Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy

Matthew Simmons

30 Min:

Recent spikes in oil prices have already jolted the economy, and it may just be the beginning of a long period of price increases. With the decline in US oil supplies and the huge growth in demand in developing nations such as China and India, the most critical question facing the world energy market is whether Saudi Arabia can substantially increase its oil production to meet world demand in the coming years.

Using over two hundred technical papers published over the last twenty years that detail problems with individual wells and fields, Simmons provides a field-by-field assessment of the key Saudi oilfields, and shows the many discrepancies between their actual production potential and optimistic Saudi claims about their future. The Saudis are still pumping the vast majority of their oil from the same few oilfields that have always accounted for the vast majority of their output, and as Simmons' analysis shows, these mature super fields are on the verge of rapid decline.

Like Craig Unger in House of Bush, House of Saud, Simmons explores in-depth the relationship between the US and Saudi Arabia since the first discovery of oil on the peninsula. The kingdom has been transformed from a primitive nation into the dominant player in the oil industry, and in many ways, the lynchpin of the global economy, in seven short decades. Simmons provides background on Saudi history, the oil industry, the world oil market, and the management of Saudi oil resources

Even as Saudi officials occasionally admit their older fields are declining, they assert that production losses can be made up with output from discovered, but yet-to-be-produced fields and anticipated new discoveries in many unexplored areas of the Kingdom. However, as Simmons counters, Saudi oil officials have never provided any evidence to substantiate these claims. Most of the fields Saudi Aramco, the national oil company, lists in its inventories of discoveries have never produced substantial amounts of oil over sustained periods of time. Further, most of the nation has already been explored extensively.

Finally, Simmons provides a blueprint for the global economy after "The Age of Cheap Oil." The twilight of Saudi Arabian oil will undoubtedly have an enormous transformative effect upon the world. However, if the world maps out a plan for the transformation of the oil economy, the earth need not become an apocalyptic wasteland. Western consumers must substantially conserve oil by reducing automobile traffic and urban sprawl. The development of alternative energies can reduce the rate of decline of oil reserves. None of these solutions can alone replace the declining oil supplies, but they can provide valuable time to discover a "new energy miracle."

ABOUT THE AUTHOR:

Matthew Simmons is Chairman and Chief Executive Officer of Simmons & Company International, a specialized energy investment banking firm. The firm has completed over 500 investment banking projects for its worldwide energy clients at a combined dollar value of approximately $60 billion.

In 1969, Mr. Simmons started a small venture capital, private debt placement, merger and acquisition firm in Boston. Among his early clients was a rapidly growing subsea service company. By 1973, most of his clients were oil service companies. Following the 1973 Oil Shock, Simmons decided to create a Houston-based firm to concentrate on providing highest quality investment banking advice to the worldwide oil service industry. Over time, the specialization expanded into investment banking covering all aspects of the global energy industry.

Today Simmons & Company International has approximately 150 employees and enjoys a leading role as one of the largest energy investment banking groups in the world. Its offices are in Houston, London, Boston, and Aberdeen, Scotland. Matthew Simmons is an international expert on oil and the energy industry and serves on the boards of The Atlantic Council of the United States and Brown Forman Corporation. He is a member of the National Petroleum Council and the Council on Foreign Relations.

Resources:

Simmons and Company Web site
Institute for the Analysis of Global Security (Article and Interview)
Energy Information Administration (EIA) Hurricane Katrina's Impact on Oil & Natural Gas Markets

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