Time to find a lady with horses
TRANSCRIPTION OF INTERVIEW
Matthew R. Simmons
Chairman, Simmons & Company, Int'l &
Author, Twilight in the Desert
April 29, 2006
"Tough Times Ahead for Energy"
[Edited for clarity]
JIM PUPLAVA: Well, energy prices are back on the front pages in the news stories today. Some think energy prices will stabilize, maybe they’ll come down a bit, while others think we’re headed for the perfect energy storm. To discuss this issue, joining me on the program is Matt Simmons, he’s Chairman of Simmons and Company International, and he's also author of a best-selling book Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy.
You know, Matt, the last time that we spoke was last August, and little did we know a few weeks later our whole energy infrastructure would be devastated by a good series of hurricanes. I would have thought that our hurricanes would have been our 9/11 or energy wake-up call, and yet I was surprised by the lack of response, and since then we’ve done very little. I believe we still don’t understand the gravity of our energy situation.
MATTHEW R. SIMMONS: You’re precisely right, and ironically you could argue that they were almost the reverse. There was this general sense by too many people that the only reason we have these temporary problems is because of these abnormal hurricanes. I’ll tell you a very odd story. I was on a BBC global radio program and it was the Tuesday afternoon after Katrina. They had a senior professor emeritus from Erasmus University on, who’s written a book called Hydrocarbon in the 21st Century [Peter Odell - Why Carbon Fuels Will Dominate the 21st Century's Global Energy Economy], and he claims we’ll be using twice as much oil in 2100 as we are today because oil in fact is renewable.
And so both of us were asked, since oil prices were at $70, do you think now this is the ultimate oil crisis? And the Professor said, “Oh, no, no, no – this is just a series of exogenous events, and within about 3 months it will all be corrected, and then oil prices will go to 35.” He said, “Mr. Simmons, what do you think?” I said, “first, I don’t know what ‘exogenous’ even means, but I think what Katrina did was actually bomb the Gulf of Mexico the same way [they] bombed Pearl Harbor. And we’re not even through the hurricane season yet and I think we’ll be very lucky if in 3 months we’ll even know the extent of the damage. And I think it will be a miracle if we have everything fixed before the next hurricane season starts in the Summer of 2006.”
And it turns out I was unerringly right, but the fact is that we had very funny oil statistics that came out when all of a sudden people couldn’t drive, and we had no way to count barrels in the areas where most of the storage was, and it created the illusion the high prices had really brought demand down. And so we had a price collapse. [3:12]
JIM: That’s absolutely amazing. Well, let’s move forward if we can to today’s headlines of record gas prices. Matt, how much of this is attributable to new government regulations on let’s say, sulfur content, and last year’s energy legislation requiring ethanol, and of course higher oil prices? I wonder if you could explain these changes and the impact they’ve made on gasoline prices.
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]
JIM: In response, however, to these higher prices over the weekend, we have two Senators, one Democrat Carl Levin of Michigan, and Arlen Specter, a Republican of Pennsylvania, they propose a windfall profits tax, and in Specter’s case anti-trust legislation, and some Congressmen are talking about price controls. What would these proposals do to alleviate our current energy problem, if not exacerbate them?
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]
JIM: In the meantime, since Katrina and Rita, and others following – heck, we’re already into a new season…
MATT: Yup, the one thing we’ll know about the new season is that they’ve taken Rita and Katrina out of the hurricane language.
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