Twilight of the Oil Age

Matthew Simmons has been stirring up a lot of angst in energy circles this year. This well-connected industry insider has concluded that some of the world's largest oil beds may be on the verge of production collapse -- and he's willing to bet his much-vaunted career on it.

Author of the recently published Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, Simmons is founder of Simmons & Company International, an investment bank that handles mergers and acquisitions among energy companies, and counts among its clients Halliburton, General Electric, and the World Bank. A graduate of the Harvard Business School, he served as an energy-policy adviser to the 2000 Bush-Cheney campaign.

Conservative credentials aside, Simmons has been boggling the minds of people across the political spectrum with his recent prediction that the price of a barrel of oil could hit the high triple digits within a few years. To postpone economic meltdown, he says we should be drilling in the Arctic National Wildlife Refuge and other hotly contested spots. At the same time, he's calling for a massive shift in energy policy, including radical improvements in efficiency, as well as a return to local farming and manufacturing. With his unconventional opinions, he's single-handedly reinventing the image of the post-oil energy crusader. He talked to us from his cell phone while dashing between energy lectures.

Let's start with a brief overview of the premise and implications of Twilight.

I believe we are either at or very close to peak oil. If I'm right, then we have to assume that five or 10 years from now we'll be producing less oil than we are today. And yet we have a society that is expecting, under the most conservative assumptions, that oil usage will grow by at least 30 to 50 percent over the next 25 years. In other words, we would end up with only 70 percent of the oil we have today when we would need to have 150 percent. It's a problem of staggering economic proportions -- far greater than the temporary setback of a terrorist attack on energy infrastructure -- that could end up leading to more geopolitical fistfights than you can ever imagine. The fistfights turn into weapon fights and give way to a very ugly society.

How did this thesis evolve?

The odyssey began in the early 1980s when I realized that my firm was threatened by a production collapse in the energy and oil-service business. I thought, "How on earth could this have happened without us even knowing?" I started doing some careful investigation into energy data. The more I studied, the more I started to realize that so many people who call themselves experts in the energy market, including government analysts, are in fact experts in their opinions and don't actually base a lot of it in actual data.

Why? Because the relevant data are confidential?

Yes, what's publicly available is extremely vague. No major oil-producing companies or nations allow audits of the data on their reserves and production, which leaves the experts effectively playing a guessing game.

If the data are concealed, on what evidence did you base your own conclusions?

I've spent years poring over hundreds of papers from the Society of Petroleum Engineers that have revealed fascinating clues. First I took an inventory of the top oil fields in the world, field by field. I was aghast to find that nobody had ever listed even the top 20 oil fields by name. I found that there are only about 120 oil fields in the world that produce half of the world's oil supply. The top 14 fields, which make up 20 percent of global supply, are, on average, over 53 years old. In Saudi Arabia, which harbors a quarter of the entire global supply, there are only five key fields producing 90 percent of their oil. They're all old.