Crude World (eBook)

Scarcity

For a man warning of a coming apocalypse, Matthew Simmons was surprisingly cheerful.

Simmons is the prosperous founder of a niche investment firm that specializes in mergers and acquisitions in the energy sector. A graduate of Harvard Business School, a member of the Council on Foreign Relations, a frequent flier on corporate jets, an adviser to George W. Bush during his first presidential campaign, and a best- selling author, Simmons would be a card-carrying multimillionaire member of the global oil nomenklatura, if cards were issued for such things. But his wonderful life has a cloud, which consists of his belief that the American dream and the world as we know it are on the verge of falling apart.

'If it turns out I am wrong, I will be the happiest guy in the world,' Simmons told me. Despite his dire prediction, he retained a mischievous demeanor. We met during a trip he made to Manhattan to talk to a group of oil-shipping executives. The impression he gave was of an enthusiastic inventor sharing a discovery (the coming apocalypse) that had taken him by surprise. He had a wide-eyed wonder in his regard, as if a bit of mystery could be found in everything that caught his eye. Whether he was saying the sky was blue or that it was falling, he emitted a happy wink.

His journey into the apocalypse began innocently enough. In 2003, Simmons visited Saudi Arabia on a government-sponsored tour for business executives. The group was presented with the usual dog and pony show, but instead of being impressed with the size and expertise of the kingdom's oil industry, Simmons became perplexed. A senior manager at Saudi Aramco, the state-owned oil company, told the visitors that 'fuzzy logic' was used to estimate the oil that could be recovered from the country's reservoirs. Simmons wondered what could be fuzzy about the contents of an oil reservoir. He realized that Aramco, despite its assurances of bottomless supplies, might not know how much oil remained.

He returned home with an intellectual itch. Saudi Arabia was one of the charter members of OPEC, an organization founded in 1960 to coordinate the policies of the major oil producers. Like every OPEC member, Saudi Arabia provides only general numbers about its output and reserves. It does not release details of how much oil is extracted from each reservoir or what methods are used to extract that oil or how much water emerges with the oil, and it does not permit outside audits or inspections. The condition of Saudi fields-like the condition of almost all OPEC fields-is a closely guarded secret. That's partly because the cartel's production quotas, which keep oil off the market to avoid gluts that drive down prices, are based on each country's reserves. The larger an OPEC member's reserves, the higher its quota. Most, if not all, OPEC members have exaggerated the size of their reserves to have the largest possible quota and thus the largest possible revenues.

During the decades of low prices and overabundant supplies, oilmen like Simmons did not care about OPEC's fudged numbers. Whether or not OPEC reserves were hyped, whether or not the cartel's fields were nearing a midlife crisis, plenty of crude was coming out of the ground. Only a boycott or a war could squeeze supplies, it seemed, and only for a short time. But while visiting Saudi Arabia in 2003, when the price of a barrel was around $30 and rising, thanks in part to China's emergence as a voracious importer, Simmons asked himself whether something might be amiss. Perhaps the world didn't have as much oil as was thought.

As a teenager, Simmons had been on a high school debate team that reached the state championships,...