The Oracle of Oil Speaks

Charles Maxwell, the world's wisest energy analyst, says the crunch will only get worse
Maxwell: "By God, we will have to bloody well change" our overreliance on oil Bill Wadman

Note to my editors: I'm putting in for time-and-a-half because lately I've been forced to work overtime as a sounding board for outlandish oil theories from friends, family, and cabbies.

"Mark my words: Tax the heck out of ExxonMobil (XOM) or we'll be paying 10 bucks for regular unleaded."

"You see, $135 oil is just Bush's way of thanking all his J.R. Ewings back in Texas—and Pops paying back the Saudis for Desert Storm."

"Dude, OPEC doesn't want you to know that if you shift into neutral behind an 18-wheeler, you'll get 100 miles to the gallon."

So to all of you armchair Oliver Stones, I bring the wisdom of Charles Maxwell, senior energy analyst at trading-and-research shop Weeden & Co. Having spent 11 years in the oil patch and 40 more on Wall Street, this reserved 76-year-old is the elder statesman of energy research.

Ranked nine times by Institutional Investor as the No. 1 analyst in his field, the professorial Maxwell is sought out not just by fund managers but also by academics, carmakers, and Mideast sovereign wealth funds. He has been corresponding with me over the past three years, scrawling various asides in the margins. The good news is also the bad news: With the price of oil up 700% in seven years, Maxwell has been right. Visiting me in my office with a briefcase full of data, he now foresees unprecedented stress on the world economy as peak oil production arrives in or about 2015.

Although Maxwell retired in 1997, he un-retired two years later on the nagging hunch that low oil prices ($10 per barrel in 1998) would starve the investments necessary to keep up with global demand growth. "We're digging ourselves into another shortage," he prophesied back in 2001, when gasoline fetched $1.25 a gallon. He explains that in response to a price collapse and 18% overcapacity in global oil production in the mid-1980s, oil companies withheld capital spending, bleeding down the capacity surplus to the low single digits by the late '90s and close to zero now.

Maxwell adamantly argues that the system needs more like an 8%-to-10% capacity cushion, especially to absorb inevitable weather and geopolitical shocks. "The problem we face, above all else," he says, "is not that we lack more oil—it's that we lack the man-made capacity to produce more oil." You'd think a price of $135 a barrel would be incentive enough to extract more. But Maxwell says that's far easier said than done in the context of a global shortage of petro-roughnecks and engineers; spiking costs for rigs, drills, and pipes; and the longer lead times necessary to extract harder-to-reach oil. Maxwell presents a chart showing that in 1988, 23 billion barrels were both found and used. By 2007 those numbers had diverged to become a gap of 8 billion found to 31.5 billion used. "We're not well-prepared at all," he says, taking off his glasses and wiping his brow. "By God, we will have to bloody well change." Weaning ourselves off our dependence on cars must be a big part of cutting demand—but that, too, is easier said than done.

Surely, though, motorists, refiners, and even Chinese bureaucrats would have to cry uncle at a certain price. "You would think so, right?" says Maxwell. "In the past, $40 was the breaking point," he notes. "But this time we went through it—then $80, then $120—like a cannonball through paper." And the economy, while weak, has not collapsed as a result.

That has set an ominous precedent: Despite all of our protestations on the evening news, we are apparently able to pay even more. "Among the poor," says Maxwell, "that will expose deep, raw wounds: to eat or not to eat, to heat or not."

Maxwell does reserve some hope for abundant compressed natural gas. He also believes that Canada's bounteous tar sands will fill some of the void.

But he wants to disabuse you of the notion that $200 oil and gasoline priced like vintage Veuve Clicquot will have ExxonMobil in clover. As the rare oil analyst who doesn't reflexively genuflect before that multinational's CEO, Maxwell condemns the company for "irresponsibly" advertising plentiful supplies. "It really does Rex Tillerson no good to keep denying that oil production will be peaking," he says. "Exxon's business plan is from the past 150 years."

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