- The Washington Times - Saturday, August 20, 2005

TWILIGHT IN THE DESERT: THE COMING SAUDI OIL SHOCK AND THE WORLD ECONOMY

By Matthew R. Simmons

John Wiley & Sons, $24.95, 448 pages

REVIEWED BY JAMES SRODES



Back in 1974 John E. Swearingen, the legendary CEO of Standard Oil of Indiana (now BP/Amoco), curtly dismissed my diffident suggestion that the United States may have come to a dangerous dependence on Middle Eastern oil in light of the OPEC embargo which started a year earlier. “You give me $13 a barrel and I’ll flood the United States with oil. I’ll cover the whole damn country,” Swearingen assured me. Since oil prices had been jacked up from its long-standing $1.30 a barrel to more than $5.00 another $8 on top seemed unlikely. Yet Swearingen ran the leading domestic exploration and drilling producer. I was just a hack journalist after all, what did I know?

Not much, as it turns out. But then, Swearingen himself was overlooking a hard truth about the difference between petroleum and other industrial commodities. Not only is there no ready substitute for oil and gas energy even today, but once you have pumped a well dry you cannot simply dig deeper or move over easily to another reservoir. It turns out that early day Cassandras (Shell geologist M. King Hubbard in 1956, for one) had been right when they forecast that America had crossed the X-mark on its ability to increasingly match demand with new supplies from domestic fields — sometime around in 1972, a year before the embargo. And today, with oil trending toward $65 a barrel we now import more than half our 20-million daily barrel consumption from the Middle East and 20 percent of that (or 1.5 million barrels) comes from Saudi Arabia. The truism that comfortable old myths too often defeat unpalatable new truths is among us again with the publication of “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy” by Houston-based energy investment banker Matthew R. Simmons.

The book is an easy read considering much of its conclusions are based on hundreds of technical studies by the Society of Petroleum Engineers and firsthand reporting. But those conclusions require hard swallowing since they destroy most of the pleasant smugness we all share about the Saudis, their society, their oil and their future stability as a key supplier of our currently irreplaceably basic energy source.

Simply put, Mr. Simmons concludes that the Saudi oil reserves may be far smaller than claimed. Worse, what they do have comes from a tiny number of superclass deposits that produce 97 percent of its 9.5 million barrels a day, out of an 11 million daily barrel likely capacity. Those wells are extremely mature and have been pumped so hard with floods of water for 50 years or more that they are extremely vulnerable to losing the capacity to continue their high flow. Such a falloff could happen any time now.

Perhaps most upsetting is his conclusion that there is almost no probability that Saudi-Aramco corporate predictions that a 12 million barrel daily flow can be achieved shortly or that 20 million new barrels can be added to the daily flow by way of accelerated drilling by the year 2030. A global increase of petroleum supplies or as much as 40 million daily barrels by 2030 is the given in most current predictions about what the booming world oil demand will require without serious economic dislocations. It ain’t gonna happen, Mr. Simmons says.

Now if I tell you that, you are free to forget it. But Matthew Simmons has been the secret card on the Rolodex of most energy reporters for more than 20 years.

Most of us in that guild are too dependent on oil company flacks guiding us to the engineer or scientist who can answer our question; although some of us actually go to the trouble to have a call list of academic energy scientists and the additional activist. But for many of us Mr. Simmons, with his crisp, breezy expertise has been a valuable litmus test for the up-and-down world of oil and gas.

To get the full horror of what Mr. Simmons is telling the reader one should stop and consider the most recent headlines about the death of King Fahd Bin Abdul Aziz earlier this month. The almost universal conclusion has been that his successor, King Prince Abdullah faces a fight for power among the hundreds of Saudi princelings that could (say this with a sneer) cause President Bush to repent his ill-planned invasion of Iraq. This of course requires that one ignore the fact that Fahd was largely incapacitated for 10 years and Mr. Abdullah is no new and uncertain king.

Mr. Simmons’ conclusions argue that the threat to King Abdullah reign will come from an inevitable, gradual, but nonetheless irreversible decline of petroleum output from first one and then all of the roughly half dozen giant oil fields that produce nearly all the current flow. And while other new fields have been announced, none are within sight of coming on line soon, or ever.

One hard Mr. Simmons truth is that Saudi Arabia is no longer the filthy rich collection of idlers who race Mercedes limousines across the sands instead of the camels of their grandfathers’ days. The country is in serious financial trouble and its people are very unhappy. Mr. Simmons explains, “For years, the population of Saudi Arabia was tiny, numbering only six million as recently 1970. Close to one-third of these people were expatriate immigrants merely working in the kingdom… . In 30 brief years, the number of Saudi citizens quadrupled from about four million in 1970 to over 16 million in 2000.

“As with the entire Middle East today, the majority of the Saudi population is very young. According to the 2003 UN statistics, only 2.5 percent of the population is over 65, and 43 percent are still under 14. The birthrate is an astonishing 6.3 children per female… .The University of Utrecht, which is known for its studies of population, forecasts that Saudi Arabia’s population will surpass 30 million by 2010 and will be close to 50 million in 2030.”

Not surprisingly the Saudi government’s ambitious social welfare programs have landed the country with a whopping debt in excess of $170 billion by latest count; that’s more per capita debt than Argentina. While the recent price doubling has eased that burden somewhat, the country’s stability is dangerously vulnerable to its capacity to pump ever more oil. It’s a no-win circumstance, it seems.

Mr. Simmons dismisses the Swearingen-style optimists who argue that the new higher prices will produce discoveries and development of other new reservoirs, if not in the Middle East then in the former Soviet republics or the South China Sea. But no geological surveys are in sight that point to rival just one of the Saudi super-giant fields such as those at Ghawar which has pumped 55 billion barrels since 1951 (against Alaska’s Prudhoe Bay field which has pumped just 10 billion barrels and may have only 13 billion left to recover).

Mr. Simmons concludes that even if some new oil is at hand current development costs may exceed any economic reasonable return. He argues, “… I suspect this (new development) would require a price of oil today that exceeds $100 per barrel. Might it be as high as $200 a barrel? Until we have better knowledge of the real replacement costs for assets like drilling rigs, pipelines, and refineries over the next 10 to 20 years, any estimate is a random guess. But $200-per-barrel could be too low.”

James Srodes is a former Washington bureau chief for Forbes Magazine and Financial World.

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