Fw: [***] Simmons: "Black Thursday Was Only The Beginning"
- Conclusions are at the end of the article.
clipped from: http://groups.yahoo.com/group/EnergyResources
Date: Fri, 22 Aug 2003 08:21:02 -0400
From: Dale pfeiffer <daleliz@...>
Subject: FTW: Matthew Simmons Interview on Blackout
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FTW Exclusive Interview
Behind the Blackout
An Energy Investment Banker and Bush Energy A dvisor Gives
Unexpected A nswers on the Northeast Power Grid, Peak Oil and Gas,
and Much More c Copyright 2003, From The Wilderness Publications,
www.fromthewilderness.com. All Rights Reserved. This story may NOT
be posted on any Internet web site without express written
Contact admin@.... May be circulated, distributed or
transmitted for non-profit purposes only.
August 21, 2003, 2350 PDT, (FTW) -- Matthew Simmons is the CEO of
the world's largest Energy Investment Bank, Simmons & Company
It has a web site located at(http://www.simmonsco-intl.com/). Its
clients include Halliburton; Baker, Botts, LLP; Dynegy;
Kerr-McGee; and the World Bank. Since 1993, it has underwritten or
financed 18 transactions valued at more than $350 million. Of
those, six were valued at more than $1 billion. Simmons is a
member of the Council on Foreign Relations and serves on the
National Petroleum Council's Natural Gas Task Force. He has a lot
to say about the Northeast power grid blackout, its causes, and
what they imply for the future. He also has a lot to say about
Peak Oil and Gas.
Surprisingly, and with remarkable candor flowing from a sense of
urgency he communicates at every one of his presentations to
global energy experts, Simmons delivers a message that sounds more
like a Democratic "New Deal" plank than a Republican Party
free-market love fest. He is an arch foe of economists who insist
that investment and technology will solve what he and a growing
number of energy industry experts call an unsolvable and permanent
decline in hydrocarbon energy resources.
Deregulation was the primary cause of the failure on Black
Thursday, August 14. But, as far as Matt Simmons is concerned, to
stop there and pretend everything is okay if only more
infrastructure is built borders on suicidal behavior.
Matt Simmons will be the first to tell you that what he says has
nothing to do with politics and everything to do with survival. He
is a man of seeming contradictions by virtue of his opposition to
the environmental movement on the one hand and his absolute
dislike of energy deregulation in the 1990s on the other. There
are very few who have interacted with him from any camp who doubt
either his honesty or his sincerity. For that reason alone, what
this insider has to say about the Northeast Power Grid collapse
deserves our fullest attention. His words carry weight in
Washingtonand around the world. Black Thursday was, he says, only
FTW interviewed Simmons via telephone from his home in Rockport,
Maineon August 18, 2003
FTW: What's the most important thing you want the A merican people
to know about Black Thursday?
SIMMONS: This blackout ought to be an incredible jolt telling us
about a host of energy problems that are ultimately going to
prevent any future economic growth. It's like people have been
ignoring annoying phone calls and living in denial about a problem
that won't go away. It's like the ghost of Enron calling. The
event itself was astonishing. Senior people like Governor Pataki
or the head of NERC [North American Electric Reliability Council]
were asking how this could happen. But the problem was inevitable.
The only thing we didn't know was when it would happen.
FTW: What did happen?
SIMMONS: On a large scale what happened was deregulation.
Deregulation destroyed excess capacity. Under deregulation, excess
capacity was labeled as "massive glut" and removed from the system
to cut costs and increase profits. Experience has taught us that
weather is the chief culprit in events like this. The system needs
to be designed for a 100-year cyclical event of peak demand. If
you don't prepare for this, you are asking for a massive blackout.
New plants generally aren't built unless they are mandated, and
free markets don't make investments that give one percent returns.
There was also no investment in new transmission lines.
Underlying all this is the fact that we have no idea how to store
electricity. And every aspect of carrying capacity, from
generators, to transmission lines, to the lines to and inside your
house, has a rated capacity of x. When you exceed x, the lines
melt. That's why we have fuse boxes and why power grids shut down.
So we have now created a vicious cyclicality that progresses over
Another problem was that with deregulation, people thought that
they could borrow from their neighbor. New Yorkthought it could
borrow from Vermont. Ohiothought that it could borrow from
Michigan, etc. That works, but only up to the point where everyone
needs to borrow at once and there's no place to go.
Asecond major reason is that decisions were made in the 1990s that
all new generating plants were to be gas fired. We've had a
natural gas summit this year and, as you know, I have been talking
for some time about the natural gas cliff we are experiencing.
Many thought that this winter would be deadly, and I have to say
that it's just a miracle that we have replenished our gas stocks
going into the cold months. This winter could have been a major
disaster. We've seen a price collapse in natural gas to the five
to eight dollar range (per thousand cubic feet) and the only
reason that happened was throughout almost the entire summer there
were only a handful of days when the temperature rose above eighty
degrees anywhere. That was miraculous. It allowed us to prepare
for the winter but we shouldn't be optimistic. One good hurricane
that disrupts production, one blazing heat wave, one freezing
winter after that and we're out of solutions.
FTW: And natural gas too?
SIMMONS: Well, I know you understand it, but people need to
understand the concept of peaking and irreversible decline. It's a
sharper issue with gas, which doesn't follow a bell curve but
tends to fall off a cliff.
There will always be oil and gas in the ground, even a million
years from now. The question is, will you be a microbe to go down
and eat the oil in small pockets at depths no one can afford or is
able to drill to? Will you spend hundreds of thousands to drill a
gas well that will run dry in a few months? All the big deposits
have been found and exploited. There aren't going to be any
dramatic new discoveries and the discovery trends have made this
We are now in a box we should never have gotten into and it has
very serious implications. We also see the inevitable issues that
follow a major blackout: no water, no sewage, no gasoline. The
gasoline issue is very important. Our gasoline stocks are at near
all time lows. With the blackout, more than seven hundred thousand
barrels per day of refinery capacity were shut down. People were
told to boil their water. So what do they do, they go to their
electric stove which isn't working. What then?
FTW: Makes you wonder about France and the heat wave that has
SIMMONS: The only reason Europewas spared a far worse blackout
than what hit the USAwas that Europebarely uses air conditioning.
In fact, even though Americauses a lot of air conditioning some
areas have become fairly efficient in the ways they use it.
Quantitatively, we use more energy because there are more of us.
But air conditioning is a relatively new experience in Ontario,
Canada. Until recently Ontariohad been a net energy exporter. They
have a population of just over 12 million. With air conditioning
in the last five years, Ontariobecame a net importer of
electricity. Now, on just a normal hot summer day, Ontario's peak
power use averages about 23,000 Gigawatts.
Texas, with a population of 25 million, set an all time record of
60,000 Gigawatts just a week before the blackout. The difference
is that except for one tiny line running into Arkansas, Texasis
self-contained for electricity. It's not tied to any other users.
As we saw on Black Thursday, Ottawawas part of a whole
interlocking system that had no place to go but down.
FTW: So how big a factor was the weather?
SIMMONS: It was THE factor in my opinion. To show much weather
determines power use, in the week of August 3rd, the USset an
all-time national record for electricity use of 90,000 Gigawatts.
The Mid-Atlantic States' use of power had jumped 29.5% over last
year and 20% over just the previous four weeks. Why? The
temperature had been as hot as we experienced on Black Thursday.
If you want to compare it to vehicles and roadways, air
conditioning is the interstate highway system and the Internet is
the equivalent of SUVs. Everything that happened on August 14
started in the 17th hour. (5 PMat various local times). That's
when everything is running at once: industrial, residential, and
This is when demand peaks regardless of the weather. And we know
that in hour 17 on that day the USexperienced all-time peak energy
use. That's when the system tripped out.
FTW: So we have two basic camps saying that the problems are
generating capacity and transmission lines, without addressing
feedstock issues. What about the advocates for deregulation who
argued that there would be more generating capacity as a result?
SIMMONS: History answers that one. Following the 1965 blackout when
NERC was created there was a mandate that publicly owned and
regulated power providers had to build new plants. Every five
years, ten per cent was added to the generating base. As
deregulation was implemented in the 1990s, it was argued that it
would open up vast quantities of energy in neighboring states. In
the first five years of the decade, only four per cent capacity
was added over the entire period. In the second five years, only
two per cent was added.
In the summer of 1999, we had thirty consecutive power events
which unleashed the single biggest construction boom in history
which built 220 thousand megawatts of new plants at a
capitalization cost of six to seven hundred thousand dollars per
megawatt. Ninety-eight per cent of those plants were gas fired.
It was decided to use solely natural gas plants for several
reasons. Coal fired plants took five to seven years to build. They
are very dirty environmentally and the permit process is
difficult. We have built on all the available hydroelectric sites
we can build on. Nuclear is unpopular and expensive. Oil fired
plants are remnants of the days when oil was cheap. Those days are
not coming back because Peak Oil is with us now. Besides that, oil
fired power plants are about the least efficient use of a barrel
of oil that I can imagine. That left natural gas and the
economists mistakenly presumed there would be large supplies. But
natural gas plants were built with no supplies. Synthetic
contracts were used, Enron-style, to sell gas futures when the gas
didn't necessarily exist.
FTW: A ssuming that there was enough feed stock to run the new
plants how much building are we talking about?
SIMMONS: Each state would need to build forty to fifty per cent
excess capacity. Aforty per cent cushion merely provides the
chance to withstand a day of high summer heat and the chance to
grow by about 3% per year for three years.
FTW: Yet even if we re-regulate there are still going to be
problems with feed stock to power the plants. How serious is that?
SIMMONS: Someone's going to be left holding the bag big time. If
natural gas consumption surges in ten days of excessive heat then
it would require almost a complete shutdown of industrial
consumption to compensate and protect the grid. As I have been
reporting for years now, there isn't going to be enough gas to run
those plants, let alone new ones.
FTW: You mean shut down the economy for ten days to keep people
FTW: Everyone keeps saying that ANWR (The Arctic Natural
Wildlife Reserve) is the answer if we drill there. Is it?
SIMMONS: ANWR is not "The Answer." However, it makes great sense
to develop. Drilling there should not have a negative impact on
the coastal plains of the Arctic. With great luck, it could create
between 300,000 and possibly up to 1.5 million barrels of oil a
day and lots of natural gas that could last a decade or two. But
this does not become the sole answer. On the other hand, if ANWR
is kept off limits, it becomes no answer.
FTW: What about imports of natural gas from overseas? Russia and
Indonesia have huge reserves; Canada, as the Canadians are
painfully aware, is almost depleted when it comes to natural gas.
SIMMONS: Indonesia's gas fields are very old. Its Natuna gas
fields, a source of stranded gas that gets discussed all the time
has 95% CO2 and apparently costs about $40 billion to develop a
mere 1 bcf/day of dry gas. Russiahas four old fields that make up
over 80% of their gas supply and they all are in decline. Canada's
decline problems are as serious as the US.
FTW: Windmills? Solar?
SIMMONS: There's no way they can replace even a portion of
FTW: Reducing consumption?
SIMMONS: Reducing consumption has to happen, but many of the
favorite conservation concepts make little overall difference. The
big conservation changes end up being steps, like a ban on using
electricity to either heat water or melt metals and instead,
always using the "burner tip of natural gas". The latter is vastly
more efficient, the energy savings are enormous and we need lower
ceilings and smaller rooms. We need mass transit, and to eliminate
traffic congestion. Finally, we need a way to keep people from
using air-conditioning when the weather gets really muggy and hot
at same time. The strain this puts on our grid is too
We also must begin to use our current discretionary power during
the nighttime. All of theses steps are hard to implement but they
make a difference.
FTW: What is the solution?
SIMMONS: I don't think there is one_ The solution is to pray. Pray
for mild weather and a mild winter. Pray for no hurricanes and to
stop the erosion of natural gas supplies. Under the best of
circumstances, if all prayers are answered there will be no crisis
for maybe two years. After that it's a certainty.
FTW: On that cheery note let's take a look at oil supplies.
SIMMONS: Currently, oil supply issues are as serious as the
electrical grid. Last month the IEA (International Energy Agency)
updated their database. They had for years been talking about a
coming huge surge in non-OPEC supply, excluding the FSU (Former
Soviet Union). It hasn't happened. We have the highest oil prices
in 20 years and even great technological advances have not had a
measurable impact on discovery or production.
FTW: I have recently noted the speed with which the Chad-Cameroon
pipeline was built and switched on. Chad only has estimated
reserves of around 900 million barrels (World consumption is I
billion barrels every 12 days). I see a sense of urgency there.
SIMMONS: It's amazing. What's that pipeline going to pump, fifty
thousand barrels per day? That figure may go up, but it's
inconsequential in the long run. It's a sign of how strapped world
supplies really are and that we may be finding out that we are
already over the peak.
FTW: What about Iraq and Saudi Arabia? We have been following
Iraq closely and all the sabotage, infrastructure damage and the
pipeline bombings are actually reducing Iraqi capacity. That
leaves Saudi Arabia with 25% of known reserves.
SIMMONS: I have for years described two camps: the economists who
told us that technology would always produce new supply and the
pessimists or Cassandras who told us that peak was coming in maybe
fifteen or twenty years. We may be finding out that we went over
the peak in 2000. That makes both camps wrong.
Over the last year. I have obtained and closely examined more than
100 very technical production reports from Saudi Arabia. What I
glean from examining the data is that it is very likely that Saudi
Arabia, already a debtor nation, has very likely gone over its
Peak. If that is true, then it is a certainty that planet earth
has passed its peak of production. What that means, in the
starkest possible terms, is that we are no longer going to be able
to grow. It's like with a human being who passes a certain age in
life. Getting older does not mean the same thing as death. It
means progressively diminishing capacity, a rapid decline,
followed by a long tail.
FTW: What about people like Alan Greenspan and popular writers
who tell us that there is no basic problem with energy supplies?
Others offer us hydrogen, which is laughed out of hand by people
who have looked at its feasibility and efficiency.
SIMMONS: Basically they just don't get it. Some of them have gotten
They were so carried away by the arguments of the economists that
they stopped doing their homework. Month by month, and year by
year, events are proving them systematically and thoroughly
incorrect. They just don't get it. Right now, there is a deluge of
stories on the wonders of hydrogen. This is another area of great
confusion. Hydrogen is not a primary source of energy. For a
Hydrogen Era to occur you need an abundance of natural gas, or you
need to create a great deal of new power plants using coal and
What I find so ironic about our very serious energy problems is
that they started in Santa Barbarain 1969. This was where the best
work was being done to create a new technological evolution in our
ability to recover energy from deep water sources. Then we had a
tragic spill. This gave birth to the environmental movement. It
began the war between modern energy and environmental
"anarchists". They have worked overtime to shut down our access
to areas that might have diversified our energy supply. Had we
been able to develop these areas, then we would have more options
now to ensure a continuation of the economic prosperity we take so
much for granted. And there is no better friend of the environment
that economic prosperity.
FTW: But peak oil is peak oil, is it not? A ren't we just talking
about something that would have delayed the inevitable for a few
years? It would take a couple of years to drill and pipe out of A
NWR but there's only a two year (total US ) supply of gas there at
best, and even less oil. Then what? A t the A SPO conference in
Paris , I think it was you or another expert who disclosed that
four out of five very expensive deep water holes were coming up
SIMMONS: Peaking of oil and gas will occur, if it has not already
happened, and we will never know when the event has happened until
we see it "in our rear view mirrors."
FTW: Is it time for Peak Oil and Gas to become part of the public
SIMMONS: It is past time. As I have said, the experts and
politicians have no Plan B to fall back on. If energy peaks,
particularly while 5 of the world's 6.5 billion people have little
or no use of modern energy, it will be a tremendous jolt to our
economic well-being and to our heath -- greater than anyone could
After I ended the interview, I recalled something that I had read
recently in a book called "Contraction and Convergence - The
Global Solution to Climate Change." (www.gci.org.uk). It was a
startling revelation that since 1950 there has been a near perfect
correlation between the growth in world GDP and the emission of
greenhouse gases (i.e. - the consumption of hydrocarbon energy).
In an economic system that is predicated first and foremost on
perpetual growth, Matt Simmons' statement that we are no longer
ever going to grow took on a whole new meaning.
-- Mike Ruppert