Martin Weiss: Two recent mega-events — the Wall Street collapse in 2008 and the Washington response in 2009 … the debt implosion and then the money printing explosion — are mind-boggling in their dimensions.
Neither you nor I can know with certainty what the future will bring. But at this particular juncture, we don’t have to poke around in hidden crevices of the economy. Nor must we stretch our imagination to conjure this or that scenario. To get a pretty good idea of what’s likely to happen next year, all we have to do is follow the path of natural consequences from these two mega-events. And that’s what we’re going to do right here and now.
I have assembled our Weiss Research team of analysts to lay out for you, step-by-step, what those consequences are likely to be in the coming year — 11 startling forecasts for 2010.
Mike Larson is one of the only analysts in the country who accurately predicted both the real estate bust in 2005 and the recent real estate bottom in 2009. Today, he is not only our resident expert on real estate, but also our chief Fed watcher, interest rate specialist and analyst of the entire financial sector.
Larry Edelson, joining us from Bangkok, Thailand, was among the very first to predict that gold would one day exceed $1,000 per ounce, and now that day has come. But Larry’s gold forecast is just one of many that illustrate a special skill he brings to as a Director of the Foundation for the Study of Cycles: Timing the markets.
Claus Vogt, joining us today from Berlin, is the man I’ve personally selected to make the picks — and give the signals — for one million dollars of my own money, based not only on his own years of trading experience but also on the input from our entire Weiss Research team.
I can think of no better person to help us forecast the direction of the global economy and global stock markets.
I hasten to add that forecasting what we believe is likely to happen in 2010 is strictly the first part of our program today. During the second, equally important, part we will give you actionable guidance — investment ideas you can USE to take advantage of the profit and income opportunities that flow directly from our forecasts. And to bring you the best of the best ideas we can, I have also assembled a panel of our investment specialists in each major arena.
Ron Rowland, our specialist on ETFs … Nilus Mattive, our specialist on dividend stocks … and Bryan Rich, our foreign currency expert.
From Southeast Asia, we have our Asia stock specialist Tony Sagami, who just completed a reconnaissance tour of Indonesia and … from Southern South America; we have Sean Brodrick, reporting on his visits to resource companies in Chile and Argentina.
Plus I have invited a special guest, Monty Agarwal, one of the nation’s leading experts on hedge funds, sovereign wealth funds, and global money flows.
Thanks to their participation in this special summit, you benefit from some of the most timely, in-depth and fascinating research in the world today.
Mike Larson: I happen to think the research effort has paid off very nicely. For example, look at the absolutely huge companies that failed, were bought out or bailed out last year! And look how many of those companies Weiss Research specifically named as candidates for failure well ahead of time:
Two of the nation’s largest brokers, Bear Sterns and Lehman Brothers … the nation’s largest mortgage lenders, Countrywide Financial and Fannie Mae … the nation’s largest savings and loan, Washington Mutual … and the nation’s second largest commercial banks, Citigroup.
And next, look at the utterly massive government reaction to those failures that we have uncovered: Fed Chairman Bernanke has responded with the most rapid acceleration of monetary expansion in U.S. history.
Before the Lehman Brothers collapse last year — it took nearly 14 years for the Federal Reserve to double the cash and reserves at the nation’s banks.
But after the Lehman Brothers collapse, it took Mr. Bernanke’s Fed only 112 days — barely four months — to double the monetary base. In other words, he accelerated the pace of bank reserve expansion by a factor of forty-five to one.
Meanwhile, Treasury Secretary Geithner and his predecessor responded with the largest bailouts of all time, helping to triple the size of an already-bulging federal deficit.
Matthew Simmons sees peak oil as the end of energy supplies as we know them.
The following is a transcript of the conversation I had with Matthew Simmons on the April 27 episode of Turning Hard Times into Good Times and with Paul Michael Wihbey on the May 4 episode of my radio show. Simmons presented his continuing thesis that the lights on western civilization are about to go out. Contrasting that notion is Paul Michael Wihbey, who provides a much more optimistic view of prospects for keeping the lights on, not from foreign imported oil, but from abundant sources right here in North America. Audio Interview
Welcome back to Turning Hard Times into Good Times. I am your host, Jay Taylor, and I am very pleased to have with me Matthew Simmons. He is the founder and now chairman emeritus of Simmons & Company International. Mr. Simmons is a prominent oil industry insider and one of the world’s leading experts on the topic of peak oil.
Mr. Simmons was motivated by the 1973 energy crisis to create an investment banking firm catering to oil companies, and in his capacity, he served as energy adviser to U.S. President George W. Bush. Matthew Simmons is a member of the National Petroleum Council and the Council on Foreign Relations.
He believes careful assessment of Saudi Arabian oil reserves to be the most significant issue, shaping petroleum politics, and he is the author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy.
His examination of oil reserves’ decline rates really was very, very significant in his work and so we are going to ask him more about that. Welcome, Mr. Simmons, to Turning Hard Times into Good Times.
Thank you, Jay.
Jay: Thank you so much for coming on our show. I really appreciate it. The term “peak oil” is a very common term among investors these days, thanks in no small part to your work and your book Twilight in the Desert, but just to make sure that everyone listening to the show understands, exactly what you mean by peak oil. Can you define the term?
Matt: Sure. It’s a term that gets widely misunderstood, thinking that the peak oil people said, “we are about to run out of oil,” and we will never run out of oil. What we are running out of is high quality oil that flows easily out of the ground. What we have already passed is a peak sustainable crude oil flow, and that happened five years ago, and we are now going to get further and further behind. So the idea of actually catching back up is becoming pretty remote.
Jay: So that was five years ago, about the time you published the book Twilight in the Desert.
Matt: Yes, just purely by happenstance.
Jay: You noted then that your major concern was, there was a great deal of complacency at the time about the lack of ability to continue producing more and more oil to meet the world’s growing demands, and specifically you thought there was too much faith put in the ability of Saudi Arabia to produce oil. You still feel that way?
Matt: Yeah. Actually not just Saudi Arabia, it was in the Middle East. We somehow created an illusion that the Middle East was a giant sea of oil laying into the sand that was almost inexpensive to produce, it would last forever. And there was never any basis for that; no one ever went back and actually dug into the data and said there is only handful of fields that were ever found, and they are all old.
Jay: Well you did do some digging in the data I think –
Matt: I spent so much time between the spring of 2003 and up till a month before the book came out, I’ve never done so much research in my life.
Jay: Well your source, I think, largely was the Society of Petroleum Engineers’ technical papers that were written by the people who would know those projects the best.
Jay: Okay. So, about that time, if I am correct about this, Saudis were producing about 10 million barrels of oil a day. I seem to recall you saying somewhere that they were projecting 50 million barrels day and then they cut it back to about 12, 12.5 million barrels a day. Have they been able to reach that level of production? Are the Saudis putting out anything like that now as far as you know?
Matt: Well, it depends on who you listen to. If you listen to the pronouncements from the Saudi Petroleum Ministry, they have the ability today to produce about 12.5 million barrels a day. If you listen to some of the insiders, they sound like they are struggling to stay close to 8.
Matt: In my opinion, this is first time we ever had no spare capacity.
Jay: So, we had of course a very dramatic drop in the oil price after the Lehman Brothers collapsed in September/October 2008—from $147 of a high to $40 or something.
Matt: 31 and change
Jay: Wow. That would have been, in retrospect, quite a buying opportunity.
Jay: So, we are back up at what, $70 or $80 now.
Matt: I think 85-86.
Jay: Okay. To my way of thinking, it’s very difficult to say where the price of oil or any commodity is going to in the future because, quite frankly, we have a measuring stick that isn’t very dependable. [I mean] the U.S. dollar. For example, we are creating enormous amounts of money out of thin air to finance all manner of bailouts and government expenditures for one thing or another, so where do you think the price of oil can go?
Matt: Well, first of all we have really basically done away with easy projects, so all of our future projects are going to be very expensive. We have an industry that basically has an asset base largely beyond its original design life, it needs to be rebuilt. If we rebuild 60% of the oil and gas infrastructure globally, it would probably cost at least $100 trillion. So prices need to go way up, where we just won’t get anything done. I am not sure we are working with the people to do that.
Jay: You mean the technicians who know how to do that?
Matt: Yeah, about two-thirds. There are too many studies, way overdue, that are now finally being done that show in the next five to seven years about two-thirds of the energy workforce will retire.
Jay: Okay. You don’t see a pool of new talent coming into the market?
Matt: No, no. We just barely got started when we had our financial collapse, and then all the new pool got fired.
The collapse turned out to be a really cruel hoax of thinking that we’d solved our oil problems and that it’s amazing how fast we bounced back. The problem is we are bouncing back too fast, and we can’t supply it.
Jay: Well, the demand side for oil of course is coming from the Far East—China, India. In India, where we have large numbers of people who for the first time in their lives are starting to enjoy what we have taken for granted here in the West: sort of middle-class comforts, people going from bicycles to cars or from walking to motorbikes, whatever, and this is of course a massive new growth in demand.
The Chinese are very active in various parts of the world—in Africa and places like that—but let’s talk a little bit more about the declining production. I mean, you paid a lot of attention to data from Saudi Arabia; what about Iran?
Matt: Iran’s fields are even older than Saudi Arabia’s and really in a mess. There is a new theory that somehow Iraq is going to come to the forefront and I read analysts’ forecasts that within five or six years Iraq will be producing 16 million barrels a day. Realistically, they will be very lucky to produce what they are doing today because their field is too old.
Jay: What is their current production about?
Matt: It’s about 1.8. We don’t have anything on the horizon that really basically works and we have demand now that you can’t stop. So demand has become a runaway train.
Jay: So staying on the supply side of the ledger, we have a declining level of production, a very rapid decline in Mexico from what I understand, and have a decline in Iran.
Are you saying that these declines are natural and it wouldn’t matter whether we had technical talent or not, they are in decline no matter what? Or would some technical expertise make some difference? Would it help someone?
Matt: Oh! Yeah. What you are really talking about is mitigating the extent of the collapse as opposed to turning an older oil field back into a young field. What also has happened is we’re really quickly running out of light sweet crude, essentially.
Most of those great crude streams have basically disappeared and what we are doing is substituting a steady rise in crude grades that are heavier and sourer, more metallic, and they are just very hard to be refined into finished products, and they’re energy intensive and extremely water intensive.
Jay: And in terms of the refining capability, I guess that’s another issue.
Matt: Refining capabilities in the United States are almost 85 years old and enormously expensive to build if you can even get permitting to build them.
Jay: So what are we going to do?
Matt: Well, that’s a problem. We have a water scarcity and we have a 10 million barrel fossil fuel scarcity, particularly in the form of transportation energy. And then there is an unbelievably interesting and almost totally ignored interdependence between the amount of water it takes to create modern energy, and the role of energy in creating water. It turns out the average gallon of motor gasoline in the world requires about three gallons of water at the refinery; in the cooling towers, 40% of America’s fresh water is used for power generation.
Jay: Is that right?
Matt: Yes. So, shortage of water.
Jay: Another big problem looming over the horizon.
Matt: The problem is already here; one we have ignored far more than peak oil is the interrelation between the two. Most of our remaining usable water comes from Aquifers , so it takes a pump to get it out of the ground. So if you don’t have energy, you can’t get the water out.
Jay: Can you talk a little bit about the cost of new exploration, I mean, oil companies are exploring deep under the ocean for oil and gas still, I guess. What’s the average cost now for oil companies to go in and find new deposits?
Matt: Yeah, you are now talking about individual wells that are costing between $150 million and $300 million. It used to be an enormous field.
Jay: And what are the probabilities of coming up empty and not having anything after you’ve spent a lot of money?
Matt: Probably two-thirds.
Jay: So one-third chance of hitting something that might pay for the capital and two-thirds chance of –
Matt: It’s one of the reasons we need to prepare ourselves for far, far higher oil prices.
Jay: A little earlier on this show, we had Amir Adnani, who is the president of a company called Uranium Energy Corporation; they are getting ready to produce something like a million pounds of uranium a year from Texas, growing that to two million pounds. He even tells me that there is 3.5 million pounds of uranium produced in United States right now and that we are consuming something like 55 million pounds of uranium in the United States a year, 55 million pounds to generate 20% of our electricity in the U.S., and although uranium is abundant in the United States, we are not going after it. Do you see uranium and nuclear power as part of the solution?
Matt: No, I think we are going to have to work very hard to stabilize what we are doing today. We probably have abundant uranium, but we don’t have abundant high-quality uranium. That’s the problem across the front of where we’re headed; we’ve certainly used up the highest quality stuff. I was actually in grad school in Utah when Charlie Steen discovered the established source of uranium in Mojave and found it with a Geiger counter. You can’t find uranium with the help of a Geiger counter anymore.
Jay: Well, that’s true. A lot of the uranium production is now coming through what they call ISL.
Matt: Yeah, very low quality.
Jay: Yeah, it’s low grade. Amir tells me their projected cost is something like $15-$18 a pound for production. Of course, that’s not counting capital cost and they were able to get some plant equipment that was in place and get it cheap. That compares to, I don’t know, $40-$50 a pound uranium prices, which, in theory, would be a nice profitable business. However, it is a little business, when we talk about a million or two million pounds compared to United States consumption of 55 million pounds, I don’t know. So what you are saying is uranium is not the answer either.
Matt: We have 103 or 104 operating nuclear plants in the United States and at least 25 to 30 of them have to be replaced in the next 10 or 15 years.
Jay: And that’s going to cost a lot of money.
Matt: A lot of money and there’s also some just basic work finally trying to be done to try to figure out the amount of energy that we use to create a thousand-megawatt nuclear plant, and some people say it might be equal to about 10-15 years’ electricity output. So it becomes kind of net energy losers on present value basis.
Jay: Yeah sure.
Matt: There are also water hogs.
Jay: Yes, that’s for sure. One of the things that troubles me, Matt, is that the price of oil, it seems to me, has risen dramatically more than the demand for oil has risen. Here’s the number I’ve just seen, I want to see what your response is to it. Between 2002 and 2008, global demand for oil supposedly grew by about 9%, while the price of oil went up 600%. Now I know you can take starting dates to make pace with that, but certainly the oil price has gone up more than demand, has it not? Are you suggesting that this is just –
Matt: We were coming from such an artificially little base and basically, and the problem we have right now is demand is outstripping supply.
Jay: Okay, demand, and primarily, would you say from Asia, from India, from –?
Matt: Yeah, I mean even in the United States, we sort of flattened out in the last decade; our demand grew up about three million barrels a day.
Jay: Our demand has grown, even in the U.S., even in a mature economy like that of the U.S.
Matt: It got to over 20 million barrels a day and literally we couldn’t supply the market.
Jay: We did drop back some I think after the financial crisis –
Matt: I think we are now down to about 19 million barrels a day versus 20.
Jay: Alright, but the economy is picking up, at least at the moment. So I would imagine automobiles— driving—will start to pick up. I did see an article the other day stating that, where people have to drive long distances from their suburb homes to their inner-city jobs (it mentioned San Bernardino or someplace like that in California), the defaults were rising more rapidly in those neighborhoods where people have to drive farther to get to work. Do you see this as something we might have more of in the future if energy prices continue to rise?
Matt: You know, I don’t know. That scenario I don’t pay much attention to, so I will just pass on that.
Jay: Okay. So oil prices are rising very dramatically, and you don’t think that’s really because they were way too low to start with? Why was that? Why did we have such low oil prices for so long?
Matt: We had a belief that we had almost a permanent glut and as long as we kept peace in the Middle East, we could live with cheap oil forever. And what was interesting is, there was never any basis to sustain that. It’s something like in the cold war, we spent forty years thinking that the Russian economy was equal to or greater than us, and we finally realized it wasn’t.
Jay: Yeah, we did, we did finally realize . . . it was a long time of propaganda, I suppose, that was needed to keep –
Matt: This was even more than propaganda. Everyone thought, “As long as we can contain peace in the Middle East, we will basically have cheap oil forever.”
Jay: Does your firm consult new producers, younger companies that are starting up, or –
Matt: Well, the historical strength of Simmons Company, we have always been focused on oil services—people building the tools and services to actually get oil and gas out of the ground—and we have friendships with some of the big oil companies. They can basically be the people most skeptical of my views.
Jay: I wonder why that is.
Matt: I am probably more skeptical of theirs.
Jay: I wonder why that is. They have so much muscle, so much –
Matt: You know, I don’t know. It’s just – I think we are sort of a “too big to fail” syndrome.
Jay: Let me ask you about natural gas, because natural gas prices have been lagging very significantly.
Matt: The biggest gap we’ve ever had between oil prices and gas prices, we are seeing today.
Jay: The biggest gap?
Jay: Why is that?
Matt: We have a firm belief that has swept over the United States that through technology we have now an abundant source of S-H-A-L-E; Shale gas. Basically we have created a glut for maybe another 10 or 20 years, and it’s preposterous.
Jay: You don’t think that’s possible?
Matt: No it’s not possible. The decline curves per well are almost vertical. The water intensity is unbelievable. The water disposal issues are very serious, so I think within a short period of time, we will look back and say, well that was one more miss.
Jay: Alright. Well then, natural gas prices –
Matt: Unless they go way up, we will not have a natural gas industry.
Jay: The price of natural gas is so low that it’s just not –
Matt: I mean it’s just killing the people in the industry.
Jay: It’s not interesting to invest in it, that’s for sure right now.
Matt: But it’s all on a belief that we have probably 10 to 20 years of gas left. So there is, sort of, everyone pretending, “we will figure out where to make this work, we will just drive our costs down rather than go way up.”
Jay: So what about coals? Coal is an answer for us?
Matt: I think the reality of coal is that we have almost depleted our high quality seams of black coal and brown coal, probably river base is really basically dirt with some coal specs in it. I mean the tragedy we had in the Massey Coal Mine in West Virginia, was basically, if you look at the schematics of that, we had about a five- or six-foot high a passage, and it used to go two miles into the mountain. And there’s no way to ventilate it. Back fifty years ago, we had huge faces of black coal and they had a ventilating shaft with an elevator going down.
Jay: Are there not some large coal deposits, open-pittable deposits, out west yet still?
Matt: That’s all brown coal which is basically brown coal.
Jay: Very low grade stuff.
Matt: High-quality stuff, the easy-to-get-to, low-cost, high-quality stuff is gone.
Jay: That’s why they are doing so much mountaintop clearing of coal; the seams are so little it’s the only way to get it out.
Jay: Well certainly it’s true also in areas that I am more familiar with like the metals mining industries. The easy plums have been picked, so to speak. But regarding energy I have a quote from Senator Orrin Hatch, I want to read to you and just get your response to it.
This was about the time he published a book in October 17, 2008. Orrin Hatch said, “You also may have recognized the profound geopolitical shift over the next decade or two as the supply of conventional oil begins to dwindle in the Middle East, and the commercial production of our unconventional resources takes off in North America. And as the scenario unfolds, I believe that U.S. and Canada will merge as dominant energy powers in the world.
“In Alberta you have dozens of major oil companies using a variety of technologies and recovery methods going after very different types of oil sands resources and in almost every case, doing so for less than $20 a barrel. It is the gigantic success story and it began with Alberta’s government deciding to promote the development of this resource and not giving out.”
So what about the oil sands? Was Senator Orrin Hatch wrong about that or non-evolving technology that might reduce the cost of oil?
Matt: We know how to do it, but it’s extremely extensive and basically it takes a prolific amount of water and natural gas to flush the oil out of the sands or in-situ mining. Senator Hatch is also a big lever because on Capitol Hill, they’ve got shale oil, and he had a huge amount of briefings about how easy it is going to be to get oil shales out of Utah and Colorado. We had an interesting conversation one day where I reminded him I was from Utah; I said there is no one, I would be happy if that was real but it’s not.
Jay: Interesting. Well, he probably had his own reasons for thinking that or pushing that –
Matt: Well he could read that every place. So it wasn’t Senator Hatch, I mean he is not an energy expert, but he read it and believed it.
Jay: And believed it. So he was talking $20 a barrel, that doesn’t sound realistic in 2000 at this point in time. What do you think the cost is in the –?
Matt: I will gather, it’s more like $70 to $80 a barrel.
Jay: Okay, alright. Well then that’s not even breakeven to cover your cap cost with current price.
Matt: Well again, interesting enough—if you have a fully depreciated plant, then you have a very different capital cost than if you are actually adding an incremental production.
Jay: Well, it’s very interesting. We are just about out of time here but I want to ask you, because I have enjoyed your Twilight in the Desert book so much, are you planning to publish anything else in the near future?
Matt: I have pretty well decided I have really gotten started very far into this, that I probably am going to do maybe one final book, called “The Dawning of Ocean Energy,” because in my opinion, that is the last frontier of tapping all the various energy sources—our ocean—because the desert is going to be dark.
Jay: “The Dawning of Ocean Energy” . . . how do we get energy out of the ocean?
Matt: Well we have a big project that I have put together in the Gulf of Maine, that’s the Ocean Energy Institute, which I founded three years ago. It is sort of overseeing and the lowest-hanging fruit of ocean energy turns out to be offshore wind when you get 10 to 20 miles offshore.
Through the advanced composite of the University of Maine, we are going to build some gigantically tall wind turbines, totally redesigned, actually turn the offshore wind into distilled seawater and liquid ammonia.
Jay: Interesting, very, very interesting. I know there will be a lot of skeptics about that project. Anything that’s new always brings the –
Matt: But it’s very real, we have got some very serious people working on it, and once we prove it can work in the Gulf of Maine, it can work a lot of different places around the world.
Jay: Okay. What about when you talk about oceans, I think tide, tidal –?
Matt: Tides are tougher, currents and waves are really tough. Offshore wind is low-hanging fruit.
Jay: Okay, well we will be looking for your book. When are you going to publish it?
Matt: Oh! Gosh, I haven’t got it started but it’s a big deal. You can go on our Web site and see it, www.oceanenergy.org.
Jay: Okay, www.oceanenergy.org, and any other sites where people can follow your work?
Matt: Well Simmons & Company Web site has all the talks I give.
Matt: Which are too many.
Jay: Oh, I don’t know about that. I am sure they are very interesting. What is that Web site then?
Matt: Well, google my name, that is easiest.
Jay: Okay, very good. We will do that. Well, thank you very much, Mr. Simmons, for your time and for sharing your expertise and your knowledge of the industry. It really is a pleasure having you on our show.
Matt: Pleasure being on.
Jay: Wish you all the best, and when you publish that book, I would like you to have on again if you agree.
Matt: Great. I would be delighted.
Jay: Thank you so much.
Jay: Folks, don’t go away, we are going to be right back with Paul Michael Wihbey; he is going to have a slightly different take on the energy markets than Mr. Simmons, but, just to coin a phrase from FOXNews, “we report, you decide.” And we will be right back with Paul.