Forbes On Matthew Simmons  

Forbes has an article on Matt Simmons, declaring "as the price of petroleum plunges, the prince of Peak Oil finds himself a contrarian again" - Crude Cassandra. I think his predictions about Russian gas are unlikely to come true, but at least he continues to draw attention to the peak oil problem.

Matthew Simmons has given 30-plus speeches in the past year, to audiences as diverse as the Pentagon and the Colorado School of Mines. One talk was tortuously titled: "Quo Vadis Energy? (Will Dawn Follow Darkness as Twilight of Energy Fades?)" Short answer: No. Simmons' message is always some variation on the global implications of Peak Oil--that point after which global crude supplies wane, prices soar and shortages spur geopolitical strife.

The Ukraine-Russia gas tiff is a first taste of the transnational energy disputes to come. Simmons believes Moscow's saber rattling is political cover for a more serious problem: a shortage of gas in Gazprom's pipeline system. "This is really serious stuff. We've had a peak in Russian gas. Next year Europe is toast. Cold toast." Could he be right? Chief Executive Alexei Miller stated last July that Gazprom's output had flattened out below 2006 production levels. Russia is already importing gas from the central Asian "Stans" and exporting it to Europe.

Peak Oil zealots eat this stuff up. As crude climbed to $147 a barrel last year, Simmons won lots of converts. But prices have since fallen 75%; OPEC has slashed output; oil companies are laying off workers and mothballing drilling rigs at a rate not seen in a decade. The market signals oodles of oil. Can't we put Peak Oil to rest?

No way, says Simmons. In the library of Simmons & Co., the Houston investment bank he founded 40 years ago, he insists we've already passed Peak Oil--but the world won't realize it until economic recovery stimulates oil thirst anew. When that comes, gird for shortages and $500 a barrel. "There's no logical reason for the price to be this low. If it doesn't reverse itself soon, it will destroy the industry," he says. If Simmons ruled the world, he'd order an oil price floor of at least $150 a barrel to stimulate exploration and to combat rust, which he says is the biggest threat to the oil supply. He figures it could cost $100 trillion to replace aged pipelines, rigs and platforms. That's quite a sum--70 years of oil industry revenues, at present rates.

According to the U.S. Department of Energy and the International Energy (otcbb: IENI.OB - news - people ) Agency, non-OPEC output appears to have peaked in 2006 at just above 51 million barrels per day (bpd), and fell below 50 million in 2008. World output inched up to 86 million bpd a year ago only by dint of spigot-opening by OPEC.

"We've avoided shortages only by squeezing every molecule of natural gas liquids, ethanol and biofuels, by increasing refinery gains a bit, by drawing down stocks," says Simmons. "That's how we balanced a market we couldn't supply." OPEC's numbers include natural gas liquids (like propane and butane), up from 4.5 million bpd to 5 million in two years. U.S. figures also include ethanol, which now contributes 600,000 bpd. Back out such substitutes and crude oil volumes have been flat at around 75 million bpd for four years. Simmons prophesies that in ten years oil will be down to 60 million bpd and natural gas production will be off 20%. He thinks the Saudis are lying about their ability to crank up output and that natural decline rates from existing fields will overwhelm new fields from Iraq, Venezuela or Nigeria.

Can the deepest commodities market on earth be getting it so wrong? "What would be really unfortunate is if 80% of the collapse in oil prices were the unforeseen implications of the credit freeze," he says. Simmons contends that traders were forced to liquidate oil contracts as credit dried up, causing prices to fall. He pulls out a chart showing the price of credit default swaps on Glencore (a Swiss firm and the biggest oil trader not part of an oil company). It went from 300 basis points (3%) in September to 3,200 in December. The chart line is a near-perfect inverse of the plunging cost of crude. As credit markets recover, he says, traders will bid up oil once again.

It wouldn't be the first time the market miscalculated. Simmons points to a framed copy of a 1999 cover story in the Economist--"Drowning in Oil"--which asserted that crude, then around $10 a barrel, would fall to $5 and stay there for a decade. Simmons (interviewed, but excluded from the article) insisted plenitude was a mirage and prices were set to soar. Nine months later oil passed $25 and the magazine issued a mea culpa.