Wikileaks, Oil, and How Matt Simmons Was Right

As readers know, one of our mantras here at Green Alpha Advisors is that the world economy has to replace oil in every sector and industry where a viable alternative exists in order to reduce demand to the point that we're no longer economic hostages of its price fluctuations, to say nothing of the absolute economic requirement to stabilize global warming. This week, if we needed it, we received a blunt reminder that the transition is urgent.

Back in 2005, investment banker and oil expert Matthew Simmons wrote in his book Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy that he couldn't understand how Saudi Arabia could be pumping 10 million barrels of oil per day, year in and year out, and yet at the end of each year, still always claim the same total quantity of untapped reserves. Were they annually discovering new fields in the exact amount of their yearly production? In a 2007 online interview, Simmons did a great job of describing the complex Saudi oil picture in a single paragraph:

"Saudi Arabia and the petroleum industry have been at their own admission and almost anybody's observation far more transparent in releasing data over the course of the past 18 months than they have ever been. If you closely listen to and read the data they are releasing it is not as comforting to me as the casual statements made by their leaders as to the ease of their being able to produce 12-15 million barrels a day for 50-100 years. There's no question that they're working on a series of new projects but none of these projects are new fields, they're complicated old fields that could never properly produce in the 1960's and 1970's. They're still silent on any production declines taking place in the old fields. They adamantly refuse to release and field by field production data and within private circles there are people starting to whisper to people in the west that it is probably unlikely that Saudi Arabia can produce 12 million barrels a day ever. But at the same time the public relations campaign says 15 million barrels a day if it's needed for 50-100 years. So I would stay we still have an awful lot to learn. Too many people that should know better are now asserting that the officials in the oil industry have proved they can produce 15 million barrels for 50-100 years and all they have done is show power point graphs that draw a line saying this is what the production will be. I could just as easily project my net worth over the next 30 and have it exceed the net worth of Bill Gates by 2030 but there's absolutely no basis or no probability that will ever happen. That technique should never be described as technically proving something."

By and large, his comments went unnoticed. And to the extent that there was reaction, it was often negative or incredulous. Yet, in 2007, even as oil approached $150 per barrel, neither Saudi Arabia nor anyone else could pump enough of the stuff to meet demand and drive prices back down. Some said this was the result of intentional reductions, as with the oil shocks of the 1970s, but many experts said this time was different:

"Whereas historical oil price shocks were primarily caused by physical disruptions of supply, the price run-up of 2007-08 was caused by strong demand confronting stagnating world production. Although the causes were different, the consequences for the economy appear to have been very similar to those observed in earlier episodes, with significant effects on overall consumption spending and purchases of domestic automobiles in particular. In the absence of those declines, it is unlikely that we would have characterized the period 2007:Q4 to 2008:Q3 as one of economic recession for the U.S. The experience of 2007-08 should thus be added to the list of recessions to which oil prices appear to have made a material contribution."

-- James D. Hamilton: "Causes and Consequences of the Oil Shock of 2007-08", Department of Economics, UC San Diego

The subsequent global recession lowered demand and price, but to many observers it was obvious that as soon as the recovery of the oil-based economy was underway, we'd see another oil price spike, possibly triggering a new recession. Still, as recently as today, many disagree, citing "plentiful supplies." And publicly, no U.S. or Saudi official has yet expressed undue concern over oil supplies.

Enter Wikileaks, which this week released several (2007-2009 timeframe) cables from the U.S. Embassy in Riyadh containing many worrisome statements such as "Our mission now questions how much the Saudis can now substantively influence the crude markets over the long term. Clearly they can drive prices up, but we question whether they any longer have the power to drive prices down for a prolonged period."

Yep, this is scary, but it doesn't have to be. The technologies exist to reduce oil demand to trivially low levels. And, as we always say, capital must and will flow to those technologies. Next Economy, investing redefined.

Garvin Jabusch is the cofounder of Green Alpha Advisors, LLC and manages The Sierra Club Green Alpha Portfolio -- a unique blend of Green Alpha Advisors' Next Economy universe and the Sierra Club's proprietary green-investment guidelines.

Comments

[jake raden]

I think in the macro point of view, when has anyone in the oil industry EVER been honest about ANYTHING? I mean, their historical precedent is to lie, cheat, steal, and occasionally even get violent if necessary. History is rife with examples of paradigm/regime change, and there is no reason why oil won't be different. They will use it up, people will be forced to move away from petroleum (which, unfortunately, is the only way large groups of people ever do anything: coercion or lack of choice)and that will be that. Big oil is a rich, powerful, but ultimately very stupid opponent. They will take of themselves. Just as science advances one funeral at a time due to obstinateness and profit motives, so to does industry. You guys are the long game, no question.

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