August 2005
World Energy Monthly Review

It doesn’t matter if Matthew Simmons is right about Saudi Arabia’s future oil production capability or not. Even if he is wrong, he’s right.

Here’s what I mean: Simmons has used his ample personal fortune and his stature in the industry to singlehandedly force the House of Saud to open its dishdash . His relentless focus on the Saudis’ ability – or possible inability — to continue increasing the output of their vast oilfields has required the Saudis to mount an expensive public relations campaign. They’ve been forced to answer questions in public forums and be far more open than ever before about what are arguably the world’s most important oil reservoirs.

Simmons may be the only person in the energy business who had the access, reputation, platform, and most importantly, the desire , to force the Saudis to have this discussion. Through his investment banking firm, Houston-based Simmons & Co. International, Simmons had the freedom from political constraints needed to force this issue to the forefront of the global energy discussion.

For that alone, Simmons’ new book, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy , deserves attention.

While this book deserves much praise, it has some flaws. First, it is too long by a third. Better editing would have allowed Simmons to tighten his arguments and avoid repetition. Second, Simmons doesn’t distinguish between reserves and the Saudis’ production practices. That is, he argues that because the Saudis are having problems raising production in certain fields, they cannot increase their output. But this argument ignores the vast resources in the kingdom that have yet to be tapped. Further, production experts I talked to believe that with better production methods and more investment, the Saudis could dramatically increase the oil output from the fields they have already drilled.

Despite these quibbles, Simmons is right: We may not be able to count on the Saudis to provide the oil production growth that the world is counting on. After looking at all of the country’s big fields – Ghawar, Abqaiq and others – he concludes that after those big fields go into decline, “there is nothing remotely resembling them to take their place.”

Simmons’ book is just what the world energy business needs: a catalyst for more transparency throughout the business, but particularly in the upstream segment, where numerous companies have been flippant in their claims of “reserves.” More openness about production volumes and proven reserves — by publicly traded companies and national oil companies alike – is desperately needed. And it’s needed not just to protect shareholders and governments, but for the entire global economy. That’s why the United Nations is interested in creating a global standard for reporting oil reserves.

In addition to putting the issues of Saudi supply and transparency in sharp focus, Simmons raises three other points that are not often discussed: the Saudis’ debt problems, OPEC’s population boom, and the reasons why high oil prices are good not just for OPEC but for the developed world as well.

At the end of 2003, the Saudi government’s debt totaled about $170 billion. And Simmons reminds us that on a per capita basis, that means the Saudis have “more debt than Argentina.” In the two decades prior to 2003, the Saudis ran budget deficits in 19 of those 20 years. When you combine high levels of debt with a surging population, the results may not be felicitous. In Twilight in the Desert , and in his recent speeches, Simmons points out that by 2030, the population of the OPEC member countries could exceed one billion people. Ten of the 11 OPEC member countries are Muslim. And over the past two decades, nearly all of those countries have seen a sharp decline in their per capita income levels. If their populations rise, as is expected, that means that the OPEC world will have huge numbers of new, poor, uneducated citizens with no prospects. And that is a tried and true recipe for breeding religious extremism, and therefore, terrorism. One of the solutions to this population boom is to assure that sufficient cash flows into OPEC countries so they can develop their social infrastructure. And that means higher energy prices for the U.S. And as Simmons put it during a speech in February, is it right “for OPEC to supply so much value and yet be so poor?”

After a stint of openness, the Saudis have decided to ignore Simmons. Rather than egange him, they insist they are going to continue managing their fields as they see fit. “We have never in our history failed to deliver a barrel that we promised to deliver,” said Saudi Aramco CEO Abdallah Jum’ah recently. For our sake and theirs, let’s hope the Saudis are able to keep their promises for a long time to come.