The Oil Drum

JOE KERNEN, CNBC ANCHOR: So what will Rita mean for the energy markets? We have guest host Matt Simmons here, also joining us, our energy reporter Melissa Francis.And right out of the bat, Matt, I heard your Pearl Harbor analogy and that sounds like, sorry to say, yelling fire in a crowded movie theater. I mean, Pearl Harbor ushered in World War II. Is that not a hyperbole or an overstatement? Tell us what you mean by that.

MATT SIMMONS, CEO SIMMONS CO. INTERNATIONAL: I mean what`s amazing, when you go back to the benefit of hindsight, World War II was 40 percent over when suddenly we got awakened by Pearl Harbor and finally realized that we were at war.

KERNEN: OK, that`s you`re analogy not necessarily the significance historically to the event, but in that it`s a wake-up call for us being asleep.

SIMMONS: We`ve missed an awful lot of wake-up calls that we`re on this, that if we didn`t do some things quickly, we were backing ourselves into a terrible corner. Over 30 years, we basically shrunk down our energy center, and put the V8 part of our engine right -- exactly in Louisiana and Texas on the coast and Hurricane alley. It`s sort of -- it`s just conning fate.

MELISSA FRANCIS, CNBC ENERGY REPORTER: What difference does it make, really? I mean, if you look at prices, isn`t this how it`s supposed to work? Prices get high enough to the point where people start consuming less. That`s how the markets work. We all drive a little less. We buy cars that consume less gasoline. What`s wrong with prices spiking and then seeing this happen?

SIMMONS: Yes, you know, 30 years ago, we created a concept, ironically, after the 1973 oil shock, that we needed enormous amounts of extra stocks on hand. And we created the Strategic Petroleum Reserve, so that we -- so that if somebody cut us off someplace else. But in our domestic reserves, we set what we called minimum operating levels -- 300 million barrels a day, when we were only using 14 million barrels a day, well, because we didn`t have any surprises. Over the last 15 years, particularly every time demand occasionally succeeded supply, we liquidated stock. We went to adjusted time inventory on the concept that we were now Wal-Mart, and that somehow or another, if we ever had a problem, we would -- we`d just overcome the problem.

FRANCIS: But we don`t need more crude oil right now. I mean, should we start stockpiling gasoline?

SIMMONS: We should have stockpiled -- well, in crude, one of the scary stories in my opinion that came post-Katrina is that Exxon Mobil is the single biggest refinery in Port Arthur -- in Lake Charles, which wasn`t hurt by the hurricane, was down to four hours remaining crude before they had to borrow from the Strategic Petroleum Reserve. We`ve shut down now sufficient days between Katrina and now Rita that will probably liquidate half of our strategic stocks over -- before this is all over. And then, we`ll basically go a decade or two maybe trying to build up an insurance policy again.

KERNEN: Yes, I heard your 30 year -- that this could affect us for 30 years. That was another thing that I thought was overstated. But you -- that`s -- I mean not that I would know.

SIMMONS: Yes.

KERNEN: But that`s a long period of time for.

SIMMONS: Well, unless we basically immediately stop consuming. Now the answer to this, we could go on a massive conservation, and take our consumption down by 20-30 percent. But that`s very hard to enact in America.

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