The following is a transcript of the conversation I had with Paul Michael Wihbey on the May 4 episode of Turning Hard Times into Good Times. The previous week, Simmons presented his continuing thesis that the lights on western civilization are about to go out. Contrasting that notion is Paul Michael Wihbey, who provides a much more optimistic view of prospects for keeping the lights on, not from foreign imported oil, but from abundant sources right here in North America.
Jay: Welcome back to Turning Hard Times into Good Times. I am your host, Jay Taylor. Again, I want to thank each of you for listening to this show, and I want to thank our sponsors for the second hour of this show, because without them this show would not be financially viable.
Sponsors for our second hour are Barkerville Gold, Magellan Minerals, Apollo Gold, Columbus Silver, Coronado Resources, Uranium Energy, Goldrich Mining, and Canaco Resources.
Last week I had Matthew Simmons on this show as a leading peak oil advocate. Matthew provided a very dire picture of the ability of oil companies to produce the amount of oil that we in the West are going to need to keep living the same kinds of lofty lifestyle standards we’ve become accustomed to.
A bit more hopeful is my next guest Paul Michael Wihbey.
Paul is president and Founder of GWEST LLC, which is Global Water and Energy Strategy Team. It’s a Washington-based consulting firm specializing in the geopolitics of strategic resources such as oil, gas, and water.
Since the establishment of GWEST in late 2002, Mr. Wihbey has provided in-person briefing on energy and energy-related issues to the heads of state of Nigeria, Ecuador, Congo-Brazzaville, Sao Tome & Principe. He has also briefed senior congressional and administrative policy advisors and officials of the State department, Commerce department, Defense, and Energy. Mr. Wihbey has written numerous articles and studies and in March of 2000 testified to the House African Subcommittee before the U.S. Congress.
Paul Michael was actually with us last week and we barely touched the surface with respect to the things he had to say, so I have invited him back. Paul Michael, thank you for returning to us this week.
Paul: Well, thank you, Jay! It’s a pleasure to be on the program with you.
Jay: You really did provide a glimmer of hope after we had Matt Simmons on last week. Matt was basically telling us, “It’s all over, folks; the lights are going off, but by the way I do have this project off the coast of Maine.” The only hope we have I think, if I am quoting Matt properly, was for some windmills off the coast of Maine or elsewhere.
Well, I am not sure about windmills; it seems to me there are lots of problems, so I think as you suggested last week, there is certainly room for alternative energies. There are some niche markets for solar, for wind, and so forth. But a general consensus among most people is that there is no way that these alternative measures can really start to produce the kind of, the level of, the amount of energy that we need to keep life going as we’ve known it in the western world. Would you agree with that?
Paul: Oh, certainly, the hydrocarbon molecule is the most energy-efficient source of power in the world and any other technologies out there would claim otherwise, and this includes hydrogen-powered vehicles, windmills, and solar panels, and so forth. So you can’t beat the economics and versatility of hydrocarbons. The issue now, as Simmons has mentioned in his conversations, is the issue of supply, and therefore the economics of petroleum, oil, and natural gas.
And Jay, as you indicated, I take a fundamentally different perspective on this issue than that of Matt Simmons. I think we have globally and within the United States abundant supplies of petroleum in one form or another and I don’t think we are running out, I don’t think there is a need for panic, and I don’t think there are requirements for the Wall Street speculators to manipulate the market, as they did in a run-up to July 2008 when prices peaked to $147 a barrel and was one of the drivers for the economic collapse a couple of months later.
Jay: Well, Mr. Simmons would agree; in fact he stated that we’re not going to run out of oil, there will always be oil. His point was that, getting it out of the ground can take as much energy as there would be oil extracted, or more energy to get out than what you get back. I think that’s his argument, an argument that you hear from peak oil people. Is it not?
Paul: Well, yes. I mean there are a lot of peak oil theorists out there who point to the United States peaking its production of oil in the 1970s. Well in fact the United States has rebounded from that, in part, thanks to the issue of offshore drilling. Gulf of Mexico now produces 25% of all U.S. oil production. A decade ago it did not produce anything and that’s a reflection of technology.
Now that technology, as we are seeing with the deadly accident in the Gulf, has an Achilles’ heel to it, nevertheless. The technology is very new. We see offshore drilling going to depths of 10,000-15,000 feet, almost three miles, and producing very significant volumes of crude oil. Some of those platforms produce up to 200,000 barrels a day, and that’s a huge amount of petroleum coming up through these deep water rigs that we see.
The big problem now, as we’ve obviously experienced, is that there can be accidents. The question is can you minimize that? Have companies like BP followed the due procedure? Is there a requirement for more regulation in terms of safety procedures and are there accident preventative measures that can be taken? Yes, I think so.
But the issue here is that is we have an abundant source of petroleum within the territory of the United States that we can access with current and future technologies.
So you see production will not peak in a manner that these theorists have propagated. In fact, it will increase, and if it doesn’t it’s for political reasons and environmental reasons that we may decide to lower our production rate and import more oil from offshore.
Jay: Are other possible options that we would import more oil or see higher prices and less consumption?
Paul: Well, that’s right, and there is a trade-off here. I don’t think there is any problem at all in importing the requirements that the United States economy will need in future years from offshore suppliers.
The cost of that could be very significant in terms of the U.S. economy functioning in a manner that we were used to, prior to the economic collapse. But the fact of the matter is that I believe supply will meet the U.S. demand for the next half a century at least and probably beyond that. As well as the global economy supply will be there.
It doesn’t necessarily mean that prices have to go above $100 a barrel, if demand increases are such that we have to have another million barrels a day every year for the next five years. Much of the price volatilities we’ve seen over the last several years are related to non-economic factors.
Jay: That seems to be the case, and in fact, I would just remind our listeners that when we talk about price, we’re talking about dollars, because the oil prices globally are denominated in dollars for the most part. And so what we’re talking about is a unit of measure that’s not stable. The dollar is being created out of thin air in huge amounts of dollars. So the nominal price of oil could go up, and yet in terms of the real price may not be going up nearly as much as it seems to be going up.
Paul: That’s right.
Jay: So I want to get on to some of the technologies, the evolving technologies. Before we go there though let me mention Chen Lin, a partner of mine and a regular guest on this show. He mentioned earlier in this show that he thinks the Gulf accident is going to mean that companies that are drilling on land, that the share prices of our land-based drillers or land-based producers of oil and gas are probably going to benefit from it, and that prices of oil could actually go up somewhat as a result of this disaster.
I see today with the equity markets really weak, though, oil down $3 to $4 or something. But what are your thoughts on that? Do you see the prospects of this disaster in the Gulf leading to higher oil prices?
Paul: I don’t think, Jay, that we see a direct linkage between oil prices and the reduction of offshore drilling and production. Second, I think yes, onshore producers will benefit from this. I think proposal that Barack Obama had put on the table just a few weeks ago for increased offshore drilling now is effectively dead. I think we’ll see a slow down, obviously in the Gulf of Mexico drilling permit and renewal permit. BP, which devotes about 40% of its budget to offshore drilling in terms of exploration and production, is going to be hit very, very hard. And I think that’s where we will see the onshore producers benefiting and we’ll see a shift here in the United States toward onshore production.
I think it could very well work for the benefit of unconventional supplies in the United States, as it relates to oil sands in the western U.S.—in Utah, Wyoming, Colorado, Nevada. So I think there may be some benefits to those leaseholders in those areas.
Jay: Yes, so speaking of unconventional production, let’s talk a little bit about the oil sands in Canada. And there are some evolving technologies there. When I mentioned it to Matt Simmons he just sort of discounted it, but Petrobank is the company that I had on my list in my newsletter at one time, and I want to go back and take a look at that company, again. I think it’s a fine company; it’s producing lots of oil from the oil sands in Alberta.
But as I understand it they have a new technology that is much more environmentally friendly, uses less water, and also uses a lot less energy. Would you care to talk about that a little bit?
Paul: Yeah, that’s one of the new emerging technologies in western Canada. We see it being applied in other places, however, by Petrobank, in the subsidiaries, in places like Columbia. They use a technology that’s driven by combustion as opposed to the more traditional steam-driven extraction technology. They use horizontal drilling and vertical drilling combined in that process.
They minimize the amount of water and natural gas required in their Thai technology and it seems to be really quite effective. It’s operational and I think it represents this third generation of technology in terms of heavy oil extraction, the first being open-pit mining, which everyone is familiar with; the second is steam-driven assisted gravity drainage, which uses quite a lot of steam and natural gas, quite a lot of water and natural gas requirements. Now the new Thai technology and also a somewhat similar technology called the VAPEX is being developed in western Canada and uses new technology based on a minimal amount of water that’s injected into the extraction system for heavy oils. It uses a solvent as opposed to using natural gas. And this solvent penetrates and essentially dissolves heavy oil sands into a more fluid, viscous product. It then moves that through the pipes into the wellhead and then brings it up using certain gadgets, pressure systems. That’s probably the fourth generation technology that we are looking at.
So each of these technologies reduces the negative environmental impact. It reduces the operating cost because you reduced the amount of natural gas and/or water you have to use, and so it makes the extraction of these heavy oils much more cost-effective, and therefore you produce more volume. So what we will see then with these new technologies, including the widely talented use of horizontal drilling, in these various technologies you’ll see the oil sands continue to be a major producer of oil. It’ll increase from its current 1.4 million barrels a day, probably to about 2.2 million barrels by the end of the decade, and it could be more. And most of that production level will come into the U.S. market.
So technology is progressing in a very coherent way, it’s more evolutionary than revolutionary; it’s something that the capital markets can understand, because these are technologies that are being tested.
They take time; however, there is no silver bullet in terms of finding an extraction technology that cannot use some volume of water or natural gas. The levels of usage of natural gas and water are on a downscale, and that’s very, very promising.
So these types of technologies can also be applicable for oil shale and natural gas shale here in the United States. If we just shift a little bit, Jay, down to the States, we see natural gas now becoming a very important player in the U.S. market as a result of a horizontal drilling and hydraulic fracturing—the usage of high-pressured water injected at the wellhead to fracture rock containing gas—and this is being played out in the Barnett Shale in Texas, in the Marcellus Shale in New York, and in Pennsylvania so that we have an abundant supply of natural gas. Again, this does not necessarily correlate to why prices are low or prices are high, but what it does say is that we do have in the United States a massive supply of domestic gas that will sustain demand in the United States from domestic suppliers.
If you look at North America you could say that North American supply will be greatly maintained by domestic North American supply, in Canada and United States, because of these new technologies that are operational and will be operational in Europe and in Alberta.
Jay: Okay, to what extent are some of these technologies reducing the reliance or the need for natural gas? Do you have a sense of the one that Petrobank is using there now? And I guess it is commercially successful, is that correct?
Paul: Commercially successful and it’s under license for other firms that may want to utilize that technology in their field. So the reduction of natural gas requirements is proceeding very well. The fact that natural gas prices are relatively low helps the process of the second generation, the technology, to maintain their market share.
But I think we will see, particularly with incentives from government and with increased awareness to the environmental requirements, a lessening of the use of massive natural gas supplies to maintain oil extraction levels in the heavy oil regions of North America.
Jay: Well, we just had the disaster in the oil industry, of course, in the Gulf of Mexico. Right before that, we had a disaster in the coal industry as well. What about coal? It is said that we are the Saudi Arabia of coal in North America. When I talked to Matt Simmons last week, he dismissed that and said, “Yeah, but it’s all low-grade stuff that’s not worth anything.”
I know you have a different take. What is your view on coal and how meaningful can coal be to suit our needs and also coal gasification; is that something you see developing anytime soon?
Paul: Look, some really interesting clean coal technology is out there, and there are some very interesting federally-sponsored programs that will act as incentives toward clean coal technology being applied, particularly relating to coal fire generation plants throughout the country.
I don’t think we are going to see the elimination of coal as a primary source of energy for a long time to come, because it’s abundant, it’s cheap. The new technologies are being developed, and I think we have too much in the way of supply that we cannot simply converge upon ourselves from that supply. We are shipping a lot of coal, interestingly enough, by rail to the Pacific Coast and exporting it to China.
So coal is here to stay. Coal gasification, some of these technologies are expensive and there is no doubt about it. But again, over a period of time, I think we will see the costs of these technologies reduce as they are applied on a larger scale.
Coal is one-third, maybe 40%, of energy used in the United States. And we just have to find a way to adapt to clean coal technologies in a manner similar to the oil industry.
The oil industry needs to adapt to clean oil technologies. That’s probably the new frontier for fossil fuels, particularly coal and oil. Using new technologies so that you develop the clean techniques of extraction and application of oil and of coal.
And I think that’s where you are going to see some very interesting new market development. I think that’s where you are going to see some investors profit quite significantly from these new clean techniques as they are applicable to fossil fuels.
Jay: Well, you provide some optimism here. I am just looking at my screen in my office, and I see Matt Simmons is on CNBC, and they are showing all of the dirty Gulf water, and I am thinking to myself, “I hope that there is somebody on with Matt who can give us some hope,” because when we listened to Matt Simmons last week, he almost thought to just give up and crawl in a hole and die somewhere. But you provide a lot of hope and a lot of optimism.
We only have a couple of minutes left here. Moving on to the geopolitical scene, in your book you raised a question: why did the U.S. go to war in Iraq when it has 750 billion barrels of unconventional oil in land?
Paul: Well, that’s one of the great unresolved questions from the Iraqi war, and you would think, after the voluminous amounts of material that have been published on the issue, this would have been addressed in greater detail, and it hasn’t.
The United States, in my opinion, went to war in part to secure the oil reserves of Iraq as a consequence of the United States’ dissatisfaction with Saudi Arabia. That’s an understatement; dissatisfaction with Saudi Arabia as a result of Saudi Arabia’s role in the 9/11 attack here in the United States.
The United States, in my opinion, saw Iraq as a replacement OPEC linchpin to Saudi Arabia, and wanted to make sure that U.S. dominance over OPEC, which had existed really since Roosevelt met with King Faisal at the end of World War II, was maintained.
Saudi Arabia was no longer the preferred party in that relationship, and Washington hoped to create the preferred partner out of a U.S.-dominated Iraqi government. And then in the process of course, secure preferential treatment for U.S. firms in the Iraqi oil sector.
So really none of that happened, and in that regard the war was a failure. It’s unfortunate that we went into Iraq, we’d observed a pre-ordained view of what the oil market ought to look like.
What I am suggesting to you is that when we went to war in Iraq in 2003, traditional conventional view of the market was already changing, and Washington was not aware that the market was changing literally under its feet, and it still wanted to play the old OPEC game in terms of controlling supply and controlling prices.
But structural changes have taken place in the market starting as early as 2000, and we miscalculated. And then when we see that miscalculation now in the Persian Gulf, on many different fronts, including the situation with Iran, including the fact that Saudi Arabia now is no longer exporting significant volumes of oil to the United States and has been shifting to China. And the fact that Saudi Arabia and its other partners in the Persian Gulf through the Gulf Cooperation Council, is forming its own monetary union with the implicit threat of trading oil in the currency that is obviously not U.S. dollars.
Jay: Well, that’s very interesting. We are really out of time here, Paul Michael. I am sorry, but I just have to run one more idea by you then.
We’ve had John Perkins, the author of Confessions of an Economic Hit Man, on this show in the past, and John suggested that another reason we may have gone into Iraq was the insistence of Saddam Hussein to get paid in euros rather than dollars. I guess you might agree with that?
Paul: I think that was a factor as well. There were a number of factors that came together and allow the coalition to be built under the Bush Administration to justify the war in Iraq.
Jay: Okay, we are going to have to leave it there, unfortunately, Paul Michael. But I want you to tell our listeners where they can pick up a copy of your book The Rise of the New Oil Order.
Paul: Sure! They can go to amazon.com.
Jay: Okay, thank you very much.
Jay Taylor
Gold Investor