In 2005, two men made a bet over the phone.
They both chipped in $5,000, with the winner to take the ten grand, plus interest earned on 1 January 2011.
It became known as “the $10,000.00 question”, and gained a large following in the years running up to it. And while the bet was won and lost more than eight years ago, what really drove the bet, “the question”, in the first place, has yet to be truly resolved:
Will Saudi Arabia be able to keep the world flush with energy?
It’s a pretty simple question, but if you think you have the answer, please let me know. The answer has vast conclusions for the state of our world, in more ways than anyone can imagine.
That bet was between an investment banker called Matthew Simmons and a columnist for The New York Times called John Tierney. Simmons was an oil specialist, having created his eponymous bank in the first place just to provide financing for oil companies.
Having studied hundreds of internal documents produced by Saudi Aramco, Simmons became convinced that Saudi oil production was about to peak, if it hadn’t done so already. He made his case that as a result global oil supply would soon be strangled in a book he titled Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy.
Key to his argument was the case of the Ghawar oil field, then the largest oil field in the world. Aramco was using oil extraction techniques there which would generally only be used if its oil reserves were already markedly depleted.
Saudi Arabia has the cheapest cost of oil production of any country, and Simmons believed that a contraction in its supply heralded the end of double-figure oil prices: his bet was that the average price of oil in the year 2010 would be $200.
He had been challenged to that bet by Tierney, who had no knowledge of Saudi oil production, but had been told by an economist that “if you find anyone willing to bet that natural resource prices are going up, take him for all you can.”
Simmons did not survive to lose the bet, drowning in his hot tub after a heart attack in mid-2010.
But while he was wrong in his price prediction, in a way, he was right…
I wrote a couple of weeks back about Saudi Aramco’s first foray into the debt market, and wondered what it means when the world’s most profitable company has decided to load up on debt.
Those bonds were so popular, Aramco was able to secure financing even cheaper than the Saudi government. But in order to do so, it issued a prospectus to investors that made certain information public that had been kept behind closed doors.
The Ghawar oil field, the prospectus revealed, cannot produce nearly as much oil as markets assumed: not 5 million barrels a day, but 3.8 million.
So Simmons was right about the Ghawar decline… but Ghawar is no longer the world’s biggest oil field. That title now goes to the Permian Basin in Texas, which can produce 4.1 million b/d, astronomically more than it could when Simmons wrote Twilight in the Desert. The energy world is now markedly different… though bond investors in Saudi Aramco certainly think that Saudi Arabia will remain a pillar of the global energy market.
The sustainability of Saudi Arabian oil, and the world’s dependency on it which ultimately drove his argument, has yet to be assured.
So I ask you – will Saudi Arabia continue to function as the world’s oil pump, and remain a keystone of the global economy for the next decade? Or will energy have changed as hugely as it did after the fracking boom?
I’d love to know your thoughts: [email protected].
We’ll be exploring this theme more closely this week – stay tuned.
Until then,
Boaz Shoshan
Editor, Capital & Conflict
Category: Market updates