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Interview with Charlie Maxwell (Part 1 of 2)

We caught up with Charlie Maxwell, the life-long oil industry analyst viewed by Barrons’ magazine as their energy guru, and asked him for a few minutes of his time. He shared that and much more with Steve Andrews.

ASPO: Over the last 12 months, what has surprised you the most about the oil roller coaster we’ve been on?

Maxwell: I would have to say that what struck me the most, as a surprise, is the virulence in the downtrend in the world economy. That’s a negative for the peak oil story, but only a temporary negative. By crushing demand, we are in effect gaining two more years, maybe three, in which we in the consuming world have added to our time before the peak, and could take good advantage of, since the peak is right upon us-I have it still at 2015 for all liquids. But, given the way we’re going about it, given the politics, given the direction of the world–like the Chavezs nationalizing all those oil service companies, and the continued Russian attitude–I don’t think that mankind is going to take advantage of those extra two or three years. And I think that when we get to 2011 or 2012, we’ll be right back in the supply-demand relationship that had looked so uneven in the early part of 2008, for 2009. As it turns out, 2009 has turned out to be a snap, but we didn’t know that in June of 2008. We anticipated supply-demand relationships that ended up not happening, surprisingly, because of the recession, but which we will see again, probably in 2011 or 2012. Then we will be back in the same position and we will not be substantially improved in our ability to handle it because we are doing just as many things now that are unfavorable as are favorable to solving our bigger energy problems. I don’t see any net gains. To put it in other words, “it ain’t hit us badly enough yet that we will put politics second and the problem first.” That time comes later when it really hurts us and then somebody stands up and says, “well, the truth of the matter is…” and then we will all say yes and get on with the job.

Talk about piggies waddling up to the trough, these politicians-whether Democrat or Republican-I mean there is not much real sense here of what’s best for the country. It’s all about what’s best for their individual constituencies, and I think maybe it’s naïve to ever think democracies will be different. Plato said that the essential problem for a democracy is that when citizens learn where the treasury is, they go there every morning to get their due.

A lot of people have said that the year 2015 is too far out for the peak. But I built a big margin in there because I thought we might have two recessions. I didn’t dream that we would have one really big one. So I’ve still got 2015 out there. But if you said to me last July, when do you really believe the peak is going to come, I would have said 2013. I started years earlier by estimating 2015 and I happily held to that view as I saw the recession begin to develop because I could see that we would probably push it off a little bit.

For your purposes, I’ve got 2008 for the peak of non-OPEC-not really a peak, it’s a plateau, but we’re falling off it now. And then 2011 for the peak of the top 50 listed companies, the ones that dominate the stock market, so the stock market investors will say the oil industry has peaked because their stocks have peaked. And then I’ve got 2013 for the peak of black crude oil and then 2015 for the all-liquids peak, which I take to be ultimate peak oil. And that would include gas-to-liquids, coal-to-liquids, NGLs. And it would include both synthetic and natural crudes.

ASPO: By 2015, what do you assume we’ll have in the way of new liquids between GTL and CTL?

Maxwell: Not much. Gas to liquids may be about 30,000 barrels/day-something really small. I think there’s about 14,000 barrels/day today. I don’t know how much CTL there is today; there must be some small labs somewhere, and some small operations-I would guess around 10,000 barrels a day at best.

There are two reasons we won’t make much progress. One, there won’t be pressure on us to really make these changes until 2015 or after. So it still seems like the majority of people will walk right into the maw of the dragon and not understand that they’re gonna be chewed. So there isn’t going to be a lot of preparation for these hard days to come. I think the preparation will come after the hard days arrive.

The second point is that Peabody group fell apart and I don’t think anyone else is going to start up another group because of that collapse; the costs went wild and nobody wants to be a part of it now. It’s going to take a cycle or so, some time before new people appear in those same positions in these companies that would take another look at it. When something like this falls, it usually knocks it out of the running for about five years, even ten.

ASPO: What do you foresee as being the smorgasbord of alternatives, such as they are, that will play out, between now and 2015?

Maxwell: When you look at the extra money that the government’s going to have by 2015, and I doubt if there will be any, then the truth of the matter is that the government is going to say, “well, we’re all for it and we back you in your efforts, but your fuels are going to have to be economic and you’ll have to do it yourself if you think it’s economic.” And today there is no coal-to-liquids pilot plant that is economic, by definition. Even the pilot plant might have to be pretty big to prove the process. So you might have to do a 5,000 barrel-a-day plant, and if that’s going to cost you $200,000 a barrel, it’s going to be really expensive. Of course they could get over that problem by building a big plant, but who in the world will build a big plant to see if it works? So unless the government is willing to step in and fund a small, expensive plant, I don’t think the industry will step forward and do much under the present circumstances of non-lethal pressure. So I think the government won’t do anything but they’ll talk a good game and be helpful, but I don’t think Congress will pass anything.

If you look at solar power, it’s terrific, so terrific, so fast growing….that without a subsidy, no one will use it. So it’s not very attractive, and people don’t admit that. And I think it’s the same thing with ethanol, which was a loser from the start. And I think it’s the same thing with wind energy. I think wind energy is going to turn into a huge disappointment because so many hopes are being pinned on it. But people don’t understand the basic issue here, which is that 50% of your costs are fuel-which you can save when the wind works, but you can’t save it when the wind doesn’t work-and the other 50% are capital costs which you have to apply anyway. Then throw in the fact that the wind zones are not where all the people are and then you have the problem that only 70% of the wind energy ever gets there. So the result is that wind becomes a very expensive source. When it comes to voting on it, somebody’s going to get to the Congress and say, “now this is a loser-it’s another ethanol.”

Editorial Notes: This is a Commentary from ASPO-USA and does not necessarily reflect the views of the organization. -BA

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