Tying up loose ends

The topic of Simmons vs. Yergin might be getting old for some people, but I wanted to follow up on something. The day that Matt Simmons had a live chat at the Washington Post, one of the things he said was that he was had submitted an editorial in response to Daniel Yergin's recent op-ed.

It looks like it was published as a letter to the editor instead, but here it is. A snippet:

The Saudis and OPEC have been quietly admitting that they will not be able to meet world oil demand in 10 to 15 years, which is at odds with Yergin's Cambridge Energy Research Associates and other optimists. The fact that futures prices for oil are above $60 a barrel out to December 2010 is at odds with CERA's position and is a testament to the risks associated with future world oil production.
That's a pretty amazing document!

First, how ironic that Simmons of all people is using futures market prices to make his case, when he was just betting two days ago that oil would be $200 a barrel by 2010! Now he has flipped and is saying that $60/bbl 2010 oil proves that CERA is wrong. Either he believes the markets are valid predictors or he doesn't - which is it?

And second, he is reduced to claiming that we will hit Peak Oil troubles in 10 to 15 years! Simmons, who is generally considered one of the strongest Peak Oilers in terms of near term problems, is now saying that the peak lies in the 2015 to 2020 time frame? (This is consistent, BTW, with the message from the NY Times article last weekend.) That completely undercuts his usual message about the dangers of near term Peak Oil problems.

If uber-pessimist Simmons sees the Saudis not peaking for another ten to fifteen years, where is the justification for a near term peak? The polls on peakoil.com have consistently showed a majority of readers see a peak this year or next. When Simmons himself predicts that we have ten to fifteen years to prepare, that casts serious doubt on these near term scenarios.

I am astonished that this letter takes such a different tone than Simmons' usual pronouncements. Granted, it was co-written, but Simmons chose to sign it, endorsing its contents. Based on this letter, Peak Oilers who are using Simmons' analysis to justify their beliefs in a near term crisis need to take another look at their beliefs.

I think you're misinterpreting the logic of the letter. I think they are saying that even if peak is in 10-15 years, as the Saudi's are "quietly suggesting", we still have a problem because it will take that long to prepare, so don't go back to sleep (which is more of a Hirsch point). I don't think it's saying that's what they think the likeliest case is (Simmons obviously believes based on past statements that the likeliest case is worse than that). They say that futures prices are "at odds" with CERA's position, which is clearly true (massive excess producion in 2010 would lead to $10 oil). The markets are also obviously at odds with Simmons position (oil is going to $200). They aren't saying one way or another whether markets are good at predicting the future, they are saying the opinion of the market is not in agreement with CERA and that should at least provoke thought as to "the risks associated with future world oil production". One can find estimates of Saudi Depletion of existing production here: http://www.eia.doe.gov/emeu/cabs/saudi.html We don't need Matt Simmons to know that 5%-12% decline on existing production (including some of the largest oil fields in the world) is going to be serious work to overcome, and given that they redrilled everything with horizontal wells a few years back, depletion could get faster in the future.
I am a complete novice to economics, but in the comments and articles from here and EconBrowser, I have read over and over that the futures markets are lousy predictors, but everything else is worse.  I'd say that Simmons trusts his judgement more than the markets, but sees the rise of futures prices as coming more in line with his expectations than with CERA's predictions.

As far as the second point, if we assume they are referring to Sadad al-Husseini's estimate that the Saudis can reach 12.5 but not 15 (and BTW I didn't read that as giving us 10 - 15 years), that doesn't necessarily mean they are stipulating to what those Saudis are quietly admitting.

This is a classic lawyer logic: Even if you believe my opponent's version of events, we should still take the same action. What Simmons and Hirsch seem to be saying is that whether you believe it is 1-15 years, we need to start taking action now.
Before reading your comment, my first impression of Simmon's letter to the Post was somewhat similar to yours, but my only point of surprise with his note is that he chose to quote futures prices.

I am a trader, focussed on energy analysis but I trade multiple markets. It doesn't matter what market we are talking about - they all act on imperfect information, emotion and best guesses. There are always someone who is right or wrong, on either side of the trade, or more right and less wrong, at any given point.

Long dated futures are up. Why? Someone offered to sell at those prices and someone else offered to buy. That's all. Its impossible to determine motive from price alone. After all, when price breaks to all new highs. someone is selling... and someone sells at such a time only because they don't believe it can go higher. Those folks that sold 10, 20$ ago were wrong. Those folks that shorted 10, 20$ ago are dead. Eventually this will flip around - even in today's market I can see sharp pull backs happening from time to time, but as long as the overall trend remains high we'll have to assume that more than just the Peak Oil community has bought into the idea of increased scarcity.

These contracts have kept hitting new highs and headed higher still, thanks to the underlying environment, and no doubt in part to a high degree of interest from non traditional players.

Simmons should have stayed away from the futures market as a proof point; but other than that I have no problem with what he wrote. Remember his focus - his is on Saudi oil production failing; Yergin's take is that overall both OPEC and Non OPEC supplies will grow at fabulous rates due to investment.

As I understand Simmons, his concern is on more than one level:

  • Saudi production will peak, one day (some whispering 10-15 years)
  • The Saudis may not themselves have a good idea of when that peak will come, since their approach to estimating reserve life is suspect
  • Some hints that production techniques may be shortening the available lifespan anyway
  • Lack of transparency makes it impossible to refine dates

I think he is right in being uber-pessimistic. Even if its 10-15 years, we have to be working to a solution yesterday.

If its 2 - 5 years, we are up a nasty creek without a boat or a paddle.

for mw: can you give us some idea of the volume of oil-futures contracts for 2010? Plus, is there an actual sector that makes use of these contracts rather than those who just play the market? I am astoundingly ignorant of these issues so if you want to reply to these questions and rephrase them at the same time I won't be unhappy. What I am trying to get at is: from what I've read it seems a lot of futures never come to fruition but are used as hedging positions...so are these future prices more based on the info we have now plus a bit of emotion and herd positioning or do they really represent a deeper level of "anticipatory knowledge" than us mere mortals believe? Plus where do the highest volume of oil-futures contracts lie? One year, two years? Any ideas? Please help me battle my ignorance!
Good questions -- with futures you are betting on price in the future - in short: if you hold the contract through delivery you get the commodity for what you paid. Bet low and if price rises at actual delivery time, you've made a profit.

Pure speculators betting on price don't take delivery - at some point, depending on their time horizon, they take profits.

The far off futures contracts generally have relatively low "open interest" (long and short positions) compared to those nearby.

You can access Open Interest information for any futures contract from the underlying exchange. In the case of the CL crude contracts, its Nymex:


You'll note that the far off futures contracts have more open interest in the peak usage months.

Speculators, energy companies, airlines, etc all play in the futures market. Its no different than the Orange Juice market that the movie "Trading Places" made famous - traders are working on behalf of both commercial organizations (growers/consolidators, industrial consumers of the products) as well as pure speculators.

Its impossible to tell from open interest numbers alone "who" or what type of speculation (production hedging vs raw speculation) is going on. There are firms that try to quantify how much activity is generated by the commercial interests vs pure speculators - myself I'm not particularly interested in who is buying or selling, just what price they are willing to execute trades at. Certainly its true the pure speculators can have shorter time horizons and are more easily spooked by adverse price movement - but knowing this doesn't help much in the big picture, because there's no identification of motive or goal or intent between traders.

Is this the first time Hirsch and Simmons have partnered on a position?  I think I take that differently than Halfin, above.  Seems to me like the establishment joining the fringe.  It's one thing (pardon me) to have a "chicken little" and another to have the "past chairman of the board on energy and environmental systems at the National Academies" join the chicken!
I believe it is, odograph, and this is good for PO awareness.
I read a comment on another blog, by some fellow, and his attatude was simply this.  Does it really matter whether we hit peak oil Last year, this year or next year, or even 5 or 10 years down the road.  If we would start spending our discresionary encome ( meaning the government ) on alternative measures to our energy supply for the future, we would be one hell of lot better off when it does come, than the way we are going about it today.   I tend to agree with him.

the hermit

Who even knows how much Simmons' op-ed was edited down?  His reference to futures contracts may have been a minor point, like his rickshaw example in Round 2 with the Freakonomics guy.

In my view, we shouldn't obsess about ideological purity.  We need more members before we can have a schism.  

This reminds me of the thread about a week ago about how to convert others to our Peak Oil beliefs.  One thing I've been trying out is to just talk about how the U.S. imports most of its oil from unstable or unfriendly countries.  A Republican friend was receptive when I cited Irwin Stelzer's February 2005 article in the Weekly Standard about China and the geopolitics of oil.  

Right now, the main thing is to get people to wake up about this problem.  If they don't buy an SUV or a McMansion on some freshly destroyed farmland, it doesn't matter if they're doing it because they hate the Saudis or if they think that Peak Oil will happen exactly 7 years from now, like the Bible story about Joseph in Egypt.

P.S.  I know Peak Oil is scientific, unlike religion.  However, the mindset seems similar if you're talking to someone who doesn't know any of the facts.  Besides, we already know what our Apocalypse will look like.

You should all take a look at this week's Economist Magazine (http://www.economist.com/index.html). Cover story: The Oilaholics refering to China and the US. Inside advocated a gasoline tax for the US.
Good to see a joint policy statement from Simmons and Hirsch, as odograph points out.

The joint letter covers two of the main points from Twilight in the Desert: 1)Saudi output appears to be in trouble 2)America and the world have no "Plan B" for a temporary oil-weaning energy infrastructure that will bridge to whatever comes next.

What scares me most about Simmons' book is his third main point: after the Plan B (which we don't have yet) falters, we need an "energy miracle" (Matt's words) to take over. I guess he's right...

All that came to mind was Bullwinkle saying, "Rocky, watch me pull a rabbit outta my hat!" to the tune of the Grateful Dead singing "I need a miracle every day."