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Saturday, July 02, 2005

Legendary oil magnate calls it, peak oil is here

Boone Pickens Warns of Petroleum Production Peak

EV World (May 03 2005)

Legendary Oklahoma energy magnate, T Boone Pickens will be 77 years old this month, and maybe because of that, he feels free to speak what's on his mind; and he did to an audience of alternative fuel advocates in Palm Springs today.

Addressing the 11th National Clean Cities conference, hosted by the former mayor of Palm Springs and introduced by former US Energy Secretary John Herrington (1984-1989), Boone, as his friends refer to him, was candid in his views of wind energy, nuclear power, natural gas, and in particular petroleum.

While he acknowledges wind power is cheap today, he, as well as former-Secretary Herrington, questioned the contribution it can make to the nation's future energy needs. He finds nuclear power attractive and believes natural gas should be used to power our transportation fleets rather than to generate electricity. In general, he was very upbeat about the prospects for alternative transportation fuels.

But on the future of petroleum, he was less sanguine.

"Let me tell you some facts the way I see it", he began. "Global oil (production) is 84 million barrels (a day). I don't believe you can get it any more than 84 million barrels. I don't care what (Saudi Crown Prince) Abdullah, (Russian Premier Vladimir) Putin or anybody else says about oil reserves or production. I think they are on decline in the biggest oil fields in the world today and I know what's it like once you turn the corner and start declining, it's a tread mill that you just can't keep up with.

"So, when you start adding the reserves in these countries, you're not even replacing what you're taking out.

"Let me take you to another situation quickly. 84 million barrels a day times 365 days is thirty billion barrels of oil a year that we're depleting. All of the world's (oil) industry doesn't even come close to replacing thirty billion barrels of oil. We don't spend enough money to even give ourselves a chance to replace thirty billion barrels. It may be because the prospects are not there. I rather imagine that's what the answer is to that.

"So, if you accept that 84 million barrels a day is all the world can (produce), and then look at refining capacity, I think it's just a coincidence that refining capacity ... world capacity ... is 84 million barrels a day. So, we're in balance: 84, 84.

"Now you see the projections for the fourth quarter of 2005, I mean like tomorrow; it is 86 to 87 million barrels of oil a day required. China (and) India (are) growing fast. Our economy is going down a little bit, but it doesn't seem to be shutting off demand for gasoline, oil, natural gas, whatever. But around the world ... just assume that the (US) economy is slowing, but China is still ramped up; it is still 86, 87 million for the fourth quarter.

"Now we've got some pretty good inventory, those will be ... I think ... they'll be gone in the third quarter. I can't wait to see how this is all going to play out.

"Don't let the day-to-day NYMEX (New York Mercantile Exchange) fool you, because it can turn and go the other direction. I may be wrong. Some of the experts say we'll be down to $35 oil by the end of the year. I think it'll be $60 oil by the end of the year. You're going to see $3 gasoline twelve months from today, or some time during that period. I know you've already experienced it in California. I am not that much out of it ... But in the Midwest you've probably got $2.20 today. That's the way I see it unfolding."

Pickens went to explain that if he were Energy "Czar", he'd immediately begin to phase out the use of natural gas in electric power generation and encourage the construction of more coal-fired and nuclear power plants. He'd use the natural gas to power transportation instead.

Speaking of the various alternative fuels, he stated, "I don't think any of them can miss. I think some will be further out than others. Hydrogen, I think, is going to take a long time." Speaking before an audience with vested interests in ethanol, biodiesel, propane and compressed natural gas as transportation fuels, he added that he believes all the alternatives will work.

"We're going to have to use shale oil the western slope of the Rockies. That's going to happen. The technology is just about here", he noted, adding that he blames both Republican and Democratic administrations for not engaging in long term planning to meet the nation's future energy needs.

"It's all getting very, very tight. We're just about there. The sixty percent we import now (of petroleum), is about all we can get from the countries that export." He cited the example of Venezuela where its "screwball" leader, Hugo Chavez has pledged to not sell any additional oil to the United States.

"The majors, they talk about plenty of oil and that they can produce more, but if you look at ExxonMobile, ChevronTexaco, BP (British Petroleum), all the production (is) going down every year. They don't replace and they don't add to production, but they say there's plenty of oil around.

"Now why would they say that? One of the chief economists with one of the major oil companies ... I was at a conference where he was ... we were talking and I asked, why do they say that? And he said, can you imagine what would happen if one of these major oil company's CEO's got up and made a speech and he said, 'We're running out of oil'? I said there'd be panic and he said, 'That's right. They're not going to make the statement. They're going to say there's plenty of oil around.'"

"I know that sounds rather simple, but that's the best answer I've had ... why they keep saying that there's plenty of oil around. I can't tell you positive, but I am just so sure that we have peaked and from here on the demand side that we are going to have a hard time making the trip on fuel. I know demand will come down with price. That will happen."

He answered several audience questions and predicted that if the summer is hot in the Southeast that natural gas prices will go to $10. "Natural gas is in decline", he stated, concluding that eventually the market will sort out the winners and losers".

After his remarks, EV World asked Mr Pickens if he agrees with Houston-based investment banker Matthew Simmons that Saudi Arabia's oil fields may be on the verge of decline and he replied that he did agree him.

If Pickens and Simmons are correct, then Crown Prince Abdullah's promises to raise production over the next ten years to fifteen million barrels a day may be just wishful thinking, in which case, Saudi Arabia's role as swing producer and oil price stabilizer may be a thing of the past. Oil prices will begin to experience unprecedented volatility, which is likely to place serious stresses on a world largely unprepared for the end of cheap fossil fuels. The road from here on will be a bumpy one.

T Boone Pickens started Mesa Petroleum with $2500 in 1956, growing it into one of the world's leading independent oil and gas producers. He is the founder and chairman emeritus of Clean Energy Fuels, the nation's largest supplier of natural gas to the transportation sector.

Boone Pickens sees oil prices going higher

by Brad Foss, AP Business Writer

The Associated Press (June 22 2005)

Oil tycoon Boone Pickens' bet that energy prices would rise made him more money in the past five years than he earned in the preceding half century hunting for riches in petroleum deposits and companies.

And even as crude futures have doubled since 2000 to almost $60 a barrel, the 77-year-old Texan sees no reason to take his chips off the table. "I can't tell for sure where we're going, other than up", Pickens said in an interview with The Associated Press.

His outlook stems from the belief that a world oil production peak is near and that, while the world won't soon run out, supplies will remain tight due to rising consumption and geopolitical uncertainty in the Middle East. The high prices haven't yet taken the wind out of the US economy, he said, because of efficiency gains made over the past 25 years. Down the road, however, he anticipates more serious pain at the pump until, eventually, fossil fuel consumption tapers off and alternatives become more popular.

Coming from just about anyone else, those comments could be dismissed as a routine oil-price prediction. But the matter-of-fact views of Pickens carry more weight than the average analyst's hunch.

Pickens started his career in the 1950s as a petroleum geologist, built his reputation in the following decades as the founder of Mesa Petroleum Company and enshrined himself in the history books in the 1980s with attempts to take over major oil companies.

But Pickens' star faded in the 1990s, when he lost control of the debt-ridden Mesa and his bullishness on natural gas prices, while prescient in hindsight, turned out to be a costly mistake. "I was ahead of my time once again", quipped Pickens, who also likes to point out that "you can be dead right - and dead".

Now, Pickens is riding high again as the chairman of BP Capital Management, a billion-dollar hedge fund focused on energy commodities and equities that has delivered mammoth gains.

BP Capital manages roughly $2.5 billion in assets, which are split approximately three ways between the equity fund, the commodity fund and Picken's personal wealth, according to chief financial officer Dick Grant. An investor who contributed $1 million to the commodity fund at its inception in 1999 has seen a return of $28 million, while an investor who put $1 million in the equity fund at its inception in 2001 would now have $3.7 million.

"I've never had so much fun in my life", said Pickens, who depends on at least a dozen experts in everything from geopolitics to weather, while leaving the day-to-day execution of BP Capital's trades to a 29-year-old New Yorker named Michael Ross.

Pickens does not believe the current tightness in the oil market will be resolved by a surge in supply, and he sees $50 a barrel as a price floor. When he does the arithmetic - the world will consume more than thirty billion barrels of oil in 2005 - Pickens is convinced that OPEC and the rest of the petroleum industry will never again be able to build a sufficient supply surplus to give the market a psychological cushion. Even if the world can produce more - Saudi Arabia claims to have reserves of 250 billion barrels - limited refining capacity will continue to be a problem, he said.

At the moment, the world's excess production capacity is about 1.5 million barrels per day, or less than two percent of total global consumption. That has traders extremely nervous about the possibility of hurricanes, terrorist attacks and labor strife in key oil production regions.

Only one thing could undermine his position as a market bull: a sharp drop in energy use, either from an economic recession or because skyrocketing prices get people to think twice about taking a long drive. Pickens believes the United States and other industrialized nations are in for a rude awakening within the next year as oil producers struggle to keep up with growing demand in the United States, China and India.

"You're going to hit a brick wall is what's going to happen", said Pickens, who foresees oil prices above $60 a barrel oil and gasoline at $3 a gallon.

Longer term, he expects very high prices to change consumers' habits. Already, he said, "you're coming to the end of the SUVs as far as being center stage".

Although he is philosophically opposed to government intervention in business, as a practical matter he said higher taxes on gasoline, and incentives for fuel-efficient cars and wind power may be necessary to smooth out the transition to the post-petroleum era.

He is not eager to open the Alaska National Wildlife Refuge to oil drilling, though not for the usual reasons.

"Leave it for another generation", he said.

Copyright 2005 by The Associated Press. All rights reserved.

Bill Totten


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