This week a study on peak oil by a German military think tank was leaked on the Internet. The document shows that the German government is closely studying the issue of peak oil, and is aware of the potential for serious consequences as oil production declines. The study is reminiscent of the Hirsch Report, commissioned by the U.S. Department of Energy, that warned of the risks posed by peak oil.

Europe's continued reliance on Russian oil and gas supplies may not be secure in the long term, according to the study.

The document warns of the potential for regional shortages, market failures, and a shift in political power toward those capable of exporting oil. This report describes potential outcomes that require planning and preparation. The scenarios outlined in the paper are exactly the kinds of drivers that lead me to advocate for greater regional energy self-sufficiency. The report clearly lays out just how vulnerable Europe will be because of its continuing dependence upon Russia for both oil and gas, and notes that Russia will be in a very strong political bargaining position as a result.

The report can be accessed from the popular German paper Der Spiegel in this story: Bundeswehr-Studie warnt vor dramatischer Ölkrise. The report is so far only available in German, and while Ich spreche ein wenig Deutsch (I speak a little German), I am not fluent enough to capture the essence of the report. (Der Spiegel has summarized the report in English now: Military Study Warns of a Potentially Drastic Oil Crisis).

However, I have a friend who is both fluent in German (his native tongue) and passionate about peak oil outreach. Given a week, I could probably translate the report. My friend (who didn’t want to be identified) did it overnight. Below is his translation of the major points in the report.

Peak Oil

Implications Of Resource Scarcity On (National) Security

Center for German Army Transformation, Group for “Future Studies”

July 2010

1.        Introduction

The focus of the document is on the topic of finite resources, using Peak Oil as an example. The report is part of a series of publications focused on long term (30 years) with the intent to enable the Ministry of Defense to take action early.

In the past, resources have always triggered conflicts, mostly of regional nature. For the future, the authors expect this to become a global problem, as scarcity (mainly of crude oil) will affect everybody.

The authors confirm multiple views on Peak Oil timing and concede that there will be Peak Oil eventually. The study isn’t about positioning the problem on a timeline, but instead about the consequences of a peak. They expect major consequences with a delay of 15-30 years after the peak has hit.

The report refers to the uncertainty of reserve statements mainly in OPEC countries based on the quota allocation method within OPEC but also refers to the possibility of better extraction technologies.

They suggest that it has become urgent to understand those consequences of an eventual peak now in order to have enough time to adapt.

2.        The Importance of Oil

2.1       Oil as a driver of globalization

95% of all industrial outputs is dependent on oil, in fuels, as a chemical base for polymer production etc. Oil has become a key driver of modern lifestyle and globalization.

Substantial oil price increases poses a systemic risk, not just for obvious things like transportation, but equally for other subsystems.

Thus, internationally, but equally nationally, there is a vital interest in securing access to oil, which is currently possible on world spot markets, with OPEC being cooperative due to a mutual dependency between key actors (and a massive presence of the U.S military in the gulf region).

Yet on the other hand, regional conflicts can always at least partially be attributed to resources, such as in the Caucasus region, the Middle East or in Nigeria, or they fuel conflicts due to the wealth they create (such as in Africa).

The report sees – within a timeframe until the year 2040 – a changed international security layout based on new risks (including transport risks for fuels) and new roles of actors in a possible conflict around the distribution of increasingly scarce resources.

2.2       German energy security

The term is defined narrowly as “reliable energy supply”, and then extended to include environmental objectives, technology transformation of societies, planning for energy demand and the long-term planning of a national strategy, tied in with international organizations

This expansion of the view is seen as required based on the globalization of energy markets. However, the report then narrows down the scope again to the possible risk from a supply shock, focusing on the key suppliers of oil: Russia, Norway and the U.K. It is noted that both European partners are already past their peak and that Germany is increasingly dependent on Russia, which currently is reliable but not necessarily so in the long term. Given the expected decline in German energy consumption, the Russian share will likely be 40% by 2025, with the Middle East, Africa and sources around the Caspian Sea making up for the increasing gap from declining European production.

3.        Possible Scenarios After Global Peak Oil

This chapter looks at gradual changes (3.1.) and the risk of disruptive changes (3.2) past a certain tipping point.

3.1       General interdependencies driven by Peak Oil

3.1.1      Oil as a deciding factor in international relationships
With increasing scarcity, producers are increasingly in an advantageous position, both from high revenues and access to cheaper oil when compared to spot market prices. This partly reverts the trend to free oil markets which took place after the ’70s shocks, and gives those countries more control over the supply chain, with a risk of monopolies and nationalizations, and of “political pricing.”

Further, oil producers use increasing amounts of their production internally at lower prices, which increases domestic consumption and inefficiencies, accelerating the problem. [The authors miss out on the fact that high oil prices also bring more wealth to the country which AGAIN increases resource consumption].

The report then looks at increasing “strategic” moves by key actors including the Chinese CNPC (China National Petroleum Corporation), which tries to grab the sources that are still available (particularly in Asia and Africa), but often at relatively unattractive conditions.

The focus of risks is expected in the “strategic ellipse” region (a term used for the region East of Europe reaching from Saudi Arabia in the South to Russia and former Soviet Union countries in the North), because a majority of oil reserves are located in this area.

Overall, the authors expect a reduction of “free market” mechanisms in oil trade, and a rise in more protectionism, exchange deals, and political alliances between suppliers and customers, which could lead to significant geopolitical shifts. Equally, the authors expect this interdependency to shape foreign affairs of oil importers, making them more tolerant towards rogue behavior of suppliers out of sheer need.

Overall, higher volatility and loss of trust are seen as possible outcomes in a world where oil supplies are limited, increasing the need for “oil related diplomacy” and thus increasing risks for moral hazard among all actors, which in turn decreases overall global supply security.

The report then refers to already existing actions of the German government to tie close economic relationships with energy suppliers, and to the tendency of consuming countries to reduce oil dependency, trying to steer clear of risks of future supply shocks.

The Middle East is identified as a very dangerous region with high external involvement from many players and thus a very unstable overall situation.

Overall, the report expects a reduction of the importance of “Western values” related to democracy, and human rights in the context of politically motivated alliances, which increasingly are driven by emerging economies such as China – likely leading to double standards. Emerging economies are equally expected to receive higher recognition in international organizations, particularly those with strength in resources (such as Russia).

3.1.2      New security risks based on additional/alternative energy resources
New conflicts are potentially arising from oil exploration in international or disputed ocean waters, where multiple issues arise, particularly around the arctic circle, with further geopolitical risks for conflict.

Also, the shift to natural gas is reviewed as an extension of the “oil age”, because it might be able to replace crude oil as a bridging source until new solutions are found. The risks for problems from transporting gas (pipelines) and the related issues (as seen between Russia and its neighbors during the past years) are highlighted.

Equally, nuclear power as a potential source is highlighted – emphasizing the risk for safety and the proliferation of nuclear technology. This would also require an increasing shift towards electricity.

Equally, the competition between biofuel and food production is highlighted, showing the limits of biofuel outputs to compensate for reductions in oil availability, and also showing risks for water supply and soil degradation from excessive use.

Overall, the authors see a trend to increase the energy autonomy of entire regions from external supplies, both in the ability to generate alternative fuels (from biofuels and coal), but particularly in electricity generation.

3.1.3      A shift in roles between private and public actors
Based on the increasing importance of oil, governments are becoming more relevant in securing the benefits of oil, both on the supply and on the demand side. This puts a higher emphasis on political negotiations and deals, and increases the risks for nationalizations of resources and key exploration activities.

Exploration licenses are seen as a key area where bidding wars (including non-financial commitments) might emerge. Equally, increasing pressure to renegotiate or revoke already existing licenses might emerge. Ultimately, each country will try to secure sufficient oil to keep its standard of living.

On the other hand, private enterprises are seen on the rise in protecting infrastructure and ensuring production and transportation security in less developed regions, particularly if weaker countries become unable to keep their own services up.

The dependency on oil-related infrastructure (pipelines, refineries, harbors, key pathways on oceans) will increase, and thus the risk. Damaging infrastructure through hostile acts (sabotage, war) might become an attractive target for groups or countries with a tendency to use violence. The same is expected for electricity and natural gas-related infrastructure – they all might require higher protection.

Generally, the focus of risks is expected in the region which the authors consider the “strategic ellipse” (a term used for the region East of Europe reaching from Saudi Arabia in the South to Russia and former Soviet Union countries in the North), because a majority of oil reserves are located in this area.

3.1.4      Economical and political crises as a consequence of the transition to “post-fossil” societies
A number of risks of higher oil prices are seen for modern economies, particularly in transportation. Security risks are seen in resulting systemic crises.

A first direct consequence of higher oil prices and lower availability of fossil fuels is a possible reduction in transportation capacity, equally in individual transportation and in freight forwarding. This might lead to another “mobility crisis” for societies that heavily depend on cars and trucks.

Higher cost in commercial transportation markets might severely affect current supply chains, and no alternatives are in sight (electric trucks don’t exist yet). Particularly food might become a critical issue for countries that are a) highly dependent on imports and b) are susceptible to price-increases of food products, particularly affecting Africa, parts of Asia and Latin America, and the Middle East.

High oil prices would further affect almost all aspects of society, as it will also influence the cost of chemicals and all products derived from them, which might substantially alter the nature of value chains and make certain things uneconomical – ultimately leading to higher unemployment during a transformational phase away from an oil based economy. This might particularly affect the German car industry.

Limits in availability might also strengthen regulatory efforts, encourage the allocation of energy (oil) by rationing schemes and possible other actions limiting free markets.

Additionally, the changes and likely reduction in standard of living might render societies less stable and make them more attracted to extremist political positions and even trigger changes in government systems, as trust into key actors in politics will diminish. This might be a particular risk for the relatively young democratic countries in Eastern Europe.

3.1.5      More selective intervention – key actors overwhelmed
Overall, more expensive transportation and increasing problems “at home” might reduce the ability of larger countries to intervene internationally (politically and/or with military action), and also lower the readiness to provide help to poorer countries. The focus will be more on a country’s egotistic (energy) interest and not so much on an ideal of transferring Western values. The gap will likely not be filled by NGOs, as they will be affected by similar limits.

Overall, international institutions will be weakened, as they will have less resources to provide help and support, and it becomes equally possible that help will be attached to direct (energy) needs of the donors.

3.2      Systemic risks after reaching a “tipping point”

In addition to the gradual risks, there might be risks of non-linear events, where a reduction of economic output based on Peak Oil might affect market-driven economies in a way that they stop functioning altogether, leaving the range of a relatively steady downward trajectory.

Such a scenario could pan out by an initially slow decline of trade and economic activity, combined with higher stress on government budgets from lower tax income, higher social cost and growing investment into alternative technologies.

Investment will decline and debt service will be challenged, leading to a crash in financial markets, accompanied by a loss of trust into currencies and a break-up of value and supply chains – because trade is no longer possible. This would in turn lead to the collapse of economies, mass unemployment, government defaults and infrastructure breakdowns, ultimately followed by famines and total system collapse.

4.        Challenges for Germany

4.1      Risk of new dependencies for Germany

Oil as a new factor of global power would create significant dependencies for Germany, and in order to avoid supply issues, strong ties with suppliers are a must, but equally a diversification of supply relationships, taking into account that a supplier might intentionally reduce capacity to accomplish political objectives.

Among the key supplier countries is Russia (supplying 35% of German oil imports), where reliability risks are prevalent, given past experience. Natural gas, as a possible temporary substitute, bears the same risk (37% come from Russia). Thus, a diversification becomes essential.

4.2      Focus of politics on supply relationships

Germany needs strong and reliable ties to Russia and other Caspian Sea countries. This might create some challenges in international relations, particularly with smaller Eastern European countries [like Poland]. Thus, intensifying relationships to the Middle East might be equally relevant. However, all those relationships have an inherent risk of being instruments in conflicts, which puts a certain limit on treating all foreign partners the same.

4.3      More pragmatic foreign policy

The need to mitigate supply risks might require some compromises on foreign affairs topics (such as human rights). Equally, more active diplomatic efforts will be required with a focus of energy security in mind. This is more difficult given Germany’s reluctance to engage in political power play due to its history, but needs to be tackled in order to deal with the challenges ahead. The authors don’t want to encourage military solutions, but suggest a strong preventive development of political and diplomatic initiatives to tackle the problem.

4.4      Importance and freedom of industrial nations reduced

All industrial nations that depend on energy imports will become more dependent on new partners, both in emerging economies and supplier countries. This requires a new focus in foreign affairs, sometimes giving up standards in negotiations with countries that have different cultures and political systems.

4.5      Help in stabilizing supplier countries at risk

Some supplier countries (and surrounding regions) might be destabilized by the force of higher resource prices. This is an area where Germany needs to help by providing support for nation building and conflict resolution on the national and international level. This is in conflict with the lower economic power likely to result from Peak Oil, which might make interventions less likely and requires new approaches of “stabilization with lower effort.”

4.6      Growing conflict potential concerning the Arctic Circle

Germany might have to take positions in case of an upcoming conflict regarding resources in the Arctic Circle, where multiple countries (including Russia) have open claims for accessing oil and gas fields. This requires further research.

4.7      Nuclear technology proliferation

The risk for nuclear technology proliferation and thus more countries with the potential for nuclear weapons (and the risk for terrorists having access to nuclear material) is growing due to the proliferation of nuclear technology for energy generation. Equally, risks for terrorist attacks and accidents on German soil are rising. Both scenarios require more surveillance, intelligence and preventive action.

4.8      Higher conflict potential regarding critical infrastructure

Energy delivery infrastructure for all sources including electricity will have a higher importance in an oil constrained world, thus, securing its reliability, security and availability becomes mission-critical. International cooperation is needed to secure large international supply paths (pipelines, sea routes).

4.9      Larger “energy regions” change international alliances

The expectation of stronger connections between suppliers and consumers across continents creates different settings for current international alliances and security risks. DESERTEC (a large power production system in Northern Africa based on CSP) would require different settings even for military strategies.

4.10   Peak Oil for armed forces

Armed forces would also be significantly affected by fossil fuel limits, as they are very dependent on oil products. Significant investments in alternative energy procurement technologies (biofuels, coal-to-liquids – Fischer-Tropsch) and applications (electric and hybrid vehicles) would be required, with long transition times. Further, local energy-independence of stationary troop infrastructure (like military bases) using more renewable sources would be beneficial. Long term objective would be to fully convert Germany’s armed forces to only use renewable energy sources by 2100.

4.11   Crude Oil as a systemic risk

For scenarios which end with a complete destabilization of societies, Germany is at a significant risk given its strong participation in a globalized economy. Being still able to act requires a number of basic infrastructures to keep functioning, both for the country and its armed forces. Work is required to look into redundancy, high-resilience of infrastructure and local self-organization approaches.

5.        Summary

The report sees significant risks arising from an unavoidable peak in oil production, which go beyond gradual shifts in energy systems and economies. This will likely lead to economic change and new geopolitical risks that affect much more than just what we can anticipate. The overall ability to describe exact outcomes is very limited, as many scenarios are possible, and further research is required.

Overall, more emphasis needs to be put on understanding and shaping international relationships in respect to energy security, anticipating and integrating the ongoing shift to different players in a resource-constrained world.

In any case, Germany has to identify and implement alternatives to the current transportation technologies that require oil, and put a similar emphasis on avoiding other dependencies, for example concerning rare earths.

For armed forces, Peak Oil creates significant risks, both from a mobility standpoint as well as from dependencies on other societal services. Understanding those risks requires further analysis and likely a very different approach in the future.

In general, more preparation is required for society and army to make sure that problems are recognized and solutions are actively implemented.

Global economic recession drove energy consumption lower in 2009 — the first such decline since 1982. Take a look at the world’s energy consumption as a factor of renewable and non-renewable energy resources, courtesy of our friends at the Travel Insurance Blog.

Click image for full-sized version

Source: Travel Insurance Blog

Europe's largest wind farm, with 140 turbines, operated at less than a quarter of its capacity in 2009.

Researcher says that government subsidies are to blame.

More than half of Britain’s wind farms are operating at less than 25 percent capacity because they’re installed in areas without a continuous breeze, according to an academic study reported by the Daily Mail.

The study was based on official data provided by energy regulator Ofgem.

The worst locations cited in the study were a 9-turbine wind farm at Blyth Harbour in Northumberland, northern England, which managed to reach only 4.9 percent of its capacity, and a 4-turbine operation at Chelker reservoir in North Yorkshire operating at 5.3 percent capacity.

More than $400,000 a year can be earned in subsidies from one turbine operating at 30%.

Europe’s largest wind farm, located near Glasgow, ran at less than 25 percent capacity, according to research of the data from 2009.

The analysis was carried out by Michael Jefferson, a professor of international business and sustainability at the London Metropolitan Business School.

Jefferson placed the blame squarely on government subsidies, which he says encourage firms to site their operations badly because of their rush to take advantage of financial incentives. British consumers currently pay an extra £1 billion ($1.56 billion) per year on their fuel bills in order to subsidize the government’s push toward it’s renewable energy goals.

“There is a political motivation to drive non-fossil fuel energy, which I very much respect, but we need more focus,” Jefferson said. He suggests that stimulus funds should be reserved only for the windiest of projects in order to ensure that taxpayers are getting the most bang for their buck.

Operations that fall below 25 per cent should be deemed ineligible for renewable subsidies. “That would focus the mind to put them in a sensible place,” he said.

Britain has 2,906 wind turbines spread over 264 sites with a further 7,000 turbines planned for the next 12 years.

Jefferson has written extensively on energy policy, including contributions to various UN bodies. He was the Deputy Secretary-General of the World Energy Council for 10 years, where his work with the Intergovernmental Panel on Climate Change led to a certificate for his contributions to their award of a Nobel prize.

As election season heats up, Obama took on Republicans who he says would rather “stand on the sidelines” than do what’s necessary to create jobs.

President Barack Obama tours the ZBB Manufacturing Facility in Menomonee Falls, Wis., and is shown the battery making process by ZBB President and CEO Eric Apfelback, left, and ZBB employee Lonnie Mages, August 16, 2010. (White House Photo/Chuck Kennedy)

While visiting a Wisconsin battery plant that he touted as the future of renewable energy in America, US President Barack Obama predicted that his administration’s clean energy policies will create 800,000 jobs in the next two years.

The President also harshly criticized political opponents who blocked some of his administration’s policies in Congress.

“There are folks in Washington right now who think we should abandon our efforts to support clean energy,” Obama told the crowd at ZBB Energy Corporation’s manufacturing facility. “They’ve made the political calculation that it’s better to stand on the sidelines than work as a team to help American businesses and American workers.”

Obama toured ZBB Energy Corporation’s manufacturing facility, which received $1.3 million in Recovery Act State Energy Program loans in order to fund a $4.5 million factory renovation to triple their capacity to manufacture flow batteries and power systems.

President Barack Obama speaks to workers following a tour at ZBB Energy Corporation in Menomonee Falls, Wis. ZBB is a leader in the design and manufacture of advanced energy-storage products. August 16, 2010. (White House Photo/Chuck Kennedy)

“We expect our commitment to clean energy to lead to more than 800,000 jobs by 2012,” Obama declared. “And that’s not just creating work in the short term, that’s going to help lay the foundation for lasting economic growth.”

The advanced zinc bromide flow batteries and intelligent control platforms manufactured by ZBB, are crucial components to building a smart energy grid and expanding the commercialization of electric vehicles. They allow users to cut costs by shifting energy use to off-peak hours and bank intermittent sources of energy like the sun and wind for future use.

Obama highlighted the major advances America has made in battery technology in just a few short years. “I just want everybody to understand –just a few years ago, American businesses could only make 2 percent of the world’s advanced batteries for hybrid and electric vehicles — 2 percent.  In just a few years, we’ll have up to 40 percent of the world’s capacity.”

This morning I received the shocking news that Matthew Simmons has passed away.

Various news reports have been coming in that he was found unconscious in his hot tub in Maine. It is believed that he suffered a heart attack. Some local stories reported that he drowned.

Matt Simmons and the BP Oil Spill

Simmons had recently become a frequent topic of discussion on this blog after the many doomsday predictions he made about the oil spill in the Gulf of Mexico.

Matt was a frequent guest on MSNBC, Bloomberg and CNN –among others– in the aftermath of the oil spill, where he continuously made claims that the oil spill was many times worse than being reported. He even went so far as to say that the government was complicit in covering up the real effects of the spill.

The press began to call on “BP’s harshest critic” whenever they wanted to broadcast outstanding claims and predictions. Since the media never questioned the veracity of Simmons’ statements this led me to examine many of the claims he made.

Matt Simmons and Peak Oil

Matt Simmons was an investment banker to the oil industry, probably most well-known for writing the book Twilight in the Desert. The book laid out the arguments that Saudi Arabia had overstated their oil reserves, that their oil production was on the cusp of decline, and that prices were set to soar.

The book became very popular, especially when Saudi production began to decline shortly after the book came out.

Although I differed on some of the arguments Simmons put forth in his book, I thought the book was important for two reasons. One, it put a spotlight on Saudi Arabia and really highlighted the importance of that country to the rest of the world, especially once oil supplies began to shrink. Second, it called a lot of attention to the issue of peak oil.

My deepest condolences to the family. As I have said many times, Simmons was one of my earliest peak oil influences, and one of the reasons I decided to start writing about energy. He educated a great many people to the threats lurking in our dependence upon oil, and he will be missed. The fact that we had differing opinions around the oil spill in the Gulf of Mexico in no way diminishes the impact he had on me.

• The Houston Chronicle released a more comprehensive story, including a look at recent events involving Matt: Matt Simmons, energy banker, dies at 67

• Matt’s Ocean Energy Institute released the following statement:

Rockland, Maine (August 9, 2010)

Matthew R. Simmons, founder of the Ocean Energy Research Institute in Rockland, Maine, passed away suddenly on Sunday.

He is survived by his wife, Ellen, and their five daughters.

Mr. Simmons was also former chairman of Simmons & Company International. Details of the services are pending. In lieu of flowers, the family asks that donations be made to the Ocean Energy Research Institute.

The U.S. Securities and Exchange Commission (SEC) is reportedly investigating whether employees at BP illegally profited from information not made available to the public in the aftermath of the Deepwater Horizon oil spill, according to anonymous sources quoted by Reuters.

According to the report, the investigation is still in the preliminary stages.

BP admitted last week that the SEC and the Department of Justice were conducting “informal inquiries into securities matters arising in relation” to the offshore rig explosion and subsequent spill.

The SEC has yet to give official confirmation of the probe.

In the two months following the spill, BP share prices plummeted — shaving off half of the company’s market value. As pessimistic news about failed efforts to cap the leaking well was released, investor confidence took hit after hit causing the stock to tumble. This may have potentially enabled someone with insider knowledge of the failed attempts to replace the well cap before it was known to the public to have capitalized on such information in an illegal manner.

The exact targets of the investigation are unknown at this time.

The news that BP investors may have been taken advantage of comes at a crucial time, just as BP is beginning to unveil its restructuring plan in a bid to regain investor confidence lost in the wake of the oil spill.

"Solar Energy is Now the Better Buy" after reaching a "Historic Crossover" according to a new study.

The costs for solar photovoltaic (PV) systems have fallen steadily while construction costs for new nuclear power plants have been rising over the past decade, which now makes electricity generated from new solar installations cheaper than electricity from proposed new nuclear power plants, according to a new report published by a retired Duke University professor.

Moreover, the report continues, solar costs are projected to continue its decline over the coming decade while nuclear costs are expected to rise further.

The report, “Solar and Nuclear Costs — The Historic Crossover: Solar Energy is Now the Better Buy,” was compiled by John O. Blackburn, Professor Emeritus of Economics and former Chancellor of Duke University, along with a student, Sam Cunningham.

Electricity generated from solar PV is now being sold by commercial developers to the utility companies at 14 cents or less per kilowatt-hour (kWh), while nuclear plants in the planning stages will be incapable of offering electricity cheaper than 14-to-18 cents per kWh, according to the report.

“The delivered price to customers would be somewhat higher for both sources,” the study notes.

Solar photovoltaic resource potential. (CLICK TO ENLARGE)

Cost estimates for new nuclear plants have risen dramatically since the much-heralded “nuclear renaissance” began during the past decade, says Blackburn. “Projects first announced with costs in the $2 billion range per reactor have seen several revisions as detailed planning proceeds and numerous design and engineering problems have emerged. The latest price estimates are in the $10 billion range per reactor.”

But Rod Adams, author of the Atomic Insights Blog, rejected the report and criticized the basis of the study, saying that the report’s nuclear cost projections rely on a paper written by a lone researcher with unclear qualifications. Mark Cooper’s “brief biography states that he has a ‘PhD from Yale’ but it does not specify his field of study. It indicates he is an ‘acivist/advocate’ with a rather wide range of interest areas including telecommunications regulations and energy consumer issues,” he writes. Adams also listed a number of papers on the subject which he says were ignored by Blackburn’s report.

“For many years the U.S. nuclear power industry has been allowed to argue that ‘there is no alternative’ to building new nuclear plants,” Blackburn’s report concludes. “This is just not true.”

TNK-BP is Russia's third largest oil company and has nearly 100,000 employees.

BP’s embattled CEO, Tony Hayward, is about to be reassigned to TNK-BP, a joint venture in Russia.

After much speculation and many reports in the press that Hayward’s days were numbered, the company finally announced on Tuesday that he will step down from his position as chief executive officer effective Oct. 1.

“The BP board is deeply saddened to lose a CEO whose success over some three years in driving the performance of the company was so widely and deservedly admired,” said BP chairman Carl-Henric Svanberg.

BP also announced a record $17 billion quarterly loss as a result of costs related to the spill.

“The Gulf of Mexico explosion was a terrible tragedy for which — as the man in charge of BP when it happened — I will always feel a deep responsibility, regardless of where blame is ultimately found to lie,” Mr. Hayward said in a statement.

In an ironic twist, Bob Dudley, who is set to replace Hayward as BP’s CEO, was formerly the chief executive at TNK-BP before a bitter dispute resulted in him being ousted from Russia by the Kremlin.

BP maintains a share in the Kovytka field located in Eastern Siberia, which is said to be one of the largest undeveloped natural gas fields in the world.

Hayward’s new position will be as a non-executive director on the board of TNK-BP, Russia’s third-largest oil company. BP owns a 50% stake in TNK-BP.

BP CEO Tony Hayward.

BP is scrambling to rebuild it’s devastated image in the aftermath of the Deepwater Horizon oil rig explosion which killed 11 rig workers and caused oil to leak into the Gulf of Mexico.

Comments made by Hayward in the early days of the spill response –such as “I would like my life back” and that the spill was “relatively tiny” compared to the size of the Gulf of Mexico– erupted into a public relations nightmare for the company which they have yet to recover from.

Dudley, an American, is said to be a softspoken character, and BP hopes that he can broadcast a positive image to both the government and the public as it launches a major restructuring process aimed at getting what was once Britain’s largest company back on its feet.

Dudley was in London on Monday to attend the board meeting discussing the company’s reshuffling and Hayward’s severance package. Hayward will receive a $1.6 million payoff – a year’s salary.

“The tragedy of the Macondo well explosion and subsequent environmental damage has been a watershed incident,” Svanberg said in a statement. BP will be a “different company going forward, requiring fresh leadership,” he said.

Introduction

I am going to address a touchy subject in this essay, but I simply can’t ignore it any longer. I have noticed that a lot of people are finding my blog through keyword searches of “Debunking Matt Simmons.” About two and a half years ago, I did write an essay called Debunking Matt Simmons. Because of Matt’s recent claims about the disaster in the Gulf of Mexico, there has been a spike in interest over whether his claims related to the disaster are actually credible. So now seems like a good time to revisit the subject.

Claims like "BP will file for Chapter 11 by July 9," and that "the 'real, untold story' is another leak that is 5-7 miles away spewing 120,000 barrels per day" are ruining Matt Simmons' credibility.

The topic is touchy because Matt Simmons has long been revered in the energy business, and some of his fans will be upset with me for writing this.

But Simmons has lately been making what I feel are very irresponsible and sensational claims that don’t hold up to scrutiny. So I will review his history here to show a pattern of Simmons making sensational predictions based on meager and/or misinterpreted data; predictions that later proved to be grossly inaccurate.

Matt Simmons, Investment Banker and Author

Matt Simmons is an investment banker to the oil industry, probably most well-known for writing the book Twilight in the Desert. The book laid out the arguments that Saudi Arabia had overstated their oil reserves, that their oil production was on the cusp of decline, and that prices were set to soar.

The book became very popular, especially when Saudi production began to decline shortly after the book came out.

My view was that Saudi production fell not because of the arguments Simmons put forward in Twilight, but rather because the Saudis were holding production back to keep prices up. So my feeling was that the Saudi decline was unrelated to many of the arguments that Simmons put forth. And in fact a couple of years later as oil prices climbed, Saudi production climbed back into record territory.

But I thought the book was important for two reasons. One, it put a spotlight on Saudi Arabia and really highlighted the importance of that country to the rest of the world, especially once oil supplies began to shrink. Second, it called a lot of attention to the issue of peak oil. I have always said that Twilight and The Long Emergency were both influential in causing me to become more involved in writing and talking to people about energy.

That isn’t to say the books don’t have flaws. They do. In Simmons’ book, I felt he frequently came to conclusions that weren’t warranted by the arguments he presented. A famous example is his “fuzzy logic” argument. Fuzzy logic is the basis of many control systems, but Simmons incorrectly interpreted the phrase to mean “hunch.” So when the Saudis used fuzzy logic in their control systems, Simmons made an argument that they were really guessing about their oil reserves. In his own words, “if they can basically just keep turning on a tap, why does it take fuzzy logic?” The comment was nonsensical, but as later events would show not simply an isolated example of Simmons speaking out when he didn’t know what he was talking about.

Matt Simmons, Layman

Twilight in the Desert made Simmons famous, and he began to be called upon as an expert on all things oil-related. There were two very big problems there. First, Simmons is an investment banker, and is not remotely an expert on all things oil-related. In fact, I don’t know anyone who is. But the bigger problem is that he either thinks he is, or just can’t say no to requests to do interviews and presentations. And when he does those, he frequently makes sensational claims and predictions. I am on an e-mail list where I saw this recent comment about Matt from a long-time admirer of his work, which I think hits the nail squarely on the head:

I think something happens to the psyche when the media pay attention to you for so long. You stop all self criticism, believing that whatever thoughts come to your mind have validity and import. In truth, it doesn’t matter if you are eventually proven wrong, because by then you’re off on the next topic.

Simmons’ Blunders at ASPO 2008

In my previous essay on debunking Simmons, I provided some examples of Simmons making factually incorrect statements. These statements were based on him not having enough information (or bad information), yet still speaking authoritatively on a topic. There were two later examples from his talk at the 2008 ASPO conference — where I also presented. (See his presentation here). He claimed in his presentation that we don’t have a good idea of our gasoline inventories, and because of Hurricane Ike we were just beginning a gasoline crisis that could bring the entire country to a halt. He spun quite a frightening tale, and I could see the shock on some people’s faces.

Contrary to Matt’s argument, the evidence was just the opposite. Even as he was speaking, refineries were coming back online from the hurricane outages and inventories were recovering. I caught up with Simmons later and told him that I used to work in a group in a refinery that provided inventory data to the Department of Energy, and we do indeed have very good data on gasoline inventories. So his fundamental premise was wrong. I was asked about Matt’s comments on a later panel session, and I said that gasoline inventories were beginning to recover and that I predicted they would be higher in a month. They were. Matt’s frightening scenario based on Hurricane Ike didn’t come to pass.

Another example is his argument about the $100 trillion corrosion issue in the oil industry. The gist is that he argues that the oil industry is full of rusting infrastructure, and he questions whether we have the money or even the iron resources to fix the problem. Further, he questions aloud how it is that he – Matt Simmons, investment banker – has ‘discovered’ this problem that the oil industry has missed. I won’t go into all of the reasons that Matt is way off the mark on this, as that would be an essay in itself. A corrosion engineer at The Oil Drum once weighed in on this issue, and explained that corrosion is well-understood, and not something that Simmons discovered. Oil companies are full of corrosion engineers who work to replace corroded equipment as needed. But it was another oil-related “crisis” Simmons “discovered” and he ran with it.

And that brings us to his recent interviews over the spill in the gulf.

Sometimes Silence is Golden

Personally, I have a rule about presentations and interviews: If the topic is outside of my area of expertise, I decline. If CNN calls up and says “Can we interview you on the future of the solar industry?” I will tell them no and give them the names of some experts in the field. Lately I have been asked a lot to comment on specifics on the disaster in the Gulf of Mexico. I always decline, again because there are plenty of people who know more about the specifics than I do.

Simmons doesn’t seem to have a filter that tells him to pass up an interview if he might not know what he is talking about. Here is a sampling of some recent interviews in which he makes numerous extraordinary claims. I have included some of the more extraordinary claims below, but there are plenty more out there that I didn’t list.

On Bloomberg: Simmons Says Government Should Take Over BP Oil Clean Up

On CNN: The Gulf Coast oil spill’s Dr. Doom

With Dylan Ratigan on MSNBC:

Simmons’ Sensational Claims on the Gulf Spill

In these and various other interviews, Simmons claims:

1. Use of a small bore nuclear device is the “only option” to stop the flow of oil.

I don’t want a banker who doesn’t know what fuzzy logic is being taken seriously on the issue of using nukes in the Gulf of Mexico.

2. BP would be insolvent by July 8, 2010. He has also stated several times that the stock is going to zero.

While I have said that I don’t think the BP brand can continue in the long run, I wouldn’t call them insolvent and it will certainly take some time for the legal issues to play out. A prediction of insolvency by July 8th was ridiculous. Simmons has also shorted BP stock, so some of this may be wishful thinking on his part.

3. The “real, untold story” is another leak that is 5-7 miles away spewing 120,000 bbls/day.

I haven’t the faintest idea where he came up with this, but I have spoken to several experts who say the chance of that is zero.

4. That there is an underground lake of oil that is 500 feet thick, 100 miles wide, and may be covering 40% of the Gulf of Mexico.

As one person calculated, that would equate to 500 trillion barrels of oil; total global reserves are estimated in the region of 2 trillion barrels.

5. The leak could last 24 years.

He believes this, because short of the nuclear weapon idea he sees no other way to stop the leak and thinks we may have to wait for all of the oil to come out of the reservoir. Meanwhile, the news is that BP is starting to get the leak under control.

6. The gulf states need to be evacuated.

Simmons says “We’re going to have to evacuate the gulf states. Can you imagine evacuating 20 million people? . . . This story is 80 times worse than I thought.”

That last claim was in the Washington Post, leading one critic to ask of the story’s author:

Did he consider that Simmons is a financial analyst and may have an agenda in creating heightened hysteria surrounding the spill?

Did he consider the effect printing this claim could have on the people of the Gulf Coast?

When Appealing to Authority, Make Sure the Authority is an Authority

Here are some comments I recently read from an actual petroleum expert (geologist) on some of Matt’s arguments:

He doesn’t seem to understand that the rig was connected to the well by the riser before it sank, and it was spewing oil and gas into the rig from the blow out. He also doesn’t seem to understand that most old blow outs occurred when drilling – and the drill string would get blown out of the hole – not the casing. And he doesn’t seem to know that blow outs are more common than we are currently aware and that relief wells are tried and tested means of stopping this. And he is the foremost oil expert in the World!

This is the problem in a nutshell. He is making authoritative, alarming, and far-fetched claims, but the real experts aren’t backing him up. His claims are quite consistent with his claims of recent years where he goes out on a limb, finds himself all alone, and eventually just jumps to another limb. I can’t figure out if he is simply after publicity to sell his book, or whether he is really as deluded as his comments seem to indicate.

Yet one thing interviewers almost always do is play up Matt’s experience. The danger in this sort of appeal to authority comes about when the supposed authority isn’t really an expert, and yet has the potential to cause mass hysteria and/or influence public policy. Simmons thinks it would be a good idea to set off a nuclear explosion in the Gulf of Mexico. He thinks we should evacuate 20 million people in the Gulf Coast. He has influence. But I think the media needs to start doing a better job here and stop facilitating this nonsense.

Conclusions

The purpose of this essay was not simply to dump on Simmons. But he is involved in sensationalistic fear-mongering, enabled by the media’s mistaken belief that he is an expert in all things oil-related. I want to make sure people know that they should take his claims with the grain of salt they deserve. As I have documented here, that grain of salt is warranted based on his history of sensational claims that never materialized.

Sadly, I believe he is in the process of destroying his credibility, and I ultimately do not think history is going to judge him kindly when it looks back on these events. This is very unfortunate, because despite the sensational claims, I still believe he is correct on a lot of the big picture questions of peak oil, long-term prices, and the need to take action. But if he loses his credibility, he will diminish his ability to convince people of the importance of the big picture issues.

GE is offering a $200 million dare to startup entrepreneurs, technology pros and other innovative thinkers: Find a way to “reinvent how energy is produced, distributed and consumed.”

That’s how Paul Koontz, a general partner with Foundation Capital, describes GE ecomagination’s new $200 million “Powering the Grid” challenge.

“Global power grids make up the largest networks in the world,” said Koontz, whose company is one of several partnering with GE on the challenge. “In most cases, the technology on which they are based is essentially 100 years old.”

That’s not good enough for 21st century society, according to GE. So the company is looking for the most innovative ideas it can find in three energy areas: grid efficiency, renewable energy and eco homes/eco buildings. The most promising entrants will get a chance to receive financial, technical and business support from GE and its challenge partners to help develop their ideas and bring them to the global market.

In addition to Foundation Capital, other companies investing in the GE ecomagination challege include Emerald Technology Ventures, Kleiner Perkins Caufield & Byers and RockPort Capital.

“This challenge is about collaboration and we are inviting others to help accelerate progress in creating a cleaner, more efficient and economically viable grid,” said Jeff Immelt, GE’s chairman and CEO. “We want to jump-start new ideas and deploy them on a scale that will modernise the electrical grid around the world.”

The challenge is open to any legal entity or individual aged 18 and up. Entries will be accepted over the next 10 weeks. In addition to entrants selected to work with GE on bringing their ideas to market, five entrants will be chosen as $100,000 innovation challenge award winners.

The GE ecomagination initiative is aimed at helping the world achieve a modern energy infrastructure that’s both efficient and “smart,” enabling two-way communications, automation and less energy waste across the grid.

“The electric power grid is the central nervous system of the global economy,” said Chuck McDermott, a general partner with RockPort Capital. “Though today’s grid is a 20th century engineering marvel, the smart grid of tomorrow promises to revolutionise how we manage our homes, offices and factories and to maximise the use of next-generation clean energy resources.”

Reproduced with permission from Greenbang.