Maxwell has been in the oil business for more than 50 years, beginning with a stint at Mobil Oil in 1957. In 1968 he began working as an energy securities analyst. Since 1999, he has been a senior energy analyst at Weeden & Co., a brokerage in Greenwich, Connecticut.

Now 76 and showing no signs of slowing down, Maxwell has become one of the most quoted analysts in the business. He spoke to Robert Bryce at the John S. Herold Pacesetters conference in Greenwich on September 25. This is an edited transcript of their conversation.

RB: You’ve been in the energy industry for more than 50 years. What have you seen during your career that has disappointed you the most?

CM: The thing that’s most disappointing is that the oil business is just, in a sense, another business. You may be in oil, you may be in the lubricating part, you may be in the refining part, or the exploration part, but it’s just a business and it’s just like any other. But for some reason it requires specialized knowledge in many cases, and these people don’t run their companies like a business, they run it [like] some kind of personal fiefdom. I don’t think that is so much so in other industries, and I don’t think the thinking is so hidebound in other industries. I think people are constantly challenging the vested ideas. People are constantly saying, “Let’s do it better.”…My point is that these many other industries have been forced to change a lot. And I found that the oil industry has certain views about the world, certain views about the rights of emerging countries, certain views about the place of energy, and so on, that [aren’t] very leavened by new ideas and competitive ideas. Places like Exxon today are towers of isolated business and philosophic thinking, away from true life.

Somebody once described [former Exxon Mobil chairman] Lee Raymond to me in what I thought were tremendously sophisticated terms. He said he is the kind of man who has a secretary who buys his toothpaste for him. He is insulated from the world.

RB: How do you mean?
CM: I think we see this insularity in a number of ways.
Somebody I know well [remarked to] Raymond, “Sir, you have these potential deep reserves of oil and gas in the Gulf of Mexico. And we have six rigs that can exploit them.” The company happened to be Transocean, but that doesn’t matter. Raymond said, “How much are they?” And the man said, about $180,000 a day. And Lee said, “Well, that’s a lot of money. The price of oil is up to $32, and in three or four years, it will be back in the $20s. So I think I’ll be able to wait on this and these rigs will be a good deal cheaper.” He then said, “Young man, if you see the price go down, come back and we will talk again.” Which is fair enough. But then in 2005, he saw this same man again, and he asked how much the rigs cost, and the answer was $375,000 per day. Raymond said, “That is a lot of money. If it comes down to $200,000, come and see me and I’ll consider it.”

So then [Rex] Tillerson came in – that was at the end of 2006 – he asked them, and the answer was $575,000 for these same rigs. Tillerson said, that’s a bit much….But I’ll give Tillerson this: he said that in early 2007, and in late 2007, he took four of those six rigs at $625,000 each.

So there is some kind of a change. But the point is that here you have a very concrete case. Lee believed that this was the kind of thing that was happening with oil prices: you could just wait until a little bit later in the cycle and you could get it cheaper. Whereas most of us believe that this [peak oil] was what was happening.

Why wouldn’t Lee Raymond, chairman of Exxon, know that that was happening in his industry? This is the single biggest thing that was happening in the oil industry in 50 years. And the number one man, who certainly had enough intellectual capacity to figure this out – he had his own reserve numbers, they were flattening, very obviously. And he couldn’t see that….[perhaps] he was so immersed in the details that he had lost the ability to think philosophically about the whole. I don’t know.

It’s an example of where Exxon has, in effect, lost vision. And I think they’ve lost vision in a number of areas – in environmental they’ve lost vision, in pricing they’ve lost vision, [and they don’t care about] Hubbert’s peak.

Someone asked him about Hubbert’s Peak at a press conference in 2006 or 2005, and he said, “Hubbert who?” Now he knew perfectly well what the question was. But he was just saying, I don’t recognize this fellow.

I’m not particularly upset that I’m a believer and he is not, that this is a moral issue. But I’m using that as an example that he didn’t seem to see anything that was happening around him. And that’s the case that the relatives of John Rockefeller made when they went to the meeting – that Exxon was in an insular field.

RB: And now it’s too late for Exxon to recover?

CM: Well, I think that the payoff on this is that these big companies are going to cease to grow in the next several years because the non-OPEC world is ceasing to grow in the next several years. These companies have various ratios, but it’s usually between 90 to 95 percent of the oil that they draw, that they own or have legal rights to, in the non-OPEC world – yes, they buy a lot of OPEC oil, but it’s not equity oil. So on the equity oil side, they are ceasing to grow. And I think that this flattening will go on for two or three years, and then inevitably, around 2015 or 2016, they’ll start down, and when that happens, hope is lost. And then the icons of this world attack.

You could say that they will convert themselves to widows’ and orphans’ trusts and give high yields – you know, a 14 percent yield in which 6 percent is real and the rest is the return of capital. But I think other people will attack them in the business way, and they will be broken up. And they will be broken up into parts that would give more benefit to mankind than the old company, which has really lost its rationale. Why do we need aStandard Oil of New Jersey? They don’t pioneer in research. You can get money from the bank. Their expertise can be hired through Schlumberger or Halliburton. They are a repository of a lot of reserves, but it can be broken up. But it may give you more value to break it up into 25 pieces and sell it all separately.

And it certainly means that there is a lot more concentration. When the U.S. majors began to sell their U.S. properties, look at the value that has been created by companies like Anadarko, and Apache and Devon, who have spent the time developing [their old properties.]

They’ve made fortunes on the stuff that they’ve bought from the majors and I think that could happen again on a world basis.

RB: So what has encouraged you during your career?

CM: Well, just one other thing about disappointment. One of the saddest things is that in the inevitable move when countries reclaim ownership of their oil and gas and turn it over to the workings of the national oil company, so few national oil companies are worthy of that trust and responsibility. They are coming from the emerging world where most of the oil reserves are located. And many of them carry with them all of the corruption of that world and all of the ignorance of that world. And instead of being shining beacons of renewed hope that Angola [for example] can have a good life for its citizens on the basis of its wonderful reserves, the national oil company tends to be a small cliquish group of very intelligent people who have learned how to game the system. Taking away from Angola the real fruit of what should [belong to] the citizens.

RB: So what is encouraging? Or has it been mostly disappointment?

CM: (Laughing) I’ll try to think of something.

One the one side, the rapid spread of the use of oil [is positive]. Which I think was paramount in the view of John Rockefeller himself – lamp oil for the lamps of China. He was in a monopoly position, quite obviously, from the early days. And yet, unlike the typical monopolist, he didn’t play for the highest returns. He tried to build, as rapidly as he could, a world business. And to do that he had to keep efficiencies very high. And in this position where there wasn’t a lot of moral or economic pressure on him to do that, he kept doing it because he felt it was the right thing to do.

But he made it highly efficient. So he managed to bring this to us. And with it, the [average American citizen has the] addition of something like 280 workers, in horsepower terms, that he gets principally through the use of oil, but also through the use of electricity, coal, and nuclear, and natural gas.

But the spread of that to the Maldive Islands, to Madagascar, is a wonderful factor of the last 50 years, since the Second World War. The economic sweep upward has just been fantastic, and given a lot more people hope and education.

RB: And allowed them to be more free.

CM: More free, and free from diseases as well as free to do things. But the flip side is that we have gone on an unsustainable energy course. And it now looks like that sustainability is being called into question over the next 10 years. We now face the potential for social chaos as people’s hopes are dashed by the realities that we have found it useful not to observe.

The oil business never seems to think about its future, and one of the reasons that they attacked [M. King] Hubbert was that he defined it in a way that they thought was unreal and unfair. Some thought it was unreal, some thought it was unfair. In any case, he defined it in a way that they could not stand, so they blamed him personally for it, which was silly. They were competing with a man instead of the ideas. He became a curmudgeon in the last part of his life because – he never expressed this – he effectively believed he was victimized by his own success. They just picked him out as somebody to go after.

They didn’t argue with him. They just dismissed him, disdained him, ridiculed him.

Anyway. Let me throw in something, Robert…when you think about democracy as a way of life and as a system. Someone asked Bernard Shaw at one stage whether he thought Christianity worked. “I don’t know,” he said. “Nobody’s ever tried it.” (Laughs.)

I think that in democracy’s case, we have two shining examples, and I suppose we could add Britain to that. But we have 200 years of Athenian democracy, between when it started and when it was brought to a close with the Peloponnesian War. So that would be basically the 400s and the 300s [B.C.]. And then we [have] had 240 years of American democracy. But what Plato said, paraphrasing him, was that democracy wouldn’t work. He couldn’t put democracy in Utopia. He would never think of putting democracy in Utopia because it was going to be the rule of the intelligent, the rule of the well-educated, the rule of people who understood how the system worked. And they had to make the decisions because the masses were not only led easily left or right, and therefore there was no constancy to policy, but they were also not well-educated and could be appealed to on the shortest-term grounds, as against the longer-term good of the whole.

He thought that was a huge weakness that would make the demos subject to wrong decisions because they didn’t have the means to look beyond the narrowest and most immediate cause of self-interest. Well, we can see now, looking back, the reason [that] democracy looked so attractive to the Athenians (and of course, it wasn’t truly democracy, we know that now; it was only one person out of every five who could vote).

But the reason that the system looked good to them is that they had the silver mines on Mount Laurion. They had the victory in the Persian War behind them. And they had the Delian League, which they converted into an empire. [Note: The Delian League, founded in 478 B.C., was an association of some 150 Greek city-states.] And they had the power of the sea. So they dominated the trade routes. So they could tell people what to do and how to do it. Once that was brought down – the silver mines were eclipsed, the Delian League was broken up, and they lost their fleet – they just became another group, and they were constrained by the resource problems of living and eating – and [those are the same problems that] we could be constrained by.

We have had this incredible backing of mineral and economic wealth, from simple things like water power in the colonial days, and then the Mississippi River for a transportation system, the lack of Indian resistance, that were very effective. You can go through all of these things.

So what I think is really at risk here is that in a democracy, you cannot have gridlock in legislation or [in an] administration that is effective. And if you have an ineffective [system,] you soon veer off into the rough of the road. You have to stay on the concrete, as it were. If you continue to veer off into the woods, why, you get stopped all the time.

I think it’d be fair to say that our sponsorship of democracy around the world was rather presumptively based on the fact that there would be an expansion of living standards that you and I would understand would have to be based on hydrocarbons. The question is: can it be based on hydrocarbons? I think the answer is plainly no….

Our modern world is based on hydrocarbons. I think it’s going to slow and maybe even stop. And now I think the question is…

RB: It’s going to slow? You mean our way of life?

CM: Our rising standard of living. This is the first time you are getting people saying, “Every generation has created children who have a better standard of living than their parents. This is the first generation where that is not proving to be so.” And I think there will be more generations where it’s proving not to be so. To me, that’s the final problem here, that we lose our political way on the basis of economic problems that really are not so much bad policy as they are the misadventure of running out of fundamental materials that we need to support our economy in sustained growth.

People say, well, we have the scientific ability to work around that. And I think that we do over time. So I would expect that 100 years from now, the world will have a higher standard of living than [we do] now.

But nevertheless, it will slow. We can’t innovate scientifically as fast as the problems are going to accrue. So we are either going to slow to zero growth or to very low growth, perhaps something equivalent to our population growth, and then your per capita ceases to grow. Anyway, that’s what I fear.

RB: In your recent interview in Barron’s, you said that oil is headed toward $300 per barrel. When will that happen?

CM: To tell you the truth, it’s just a wild number. But to this degree, it’s fair. Look at what’s happening today. We are going to throw $700 billion down this rat hole [on the financial bailout] and no one is sure that’s it’s not going to be a trillion or a trillion and a half.

At first, because of the deflationary forces that this is unleashing, I don’t think that this is going to be so inflationary. The deflationary forces will be uppermost for the next two or three years as we carry the world through this inability of demand to approach supply. Because it’s demand that’s being stopped.

RB: Deflationary forces are coming from where?

RB: The deflationary force is because the asset base is being eroded. People’s [homes] are valued less, their stocks are valued less, and homes are falling in value, partly because there will be lots of competition. Partly because supply is going to continue to expand but demand is not. So there’s going to be a big cushion between supply and demand.

Whereas two years ago, that cushion was pretty well removed. My point is that eventually the inflationary potential of this is huge. The dollar should continue on a long-term downward course. So when you look out seven years to 2015, and you look at $300 oil, I would suggest it’s actually $250 oil in today’s dollars. This kind of economic management, we could have $210 oil. It’s not going to be nearly as much as $300 sounds.

In seven years, it could well be $200 oil. And the second thing, of course, is that a bit more than 90 (I think it’s 92 or 93) percent of all energy is involved in the four great pillars: oil, gas, coal, and nuclear. The other 7 or 8 percent is involved in wood-burning, biomass (about 1 percent), and the rest is hydro. Hydro is the big one in there. But it’s something like 93 and 7. So if you look at those four, we have plenty of coal. We may choose not to use it because of the emissions problem. But that’s our choice. We do have it.

Then, in natural gas, we are getting a whole other ballgame with the shale. And people tend to forget that first the shale will be exploited in the U.S. But then [in] Canada, EnCana’s up there looking for it. They have two huge plays in places called Horn River and Montney. They are going to be finding shale all over Canada. So North America looks to be quite well-supplied with gas over the next 20 years. Now the Russians will start looking for it. They have found it in great quantities of gas but they have never been able to exploit it. We will send people over and Halliburton will do it.

So one of the ways out of this immediate energy problem will be some proportional percentage of loss by oil, and gains by natural gas and nuclear. But the problem is that we probably are short – taking a 100- or 200-year view – of very attractive uranium ore. A lot of it is low-grade that we can probably get over time. But that’s not a problem that I’m going to have to face, or our children will have to face. That’s a problem for 100 years from now.

The immediate problem – and this is something that is very obviously true but is not being said – the immediate problem is oil. And that hits us particularly hard. Unlike other societies, our transport sector is run 97 percent on oil. So T. Boone is standing up there begging for CNG help and others are talking about the Volt and the plug-in hybrid.

These are the only viable ideas we have found to substitute some of these other fuels for oil. I may not be a big enthusiast for CNG. But I will tell you that I am becoming more interested in it for the lack of a better idea. No one is coming up with any other ideas other than the battery idea and CNG.

RB: CNG can substitute in the heavy truck market so it can supplant diesel, and that’s a real key.

CM: Absolutely right.

What I’m saying is that as oil withdraws, it hits America with particular force because of our heavy dependence. I think oil is 40 percent of our total energy; worldwide, by the way, I think it’s 39. But I see it something like this, and I’m quoting from the BP Statistical Review: in 1996, oil was 40 percent of the world’s energy. In 2006 it was 39. So oil is not growing as fast as some others, or it wouldn’t be losing ground. So [that’s been in the last] 10 years, exactly a decade. I think it is going to take five years to lose the next percentage. And then I’ve calculated that it’s going to take three years to lose the next percentage. And then two years. Then a year and a half, and then a year. Something like that. It won’t be that exact. But I am just trying to give you the scale of what’s happening.

Oil is going to be really withdrawing because we will slow production of oil between now and 2013. And we will flatten production of oil between 2013 and 2017, and then oil is going to go backwards. And now the question is: what substitutes for that, as the total pie has to be slightly expanding every year, or at least it has expanded every year [when] we have growth in the world.

Apart from a war like [the one in] 1917, where we didn’t grow, I’m not sure. The point is, apart from war [and war-related years], we have had an expansion, and an expansion in GNP most years. Now, can we expand GNP without expanding energy use? Most economists would say, well, it’s possible, if we prepared the ground for it over many years. But in two years, can we have an up economy in a down energy year? I think the answer would be no.

My point is that oil is going to be withdrawing. So not only does the total increase have to be all fuels growing together, but you have to make up for the loss of the oil. So nuclear and coal and gas have got to fill in the gap as well as give you growth. The environmentalists are not prepared to give up on coal. They don’t want it.

The nuclear can’t be accelerated on any one- or two-year scale; it’s got be accelerated on a 10- or 15-year scale, so it can’t do it. Natural gas is not cast in the right energy form to do it. We can do it, but we have to redo our capex to be able to use that natural gas in a car.

RB: On a global fleet of 800 million vehicles.

CM: Yeah, on a fleet of 800 million vehicles. So there are answers to the energy problem, but those answers aren’t going come between 2010 and 2020, because so much re-capexing of the system has to go on before we can
use those fuels as oil is going to be withdrawing, and effectively, none of those other fuels are growing fast enough to take over that role. As oil pulls out, we can’t ramp up the other stuff up fast enough to carry GNP higher. Maybe we will carry it higher, but remember that the world [economy] is growing by about 3 percent per year. So if you said we can ramp it up to grow at 1.5 percent per year, that may or may not be sufficient to stop blood in the streets. I don’t know what world growth at 1.5 percent means. It may mean political problems of the first order. This isn’t going to be universally seen.
It will be more in some places than in others. If the growth is negative in 15 countries and positive in 135, those 15 countries may have inordinate political pressures on them.

RB: We blame the Saudis for politicizing oil but we are doing the same with food.

CM: We are doing the same with food. Anyway, all of this is to say, in my opinion, we don’t have a choice in this withdraw of oil. The oil is being withdrawn because of geopolitical and geological reasons combined. (I don’t go on the theory that it’s geological alone.) …In that context I do not believe we have the means to make it up. I don’t think the geopolitical and geological potential.

Sure we can produce more coal in this country. Yes we can, if we expand the railway system. But we’re not expanding the rail system. These are things that take long preparation.
All in all, I’m suggesting that we are going to slow economic growth in the end….There are a lot of constricted passages to this concept that we can continue to grow at 3 percent. There are a host of constrictions. And working together, they are going to make it very difficult to grow at 3 percent.

With this withdrawal of oil, that’s why I use $300. But I prefer to use $200 or $220….In metaphoric terms, people are clinging to the edge of the barrel. They want to stay in the mobile economy. And they don’t want to be dislodged.

RB: You are a big fan of the companies with long-lived reserves, Lukoil, Conoco, Petrobras, and also the Canadian tar sands companies. Which ones are your favorites?

CM: The one I want to get to is Canadian Natural Resources. They are bringing on the Horizon project. While it’s only 200,000 barrels a day, they have potential reserves that could handle 500,000 to 600,000 barrels per day over time. So it’s a really wonderful growth story. And I have them pegged at 2035 for their peak. In a world in which most oil companies will be peak by 2012 or 2013, and the average I’m using is 2011, it will make them stand out. And all that in the next five years. Does the investing public really believe in Hubbert? I say no. Because if they did, then the public wouldn’t allow it to sell at a 15 P/E. I’m looking out and I’m saying nobody buys this story because they wouldn’t allow a company to go to 2035 on average if they really understood those were the terms of the deal.

RB: So the retail investor doesn’t understand.

CM: The peak production year for Nexen is 2035. Suncor says they can go to 2045. I have Lukoil at 2022. And EnCana at 2020. Those are the furthest out. Petrobras is maybe 2018 or 2019. [Note: Maxwell does not have a formal rating on any of those companies, except for Suncor, which he rates as a hold, and EnCana, on which Maxwell has a buy rating.]

RB: You mentioned EnCana in Barron’s.

CM: Encana sold half their Christina Lake to ConocoPhillips.
Among the big companies, [their peak] is about 2015, and they are the best of the big companies. They have a share of syncrude, a tiny share. They have lost their Venezuelan stuff. They are building, I think, two more tar sands projects. So they really are working on it.

RB: And they have the share of Lukoil.

CM: Right.

RB: I have kids. I’m an optimist. So what is your view of the future?

CM: Strangely enough, I come out optimistically. I think we are going to be hit by a lack of preparedness. That’s really what it is, a lack of preparedness, because we are not acknowledging the size and shape of the problem that is heading toward us. And until we acknowledge it, we can’t solve it. That’s what I really hold against Lee Raymond. Exxon can’t do anything about a problem that they can’t even recognize….The reason that we will get to $300 is that supplies will get tighter and tighter.

RB: So we will have more rationing by price for hydrocarbons, but the Third World will feel it the most?

CM: There will be human despair. And it will fall not so much on us. But even in our areas, there are farmers and there are marginal people all over the place who will be wiped out by this.

[After oil peaks] we will be bidding in a world of tight supplies against each other, as consumers, to get the oil from the 15 countries that can still produce the incremental barrel. And the effect of that, year after year, will be to push the price up, because it ain’t getting more, it’s getting less. It’s going to be bad enough when we have a theoretical 1 percent per year gain in the usage of oil and zero percent gain in the production of oil. But when oil turns down and we are getting negative 1 percent per year, I think that’s what will really spur it.

RB: That’s what will spur upheaval?

CM: For the marginal customer eliminated from it, the upheaval will be very serious. God knows we haven’t really seen it yet.