfield technology. Sadly, this is the greatest myth of all. I spent four decades as an investment banker to the global oil-service industry, which collectively invented all of this technology. The concept that there are new innovations in this area is false.

In fact, the seeds of this so-called technological revolution -- the ability to exploit oil from deep water or drill horizontally -- were first developed 40 years ago. I personally raised a great deal of the venture capital that helped implement some of the most important technical advances in the industry. Our firm, through advising on mergers, consolidations, reorganizations, and bankruptcies, helped save the oil-service companies that created these great technological advances that help us find and commercially exploit oil and gas.

None of this technology is new -- in fact, it is now quite mature. Sadly, there are few new ideas in the oilfield pipeline to replace advances that were made decades ago.

In my view, while Yergin, Lynch, Morse, and Jaffe, are articulate in their theories, none seem to have any strong sense of the brutally grim reality of today's oil markets. The facts speak for themselves: Oil flows have peaked, technology is now mature, the people running the industry are far too old, and few top-notch graduates are interested in embarking on a career in such a volatile field.

Even oil's much-touted 150th anniversary is a myth. You can read about an oil flame burning next to Babylon in the Old Testament. This was oil flaring from Kirkuk, which later became the first super-giant oilfield found in the Middle East in the late 1920s.

Oil has been a miracle resource for ages but has never been well understood. For more than a century, myths about oil kept the real facts buried in a fog of bad information. Until the world's oil producers allow third-party audits of the flow rates of the world's largest oil fields, which they have so far been reluctant to do,[emphasis added] it is impossible to know just how dire a situation we are in. I believe that such an audit would prove peak oil, but it is certainly irresponsible to make optimistic projections without hard data.”

The crux of the matter is that our oil reserves are declining, but the demand and use of petroleum and derivatives is increasing. Until we can get ahold of this truth and start meaningful discussions not pie- in- the- sky answers, we are facing a bleak future.

With Love and Kindness,

THE HATMAN