Simmons: Energy Optimists vs Energy Pessimists (and Understanding EIA Data)

World Energy has provided us with another Matt Simmons video. In this video, I don't think Matt is interpreting EIA data correctly, at least for part of what he is saying. (The rest may be fine.) Below the fold, I explain what the problem is. Much of the problem has to do with EIA weekly demand estimates being higher than monthly demand estimates, at least in the recent past.

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Matt Simmons discusses the difference between Energy
Optimists and Energy Pessimists in his latest speech.

This is a link to Matt's presentation that goes with this video.

One of the points that Matt makes is that while US demand (consumption) dropped, it is now back up again. These are the slides he shows:

I think Matt makes two mistakes:

1. Overlooking the hurricane impact in September-October 2008. It wasn't that demand was down in the usual sense during September; it was the people in Atlanta and the Southeast couldn't buy fuel if they wanted it for a time. In October, end users (automobile drivers, for example) were busy refilling their tanks, so demand bumped up a bit. One needs to understand this, when comparing to other months.

2. Trying to match up EIA weekly demand data with EIA monthly demand data. The weekly amounts are estimates, based on a survey of suppliers, but the portion relating to exports is not known well. When the monthly numbers with actual export data become available, the monthly numbers have tended to be considerably below what one would have estimated based on the earlier weekly estimates that were released.

Regarding Item 2, what happens on the slides is that Matt shows monthly data through November 2008, then switches to monthly amounts estimated based on weekly EIA supply estimates. Matt's slides were evidently put together a while ago. We now have two more months of actual data, and these indicate that the weekly numbers Matt showed were too high. For December 2008, monthly EIA data (demand="product supplied") shows demand was 19,199, rather than 19,993 Matt shows. For January 2009, monthly EIA data shows demand was 19,125, rather than 19,565 Matt shows.

We still don't have monthly February numbers, but I would be willing to bet they will come in lower than the 19,545 Matt shows on his slide, which is based on weekly EIA estimates.

EIA Weekly demand numbers for March and early April have been coming down a lot. I suspect this may mean that EIA weekly estimates are moving closer to monthly numbers, but it could also mean a continuing drop in demand. For the four weeks ended 3/27/09 (which is close to the month of March), demand averages 18,865. This is very low compared to previous numbers. For the week ended April 3, 2009, the indicated demand is about the same, 18,867.

Thus, demand is in fact down, and continues to be down. It is just that the EIA reports didn't initially reflect that information accurately, and Matt overlooked the September hurricane effect.

I have talked about problems with the EIA weekly supply estimates a couple of times previously, here and here.

Sorry, I accidentally had this post set for "no comments", but fixed it.

No comment...

I'd really like to see a global oil demand post for what has happened in the last year. Which countries have seen the biggest demand drops? Any coming back?

Rune has a post which we are planning for Tuesday that shows in that in the past, OECD countries (in other words, the "developed" world) is much more affected by price spikes than China or India or the oil exporting nations. He also explains why this might be the case.

I think we are starting to see that OECD countries are most-affected by the demand slump now as well. There was an article in the Wall Street Journal yesterday called India Defies Slump, Powered by Growth in Poor Rural States. Today there was an article called China Turns a Corner as Spending Takes Hold. (If the articles don't pull up, type the names into Google, and they should pull up, even if they are behind a pay wall.)

We may be able to run another article on this subject as well. Thanks for the idea!

It looks like demand is down about 1.7M BPD, or about 8%, from the peak roughly in 2005.

Here's an interesting analysis:

Thanks. Hamilton's work is being discussed a lot lately. It was discussed last Saturday on Drumbeat. At the EIA Conference last week, Steven Chu and one other presenter showed slides from Hamilton's work.

What he is saying isn't too different from what I have been saying. He is emphasizing the price of oil being the causative factor in the slump. I have been saying that it is the interruption in growth, and the resulting credit unwind, caused by the higher oil prices (based on a squeeze in resources) that is causing the slump.

If major factor in the slump is only the high oil prices from last year, I would expect the impact on the economy to go away quite quickly. I would need to understand Hamilton's work better to see if that is what it is indicating. If the current slump is really caused by the squeeze in resources -> high oil prices -> credit unwind, then our current problems are much more long term, since resource limits are likely to keep growth from resuming, and this will keep credit unwinding.

"He is emphasizing the price of oil being the causative factor in the slump. "

Actually, he's more careful than that. His second analysis showed that high oil prices were a good predictor of economic slowdown. The only underlying explanation he suggested was the transfer of income from exporters to importers.

The first part was also interesting: it analyzed elasticity of demand, showing that there was a lag before high prices caused people to reduce consumption (more than would be explained by reduced incomes from economic slowdown).

"I have been saying that it is the interruption in growth, and the resulting credit unwind, caused by the higher oil prices (based on a squeeze in resources) "

I would suggest that the higher oil prices put greater pressure on a faulty petro-dollar recycling mechanism, causing the credit unwind, which in turn interrupted growth. Take a look at the first part of his analysis: he shows that world growth was unaffected by rising oil prices in 2006 and 2007.

Maybe world growth was unaffected, but US vehicle miles traveled was affected. This illustration is from this Brookings Institution Report.

Housing values started going down as well, especially in the most distant suburbs.

I suppose if you follow some definitions, none of this affected world growth. I am not as certain.

"US vehicle miles traveled was affected"

Sure. That was partly an income effect (income going to oil sellers, some of them oil exporters), and partly conservation (reduction in low priority driving).

"Housing values started going down as well, especially in the most distant suburbs. "

Sure. That was also partly an income effect, as the poorest suburbs are the farthest out, and partly a result of the slowing housing bubble, which affected the newest construction, which was also the furthest out. Certainly it also was affected by rising commuting costs, but I don't see evidence that was the most important thing.

"I suppose if you follow some definitions, none of this affected world growth."

Of course it affected US growth. But, keep in mind that the income transfer from oil importers to exporters also shifted economic growth: the US & OECD slowed down, and Russia, FSU, & the ME grew more quickly.

I have a question about Russian crude supply. Despite the alleged lack of investment in Russian infrastructure, and even with the big drop in NG production, Russian crude supply is forecast to drop by only 2.5% in 2009. Do the experts here believe in this modest drop or could it be much higher?


Our (Khebab/Brown) projected initial decline rate over a 10 year period is -5.1%/year plus or minus 2% for Russia (from mature basins):

I noticed this article today, from Drumbeat, I believe:

Oil Giant Chief Predicts Shortfall in Investment in Russian Oil Industry.

The shortfall in investment in the oil sector will reach R300bn in 2009, Rosneft head Sergey Bogdanchikov predicted today. In his words, "the shortfall in investment may lead to a reduction in oil production from 490m tonnes to 450m tonnes over five years". Over the period between 2009 and 2013 the shortfall in investment may reach R2,800bn. Bogdanchikov said however that according to an optimistic scenario "should sufficient investment be made, oil extraction in the country could increase and reach 700m tonnes a year".

Bogdanchikov also said that at present 93 percent of the new oil deposit development projects are unprofitable due to fiscal burden and high tariffs for natural monopolies. In his words, "fiscal burden and income tariffs constitute around 70 percent of the price of oil". Thus, he said, "an oil company manages only 7 percent of the price of oil; everything else is taken away".

If it is really not profitable, it seems like companies might cut back more than geological limits would require. Of course, they still want to cover their fixed costs, so that may keep them pumping when it may not be profitable.

The part I don't understand is what Matt is saying is the cause of the price drop if not demand drop. It doesn't hang together.

The other part I have always disagreed with: we should be working fast and furious to retrench, to change our way of life to one far less dependent on energy in ways I have described previously. It doesn't make any sense to spend 50-100 trillion trying to delay the unavoidable, and indeed steppen it when it does occur.

I wonder if Matt's post isn't like some of the EIA talks I heard by economists. We made Hypothesis A, B, and C. (The price run up and decline was caused by speculators; the price run up and decline was caused by companies acting as oligopolists. etc.) None of them worked. I think all it proves is that the approach being suggested isn't right, or perhaps isn't being measured correctly. It doesn't seem like it gets Matt very far.

I think I agree with you on the second point, but many disagree. Why spend trillions on wind turbines and other infrastructure that is expensive and may not last very long. We just have to power down from perhaps a bit higher, but on a steeper slope.

Long time reader, first time poster. While I agree that society needs to power down, I think Matt realizes this also. In many speeches, I have heard him say that his big worry was true oil shortages. While most people on this site realize that our “Just In Time” world leaves us vulnerable to many single points of failure, the average person just assumes things will be BAU. Most cities have only about a week’s worth of food on hand. Things could get real ugly real fast if the transport trucks stopped because of fuel shortages. How many meals are we away from collapse?

I think Matt wants to make people realize that things are bad and are going to get worst. The problem is that nobody truly believes him. They are hoping for some miracle solution that will allow BAU. The problem is how do you get people to face problems they don’t know exist and they feel powerless to change?

All solutions for alternate energy will take decades to make a real difference to society as a whole. How do we get from here to there? How do we convince people and governments that we need radical change? Remember it is not only the king who shoots the bearer of bad news. I know, I have the scars to show for trying to talk to people. I have lost more than a few good friends when I tried to talk to them about the coming problems. I now only say that “I will be damn if I give the greedy oil companies one penny more than I have to.” This is acceptable but all talk of oil shortages is not.

I think Matt is trying to change the “Happy days are here again” attitude by harping on the aging workforce and rusting assets. This is a message that is not too far out in left field for most of his audiences but he still is mentioning that there no magic Shangri-La of oil that will save our behinds.

I don’t blindly accept everything Matt says but I respect his attempt to get people to stand up and take a clear look at our energy situation. It is blacker than Matt lets on but it would only turn off the audience and they would stop listening if he was talking about how bad things are really going to get.

I think we can power society down and it does not have to be a collapse but only if we have very great leaders. So I guess it is time to find a quiet hidey hole. :)

I really enjoy the web site, lots great information. Keep up the good work!

Thanks for your thoughts, Peter. You make some good points. Matt works hard at what he does. We probably see so much of Matt that we become more critical than we should be.

Matt is one of the peak oil greats, along with Deffeyes, Campbell, and several others. There's no disrespect in disagreeing and questioning them on this or that. In that sense, there's nothing wrong in being critical (or getting criticized in turn for that matter!)

I think he doesn't think the demand drop was that bad to cause a 75% drop in price. Sure there was price drop due to "demand drop" but not 75% percent.

I agree on that "+50Trillion" -- no point of building things that will be obsolete in 20-30 years. But I think his audience is a bit different from TODers -- probably mostly oil/gas people and the investors. So he told them - "here is the cost". It's up to them to spend or not spend if they think they can recover it.

Another interesting point is -- what is the true cost/value of oil? Surely, at +$100/bbl we saw a huge drive to exploit this resource and thus saw a nice gain in the economy at the expense of the environment and future cost. Yet, he thought it was good b/c the economy was "good". So for Matt, he still tried hard to make sure this engine of "growth" running -- but for most of us, we want a different engine all together.
It's weird -- we all are in this catch-22. On one hand, the low price of oil stopped people from exploring more resources but yet it encouraged people to spend wastefully. But for sure, we all know that even at $150/bbl; enough people are willingly to pay for it. For a 100% increase in price; the demand destruction is just 5% (or even less). If you manage to monopolize the oil market --- then even at $300-$500/bbl, there are still a huge huge demand for the drug.

I think part of the problem is that demand destruction that takes place with high priced oil is not toward the oil products themselves. Instead, people cut back their purchases of restaurant food, new cars, and all kinds of goods that they can easily cut back on. One ends up with a round about cutback in oil. In the US, the cutback is clearly there, if you measure it correctly. Part of the problem may be the confusing EIA weekly statistics, that are often revised downward.

It doesn't take a very big drop in demand to cause a big drop in the price of oil.

According to the EIA's STEO, last month, the previous 4 months had seen consumption above production. This would normally result in much higher prices but there is obviously some other factor at play. Speculation?

US oil demand is getting more irrelevent by the month. Today's news from China- car sales for March a record 1.11 million. 5% up on last year. That's 3 months consecutively China's auto sales have exceeded those of US. India is just starting to sell Tata Nano's at $3000 each. When are you guys going to get the fact that there's another world of 2.5 million aspirational people out there just waiting to consume all the fossil fuels we can extract- and they are not fat, unintelligent and lazy like most westerners.By the end of 2009 most of the demand drop in USA will be eaten up by Asia and other developing nations. The rest will be consumed by Americans paying under $3 /gallon for gasoline.

I think that is sort of what Rune's post will say on Tuesday.

"I think that is sort of what Rune's post will say on Tuesday."

I don't know who "Rune" is, but of course it is what I have been trying to tell folks here for the last year.

If you accept the projections of Deffeyes, Campbell (where's he been, anyway?) and Simmons and other "guiding lights" of the peak oil movement, then what the Americans drive and how much they drive matter only to our national balance of trade and nothing else. As a percent of world consumption we are declining with each day and will only decline faster in the future in both our percentage of world consumption and our percentage of carbon/greenhouse gas will decline as developing world consumption grows and ours stays flat, even if we factor in no technical or logistical changes in our consumption, and there WILL be technical and logistical changes. So much of what Americans do is now at the margins anyway and becoming moreso, and the same is true of Europe and Japan.

Ragarding Simmons presentation, as one poster (at least)above said, somehow it just doesn't add up. I say this being a longtime fan of Matthew Simmons (in many ways, it was him along with Colin Campbell and Westexas here on TOD who introduced me to the modern fundamentals of "Peak Oil" as opposed to the "scare" of the 1970's, a false alarm that altered my thinking and planning for most of my adult life)

Simmons, after saying that the "fundementals" drove everything then makes three improbable statements:

“There is no rational for why oil prices plunged 74% in 90 days.”
“There is no rational to explain why low WTI keeps bouncing around mid-$30 to $40 level.”
“There is no rationale why so many other key crude grades stayed significantly higher.”

No rational? Or simply no rational that Simmons can accept?

In 1999, an act which had prevented large bank, mortgage companies and insurance companies from engaging in high risk speculation without oversight was thrown out the window with the repeal of the Glass-Steagall Act, a act of congress which had contained the financial sector since 1933:

Look at Simmons charts and notice when the oil prices began to race upward. Oh, by the way, did anyone notice that house prices and all other commodities began to race upward at about the same time?

The explanation of course is SO SIMPLE but one that Simmons for whatever reason (along with most peak oilers) CANNOT force themselves to accept. There was a truly massive flood of money out of the dot com crash looking for a place to go. This combined with the newly freed up money that poured into speculative financial investments from the now freed up banks, mortgage firms and insurance companies and biggest of all, hedge funds (which had formerly been an investment trinket at the margins for the very rich).

This money poured into Collateralized Debt Obligations (CDO's)and mortgages at a truly unbelievable pace. When housing prices had obviously peaked, the money began to move out fast and find another "low risk" formerly underinvested area to go to: You guessed it, commodities and energy in particular. The outcome was assured, peak oil or no peak (until after peak occurs, price of oil and peak oil are almost COMPLETELY unrelated, we proved that with the American peak in the 1970's)

The power of the hedge funds and specuative arms of the banks and insurance companies is ASTOUNDING. Charles Schwab Jr. recently said that at the peak of the last speculative bubbble, after leverage, the hedge funds could move money equal to two thirds of the yearly GDP of the United States. This is not a story at the margins, but is at the HEART of the financial crisis, and it still has not been addressed in any real way.

What bothers me is the absolute refusal to either (a)Acknowledge this factor in the astonishing run up and then crash of oil and commodities prices and (b)or to even be able to see this factor on the part of Matthew Simmons and most of the rest of the peak oil community. Why?

The perception seems to be that if the above financial dislocation of oil prices is admitted somehow the importance or reality of peak oil is diminished.

Nothing could be further from the truth. When peak oil occurs (and it must occur, either on the supply side or the demand side first, then decline at one side of the spectrum will drag down the other, Simmons is right about the fact that the low prices will finally pull down supply even if nothing else does) it will be a major change in the fundamental structure of modern technical economies (it could be a major positive change, or a major negative one, depending on how it is managed) but price be damned, peak conventional oil production/consumption (you can't have one without the other over the long term) WILL OCCUR, and in fact may have already occured. We simply cannot know when.

I cannot know, but I am betting my money on the fact that peak oil and the current financial dislocation have NOTHING to do with one another. As far as oil consumption goes, I have gone from 42 miles commuting daily (5 days per week, 50 weeks per year) to commuting 3.4 miles per day, and am now in an apartment with a $40 utility bill instead of an old rural house wiht a $250 utility bill per month. Is Simmons, linked to the oil industry as he is, able to understand a 90% plus decrease in overall energy consumption? And I know I am not the only person to make this kind of choice, several of my friends and co-workers have done similiar. I worry that those so tightly linked to the oil and gas companies are blinded by their loyalty to the industry that made them, and cannot see what is happening in the larger world. It will be revolutionary.


Rune is Rune Likvern, of The Oil Drum Europe.

I am willing to take the other side of your bet. If our financial system could get along without growth, I think there would be no problem. It can't--our financial system will collapse without growth. We live in a finite world, and we are reaching limits in many ways--fresh water, lack of cheap oil, lack of fertilizer (NPK), and many minerals that are becoming more and more difficult to extract. Last summer, we saw what happens when we try to keep growth up, despite limits. It doesn't work. If we can pump the world back up to growth again, we can get past this. I don't see it happening.

As I write this, I am watching a special on CNBC on India. Disney is given as a company that is making a fortune there because the country has 300 million children! If only a dollar or two is spent by the customer per child, you guessed it. There are more children in India that the entire population of the U.S. (!!)

Catapiller Corp. is helping India build 3000 miles of road.

One billionaire makes a fair portion of his fortune selling a "powder hair coloring" to help middle aged Indian citizens hide the grey of their hair (!)

But all agree, the massive investment must come in educating Indian children, remember, 300 million of them. It will be the biggest educational undertaking in history, the greatest "inclusion" effort in history in the worlds biggest democracy. Astounding. Think of the computers,software, wireless services, etc, that can assist with online education to the villages. It would be bigger than America's dot com bubble by a factor of 4.

This is just India. Imagine Brazil, imagine Eastern Europe, imagine the new technology that will be needed to get this people to a standard of living long known in Alabama or Mississippi for years, and which we are a bit embarresssed by.

But most of all, imagine the pure volume and variety of TALENT that will be released. Technology and creativity not even viewed as possible yet will be unleashed.

China is now in front of the U.S. on application of Hybrid autos, solar PV cells and advanced batteries and continue to push the frontier faster and faster. We are now having to concern ourselves with the North Koreans able to launch into space (!!)

Artificial islands in the Middle East and the worlds tallest buildings? Indoor snow skiing in the desert?

Even if the Americans ABSOLUTELY REFUSE the concept of growth, the rest of the world will be willing to FIGHT for it. They are where we were in the 1890's.

All renouncing "growth" or modernity will do is INSURE America's slavery. I will bet my money on the world.


> [thatsitimout wrote] What bothers me is the absolute refusal to either (a)Acknowledge this factor in the astonishing run up and then crash of oil and commodities prices and (b)or to even be able to see this factor on the part of Matthew Simmons and most of the rest of the peak oil community. Why?

You have to distinguish between the chicken and the egg. By blaming price adjustments on capital liquidity, are you saying that liquidity, by causing prices to better reflect fundamentals, is a "bad" thing that should be blocked?

Oops- I meant 2.5 Billion!!

The problem is how do you get people to face problems they don’t know exist and they feel powerless to change?

People will face the problem when it faces them, but not before. Even with the current economic downturn, there is still a huge amount of slack in the system. Oil prices may rise quite high, say $10 a gallon, and supplies decline so there are shortages, and people will still not "get it." Sometime in the next 2 to 4 years, maybe less, maybe more, a point will be reached when people will know that something needs to be done--and at his point education may begin. For example, high prices and low demand may cause the need for consolidation of transported goods (to save on costs of transport), food may be in short supply, and so on. This point is still a ways away (based on the data supplied in the video).

I'm not sure that people feel powerless to change; it's more that they don't know what to spend their energy on. So, they are perhaps mentally prepared to act, but they is no clear solution or path for them to take, so they wait passively for some tipping point and then they will do something.

Two years ago, we were told to prepare for high winds, so we got our candles and flashlights ready, and some food that didn't need to be cooked, and since it was winter, a couple extra blankets. Little did we know that the next morning we would wake up to a county without electricity or water and widespread devastation, nor did we guess that some of us would be waiting a week for electricity, some several weeks, and that we would all be "camping out" for an extended period of time while our energy distribution system was re-built. But when it happened, people went from doing their own thing to a collective shared experience, helping people with food, water, and so on.

So, basically, the answer to your question is: There is no way before the fact to get people ready. First, we need a major tipping point or two, and some major event to get the juices flowing. Our petroleum reserves would give the entire country 3 to 6 months in critical mode to make necessary adjustments to food, water, shelter, and energy catastrophes.

I check out the Energy Shortage site regularly

Pakistan and India particularly are regularly featured as suffering from load shedding. Does anyone know why? Non-availability of fuel is mentioned in this article.

for instance
India: Over half the power capacity addition target missed last fiscal
Fresh power capacity addition has fallen short of target by over a half in the year 2008-09, because of the delay in supply of critical components in thermal projects and non-availability of fuel.

According to the latest data provided by the Central Electricity Authority (CEA), only 4,900 Mw, or 44 per cent of the targeted addition of about 11,061 Mw, was achieved in the twelve months ended March 31, 2009.

The article says the nuclear target was completely missed because of the lack of availability of uranium. This is an issue I have talked about.

Thermal seems to be mostly coal (with perhaps a little natural gas). The article sounds like some of the necessary equipment has not been installed.

I ran across this article (with tomorrow's date) which may be related. It talks about problems with water availability for cooling.

The Central Electricity Authority (CEA) is worried that securing water linkages for thermal power plants is becoming tougher and could hurt plans to boost India’s power generation capacity.

“Already we are having problems in setting up some projects. There has to be a comprehensive plan for setting up water resource facilities in states having potential for thermal development,” said Rakesh Nath, chairman of CEA, the country’s apex power sector planning body. . .

“For all new projects, there is no water linkage available. They have no option but to go for coastal projects by using sea water for the purpose. Only in monsoons there is water in the rivers. We have to create dams for different seasons,” said another CEA official, who didn’t want to be identified.

According to the Central Water Commission, while the average annual rainfall in India is 4,000 billion cu. metres (bcm), the estimated utilizable surface water resources is 690bcm. An official in the ministry of water resources confirmed the problem that thermal power plants are facing, but said: “States are diverting water meant for agricultural use for power generation.”

IMHO and nothing more I believe the problem with Matt and many on TOD is tunnel vision.

Agreed oil is important but there never was a shortage last year to cause the price to be up that much. Yes, some suffered because of hurrican disruption but there never was a country-wide shortage. There was a fear of shortage but the actual thing didn't happen. I never saw or heard of lines at the pump as there were in the 70s. The price was high but I could get all the fuel I wanted. I will leave it that; there was something else (probably artificial)caused the price to go up.

That said, at about the same time the sub-prime mortage problem developed horns and went through the china shop breaking everything in sight. This exposed the bankster crooks.

From there, the floor traders saw the possibility to make a quick buck in a little bear market and that went wild and this added to the downturn because 401s were soon to be 201s.

The population retrenched and quit spending so much discretionary income and that is causing a minor SHTF.

This domino effect caused where we are today. What triggered it, is inconsequental but it was not an oil shortage.

Now is the time to deal with reality or ...