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Thanks to Scott Hess.

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THE BREAKING POINT
By Peter Maass
The New York Times Magazine
Cover Story
August 21, 2005

http://www.nytimes.com/2005/08/21/magazine/21OIL.html

The largest oil terminal in the world, Ras Tanura, is located on the eastern
coast of Saudi Arabia, along the Persian Gulf. From Ras Tanura's control
tower, you can see the classic totems of oil's dominion -- supertankers
coming and going, row upon row of storage tanks and miles and miles of
pipes. Ras Tanura, which I visited in June, is the funnel through which
nearly 10 percent of the world's daily supply of petroleum flows. Standing
in the control tower, you are surrounded by more than 50 million barrels of
oil, yet not a drop can be seen.

The oil is there, of course. In a technological sleight of hand, oil can be
extracted from the deserts of Arabia, processed to get rid of water and gas,
sent through pipelines to a terminal on the gulf, loaded onto a supertanker
and shipped to a port thousands of miles away, then run through a refinery
and poured into a tanker truck that delivers it to a suburban gas station,
where it is pumped into an S.U.V. -- all without anyone's actually glimpsing
the stuff. So long as there is enough oil to fuel the global economy, it is
not only out of sight but also out of mind, at least for consumers.

I visited Ras Tanura because oil is no longer out of mind, thanks to record
prices caused by refinery shortages and surging demand -- most notably in
the United States and China -- which has strained the capacity of oil
producers and especially Saudi Arabia, the largest exporter of all. Unlike
the 1973 crisis, when the embargo by the Arab members of the Organization of
Petroleum Exporting Countries created an artificial shortfall, today's
shortage, or near-shortage, is real. If demand surges even more, or if a
producer goes offline because of unrest or terrorism, there may suddenly not
be enough oil to go around.

As Aref al-Ali, my escort from Saudi Aramco, the giant state-owned oil
company, pointed out, ''One mistake at Ras Tanura today, and the price of
oil will go up.'' This has turned the port into a fortress; its entrances
have an array of gates and bomb barriers to prevent terrorists from cutting
off the black oxygen that the modern world depends on. Yet the problem is
far greater than the brief havoc that could be wrought by a speeding zealot
with 50 pounds of TNT in the trunk of his car. Concerns are being voiced by
some oil experts that Saudi Arabia and other producers may, in the near
future, be unable to meet rising world demand. The producers are not running
out of oil, not yet, but their decades-old reservoirs are not as full and
geologically spry as they used to be, and they may be incapable of
producing, on a daily basis, the increasing volumes of oil that the world
requires. ''One thing is clear,'' warns Chevron, the second-largest American
oil company, in a series of new advertisements, ''the era of easy oil is
over.''

In the past several years, the gap between demand and supply, once
considerable, has steadily narrowed, and today is almost negligible. The
consequences of an actual shortfall of supply would be immense. If
consumption begins to exceed production by even a small amount, the price of
a barrel of oil could soar to triple-digit levels. This, in turn, could
bring on a global recession, a result of exorbitant prices for transport
fuels and for products that rely on petrochemicals -- which is to say,
almost every product on the market. The impact on the American way of life
would be profound: cars cannot be propelled by roof-borne windmills. The
suburban and exurban lifestyles, hinged to two-car families and constant
trips to work, school and Wal-Mart, might become unaffordable or, if gas
rationing is imposed, impossible. Carpools would be the least imposing of
many inconveniences; the cost of home heating would soar -- assuming, of
course, that climate-controlled habitats do not become just a fond memory.

But will such a situation really come to pass? That depends on Saudi Arabia.
To know the answer, you need to know whether the Saudis, who possess 22
percent of the world's oil reserves, can increase their country's output
beyond its current limit of 10.5 million barrels a day, and even beyond the
12.5-million-barrel target it has set for 2009. (World consumption is about
84 million barrels a day.) Saudi Arabia is the sole oil superpower. No other
producer possesses reserves close to its 263 billion barrels, which is
almost twice as much as the runner-up, Iran, with 133 billion barrels. New
fields in other countries are discovered now and then, but they tend to
offer only small increments. For example, the much-contested and
as-yet-unexploited reserves in the Alaska National Wildlife Refuge are
believed to amount to about 10 billion barrels, or just a fraction of what
the Saudis possess.

But the truth about Saudi oil is hard to figure out. Oil reservoirs cannot
be inventoried like wood in a wilderness: the oil is underground, unseen by
geologists and engineers, who can, at best, make highly educated guesses
about how much is underfoot and how much can be extracted in the future. And
there is a further obstacle: the Saudis will not let outsiders audit their
confidential data on reserves and production. Oil is an industry in which
not only is the product hidden from sight but so is reliable information
about it. And because we do not know when a supply-demand shortfall might
arrive, we do not know when to begin preparing for it, so as to soften its
impact; the economic blow may come as a sledgehammer from the darkness.

Of course the Saudis do have something to say about this prospect. Before
journeying to the kingdom, I went to Washington to hear the Saudi oil
minister, Ali al-Naimi, speak at an energy conference in the mammoth Ronald
Reagan Building and International Trade Center, not far from the White
House. Naimi was the star attraction at a gathering of the American
petro-political nexus. Samuel Bodman, the U.S. energy secretary, was on the
dais next to him. David O'Reilly, chairman and C.E.O. of Chevron, was
waiting in the wings. The moderator was an éminence grise of the oil world,
James Schlesinger, a former energy secretary, defense secretary and C.I.A.
director.

''I want to assure you here today that Saudi Arabia's reserves are
plentiful, and we stand ready to increase output as the market dictates,''
said Naimi, dressed in a gray business suit and speaking with only a slight
Arabic accent. He addressed skeptics who contend that Saudi reservoirs
cannot be tapped for larger amounts of oil. ''I am quite bullish on
technology as the key to our energy future,'' he said. ''Technological
innovation will allow us to find and extract more oil around the world.'' He
described the task of increasing output as just ''a question of investment''
in new wells and pipelines, and he noted that consuming nations urgently
need to build new refineries to process increased supplies of crude. ''There
is absolutely no lack of resources worldwide,'' he repeated.

His assurances did not assure. A barrel of oil cost $55 at the time of his
speech; less than three months later, the price had jumped by 20 percent.
The truth of the matter -- whether the world will really have enough
petroleum in the years ahead -- was as well concealed as the millions of
barrels of oil I couldn't see at Ras Tanura.


For 31 years, Matthew Simmons has prospered as the head of his own firm,
Simmons & Company International, which advises energy companies on mergers
and acquisitions. A member of the Council on Foreign Relations, a graduate
of the Harvard Business School and an unpaid adviser on energy policy to the
2000 presidential campaign of George W. Bush, he would be a card-carrying
member of the global oil nomenclatura, if cards were issued for such things.
Yet he is one of the principal reasons the oil world is beginning to ask
hard questions of itself.

Two years ago, Simmons went to Saudi Arabia on a government tour for
business executives. The group was presented with the usual dog-and-pony
show, but instead of being impressed, as most visitors tend to be, with the
size and expertise of the Saudi oil industry, Simmons became perplexed. As
he recalls in his somewhat heretical new book, ''Twilight in the Desert: The
Coming Saudi Oil Shock and the World Economy,'' a senior manager at Aramco
told the visitors that ''fuzzy logic'' would be used to estimate the amount
of oil that could be recovered. Simmons had never heard of fuzzy logic. What
could be fuzzy about an oil reservoir? He suspected that Aramco, despite its
promises of endless supplies, might in fact not know how much oil remained
to be recovered.

Simmons returned home with an itch to scratch. Saudi Arabia was one of the
charter members of OPEC, founded in 1960 in Baghdad to coordinate the
policies of oil producers. Like every OPEC country, Saudi Arabia provides
only general numbers about its output and reserves; it does not release
details about how much oil is extracted from each reservoir and what methods
are used to extract that oil, and it does not permit audits by outsiders.
The condition of Saudi fields, and those of other OPEC nations, is a closely
guarded secret. That's largely because OPEC quotas, which were first imposed
in 1983 to limit the output of member countries, were based on overall
reserves; the higher an OPEC member's reserves, the higher its quota. It is
widely believed that most, if not all, OPEC members exaggerated the sizes of
their reserves in order to have the largest possible quota -- and thus the
largest possible revenue stream.

In the days of excess supply, bankers like Simmons did not know, or care,
about the fudging; whether or not reserves were hyped, there was plenty of
oil coming out of the ground. Through the 1970's, 80's and 90's, the
capacity of OPEC and non-OPEC countries exceeded demand, and that's why OPEC
imposed a quota system -- to keep some product off the market (although many
OPEC members, seeking as much revenue as possible, quietly sold more oil
than they were supposed to). Until quite recently, the only reason to fear a
shortage was if a boycott, war or strike were to halt supplies. Few people
imagined a time when supply would dry up because of demand alone. But a
steady surge in demand in recent years -- led by China's emergence as a
voracious importer of oil -- has changed that.

This demand-driven scarcity has prompted the emergence of a cottage industry
of experts who predict an impending crisis that will dwarf anything seen
before. Their point is not that we are running out of oil, per se; although
as much as half of the world's recoverable reserves are estimated to have
been consumed, about a trillion barrels remain underground. Rather, they are
concerned with what is called ''capacity'' -- the amount of oil that can be
pumped to the surface on a daily basis. These experts -- still a minority in
the oil world -- contend that because of the peculiarities of geology and
the limits of modern technology, it will soon be impossible for the world's
reservoirs to surrender enough oil to meet daily demand.

One of the starkest warnings came in a February report commissioned by the
United States Department of Energy's National Energy Technology Laboratory.
''Because oil prices have been relatively high for the past decade, oil
companies have conducted extensive exploration over that period, but their
results have been disappointing,'' stated the report, assembled by Science
Applications International, a research company that works on security and
energy issues. ''If recent trends hold, there is little reason to expect
that exploration success will dramatically improve in the future. . . . The
image is one of a world moving from a long period in which reserves
additions were much greater than consumption to an era in which annual
additions are falling increasingly short of annual consumption. This is but
one of a number of trends that suggest the world is fast approaching the
inevitable peaking of conventional world oil production.''

The reference to ''peaking'' is not a haphazard word choice -- ''peaking''
is a term used in oil geology to define the critical point at which
reservoirs can no longer produce increasing amounts of oil. (This tends to
happen when reservoirs are about half-empty.) ''Peak oil'' is the point at
which maximum production is reached; afterward, no matter how many wells are
drilled in a country, production begins to decline. Saudi Arabia and other
OPEC members may have enough oil to last for generations, but that is no
longer the issue. The eventual and painful shift to different sources of
energy -- the start of the post-oil age -- does not begin when the last drop
of oil is sucked from under the Arabian desert. It begins when producers are
unable to continue increasing their output to meet rising demand. Crunch
time comes long before the last drop.

''The world has never faced a problem like this,'' the report for the Energy
Department concluded. ''Without massive mitigation more than a decade before
the fact, the problem will be pervasive and will not be temporary. Previous
energy transitions (wood to coal and coal to oil) were gradual and
evolutionary; oil peaking will be abrupt and revolutionary.''

Most experts do not share Simmons's concerns about the imminence of peak
oil. One of the industry's most prominent consultants, Daniel Yergin, author
of a Pulitzer Prize-winning book about petroleum, dismisses the doomsday
visions. ''This is not the first time that the world has 'run out of oil,'''
he wrote in a recent Washington Post opinion essay. ''It's more like the
fifth. Cycles of shortage and surplus characterize the entire history of the
oil industry.'' Yergin says that a number of oil projects that are under
construction will increase the supply by 20 percent in five years and that
technological advances will increase the amount of oil that can be recovered
from existing reservoirs. (Typically, with today's technology, only about 40
percent of a reservoir's oil can be pumped to the surface.)

Yergin's bullish view has something in common with the views of the
pessimists -- it rests on unknowns. Will the new projects that are under way
yield as much oil as their financial backers hope? Will new technologies
increase recovery rates as much as he expects? These questions are next to
impossible to answer because coaxing oil out of the ground is an
extraordinarily complex undertaking. The popular notion of reservoirs as
underground lakes, from which wells extract oil like straws sucking a
milkshake from a glass, is incorrect. Oil exists in drops between and inside
porous rocks. A new reservoir may contain sufficient pressure to make these
drops of oil flow to the surface in a gusher, but after a while -- usually
within a few years and often sooner than that -- natural pressure lets up
and is no longer sufficient to push oil to the surface. At that point,
''secondary'' recovery efforts are begun, like pumping water or gas into the
reservoirs to increase the pressure.

This process is unpredictable; reservoirs are extremely temperamental. If
too much oil is extracted too quickly or if the wrong types or amounts of
secondary efforts are employed, the amount of oil that can be recovered from
a field can be greatly reduced; this is known in the oil world as ''damaging
a reservoir.'' A widely cited example is Oman: in 2001, its daily production
reached more than 960,000 barrels, but then suddenly declined, despite the
use of advanced technologies. Today, Oman produces 785,000 barrels of oil a
day. Herman Franssen, a consultant who worked in Oman for a decade, sees
that country's experience as a possible lesson in the limits of technology
for other producers that try to increase or maintain high levels of output.
''They reached a million barrels a day, and then a few years later
production collapsed,'' Franssen said in a phone interview. ''They used all
these new technologies, but they haven't been able to stop the decline
yet.''


The vague production and reserve data that gets published does not begin to
tell the whole story of an oil field's health, production potential or even
its size. For a clear-as-possible picture of a country's oil situation, you
need to know what is happening in each field -- how many wells it has, how
much oil each well is producing, what recovery methods are being used and
how long they've been used and the trend line since the field went into
production. Data of that sort are typically not released by state-owned
companies like Saudi Aramco.

As Matthew Simmons searched for clues to the truth of the Saudi situation,
he immersed himself in the minutiae of oil geology. He realized that data
about Saudi fields might be found in the files of the Society of Petroleum
Engineers. Oil engineers, like most professional groups, have regular
conferences at which they discuss papers that delve into the work they do.
The papers, which focus on particular wells that highlight a problem or a
solution to a problem, are presented and debated at the conferences and
published by the S.P.E. -- and then forgotten.

Before Simmons poked around, no one had taken the time to pull together the
S.P.E. papers that involved Saudi oil fields and review them en masse.
Simmons found more than 200 such papers and studied them carefully. Although
the papers cover only a portion of the kingdom's wells and date back, in
some cases, several decades, they constitute perhaps the best public data
about the condition and prospects of Saudi reservoirs.

Ghawar is the treasure of the Saudi treasure chest. It is the largest oil
field in the world and has produced, in the past 50 years, about 55 billion
barrels of oil, which amounts to more than half of Saudi production in that
period. The field currently produces more than five million barrels a day,
which is about half of the kingdom's output. If Ghawar is facing problems,
then so is Saudi Arabia and, indeed, the entire world.

Simmons found that the Saudis are using increasingly large amounts of water
to force oil out of Ghawar. Most of the wells are concentrated in the
northern portion of the 174-mile-long field. That might seem like good news
-- when the north runs low, the Saudis need only to drill wells in the
south. But in fact it is bad news, Simmons concluded, because the southern
portions of Ghawar are geologically more difficult to draw oil from.
''Someday (and perhaps that day will be soon), the remarkably high well flow
rates at Ghawar's northern end will fade, as reservoir pressures finally
plummet,'' Simmons writes in his book. ''Then, Saudi Arabian oil output will
clearly have peaked. The death of this great king'' -- meaning Ghawar --
''leaves no field of vaguely comparable stature in the line of succession.
Twilight at Ghawar is fast approaching.'' He goes on: ''The geological
phenomena and natural driving forces that created the Saudi oil miracle are
conspiring now in normal and predictable ways to bring it to its conclusion,
in a time frame potentially far shorter than officialdom would have us
believe.'' Simmons concludes, ''Saudi Arabia clearly seems to be nearing or
at its peak output and cannot materially grow its oil production.''

Saudi officials belittle Simmons's work. Nansen Saleri, a senior Aramco
official, has described Simmons as a banker ''trying to come across as a
scientist.'' In a speech last year, Saleri wryly said, ''I can read 200
papers on neurology, but you wouldn't want me to operate on your
relatives.'' I caught up with Simmons in June, during a trip he made to
Manhattan to talk with a group of oil-shipping executives. The impression he
gives is of an enthusiastic inventor sharing a discovery that took him by
surprise. He has a certain wide-eyed wonder in his regard, as if a bit of
mystery can be found in everything that catches his eye. And he has a
rumpled aspect -- thinning hair slightly askew, shirt sleeves a fraction too
long. Though he delivers a bracing message, his discourse can wander. He is
a successful businessman, and it is clear that he did not achieve his
position by being a man of impeccable convention. He certainly has not lost
sight of the rule that people who shout ''the end is nigh'' do not tend to
be favorably reviewed by historians, let alone by their peers. He notes in
his book that way back in 1979, The New York Times published an
investigative story by Seymour Hersh under the headline ''Saudi Oil Capacity
Questioned.'' He knows that in past decades the Cassandras failed to foresee
new technologies, like deep-water and horizontal drilling, that provided new
sources of oil and raised the amount of oil that can be recovered from
reservoirs.

But Simmons says that there are only so many rabbits technology can pull out
of its petro-hat. He impishly notes that if the Saudis really wanted to,
they could easily prove him wrong. ''If they want to satisfy people, they
should issue field-by-field production reports and reserve data and have it
audited,'' he told me. ''It would then take anybody less than a week to say,
'Gosh, Matt is totally wrong,' or 'Matt actually might be too optimistic.'''

Simmons has a lot riding on his campaign -- not only his name but also his
business, which would not be rewarded if he is proved to be a fool. What, I
asked, if the data show that the Saudis will be able to sustain production
of not only 12.5 million barrels a day -- their target for 2009 -- but 15
million barrels, which global demand is expected to require of them in the
not-too-distant future? ''The odds of them sustaining 12 million barrels a
day is very low,'' Simmons replied. ''The odds of them getting to 15 million
for 50 years -- there's a better chance of me having Bill Gates's net worth,
and I wouldn't bet a dime on that forecast.''

The gathering of executives took place in a restaurant at Chelsea Piers;
about 35 men sat around a set of tables as the host introduced Simmons. He
rambled a bit but hit his talking points, and the executives listened
raptly; at one point, the man on my right broke into a soft whistle, of the
sort that means ''Holy cow.''

Simmons didn't let up. ''We're going to look back at history and say $55 a
barrel was cheap,'' he said, recalling a TV interview in which he predicted
that a barrel might hit triple digits.

He said that the anchor scoffed, in disbelief, ''A hundred dollars?''

Simmons replied, ''I wasn't talking about low triple digits.''


The onset of triple-digit prices might seem a blessing for the Saudis --
they would receive greater amounts of money for their increasingly scarce
oil. But one popular misunderstanding about the Saudis -- and about OPEC in
general -- is that high prices, no matter how high, are to their benefit.

Although oil costing more than $60 a barrel hasn't caused a global
recession, that could still happen: it can take a while for high prices to
have their ruinous impact. And the higher above $60 that prices rise, the
more likely a recession will become. High oil prices are inflationary; they
raise the cost of virtually everything -- from gasoline to jet fuel to
plastics and fertilizers -- and that means people buy less and travel less,
which means a drop-off in economic activity. So after a brief windfall for
producers, oil prices would slide as recession sets in and once-voracious
economies slow down, using less oil. Prices have collapsed before, and not
so long ago: in 1998, oil fell to $10 a barrel after an untimely increase in
OPEC production and a reduction in demand from Asia, which was suffering
through a financial crash. Saudi Arabia and the other members of OPEC
entered crisis mode back then; adjusted for inflation, oil was at its lowest
price since the cartel's creation, threatening to feed unrest among the
ranks of jobless citizens in OPEC states.

''The Saudis are very happy with oil at $55 per barrel, but they're also
nervous,'' a Western diplomat in Riyadh told me in May, referring to the
price that prevailed then. (Like all the diplomats I spoke to, he insisted
on speaking anonymously because of the sensitivities of relations with Saudi
Arabia.) ''They don't know where this magic line has moved to. Is it now
$65? Is it $75? Is it $80? They don't want to find out, because if you did
have oil move that far north . . . the chain reaction can come back to a
price collapse again.''

High prices can have another unfortunate effect for producers. When crude
costs $10 a barrel or even $30 a barrel, alternative fuels are prohibitively
expensive. For example, Canada has vast amounts of tar sands that can be
rendered into heavy oil, but the cost of doing so is quite high. Yet those
tar sands and other alternatives, like bioethanol, hydrogen fuel cells and
liquid fuel from natural gas or coal, become economically viable as the
going rate for a barrel rises past, say, $40 or more, especially if
consuming governments choose to offer their own incentives or subsidies. So
even if high prices don't cause a recession, the Saudis risk losing market
share to rivals into whose nonfundamentalist hands Americans would much
prefer to channel their energy dollars. A concerted push for greater energy
conservation in the United States, which consumes one-quarter of the world's
oil (mostly to fuel our cars, as gasoline), would hurt producing nations,
too. Basically, any significant reduction in the demand for oil would be
ruinous for OPEC members, who have little to offer the world but oil; if a
substitute can be found, their future is bleak. Another Western diplomat
explained the problem facing the Saudis: ''You want to have the price as
high as possible without sending the consuming nations into a recession and
at the same time not have the price so high that it encourages alternative
technologies.''

From the American standpoint, one argument in favor of conservation and a
switch to alternative fuels is that by limiting oil imports, the United
States and its Western allies would reduce their dependence on a potentially
unstable region. (In fact, in an effort to offset the risks of relying on
the Saudis, America's top oil suppliers are Canada and Mexico.) In addition,
sending less money to Saudi Arabia would mean less money in the hands of a
regime that has spent the past few decades doling out huge amounts of its
oil revenue to mosques, madrassas and other institutions that have fanned
the fires of Islamic radicalism. The oil money has been dispensed not just
by the Saudi royal family but by private individuals who benefited from the
oil boom -- like Osama bin Laden, whose ample funds, probably eroded now,
came from his father, a construction magnate. Without its oil windfall,
Saudi Arabia would have had a hard time financing radical Islamists across
the globe.

For the Saudis, the political ramifications of reduced demand for its oil
would not be negligible. The royal family has amassed vast personal wealth
from the country's oil revenues. If, suddenly, Saudis became aware that the
royal family had also failed to protect the value of the country's treasured
resource, the response could be severe. The mere admission that Saudi
reserves are not as impressively inexhaustible as the royal family has
claimed could lead to hard questions about why the country, and the world,
had been misled. With the death earlier this month of the long-ailing King
Fahd, the royal family is undergoing another period of scrutiny; the new
king, Abdullah, is in his 80's, and the crown prince, his half-brother
Sultan, is in his 70's, so the issue of generational change remains to be
settled. As long as the country is swimming in petro-dollars -- even as it
is paying off debt accrued during its lean years -- everyone is relatively
happy, but that can change. One diplomat I spoke to recalled a comment from
Sheik Ahmed Zaki Yamani, the larger-than-life Saudi oil minister during the
1970's: ''The Stone Age didn't end for lack of stone, and the oil age will
end long before the world runs out of oil.''

Until now, the Saudis had an excess of production capacity that allowed
them, when necessary, to flood the market to drive prices down. They did
that in 1990, when the Iraqi invasion of Kuwait eliminated not only Kuwait's
supply of oil but also Iraq's. The Saudis functioned, as they always had, as
the central bank of oil, releasing supply to the market when it was needed
and withdrawing supply to keep prices from going lower than the cartel would
have liked. In other words, they controlled not only the price of oil but
their own destiny as well.

''That is what the world has called on them to do before -- turn on the taps
to produce more and get prices down,'' a senior Western diplomat in Riyadh
told me recently. ''Decreasing prices used to keep out alternative fuels. I
don't see how they're able to do that anymore. This is a huge change, and it
is a big step in the move to whatever is coming next. That's what's really
happening.''

Without the ability to flood the markets with oil, the Saudis are resorting
to flooding the market with promises; it is a sort of petro-jawboning.
That's why Ali al-Naimi, the oil minister, told his Washington audience that
Saudi Arabia has embarked on a crash program to raise its capacity to 12.5
million barrels a day by 2009 and even higher in the years after that. Naimi
is not unlike a factory manager who needs to promise the moon to his
valuable clients, for fear of losing or alarming them. He has no choice. The
moment he says anything bracing, the touchy energy markets will probably
panic, pushing prices even higher and thereby hastening the onset of
recession, a switch to alternative fuels or new conservation efforts -- or
all three. Just a few words of honest caution could move the markets;
Naimi's speeches are followed nearly as closely in the financial world as
those of Alan Greenspan.

I journeyed to Saudi Arabia to interview Naimi and other senior officials,
to get as far beyond their prepared remarks as might be possible. Although I
was allowed to see Ras Tanura, my interview requests were denied. I was
invited to visit Aramco's oil museum in Dhahran, but that is something a
Saudi schoolchild can do on a field trip. It was a ''show but don't tell''
policy. I was able to speak about production issues only with Ibrahim
al-Muhanna, the oil ministry spokesman, who reluctantly met me over coffee
in the lobby of my hotel in Riyadh. He defended Saudi Arabia's refusal to
share more data, noting that the Saudis are no different from most oil
producers.

''They will not tell you,'' he said. ''Nobody will. And that is not going to
change.'' Referring to the fact that Saudi Arabia is often called the
central bank of oil, he added: ''If an outsider goes to the Fed and asks,
'How much money do you have?' they will tell you. If you say, 'Can I come
and count it?' they will not let you. This applies to oil companies and oil
countries.'' I mentioned to Muhanna that many people think his government's
''trust us'' stance is not convincing in light of the cheating that has gone
on within OPEC and in the industry as a whole; even Royal Dutch/Shell, a
publicly listed oil company that undergoes regular audits, has admitted that
it overstated its 2002 reserves by 23 percent.

''There is no reason for any country or company to lie,'' Muhanna replied.
''There is a lot of oil around.'' I didn't need to ask about Simmons and his
peak-oil theory; when I met Muhanna at the conference in Washington, he
nearly broke off our conversation at the mention of Simmons's name. ''He
does not know anything,'' Muhanna said. ''The only thing he has is a big
mouth. We should not pay attention to him. Either you believe us or you
don't.''


So whom to believe? Before leaving New York for Saudi Arabia, I was advised
by several oil experts to try to interview Sadad al-Husseini, who retired
last year after serving as Aramco's top executive for exploration and
production. I faxed him in Dhahran and received a surprisingly quick reply;
he agreed to meet me. A week later, after I arrived in Riyadh, Husseini
e-mailed me, asking when I would come to Dhahran; in a follow-up phone call,
he offered to pick me up at the airport. He was, it seemed, eager to talk.

It can be argued that in a nation devoted to oil, Husseini knows more about
it than anyone else. Born in Syria, Husseini was raised in Saudi Arabia,
where his father was a government official whose family took on Saudi
citizenship. Husseini earned a Ph.D. in geological sciences from Brown
University in 1973 and went to work in Aramco's exploration department,
eventually rising to the highest position. Until his retirement last year --
said to have been caused by a top-level dispute, the nature of which is the
source of many rumors -- Husseini was a member of the company's board and
its management committee. He is one of the most respected and accomplished
oilmen in the world.

After meeting me at the cavernous airport that serves Dhahran, he drove me
in his luxury sedan to the villa that houses his private office. As we
entered, he pointed to an armoire that displayed a dozen or so vials of
black liquid. ''These are samples from oil fields I discovered,'' he
explained. Upstairs, there were even more vials, and he would have possessed
more than that except, as he said, laughing, ''I didn't start collecting
early enough.''

We spoke for several hours. The message he delivered was clear: the world is
heading for an oil shortage. His warning is quite different from the calming
speeches that Naimi and other Saudis, along with senior American officials,
deliver on an almost daily basis. Husseini explained that the need to
produce more oil is coming from two directions. Most obviously, demand is
rising; in recent years, global demand has increased by two million barrels
a day. (Current daily consumption, remember, is about 84 million barrels a
day.) Less obviously, oil producers deplete their reserves every time they
pump out a barrel of oil. This means that merely to maintain their reserve
base, they have to replace the oil they extract from declining fields. It's
the geological equivalent of running to stay in place. Husseini acknowledged
that new fields are coming online, like offshore West Africa and the Caspian
basin, but he said that their output isn't big enough to offset this growing
need.

''You look at the globe and ask, 'Where are the big increments?' and there's
hardly anything but Saudi Arabia,'' he said. ''The kingdom and Ghawar field
are not the problem. That misses the whole point. The problem is that you go
from 79 million barrels a day in 2002 to 82.5 in 2003 to 84.5 in 2004.
You're leaping by two million to three million a year, and if you have to
cover declines, that's another four to five million.'' In other words, if
demand and depletion patterns continue, every year the world will need to
open enough fields or wells to pump an additional six to eight million
barrels a day -- at least two million new barrels a day to meet the rising
demand and at least four million to compensate for the declining production
of existing fields. ''That's like a whole new Saudi Arabia every couple of
years,'' Husseini said. ''It can't be done indefinitely. It's not
sustainable.''

Husseini speaks patiently, like a teacher who hopes someone is listening. He
is in the enviable position of knowing what he talks about while having the
freedom to speak openly about it. He did not disclose precise information
about Saudi reserves or production -- which remain the equivalent of state
secrets -- but he felt free to speak in generalities that were forthright,
even when they conflicted with the reassuring statements of current Aramco
officials. When I asked why he was willing to be so frank, he said it was
because he sees a shortage ahead and wants to do what he can to avert it. I
assumed that he would not be particularly distressed if his rivals in the
Saudi oil establishment were embarrassed by his frankness.

Although Matthew Simmons says it is unlikely that the Saudis will be able to
produce 12.5 million barrels a day or sustain output at that level for a
significant period of time, Husseini says the target is realistic; he says
that Simmons is wrong to state that Saudi Arabia has reached its peak. But
12.5 million is just an interim marker, as far as consuming nations are
concerned, on the way to 15 million barrels a day and beyond -- and that is
the point at which Husseini says problems will arise.

At the conference in Washington in May, James Schlesinger, the moderator,
conducted a question-and-answer session with Naimi at the conclusion of the
minister's speech. One of the first questions involved peak oil: might it be
true that Saudi Arabia, which has relied on the same reservoirs, and
especially Ghawar, for more than five decades, is nearing the geological
limit of its output?

Naimi wouldn't hear of it.

''I can assure you that we haven't peaked,'' he responded. ''If we peaked,
we would not be going to 12.5 and we would not be visualizing a
15-million-barrel-per-day production capacity. . . . We can maintain 12.5 or
15 million for the next 30 to 50 years.''

Experts like Husseini are very concerned by the prospect of trying to
produce 15 million barrels a day. Even if production can be ramped up that
high, geology may not be forgiving. Fields that are overproduced can drop
off, in terms of output, quite sharply and suddenly, leaving behind large
amounts of oil that cannot be coaxed out with existing technology. This is
called trapped oil, because the rocks or sediment around it prevent it from
escaping to the surface. Unless new technologies are developed, that oil
will never be extracted. In other words, the haste to recover oil can lead
to less oil being recovered.

''You could go to 15, but that's when the questions of depletion rate,
reservoir management and damaging the fields come into play,'' says Nawaf
Obaid, a Saudi oil and security analyst who is regarded as being
exceptionally well connected to key Saudi leaders. ''There is an
understanding across the board within the kingdom, in the highest spheres,
that if you're going to 15, you'll hit 15, but there will be considerable
risks . . . of a steep decline curve that Aramco will not be able to do
anything about.''

Even if the Saudis are willing to risk damaging their fields, or even if the
risk is overstated, Husseini points out a practical problem. To produce and
sustain 15 million barrels a day, Saudi Arabia will have to drill a lot more
wells and build a lot more pipelines and processing facilities. Currently,
the global oil industry suffers a deficit of qualified engineers to oversee
such projects and the equipment and the raw materials -- for example, rigs
and steel -- to build them. These things cannot be wished from thin air or
developed quickly enough to meet the demand.

''If we had two dozen Texas A&M's producing a thousand new engineers a year
and the industrial infrastructure in the kingdom, with the drilling rigs and
power plants, we would have a better chance, but you cannot put that into
place overnight,'' Husseini said. ''Capacity is not just a function of
reserves. It is a function of reserves plus know-how plus a commercial
economic system that is designed to increase the resource exploitation. For
example, in the U.S. you have infrastructure -- there must be tens of
thousands of miles of pipelines. If we, in Saudi Arabia, evolve to that
level of commercial maturity, we could probably produce a heck of a lot more
oil. But to get there is a very tedious, slow process.''

He worries that the rising global demand for oil will lead to the petroleum
equivalent of running an engine at ever-increasing speeds without stopping
to cool it down or change the oil. Husseini does not want to see the fragile
and irreplaceable reservoirs of the Middle East become damaged through
wanton overproduction.

''If you are ramping up production so fast and jump from high to higher to
highest, and you're not having enough time to do what needs to be done, to
understand what needs to be done, then you can damage reservoirs,'' he said.
''Systematic development is not just a matter of money. It's a matter of
reservoir dynamics, understanding what's there, analyzing and understanding
information. That's where people come in, experience comes in. These are not
universally available resources.''

The most worrisome part of the crisis ahead revolves around a set of
statistics from the Energy Information Administration, which is part of the
U.S. Department of Energy. The E.I.A. forecast in 2004 that by 2020 Saudi
Arabia would produce 18.2 million barrels of oil a day, and that by 2025 it
would produce 22.5 million barrels a day. Those estimates were unusual,
though. They were not based on secret information about Saudi capacity, but
on the projected needs of energy consumers. The figures simply assumed that
Saudi Arabia would be able to produce whatever the United States needed it
to produce. Just last month, the E.I.A. suddenly revised those figures
downward -- not because of startling new information about world demand or
Saudi supply but because the figures had given so much ammunition to
critics. Husseini, for example, described the 2004 forecast as unrealistic.

''That's not how you would manage a national, let alone an international,
economy,'' he explained. ''That's the part that is scary. You draw some
assumptions and then say, 'O.K., based on these assumptions, let's go
forward and consume like hell and burn like hell.''' When I asked whether
the kingdom could produce 20 million barrels a day -- about twice what it is
producing today from fields that may be past their prime -- Husseini paused
for a second or two. It wasn't clear if he was taking a moment to figure out
the answer or if he needed a moment to decide if he should utter it. He
finally replied with a single word: No.

''It's becoming unrealistic,'' he said. ''The expectations are beyond what
is achievable. This is a global problem . . . that is not going to be solved
by tinkering with the Saudi industry.''

It would be unfair to blame the Saudis alone for failing to warn of whatever
shortages or catastrophes might lie ahead.

In the political and corporate realms of the oil world, there are few
incentives to be forthright. Executives of major oil companies have been
reluctant to raise alarms; the mere mention of scarce supplies could
alienate the governments that hand out lucrative exploration contracts and
also send a message to investors that oil companies, though wildly
profitable at the moment, have a Malthusian long-term future. Fortunately,
that attitude seems to be beginning to change. Chevron's ''easy oil is
over'' advertising campaign is an indication that even the boosters of an
oil-drenched future are not as bullish as they once were.

Politicians remain in the dark. During the 2004 presidential campaign, which
occurred as gas prices were rising to record levels, the debate on energy
policy was all but nonexistent. The Bush campaign produced an advertisement
that concluded: ''Some people have wacky ideas. Like taxing gasoline more so
people drive less. That's John Kerry.'' Although many environmentalists
would have been delighted if Kerry had proposed that during the campaign, in
fact the ad was referring to a 50-cents-a-gallon tax that Kerry supported 11
years ago as part of a package of measures to reduce the deficit. (The gas
tax never made it to a vote in the Senate.) Kerry made no mention of taxing
gasoline during the campaign; his proposal for doing something about high
gas prices was to pressure OPEC to increase supplies.

Husseini, for one, doesn't buy that approach. ''Everybody is looking at the
producers to pull the chestnuts out of the fire, as if it's our job to fix
everybody's problems,'' he told me. ''It's not our problem to tell a
democratically elected government that you have to do something about your
runaway consumers. If your government can't do the job, you can't expect
other governments to do it for them.'' Back in the 70's, President Carter
called for the moral equivalent of war to reduce our dependence on foreign
oil; he was not re-elected. Since then, few politicians have spoken of an
energy crisis or suggested that major policy changes are necessary to avert
one. The energy bill signed earlier this month by President Bush did not
even raise fuel-efficiency standards for passenger cars. When a crisis comes
-- whether in a year or 2 or 10 -- it will be all the more painful because
we will have done little or nothing to prepare for it.

------------

PREVIOUS NHNE NEWS LIST ARTICLES:

OIL EXPERT PREDICTS APOCALYPSE, BUT FEW ARE LISTENING (8/22/2005):
http://groups.yahoo.com/group/nhnenews/message/9787

SAUDIS WARN OF SHORTFALLS AS OIL HITS $61 (7/7/2005):
http://groups.yahoo.com/group/nhnenews/message/9524

PERSPECTIVE: END-TIME FOR USA UPON OIL COLLAPSE (6/27/2005):
http://groups.yahoo.com/group/nhnenews/message/9454

SIMULATED OIL MELTDOWN SHOWS U.S. ECONOMY'S VULNERABILITY (6/25/2005):
http://groups.yahoo.com/group/nhnenews/message/9444

EXXONMOBIL EXPECTS PEAK OIL IN 5 YEARS (5/27/2005):
http://groups.yahoo.com/group/nhnenews/message/9244

THE END OF OIL IS CLOSER THAN YOU THINK (4/21/2005):
http://groups.yahoo.com/group/nhnenews/message/9056

GOODBYE TO ALL THAT OIL (4/5/2005):
http://groups.yahoo.com/group/nhnenews/message/8987

JOE FIRMAGE ON "PEAK OIL", "THE SINGULARITY" & KEN WILBER (11/2/2004):
http://groups.yahoo.com/group/nhnenews/message/8199

OIL & GAS RUNNING OUT MUCH FASTER THAN EXPECTED (10/6/2003):
http://groups.yahoo.com/group/nhnenews/message/6054

WORLD OIL SUPPLY COMFORTABLY EXCEEDS DEMAND (6/18/2003):
http://groups.yahoo.com/group/nhnenews/message/5550

NEW BOOK: WHEN THE OIL RUNS OUT, HORRIFIC PROBLEMS WILL FOLLOW (5/14/2003):
http://groups.yahoo.com/group/nhnenews/message/5304

OIL MORE PLENTIFUL THAN PREVIOUSLY THOUGHT (4/27/2002):
http://groups.yahoo.com/group/nhnenews/message/3067

AGE OF OIL ABOUT TO END (6/24/2000):
http://groups.yahoo.com/group/nhnenews/message/427


------------

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Published by David Sunfellow
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