Twilight in the Desert: The Coming Saudi Oil Shock and the World Economyby Matthew R. Simmons
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Twilight in the Desert reveals a Saudi oil and production industry that could soon approach a serious, irreversible decline. In this exhaustively researched book, veteran oil industry analyst Matthew Simmons draws on his three-plus decades of insider experience and more than 200 independently produced reports about Saudi petroleum resources and production operations. He uncovers a story about Saudi Arabia’s troubled oil industry, not to mention its political and societal instability, which differs sharply from the globally accepted Saudi version. It’s a story that is provocative and disturbing, based on undeniable facts, but until now never told in its entirety. Twilight in the Desert answers all readers’ questions about Saudi oil and production industries with keen examination instead of unsubstantiated posturing, and takes its place as one of the most important books of this still-young century.
“…a realistic look at the future of Saudi Arabian oil supplies” (Wexus, 7th December 2005)
"The Texas energy specialist, Matthew Simmons, has suggested that the world derives false comfort from the Saudi Arabian assurances of willingness to increase production to meet consumer shortfalls." (Financial Times, 16th September 2005)
"Oil industry expert Matthew Simmons thinks...claims and forecasts are exaggerations and unrepresentative...the book goes into good detail..." (Lloyds List, 26th August 2005)
"...an analyst who is warning that the end of booming oil production is nigh, or already upon us..." (The Business, 4th September 2005)
"This book by Matthew Simmons comes at a timely moment...[and is] therefore essential reading for industry, government, the investment community and academia. It has a message for everyone." (Times Higher Education Supplement, 9th September 2005)
"...there are many valuable insights in Simmons' book. His basic points are right on target." (BusinessWeek, August 1, 2005)
"...This is a ground-breaking book by an analyst of unimpeachable authority..." (New Statesman, 25 July 2005)
In 1956, Shell Oil geologist M. King Hubbert discovered a grand illusion in the American oil industry. For tax purposes, he noted, American oil companies regularly delayed the declaration of new oil reserves by years and even decades. The result was a false impression that new oil was being found all the time. In fact, discoveries had peaked in 1936.
Based on this observation, Mr. Hubbert predicted that American oil production would peak in 1969. He was wrong by one year. We briefly produced 10 million barrels a day in 1970 but have never hit that level since. Even with the addition of Prudhoe Bay, Alaska, American production has slipped to eight million barrels a day which is why we import 60% of our oil.
Across the oil industry, the uneasy feeling is growing that world production may be approaching its own "Hubbert's Peak." The last major field yielding more than a million barrels a day was found in Mexico in 1976. New discoveries peaked in 1960, and production outside the Middle East reached its high point in 1997. Meanwhile world demand continues to accelerate by 3% a year. Indonesia, once a major exporter, now imports its oil.
The Saudis claim to have huge oil reserves. Do they really?
Before an uneasy feeling grows into full-blown pessimism, however, one must consider the supposedly vast oil resources lying beneath Saudi Arabia. The Saudis possess 25% of the world's proven reserves. They routinely proclaim that, for at least the next 50 years, they could easily double their current output of 10 million barrels a day.
But is this true? Matthew R. Simmons, a Texas investment banker with a Harvard Business School degree and 20 years' experience in oil, has his doubts. In "Twilight in the Desert" (John Wiley & Sons, 422 pages, $24.95), Mr. Simmons argues that the Saudis may be deceiving the world and themselves. If only half of his claims prove to be true, we could be in for some nasty surprises.
First, Mr. Simmons notes, all Saudi claims exist behind a veil of secrecy. In 1982, the Saudi government took complete control of Aramco (the Arabian American Oil Co.) after four decades of co-ownership with a consortium of major oil companies. Since then Aramco has never released field-by-field figures for its oil production. In fact, no OPEC member is very forthcoming. The cartel sets production quotas according to a country's reserves, so each member has reason to exaggerate. Meanwhile, OPEC nations are constantly cheating one another by overproducing, so none wants to publish official statistics.
As a result, the world's most reliable source for OPEC production is a little company called Petrologistics, located over a grocery store in Geneva. Conrad Gerber, the principal, claims to have spies in every OPEC port. For all we know, Mr. Gerber is making up his numbers, but everyone including the Paris-based International Energy Agency takes him seriously, since OPEC produces nothing better.
The Saudis, for their part, obviously enjoy their role as producer of last resort and feel content to let everyone think that they have things under control. Yet as Mr. Simmons observes: "History has frequently shown that once secrecy envelops the culture of either a company or a country, those most surprised when the truth comes out are often the insiders who created the secrets in the first place."
Mr. Simmons became suspicious of Saudi claims after taking a guided tour of Aramco facilities in 2003. To penetrate the veil, he turned to the electronic library of the Society of Petroleum Engineers, which regularly publishes technical papers by field geologists. After downloading and studying more than 200 reports by Aramco personnel, Mr. Simmons came up with his own portrait of Saudi Arabia's oil resources. It is not a pretty picture.
Almost 90% of Saudi production comes from six giant fields, all of them discovered before 1967. The "king" of this grouping the 2000-square-mile Ghawar field near the Persian Gulf is the largest oil field in the world. But if Saudi geology follows the pattern found elsewhere, it is unlikely that any new fields lie nearby. Indeed, Aramco has prospected extensively outside the Ghawar region but found nothing of significance. In particular, the Arab D stratum the source rock of the Ghawar field has long since eroded in other parts of the Arabian Peninsula. The six major fields, having all produced at or near capacity for almost 40 years, are showing signs of age. All require extensive water injection to maintain their current flow.
Based on these observations, Mr. Simmons doubts that Aramco can increase its output to anywhere near the level it claims. In fact, he believes that Saudi production may have already peaked. Is he right?
Mr. Simmons's critics say that, by relying on technical papers, he has biased his survey, since geologists like to concentrate on problem wells the way that doctors focus on sick patients. Still, the experience in America and the rest of the world shows that oil fields don't last forever. Prudhoe Bay, which was producing 1.2 million barrels a day five years after being brought on line in 1976, is now down to less than 400,000.
The mystery of Saudi oil capacity bears an eerie resemblance to Saddam Hussein's apparent belief that his scientists had developed weapons of mass destruction. Who are the deceivers and who is the deceived? No one yet knows the answers. But at least Matthew Simmons is asking the questions. (Wall Street Journal, June 28, 2005)
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Twilight in the Desert
By Matthew R. Simmons
John Wiley & SonsISBN: 0-471-73876-X
Chapter OneThe Birth of a Nation
A Century of Extraordinary Change and Economic Challenges
The West has had very little appreciation of the rich history and culture of the entire Islamic Middle East. Knowledge of Saudi Arabia, in particular, was almost nonexistent until oil was discovered in 1938. Even after oil was found, the kingdom remained cloaked in obscurity for another three decades. Once the kingdom was thrust onto the world stage, obscurity gave way to glaring celebrity and negative stereotypes. Today, although much more is known about Saudi Arabia, ignorance and prejudice are only slowly giving way to understanding.
Only a handful of geopolitical experts and oilmen has ever traveled to this remote part of the world. Despite the critical role Saudi Arabia's oil now plays in the world economy, many people still assume the country consists of a few thousand wealthy princes squandering an endless flow of petro-dollars in self-indulgent decadence. This view may once have had a certain plausibility. Today, however, the real picture is vastly different.
While Saudi Arabia became an oil producer in the late 1930s, the kingdom's rapid emergence as a global energy and economic power took place when U.S. oil production suddenly peaked in 1970. This event, coming at a time of rapidly increasing global oil demand, created an immediate potential for supply shortages. Saudi Arabia was the only producer with the capacity to keep pace with the world's ravenous appetite for oil. Seizing the opportunity, the kingdom leapt from the rank of a leading oil producer, with output of about 2.5 million barrels a day in 1965, to super-star status by providing over eight million barrels a day in 1974. For the next three decades, Saudi Arabia would become the key swing supplier of oil exports to the rest of the world, adjusting its output according to changes in world demand.
Tables 1.1 and 1.2 demonstrate the importance of the Middle East's oil production and reserves, the basic reason why Saudi Arabia and the rest of the Middle East are likely to remain among the world's crucial geopolitical regions.
Given these plentiful oil resources, why should anyone worry about Saudi Arabia? Apart from concerns about potential political upheaval, most energy observers seem not to have entertained the possibility that Saudi Arabia's Oil Miracle might someday end. This chapter reviews the history of Saudi oil, to provide some framework for better understanding the oil supply situation facing the world today.
The Reign of the Warrior King: 1902-1953
The roots of the Kingdom of Saudi Arabia go back to January 15, 1902, when Abdul Aziz (also known as King Ibn Saud, Figure 1.1) gathered a large group of warriors to capture Riyadh. Prior to this raid, most of Arabia had been controlled for several centuries by the Rashid Arab clan aligned with the waning Ottoman Empire. The victorious Abdul Aziz expelled the Rashid dynasty forever from what ultimately became Saudi Arabia.
After capturing Riyadh, Abdul Aziz embarked on a series of campaigns to subdue additional towns and consolidate his control. In January 1926, Abdul Aziz became the King of Hadja and the Sultan of Naijd, and thus established his authority over most of the territory of modern Saudi Arabia.
As Abdul Aziz conquered the Arabian Peninsula, some of his most powerful supporters were the Ikhwan, the strictest, most zealous group within the Islamic Wahhabi sect. Once his power was secure, Abdul Aziz turned on these strict but unruly Wahhabists and, after four bloody, battleridden years, finally brought them under his control. But the religious fanaticism of this group never ebbed and played a dominant role in preserving the strict religious control that is still evident in Saudi Arabia today.
After almost three decades of warfare and political consolidation, on September 22, 1932 Abdul Aziz finally declared his realm the Kingdom of Saudi Arabia by merging the Hadja and Naijd realms. He ruled this new kingdom for 21 additional years. While he remained quite obscure throughout his life outside his kingdom, he was truly one of the twentieth century's most dynamic and intriguing characters.
Historians still debate the extent to which Abdul Aziz was involved in the development of Saudi Arabia's oil. As will be detailed later, a series of advisors and quasi-advisors such as New Zealand's Major Frank Holmes, the Arabist Harry St. John Philby, the American philanthropist Charles Crane of the Crane Plumbing fortune, the Vermont mining engineer Karl Twitchell, and a group of Standard Oil Company of California geologists all played important roles in convincing Abdul Aziz to grant the oil concession that ultimately led to the discovery of the world's greatest collection of super-giant oilfields. But the king played a canny role in orchestrating the early development of Saudi Arabian oil resources. Did he suspect that this barren kingdom might have such rich petroleum deposits, or were fate and luck the key determinants? Given the lack of records and the limited written history of Saudi Arabia's early years, definitive answers to these questions may never be known.
What is clear, however, is that by the time Abdul Aziz finally consolidated his power, his new kingdom was extremely poor. Its only source of real money came from fees charged to Muslims on the annual pilgrimage to Mecca. When Aziz finally became king, the global depression had reduced the flow of pilgrims to a trickle, and the royal family of the new kingdom teetered on the brink of insolvency. Their need for hard currency was so urgent that an oil company might have been expected to hold the clear upper hand in negotiations for an oil concession. That an oil company might take a gamble at all on the unknown geology of Arabia at that time is somewhat surprising, since most oil companies were struggling to stave off insolvency as the depression deepened and oil prices fell to 10 cents a barrel.
Opposition to Jewish Immigration Foreshadows First Oil Crisis
As he battled to establish control of Arabia, Abdul Aziz was acutely aware of the potential for political disruption and violence stalking his kingdom and the entire Middle East region as a result of Zionist efforts to create a Jewish homeland in Palestine. In fact, Abdul Aziz was among the first Arab leaders to warn that a Jewish homeland in the Muslim-dominated region posed serious risks for the Middle East and the world. The prominent role that Abdul Aziz tried to play during the crucial years of the Zionist campaign has been overlooked by many Middle East historians. And while the story has limited relevance to Saudi Arabia's oil development, it does shed some light on King Faisal's use of the "oil sword" to trigger the 1973 oil shock.
In 1937, Abdul Aziz spoke at length to Sir Percy Cox's deputy H. R. P. Dickson about the millennium-long hatred that true adherents to the Muslim faith had towards Jews and urged the British government to maintain Palestine under British sovereignty, ruling it, if necessary, for another 100 years rather than partitioning it to create a Jewish state. In March 1943, Abdul Aziz invited representatives from Life magazine to Riyadh to proclaim his strong opposition to Jewish immigration to Palestine. During this visit, he retold the history of the region and gave his reasons for rejecting all arguments used to validate the Jewish claim to a homeland in the region.
Abdul Aziz came face to face with world leaders only rarely. The most prominent meetings took place in 1945, when he secretly conferred with both President Franklin Roosevelt and Prime Minister Winston Churchill. These visits occurred late in Abdul Aziz's life on the occasion of FDR's last trip outside the United States before his death two months later. After FDR left the gathering of Allied leaders at Yalta in February 1945, he secretly flew to Egypt and boarded a navy vessel, the USS Quincy, which steamed to Great Bitter Lake. The purpose of his trip was to meet three kings: Farouk of Egypt, Haile Selassie of Ethiopia, and Abdul Aziz ibn Saud of Saudi Arabia.
The journey to meet FDR was one of the few trips during his long life that Abdul Aziz made outside of his kingdom. On the way to this meeting, in the Marrat area of Saudi Arabia, the king shared his vehemence about a Jewish homeland with a crowd of his staunch supporters. Abdul Aziz told them of the progress of the war and what place the Arab nations should claim in the world when the war ended. He warned his supporters of the dangers if Zionists dared to drive a small and weak nation of Palestinians from their own land. These views were a key component of the positions Abdul Aziz brought to his meeting with Roosevelt.
On Valentine's Day, King Ibn Saud was lifted onto the Quincy in his wheelchair to meet the American president, the most powerful leader in the world, who was also wheelchair-bound (Figure 1.2). Jim Bishop, in his book FDR's Last Year, eloquently characterized this historic visit as "two sick men facing each other in their respective wheelchairs." Roosevelt led off this discussion by speculating on the wonders to be achieved if all the arid land in Saudi Arabia and Egypt could be made to flourish and bloom. The king, in a most respectful manner, said he was not interested in the subject of water. He spoke to FDR about his love for the desert. He went on to explain that he was simply a warrior-nothing more, nothing less. He had spent a lifetime fighting recalcitrant tribes to establish his kingdom, and now he was nearing the end of his days. The thought of making deserts bloom was a good one, but there should still be a place for deserts. Deserts were good, not bad! This was a true Bedouin talking candidly to a true aristocrat.
As the meeting between these two old warriors extended into several hours, their friendship grew. Roosevelt said he was particularly interested in the Palestine question. King Ibn Saud said, "You mean the Jews?" and then went on to say, "When peace comes [i.e., when World War II ends], the Jews should be returned to the lands from which they have been driven, not sent to Palestine." The king was clearly very alarmed about the pace at which Jews were buying Palestinian land and acquiring arms to fight the Palestinian Arabs. Once WW II ended, Abdul Aziz warned FDR that if the Jews came to Palestine, they would establish a culture entirely different from the Arabs. This would eventually lead to armed conflict between the Muslim world and the Jewish people. As a true believer, King Ibn Saud told FDR, he would then be forced to fight on the side of the Arabs. To prevent this chaos, Ibn Saud urged that a Jewish European homeland be created instead.
After the king departed the USS Quincy, FDR reportedly told Harry Hopkins that he had learned more about the Arab-Jewish situation from Ibn Saud in five minutes than he had from others over the whole course of his life. According to Jim Bishop, Hopkins would enjoy telling others, long after the trip ended, that "The only thing FDR really learned was that the Arabs don't want any more Jews in their neighborhoods."
Did King Ibn Saud and President Franklin Roosevelt Discuss Oil?
Whether or not oil entered the five-hour conversation between FDR and the king is not recorded. It would be odd if it did not. An American oil company had made the first two significant oil discoveries in Saudi Arabia several years earlier, and one field was then in production. Abdul Aziz was eager to further develop Saudi Arabia's bonds to the United States as a balance to the strong British influence in the region. Access to Middle East oil was an Axis objective in WW II and the reason behind the North African campaign. And Roosevelt was keenly aware of the oil potential in Saudi Arabia. During the height of the war in 1943, Roosevelt instructed Harold S. Ickes, U.S. Secretary of the Interior, to dispatch a senior delegation from the Petroleum Reserves Corporation, the official entity responsible for supplying petroleum to the war effort, to inspect Saudi Arabia's oil resource. The Allies were gearing up for massive offenses in Southeast Asia which had to be fueled by Middle East oil; U.S. reserves could not sustain the wartime drain of two billion barrels of oil per year.
Leading this delegation was Everett Lee DeGolyer, one of the world's most distinguished geologists. Upon his return to the United States, DeGolyer reported to Roosevelt that the center of gravity for oil production would soon begin shifting from what he labeled the American-Caribbean area to the Middle East-Persian Gulf area. He estimated the kingdom's oil resources at 2 billion barrels of proven reserves, 5 billion barrels of probable reserves, and 20 billion barrels of possible reserves.
A day after his meeting with FDR, Abdul Aziz met with Winston Churchill in Cairo. From notes taken at the visit, it seems that Churchill may have confused Abdul Aziz with a member of Iraq's royal family. This confusion highlights the obscurity of Saudi Arabia even as World War II was coming to an end.
FDR was clearly impressed with Abdul Aziz, oil or no oil. After FDR returned to the United States, he penned a handwritten note to the king dated April 4, 1945 reiterating his pledge that no decision would be taken with respect to the Palestine issue without fully consulting both the Arabs and the Jews. He ended the note by assuring the king, "I will take no action in my capacity of Chief of the Executive Branch of this government, which might prove hostile to the Arab people." Eight days later, FDR died.
During this brief but potentially profound friendship between FDR and Abdul Aziz, it is unlikely that either leader glimpsed the powerful position the Kingdom of Saudi Arabia would occupy once it became the world's most important oil supplier, nor the violence that would engulf Middle East politics. Had these two old warriors each been 20 years younger when they first met, and had their brief acquaintance blossomed while they were both still young, it is not hard to imagine that the history of the Middle East might have taken a different course. Only weeks before FDR died, he apparently suggested to his wife, Eleanor, that he would like to travel back to the Middle East after he left office and become more engaged in seeing that part of the world grow.
Abdul Aziz viewed the danger embedded in creating a Zionist state in the Middle East with great passion. To make his views more widely known, he sent his favorite son, Prince Faisal, to the international gathering in San Francisco that created the United Nations. Faisal appealed to the United States to honor FDR's promise to hear Saudi concerns about creating a Jewish state in Palestine. His appeal was ignored, and he returned to Saudi Arabia nurturing a deep resentment against the United States for not supporting a key ally and instead tilting toward the establishment of a secular Jewish state. These resentments may have influenced Faisal's action 25 years later when, as the King of Saudi Arabia, he used the "oil sword" to punish the United States for its support of Israel in the 1973 Middle East war, creating the first U.S. oil crisis and gasoline lines at service stations from coast to coast.
In the last eight years of his life, Abdul Aziz quietly retreated from public affairs, delegating most of his official duties to his sons, particularly the two most senior, Saud and Faisal. Upon his death in 1953, a fierce power struggle erupted between the two eldest sons. Saud became the new king. Faisal became the crown prince.
At the time of Abdul Aziz's death, Saudi Arabia's oil production had risen to almost 840,000 barrels per day. By then, five great oilfields had been discovered, although only two of the five fields, Abqaiq and Ghawar, were in full production. Revenue to this tiny kingdom, however, had risen to $110 million.
King Saud and Crown Prince Faisal could not have been further apart in their personal preferences, behavior, and styles. Saud loved his expansive palace, luxuries, and the opulent lifestyle. Faisal was best known for his sobriety, piety, purity, and financial acumen. King Saud did not take well to the role of steward of the nation's resources, and through the 1950s, Saudi Arabia's economy often teetered on the brink of financial collapse. King Saud had inherited a surprisingly large debt from his father, estimated to total around $200 million in 1953. By 1958, the kingdom's debt had soared by another 250 percent.
Excerpted from Twilight in the Desert by Matthew R. Simmons Excerpted by permission.
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Meet the Author
MATTHEW R. SIMMONS is Chairman of Simmons&Company International, a Houston-based investment bank that specializes in the energy industry. He now focuses on research, writing, and speaking engagements. Last year, he gave seventy-five speeches to a variety of groups, including energy industry conferences, university symposiums, and think tanks. Mr. Simmons is a member of the National Petroleum Council, a board member of Resources for the Future, and a Trustee of The Atlantic Council of the United States. He has an MBA from Harvard University.
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