THE COMING BREAKDOWN OF U.S. & GLOBAL MARKETS EXPLAINED… What Most Analysts Miss

The U.S. and world are heading toward an accelerated breakdown of their economic and financial markets.  Unfortunately, the overwhelming majority of analysts fail to understand the root cause of this impending calamity.  This is also true for the majority of precious metals analysts.

The reason for this upcoming systemic collapse of the U.S. and Global markets is quite simple when you understand the information and are able to CONNECT THE DOTS.  While it has taken me years of research to be able to finally put it all together, new information really put it all into perspective.

Yes… a HUGE LIGHT BULB went off, but unfortunately the realization is much worse than anything I imagined before.  I briefly discussed this in my last article, The Coming Global Silver Production Collapse & Skyrocketing Silver Value.

The information discussed in this article makes it abundantly clear that the precious metals will be the GO TO ASSETS in the future.  The standard financial practice of investing most of one’s assets in stocks, bonds and real estate will no longer be true.  What little investment strategies are left in the future will turn to PROTECTING WEALTH, rather than building wealth.  The days of acquiring wealth are coming to and end… and fast.

So, now I will try to lay out all the details in a way that will make this easy to understand.  However, I have a word of warning.  Those who are able to connect the dots… it’s like taking the RED PILL, you can’t unlearn what you now realize.

The Collapsing EROI Is Destroying Everything In Its Path & Quickly

Americans used to enjoy a much better standard of living when it only took one person in the family to provide the income.  This was during the late 1940’s, 1950’s and early 1960’s.  However, the situation started to change in the 1970’s.

Not only do both spouses have to earn a living to make it today, health care and college education are becoming unaffordable.  I remember back in the 1980’s that most health plans had full coverage with little or no premium.  Basically, your health care was free, and all you had to do was pay a small deductible when you went to the doctor.  Now, more and more Americans can only afford catastrophic coverage, for an expensive monthly premium with a high deductible.

Many believe this is all due to the corrupt insurance, healthcare and pharmaceutical companies.  While they are partly the blame, the majority of the reason is due to the rapidly falling EROI.  Furthermore, the falling EROI is making higher degrees of education less affordable to the public.

Before I get into the details here, let me explain the EROI.  The EROI stands for Energy Returned On InvestedBasically, its how much profitable energy you get in return from what amount of energy was invested (burned).  The EROI has been a guiding principle for humans going back thousands of years when we were hunter gatherers.

Here are some simple EROI for human food production:

Hunter Gatherer = 10/1

Simple Human Farming = 5/1

Human & Animal Farming = 1-2/1

High Tech Modern Food System = 1/10

Data from Thomas Lough/ Energy Efficiencies (EROI) of food procurement strategies/ (page 4)

A typical hunter gatherer only burned 1 calorie of energy to acquire 10 calories of food.  You will notice that a hunter gatherer was 100 times more efficient in food production (gathering) than our modern high-tech food system that devours 10 calories of energy to provide 1 calorie of food on the dinner plate.

Our modern food system can waste so much energy growing, harvesting, processing and delivering food because of the high EROI of oil we have enjoyed in the past.  Unfortunately, the rapidly falling EROI of U.S. and Global oil will cause serious trouble for food production going forward.

Why the Falling EROI is Causing Havoc To Our Modern Way Of Life

In a recent three-part article by Louis Arnoux, Some Reflections On The Twilight Of The Oil Age, the following chart was posted about the importance of a high EROI for our modern society:

Different-EROI-FIgures

I am going to simply the chart above.

EROI 3/1 = Transportation System: Roads, Bridges & Trucks only.

EROI 10/1 = Transportation System, Agriculture, minimal Health Care & Education.

EROI 20/1 = Transportation System, Agriculture, Basic Living, Health Care & Education along with basic consumer goods

EROI 30/1 = Transportation System, Agriculture, Prosperous Living, Heath Care & Education with advanced consumer goods.

The important thing to understand from these EROI guidelines, is that a minimum value for a modern society is 20/1.  For citizens of an advanced society to enjoy a prosperous living, the EROI of energy needs to be closer to the 30/1 ratio.

Well, if we look at the chart below, the U.S. oil and gas industry EROI fell below 30/1 46 years ago (after 1970):

U.S.-Public-Debt-vs-U.S.-OIl-Gas-EROI

You will notice two important trends in the chart above.  When the U.S. EROI was higher than 30/1 prior to 1970, U.S. public debt did not increase all the much.  However, this changed after 1970 as the EROI continued to decline, public debt increased in an exponential fashion.

We must remember, to sustain a transportation system with agriculture and minimal health care and education, we must have at least an EROI of 10/1.  Well, with U.S. shale oil production that comes in at an EROI of 5/1 (or less), we can no longer afford the basic necessities.  Of course, we still have other higher EROI forms of oil production as well as higher imported EROI oil from foreign countries, but these are rapidly falling as well.

Typical Bakken Shale Oil Well

Here is another chart showing the rapidly falling EROI from Louis Arnoux’s article linked above:

Falliing-EROI-Levels

As we can see from the chart above, the Global Energy EROI continues to fall below the 10/1 level which only offers a minimum viability for our industrialized world.  Thus, the more low quality tar sands, shale oil and other unconventional oil supplies we bring into the mix, the less the overall EROI.

This is the reason why there is so much debt in the world today.  We are trying to enjoy the same standard of living as we had a few decades ago, but we can’t as the EROI is falling below our basic minimum requirements.  So to counter the falling EROI, we add more debt to bring on expensive energy that for a short period allows us to continue BAU – Business As Usual.

NOTE:  The Solar EROI of 30/1 in the chart above, is one figure that does not represent the true value of solar.  This is where we have to distinguish between good and bad analysis.  I will get into more detail on this in future articles.

Unfortunately, the massive amount of debt in the system is becoming unsustainable.  This is why we are seeing many countries going to zero or negative interest rates.  Furthermore, the amount of global bonds with negative rates are increasing at a stunning pace.  In just the past six months, global bonds with negative rates have doubled to $13.5 trillion.

Why are we seeing such a rapid and volatile change in the markets recently?  It’s due to rapidly falling EROI and oil price.

The Coming Oil Pearl Harbor Will Destroy The World’s Oil Industry

Very few people understand just how quickly the U.S. and world oil industries are disintegrating.  This chart is from Louis Arnoux’s Part 2 of the article linked above:

EROI-Oil-Pearl-Harbor

Louis along with the work of the oil engineers at the Hill’s Group, suggest that oil prices will not rise going forward, rather they will continue to fall.  This goes against the economic principle of Supply & Demand, but according to their studies on how thermodynamics impacts the oil price, they forecast a continued lower oil price.

According to Louis Arnoux:

In brief, the GIW (Global Industrialized World) has been living on ever growing total debt since around the time net energy from oil per head peaked in the early 1970s. The 2007-08 crisis was a warning shot. Since 2012, we have entered the last stage of this sad saga – when the OI began to use more energy (one should talk in fact of exergy) within its own productions chains than what it delivers to the GIW. From this point onwards retrieving the present financial fiat system is no longer doable.

This 2012 point marked a radical shift in price drivers.[1] Figure 4 (shown above) combines the analyses of TGH (The Hills Group) and mine. In late 2014 I saw the beginning of the oil price crash as a signal of a radar screen. Being well aware that EROIs for oil and gas combined had already passed below the minimum threshold of 10:1, I understood that this crash was different from previous ones: prices were on their way right down to the floor. I then realised what TGH had anticipated this trend months earlier, that their analysis was robust and was being corroborated by the market there and then.

Their forecast of continued lower oil prices is due to a “Thermodynamic Collapse” of net energy.  The Hill’s Group put together this chart forecasting the oil price to reach $11.76 by 2020:

Hills-Group-Oil-Price

The Hill’s Group is an association of  consulting oil engineers and professional project managers headed by B. W. Hill.  If you want to read their technical explanation as to how they arrive at this price forecast, you can click on the following link: The Energy Factor- Part 4.

This is by far the most important paragraph from that analysis:

The Maximum Consumer Price curve is curtailed at 2020 at $11.76/ barrel. At this point petroleum will no longer be acting as a significant energy source for the economy. Its only function will be as an energy carrier for other sources. Production will continue as long as producers can realize the lifting costs at existing fields. E&D expenditures, and field maintenance costs will have been curtailed. All production from that point forward will be from legacy fields only. The economic impact that will result from the energy lost to the general economy is beyond the scope of this report.

Basically, what the Hill’s Group is saying here, things will become pretty ugly by 2020.  Thus, this will negatively impact the United States much worse than either the Main Stream or Alternative precious metals analysts realize.  Here are two more quotes from the Hill’s Group posted from my previous article:

1) Within 10 years the Oil Industry as we know it will have disintegrated

2) B.W. Hill considers that within 10 years the number of petrol stations in the US will have shrunk by 75%…

I would imagine very few, if any, Americans understand the dire consequences presented by the analysis here.  If we thought the Great Depression during the 1930’s was bad… this would be several orders of magnitude worse.  Why?  Because a lot of people living in the cities who couldn’t find a job during the Great Depression could move to the country and live with family.  At least they could have a place to stay and have something to eat.  This is no longer possible… only a small fraction of the population could do this today.

Furthermore, the United States was able to pull itself out of the Great Depression because it only had just begun to tap into its massive cheap oil reserves.  Oil production in the United States continued to increase for the next four decades.  This is no longer possible, as U.S. oil production is likely to collapse over the next decade.

That being said, are we to assume that Louis Arnoux and the Hill’s Group are correct in their analysis and forecasts?  Of course, it would be prudent to be skeptical and realize that there is a possibility that their analysis may be wrong, or off on the timing.

However, if we look around at the markets today, things are changing at a RAPID & VOLATILE PACE.  As I mentioned, to see global bonds with negative rates double to $13 trillion in the past six months is a WARNING SIGN that situation is rapidly getting out of hand.

In addition, we see more and more evidence of how unsustainable the financial system has become.

  1. Increasing number of underfunded Pension Plans
  2. Massive Student Debt with no possibility of being repaid
  3. Record amount of Large companies borrowing money a low-interest rates to buy back stock and pay dividends
  4. Increasing number of Health Providers exiting the Obama Healthcare system leaving millions without basic catastrophic insurance
  5. High paying manufacturing jobs lost only to be replaced by inferior waitress and retail service jobs.

The list can go on and on.  People need to realize that even though the politicians in the U.S. Govt and Corporations are committing fraud by lining their pockets, the overwhelming reason for the collapse of the American Standard of Living is due to the falling EROI.

It’s that simple.

The Rapidly Falling EROI and Oil Price Is Gutting The U.S. Oil Industry

This next chart says it all.  The top three U.S. oil companies, ExxonMobil, Chevron and ConocoPhillips cleared a hefty $16.3 billion after CAPEX and dividends were paid during the first half of 2011:

Top-3-U.S.-Oil-Companies-Free-Cash-Flow-Minus-Dividends

I arrived at that figure by taking these three companies Cash from Operations and then deducted Capital Expenditures (CAPEX) and Dividends.  Now, if we look at the same figure five years later, these three U.S. oil companies are in the HOLE for $18.1 billion.  What a change in five years… aye?

Watch for these oil companies to start cutting their dividends in a big way.  Matter-a-fact, ConocoPhillips already cut their dividend by a third from $0.74 a share down to a lousy $0.25.

Furthermore, the total U.S. Energy Sector now has a whopping $370 billion worth of debt.  I am being a broken record here, but let’s take a look at this chart which shows their ballooning INTEREST ON DEBT:

U.S.-Energy-Sector-Interest-Payments-On-Debt-%

In the first quarter of 2016, the U.S. Energy Sector paid 86% of their operating profits just to pay the interest on their debt.  If oil prices continue to remain lower (or even lower), this won’t be sustainable for long.

Here is a chart from YahooFinance showing the U.S. Energy Sector interest on debt.  As we can see in 2016, the chart line shoots up towards the heavens as the U.S. Energy Sector paid 86% of their operating income just to service the interest on the debt:

U.S.-Oil-Sector-Interest-On-Debt-YahooFinance

What it so important to understand about this chart is the difference between 1998 and Q1 2016.  In 1998, the price of oil had fallen to a low of $14.50.  However, the U.S. Energy Sector interest on debt only jumped to 25% of their operating income.  In the first quarter of 2016, the price of oil was more than double at $33.5o a barrel, but the U.S. Energy Sector’s interest on their debt surged to 86% of their operating income.

Why the big surge in interest payments on debt with a doubling of the oil price since 1998???  That’s correct, it’s due to THE RAPIDLY FALLING EROI.

Now, if the Hill’s Group is correct in their forecast that they see a “Thermodynamic Collapse” of oil prices to $11.76 by 2020, what the hell will this do to the U.S. Energy Sector??

Correct… IT WILL TOTALLY GUT IT.

Which is why, they made this quote in their report:

Within 10 years the Oil Industry as we know it will have disintegrated

Unfortunately, this information will reach the masses after it’s too late.  Moreover, the majority of precious metals investors will likely remain in the dark because they continue to wear HORSE BLINDERS.  Unless an article is about the U.S. Economy, debt, manipulation or gold and silver, precious metals investors have no desire to read about energy.

How Will The Rapidly Collapsing EROI Impact The U.S. & Global Markets??

The important thing to understand about this information is that the situation will likely unfold in a way that is extremely hard to predict.  However, we can make some common sense assumptions:

  1. The Standard Investing Practice of putting 95-99% of one’s wealth in Stocks, Bonds & Real Estate will be DEAD FOREVER.
  2. Entire sections of cities and suburbs will experience a 75%+ decline in economic activity.  This will destroy the value of most forms of Real Estate.
  3.  No longer will investors be concerned about earning a YIELD or GROWING their wealth.  Instead, investors will protecting wealth as best they can.
  4. Big Investors such as Warren Buffet will watch as their wealth evaporate, never to return.
  5. Whole Service Industries & Employment Careers will disintegrate.  Watch as Restaurants and Retail stores close doors by the thousands forever.
  6. The Highly Complex Supply Chain System that delivers goods will breakdown considerably.  Trade will move to more regional or local systems.

There are so many more things that could be added to that list, but you all get the point here.  Things will start to fall apart more rapidly over the next few years.

Physical Precious Metals Will Offer Much Better Options  In The Future Than Most Assets Today

The reason physical gold and silver will offer much better options for the individual going forward is due to the STORE OF WEALTH characteristic of the precious metals.  As I have stated in several articles and interviews, Stocks, Bonds & Real Estate are CLAIMS OF FUTURE ECONOMIC ACTIVITY.  They are not stores of wealth like GOLD & SILVER.

While it’s true that Real Estate has been viewed as a store of wealth in the past, this was only due to the increasing cheap supply of energy, especially oil.  A home, warehouse or commercial building only has value if it there is economic activity to support its use.

As the EROI continues to fall, along with oil production, economic activity will evaporate making it impossible for the owners to pay their mortgage or rent for these buildings.  As economic plummets further, the whole system disintegrates.  And along with it, the value of most real estate.

As the world begins to wake up to the ramifications of the rapidly falling EROI, investors will move into gold and silver to protect wealth.  Only 1% of the world’s investors own precious metals.  This will be like musical chairs.  However, there will only be 2 chairs with 100 people.

Gold and silver will act as two of the very few LIQUID ASSETS in the future that can be used for trade or to purchase larger items such as businesses or real estate.  Bonds will no longer work on a large-scale as they need a growing energy supply to function and to provide a yield.

Where do you think Bond yields came from?  That’s correct… GROWING ENERGY SUPPLIES.  With falling energy supplies, Bonds just don’t work all that well.

The Majority Of Analysis Will Become Totally Meaningless In The Future

We will continue to see analysts putting out forecasts based on information and data that is totally meaningless going forward.  Unless an analyst understands the energy information presented in this article, all forecasts will be totally worthless.

For example, Kevin Weiner of Monetary Metals puts out analysis showing the supposed abundance or tightness of the gold and silver market due to the “Basis & Cobasis”, as well as other factors.  He recently wrote an article stating that the price of silver was over-inflated by $3 due to the basis and relative abundance of the metal.

This actually maybe true (IN THE SHORT-TERM) as many investors wanting to pocket profits have sold back into the secondary market silver they purchased at much lower prices.  Furthermore, economic activity is heading south, which means lower consumption of silver for industrial purposes.  Lastly, India who was making record imports of silver last year, has seen a huge drop in the silver imports the first five months of 2016.

This could translate to more silver being abundant currently.  HOWEVER, most humans do not live for weeks, months or a few years.  We live on average for 7-8 decades.  I have never stated that owning silver is for the SHORT TERM.

That being said, the rapidly failing EROI will turn the U.S. and World on its knees within the decade…. if we agree with the analysis by the Hill’s Group.  Folks, the 2008 collapse of the U.S. Investment Banking and Housing Industry was eight years ago.  While it seems like it was yesterday, eight years have come and gone in a blink of an eye.

The Fed and Central Banks have pushed in a massive amount of liquidity and along with zero interest rates to keep the falling EROI at bay.  Unfortunately, the FORCES OF GRAVITY will finally overwhelm the system as Central Bankers can’t create cheap oil out of thin air.

I will be altering my analysis going forward as certain topics aren’t as important anymore.  We need to look at how this ENERGY DYNAMIC is changing and how it is impacting the U.S. and Global Markets going forward.

Lastly, some readers will be highly skeptical of the information presented in this article.  That is a good thing.  However, those who believe that  alternatives such as Free Energy Technology, Solar, Wind or etc, will be our SILVER ENERGY BULLET… they won’t.  I will discusses this in detail in future articles.

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59 Comments on "THE COMING BREAKDOWN OF U.S. & GLOBAL MARKETS EXPLAINED… What Most Analysts Miss"

  1. peter johnson | August 9, 2016 at 3:31 pm | Reply

    Wow, the future’s definitely not orange…

  2. Steve,

    I read the complete Arnoux’s article as well as Hills papers.
    Although their timing may be off, I agree with a number of their conclusions. i.e. 1) Within 10 years the Oil Industry as we know it will have disintegrated, & 2) B.W. Hill considers that within 10 years the number of petrol stations in the US will have shrunk by 75%…

    Their conclusion that oil will be $11.76 by 2020 is seriously flawed because it ignores fundamental price theory – supply and demand.

    EROEI is a powerful and unrelenting principle and argument but is does not contradict price theory. As we go further and further into petrodepletion there will always be those with the “where with all” to buy the full range of petroleum products and there will be producers that will provide them for the right price.

    Just like diamond studded gold Rolex watches, which provide no more utility than an everyday Timex, there will be specialty providers that will market the whole line of petro products. It is just that the masses will not be able to participate.

    As we ride the Seneca cliff face down petrodepletion, petroleum products, precious metals, and all other things that rely on cheap oil will skyrocket in price or just disappear from the market place.

    It is going to get very ugly out there.

    SteveW

    • Steve W,

      You wrote: Their conclusion that oil will be $11.76 by 2020 is seriously flawed because it ignores fundamental price theory – supply and demand.

      The Hill’s Group stated that SUPPLY & DEMAND forces must abide by the SECOND LAW OF THERMODYNAMICS.

      Steve, you can’t have typical supply & demand forces when the massive amount of debt implodes. Normal Economic principles will no longer work properly in a SENECA CLIFF like collapse.

      steve

      • Steve,

        “The Hill’s Group stated that SUPPLY & DEMAND forces must abide by the SECOND LAW OF THERMODYNAMICS.”

        The laws of supply, demand and price theory are universal laws just like gravity. They continue to function regardless of boom or bust.

        In Hills The Energy Factor- Part 4, chart# 160, Maximum Consumer Price curve, Is in fact a demonstration that, for consumers, the price would have to be $11.76. If you look at the blue line labeled “Projected Price” it goes off the chart at over $225 per barrel in 2021.

        With a Seneca decline, you have a massive increase in entropy and a similar massive decrease in supply. That only means you have a corresponding massive increase in the price.

        With over 100 years of petroleum combustion engines hanging around there will be the 1% that have surplus precious metals that will still be buying fuel for their motors. The masses will be riding bicycles or horses and, if our government survives, trains.

        SteveW

      • It may be useful to consider statistical mechanical definitions of other quantities, that may be conveniently called ‘entropy’ but they should not be confused or conflated with thermodynamic entropy, properly defined for the second law. These other quantities indeed belong to statistical mechanics, not to thermodynamics, the primary realm of the second law.

  3. You may be right (probably), you may be wrong (unlikely), but most analysts will never look at the issue this way.

  4. Steve,
    not arguing with you, just want to know your thoughts:

    roughly 2-2.5 years ago I was (basically) the ONLY one on POB saying exactly the same thing in
    10-15 lines, or so of exchanges with you and others there….
    Why then you believed that oil will go up and now it will not (my famous: linear thinking, “supply-demand”…theme that I told you, Dennis and others.)?

    Why TGH and L.Arnoux is more credible to you now than I was 2 years ago?

    You do not act on how colourful the charts are, do you?

    Be well,

    Petro

    P.S.: don’t feel bad, you were in good company.
    Until recently the likes of A.Berman and E.Mearns thought the same “supply-demmand” stuff …….. they are now finally getting it….
    Thanks for the good work. I continue to read you with interest.

    • Petro,

      Yes, analysis needs to constantly be updated. So, yes.. I thought we would see much higher oil prices. Reading a lot of Gail Tverberg’s work and along with the Hill’s Group…. it makes one hell of a lot of sense.

      HATS OFF TO YOU for seeing it so soon.

      steve

      • This is not an update in analysis,Steve!

        This a “quantum leap”, a total change in the “operating system” within your thinking…. and I am happy that you reached it.

        Next part of your “awakening” is gold and silver….

        …..while I fully and wholeheartedly agree with you that they will be the best INVESTMENT by far, when what I talked about at POB and you so eloquently and colourfully explained it in your article really transpires, there shall be no investments……
        …. there will be no god and gold in the universe that will get us out of the mess we are…..

        This will be the 6th (and largest) extinction event my dear friend…….. and we (humans) are going to be mother Nature’s main course…….

        Be well and thank you for the good words,

        Petro

  5. Global warming my foot! Sounds like we’ll all freeze to death.
    The last thing I’ll throw in the fire will be my recliner while saving my Bible and a candle for light.

  6. This article is very scary. I now realize that i need much more gold and silver than i have now. I also should start thinking about selling my house very soon.

    • Don’t sell your house. When the system goes down, all debt will evaporate and you need a place to stay. Get out of big cities however.

    • Trade house for one in the country. Get some chickens and goats, windmill for water and garden.
      Or get a bicycle with a basket to ride to the nearest farmers mkt.
      Invest in a coal-oil lamp company.

  7. Northwest Resident | August 9, 2016 at 9:13 pm | Reply

    The price of oil can’t be above what people can afford to pay for it. True, there are those who have unlimited financial ability to buy oil and oil products at ANY price, for now, but that is a tiny fraction of the consumption and income that the oil industry needs to sustain operations. As demand destruction increases, fewer people with less money act as a drag on oil price. And demand destruction is really kicking in, and headed only one. If oil production can’t produce enough net energy to power the economy, then fewer and fewer will be buying oil, and the price can only go down. ECON 101 principles don’t take into account the “new world” dynamics that we are now faced with.

    • Don’t plan on oil being in mankind’s future. The survival choices will be few. The two main ones will be a farmer or fisherman. A man of the land and a man of the sea, with like minded people forming close communities around these two activities, for mutual support and protection. A friendly trade link will form between these two diverse groups, giving rise to a market place. The start of a town, with a bank. Get ready to do it all over again. LMAO

      • Funny that you mention that OutLookin. I was just doing my last round of scoping out 40+ ft ketchs , pilothouses , and yawls for sale . A must do on the list !

    • True, but demand destruction instigates supply destruction – witness the shaler’s. Deeper pockets may live longer, but not forever. And guess what – there is a ‘rest of the world’ outside the US that will recover and start buying up oil again. Chinese middle class – now 300 mn people – the entire US population.
      Oil price uncertain, but there’s a lot more upside than downside at this point.
      I’m betting up – I bought a fleet of USO Jan. ’18 calls on $25 Strike.
      Hey – 8 cents an option. If oil goes to $80 by then, I make about half a million on $200 bet.

    • ECON 101 principles don’t take into account the “new world” dynamics that we are now faced with.

      It’s called a shift of the demand curve.

  8. Necessity is the mother of invention plus greed has no bounds = new inventions, new discoveries, new alternatives building off the old/current and ushering in a new age. It has always worked this way. But it will get ugly for a while, no doubt. Preppers, stackers, hoarders will be the few to help the many, will be the few to help the sheeple across the river rapids to the promised land. Prepare for the worst, pray for the best. +

  9. One more thing analysts do not know — about nuclear EROI. The commonly mentioned value of 15 refers to the archaic US nuclear industry based on diffusion enrichment and 30+ years of stagnation. Diffusion enrichment plants were never meant to be used for power, their objective was weapons material production. Nuclear industry simply inherited them. Centrifuge enrichment, now in its tenth generation of machines, provides EROI over fifty. Yet another thing analysts do not know is recent developments in fast reactors and closing of nuclear fuel cycle, which returns used fuel into reactors after a short cool-down instead of burying it for 100 thousand years, reduces the volume and long-term radiotoxicity of fission products, and reduces irradiated fuel storage expenses. Russia and China are all-in on this, France is a bit behind for political reasons (to put it mildly), the rest have pretty much droped out. Suffice it to say that US is buying some of the nuclear fuel from Russia now.
    https://www.rt.com/business/352026-russia-us-nuclear-fuel/

    • Thank you for this post; I would like to hear more about nuclear. Like it or not, environmentally sound or not, more plants are coming.

    • Reader,

      One subject matter from my readers that fills my INBOX more than anything else over the past several years… are supposed SILVER BULLET ENERGY TECHNOLOGIES. If not the new technological energy wonder that will solve all our problems, then it’s a HAIL MARY FREE ENERGY technology that we will just PLUG & PLAY and go on forever.

      This sort of WISHFUL thinking is not helpful when we carefully study the FULL CYCLE EROI COSTS of these supposed break-through energy technologies.

      Furthermore, I would like to remind everyone here that our Global Economic Model is based on LIQUID FUELS. We live in a JUST IN TIME INVENTORY system that only works on liquid fuels. I just listened to a great interview on James Howard Kunstler’s site about “What Happens If the Trucking Industry stops.” A lot of great info in that interview.

      For example, battery technology has only increased 6 times since the early 1900’s… this is not that great. For a SEMI-TRACTOR TRAILER to pull a full load of 50,000 pounds the battery to power a totally electric Truck would weigh a stunning 55,000 pounds.

      There is no way to transition to a different energy source even if it had a high EROI. Also, it takes liquid fuels to MINE & TRANSPORT the materials to make Nuclear or Thorium Based reactors.

      Folks… WE JUST DON’T HAVE THE TIME or CHEAP ENERGY to transition now. We have run out the clock.

      Collapse comes… I just don’t know what it looks like.

      steve

      • What I wrote describes nuclear technology that is in operation now. It is not a silver bullet, and it is definitely not for everyone, but there are several countries that invest heavily into them, and already have them running. The improvements in fuel cycle are just improvements: less costs and expenses in the future, while the current generation plants are running with a useful life of 60 years. A major improvement is a fast reactor. Russia has commissioned its third generation fast reactor (BN-800) into commercial operation, with several more powerful ones to be built by 2030 as per their plan. Also, what can be considered a technological marvel, but is really just another good reactor from an economic point of view, is their lead-cooled fast reactor with on-site fuel recycling. China commissions their first large commercial reactor designed without foreign help, and along that they have high-temperature gas-cooled reactors (used to be German before they cancelled that program) that are thermodynamically more efficient than other reactors, meaning even better EROI. These are current affairs, not silver bullets from the future. In the west the nuclear story is really dark though, and in reference to the solar-wind-bio craze your point on the inescapable collapse is correct. But others chose differently, and they will not have a collapse due to that difference.

        Liquid fuel for transport can be made easily from coal, which then becomes a reagent, not a source of energy. High EROI from nuclear can offset the energy expenses of the process, and well people will have to drive appropriately-sized cars, not trucks to pick groceries. Batteries are not the only technology for electric transport. Mercedes already runs electric trucks (in US!) on grid power relayed by a trolley contact. That is a very old technology with zero risk – does not look pretty, but cheap and functional. All municipal transport can be powered that way, with a small remaining fleet (including aircraft) powered by liquid fuel. Mines have such trucks both under and over ground – look them up as “electric trolley truck”.

        True, the time is short, but outside the west people do understand that and take action. Russian nuclear program has been accelerated and upscaled, with three different technologies funded and developed (very expensive): advanced water-cooled reactors, sodium-cooled fast reactors, and lead-cooled fast reactors. Also a public-private branch of the program are commercializing a proven military lead-bismuth-cooled reactor design for small-scale generation. It seems to be nuclear at all scales there, from a 10MW to 1200MW power levels. Chinese are building up their nuclear at a rate that even they call stunning, and they are the only ones that can do it quickly from almost nothing. Same goes for their solar (where appropriate, i.e. remote and dispersed loads) and natural gas. Also it so happens that within eastern economic block they have uranium, oil, gas and coal in relative abundance, which extends the time to ramp up nuclear power generation. Collapse truly comes, but only to those who chose that end years ago.

        • Reader,

          Unfortunately, you are being highly guilty of looking at these systems with HORSE BLINDERS ON. Let me share a just a few:

          1) Nuclear Power has a very LOW EROI when we factor in FULL CYCLE COSTS. We aren’t building them anymore because the cost and problems associated are off the charts. A large percentage of our Nuclear power plants are reaching the end of their FUNCTIONAL LIFESPAN. There are NO FUNDS set aside to decommission NOT ONE of the Nuclear power plants we have in the country. Furthermore, estimates are that it would take upwards of 2 decades to decommission just one plant correctly. Nuclear power is extremely dangerous, and when we factor in FULL CYCLE COSTS, the EROI is very low.

          2) We have used up all our high quality HIGH EROI coal in the United States, the EROI to convert coal to liquid fuel is VERY LOW. Furthermore, we won’t have enough coal to do this and power the electric grid.

          3) The Chinese are completely STUPID building these Nuclear Power Plants on locations that are very unstable. Many experts believe they are being DANGEROUSLY CARELESS in building so many of these Nuke Plants in unstable geology and by high population centers.

          Reader… I would bet a handful of American Eagles that nothing I typed above will change your mind. That being said… let’s check back in say 5 years and see how things played out.

          steve

          • There is no room for a discussion if I am being “found highly guilty” in response to facts. I made an attempt to bring relevant facts to your attention on the subject of other countries’ response to the energy troubles ahead, but you are not interested in facts. Nuclear EROI is universally 15, and Chinese are completely stupid and careless because someone out there believes so. OK…

  10. Great article Steve. Doom and gloom looms. Anyway, as for the timing, I guess the BIG unknown is how much longer the CBs of the world can create more debt and buy up bad debt to “paper band-aid” the current status quo more or less. My gut feeling is that this may last for a while longer, BUT will translate in much higher gold prices (gold being re-monetized to balance the outlandish debts)… Silver will ultimately also go for the ride, but the primary monetary metal right now IS gold. Time will tell when it all comes crashing down (or shooting to the stratosphere – gold) and how it all will pan out… Lots to ponder.

  11. EROI is only part of the story as clearly growth in GDP is directly correlated to growth in debt. It’s diengenuous to suggest that declining EROI is the onlly reason for the growth in debt as our entire economic system has been predicated on ever increasing debt. Debt saturation is occurring in all areas of life and becoming unsustainable; the article suggests that negative rates are a response to this but actually the opposite would be the case – negative rates are symptomatic of the central bank ‘put’ combined with a quest for yield. Demand destruction will escalate in all areas of the economy only to be countered by greater central bank intervention culminating in the current stall speed rapidly becoming a crash. Sure, oil and EROI are central planks to this terminal decline but so is the growth of debt in the broader economy.

  12. Rumplestiltskin | August 10, 2016 at 5:03 am | Reply

    I do not Grok what you are trying to imply about oil being the driving force of humanity. I did not read anything about how new energy sources which are coming on line now will affect the analysis outcome.

    I have faith in humanity that we will move to new types of energy production that will be cost effective, but it will be a slow slog. The ultimate value given to anything is through human labor. IE: If you find a pretty stone, it is still just a rock, but if that stone if faceted and polished it becomes a brilliant diamond.

    Whether it is oil production or growing fruit trees, human labor is what gives those items value. When labor is essentially taken out of the equation such as in robotic manufacturing, where does the labor go? It then turns into an absorbing sponge taking value out of the system while adding nothing to it.

    IE: That labor force must eat, and what we eat is being produced by machines that add no value, thus the human population must necessarily die out least our useless labors do no more than produce hunger which will outstrip the mechanics ability to produce it as the human numbers increase. When you take humans out of the equation you have no viable nor applicable analysis.

  13. Scott Rodibaugh | August 10, 2016 at 5:43 am | Reply

    This is deeply valuable, but I admit that the “Thermodynamic” analysis eludes me at first scan.
    ONE HISTORIC THOUGHT: it would be absolutely fascinating to get EROI figures for the Japanese in the years 1925-1941; if our historians are correct (“they had to have oil”) then their EROI vs World EROI would demonstrate this better than any other analytic tool.

    scott

  14. a guy from Ukraine | August 10, 2016 at 7:29 am | Reply

    great analysis. We are an energy civilization. Cheap energy is at the core of our development. when the western civilization started running out of cheap energy they began ravaging the rest of the world by piling up huge amounts of debt to keep their standard of living artificialy propped-up. Now that the gimmick is coming to an end as the debt pyramid is getting increasingly shaky and ready to turn over, the payback might prove to be a real bitch. You can’t deceive Mother Nature for ever. There is a price to pay for any breach, and the breach of Laws of Nature is no exeption. The world is up for a very bumpy ride with far from all of the “sovereign” nations enduring to the end of the road…
    Buckle up!

  15. Interesting information and food for thought [including some good comments].

    “The Hill’s Group put together this chart forecasting the oil price to reach $11.76 by 2020:”

    This however is conjecture. A few years ago many were projecting the price of gold and silver by now, and that was conjecture, just like it would be to predict their prices by 2020.

    For example the policies the Fed is using to keep the stock markets propped up will damage the dollar’s buying power. It will take more currency units to buy necessities in the future whether people can afford them or not. That may not affect gasoline as much as food, but it does have an effect.

  16. The elephant in the room no one wants to talk about. Or even acknowledge. Scary stuff no doubt. Mix in the current choices that want to inherit this night mare as president and its the perfect storm building. We all have been warned for many years that we are faced with oil running out or becoming to costly to extract from the ground. It’s simple to correlate the rise in population world wide with cheap oil, it’s also easy to see population decline when it becomes impossible to sustain current levels with the collapse of cheap oil. The poor folk will be the first to go. Law of nature will always prevail, no matter what. No math formula or anything else short of free energy for the masses will correct the current imbalance except fewer people on the plant to feed. That’s my humble opinion. I take no pleasure in saying it. The only variable is the time table. Mother Nature will win.

  17. The FED will just slowly devalue the US Dollar to save the day – as a result; the stock markets will go up … but measured against sound money; well, you know the story.

    • Precisely…although the concepts that this article present on EROI are 1) accurate and 2) neglected in the main stream, they fail to account for the typical reactions to crisis and deflation, and they are 1) money printing and 2) war.

      • BobM,

        Yes, the article does not take into account money printing or war. However, money printing which will likely be a HYPERINFLATIONARY EVENT will not last long. Already the Central Banks are running out of things to print money and purchase. This was the problem the Bank of England was dealing with reported on Zerohedge last night.

        So, the Central Banks will have to send out checks to the masses… this is their last bullet. Once that has run it’s course, then things will fall apart more quickly.

        As for war, anything is possible. However, with the rapidly falling EROI, it will become increasingly difficult to wage war as PROFITS are needed as a result. PROFITS will not likely be enough to fund many wars in the future. Thus, wars will become less on a GRAND SCALE due to the falling EROI.

        steve

        • The US Dollar rose significantly over the past 3 or 4 years … and even though the FED only did 1 rate raise, the lengthy jaw-boning and subsequent rise in the Dollar was equivalent to several rate hikes …. there’s a huge amount of air below 96.6 on the DYX that can be deflated … which will fill a multitude of ballons full of air.

          • Paper Silver,

            The issue going forward is the massive debt in the system and a rapidly declining EROI. Again, $13.5 trillion of global bonds with negative rates doubled in just 6 months. If we go back two years, there weren’t any. And again, the doubling is happening at an EXPONENTIAL RATE.

            While a hyperinflationary event is likely, it will not last that long. Another reminder… we as humans live 7-8 decades. I really don’t care about what happens in say 1-3 years. I am more concerned about 10+

            Thus, the disintegration of the U.S. and Global Markets is COMING. To be honest, I don’t care about the Dollar, the Presidential Race or the NSA. Those will become meaningless in short order.

            steve

        • The Feds will just continue to print more money. They can and will buy out all personal (think student loans) and business debt. And then the Central Bank will have lots of Treasurys to buy. It seems there is absolutely no limits to Federal Debt. It doesn’t matter!

          You can say its only paper, but its not even that anymore. Just bits and bytes.

          There will never be a hyperinflation as long as there are more people than work available. Us little folk will never have wheelbarrows full of money. If anything, more DEflation is coming…..

  18. Steve, you’ve know about low EROI for a while, so what was the “light bulb” moment for you in this new info? For me it was this:

    1. “The world is now spending $2.3 trillion per year more to produce oil than what is received when it is sold. The world is now losing a great deal of money to maintain its dependence on oil.” (WB Hill)

    2. In 2012 the OI began to use more energy per barrel in its own processes (from oil exploration to transport fuel deliveries at the petrol stations) than what it delivers net to the GIW. We are now down below 4GJ/head and dropping fast.

    The oil industry itself is eating up way more oil than I thought. As industrialized economies need to become more efficient because the oil industry itself becoming less efficient due to low EROI, just the opposite is happening as is dictated by a Keynesian system trying to resuscitate itself with nothing but wasteful spending.

    Thanks for your great work man.

  19. BTW … anybody who bought CDE several months ago when I brought it up on this web site has made a killing in the past several months;

    http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=cde&insttype=&freq=&show=

    I mentioned EXK about 2 weeks ago; already up around 20% in a couple weeks;

    http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=exk&insttype=&freq=1&show=&time=8

  20. This explains why nations such as China, India, and Germany are investing heavily in Solar and to a lesser extent nuclear. TPTB have less then 10 years to install infrastructure that is as independent from oil as possible. Nuclear plants require Uranium which needs to be mined. Nuclear plants also use diesel or petrol based turbines to augment power output for heavy energy demands throughout the day. Solar panels require silver…which needs to be mined. Once again a heavy energy requirement. Solar might buy us a few more years of at least having the lights on, but its a cheap band-aid at best. You also need heavy batteries to store the power. Batteries require Lithium, which needs to be mined. Once again a heavy energy endeavor. Let me re-phrase that. I have a few years to get my home equipped with solar panels to at least keep the lights on.

    When I consider what we face…its daunting. Modern food production is a byproduct of mining (fertilizers). Farming is a high energy operation. You say we’ll see a 75% reduction in gas stations. Won’t we also see a corresponding 75% reduction in working farms?

    If oil production comes to a halt, what about oil derivatives like plastics, tar, etc… The oil used in plastics and tar are created during the refining process If no one pulls oil out of the ground what happens to the by-products? Do they go away too? A world without tires, plastics, road repairs, roof tiles, etc…

    Explains why the U.S. paid the Iranian ransom. They and the Russians are the only ones with cheap oil left. I suspect the Saudi’s are out of easy oil like Venezuela, Brazil, Canada, and soon Mexico.

    Let me see, where is that copy of Madmax…It has to be here somewhere.

  21. The only thing that will cause the price of oil or any other form of energy to collapse will be a cheaper alternative (such as solar) or a reduction in demand. To me neither seems likely given that what I am currently observing is the re-population of American roads with big dumb trucks and urban assault vehicles that consume two to four times as much fuel as any rational single occupant vehicle.
    Oil isn’t just a fuel it is also the basis for the entire petrochemical industry which includes such things as fertilizers and plastics. And, then there is the consumption related to the global airline industry. My prediction is that you will never see a common commercial aircraft that flies faster than 300 kilometers per hour with a range of greater than 500 kilometers that is fueled by anything other than petroleum.
    That said, with one hundred million tons of carbon dioxide per day (think about that) as a bi-product of fossil fuel consumption and a global absorption capacity that is currently being greatly exceeded, the shift this is causing in the global equilibrium chemistry may soon force changes in demand structure.
    One of the problems is that our entire economy and debt structure relies on waste and over consumption just to balance its books. Growth in the economic sense is not about improving the quality of peoples lives; it is about increasing the amount of debt that individuals and families are obligated to carry. I am old enough to remember when a single income was adequate to buy a real house raise a family and retire comfortably on. Now in may urban areas two professional incomes are barely adequate to purchase a condominium. You can imagine what kind of stress that puts on the relationship so forget about the family and good luck retiring without first hitting the lottery. Thank god for the invention of equity dollars so we can suck them out of out of our only real asset as reverse-mortgages just before we exit this debt-stress-role system.
    Also, good luck reducing waste and consumption while increasing debt (economic growth) at the same time; particularly now that interest rates are already lower than a snakes shadow.

  22. I agree with your analysis, but with a few exceptions. I believe that currently industrialized nations will see, after a period of deprivation, subsistence farming return in a big way. This will include reclaiming formerly nonproductive marginal lands such as city parks, golf courses, school yards, etc. I look at suburban residential neighborhoods as already being set up in a way which is ideal for intensive pasture management of goats and sheep due to the fact that they are comprised of small plots of grass that are segregated by fencing. Of course they could not provide for as many people as currently exist in those places, one residential area could provide for a family.

    While most forms of real estate will lose value agricultural land may rise in terms of value measured in gold. Also while people will cease to look at stocks as a store of value, livestock will remain as one. Remember that you cannot eat metal and you don’t need it to survive. So while I agree that in the medium term people will become defensive in their investment strategy, over the long term i believe that they will look for yields in the places that they always have found them historically speaking. Fruit trees grow and yield more fruit every year. Grain grows and one seed produces ten more. A milk cow has a calf every year. When the system breaks down food will become the ultimate commodity, just like it always has been. Unfortunately for too many it will take knowing real hunger to understand that.

    • Try to grow something when you’ve got aluminum, barium and strontium raining down on you.Trees are dying everywhere. Here in NJ 26 out of 31 days in May—May—were overcast. No sun. The plants could barely photosynthesize.

  23. R. Stephen Dorsey | August 10, 2016 at 7:22 pm | Reply

    Steve,
    A great analysis and some excellent comments. I, however, have some skepticism about the $11.76 price and would very much appreciate your comments on its viability and derivation. Thank you.

  24. Steve: Can you visualize your scenario in EROI in the USA? About 99% of the people will riot in
    every city in the USA. That’s right, a Fergason everywhere. And before that unfolds the government
    will confiscate all stackers gold and silver. You must consider that alternatives will be developed.
    a complete collapse is not inevitable.

    • In the future, anything between what we have now [no current riots where they allow looting, pillage, burning, and assorted assault, rape, etc. with little-to-no-effort to stop] and wider-scale riots in several cities is possible.

      It isn’t worth the government’s effort to try to go door-to-door to try to steal & confiscate…unless they have intel that a particular residence is loaded with cash, guns, food, metals, etc. At least not with an armed populace.

    • Joe – What makes you think that the government will confiscate gold and silver when there are very little in number regarding those collecting and holding any in the first place. That’s just a scare tactic that is out dated. Besides Roosevelt’s scare back in 1933 really was more bark than bite.

    • Joe Lindell. We are ready for the FDR gold pirates this time. Just as in the story of Copperhead Road, it will be a dangerous time for revenuers coming for our gold. They can’t find it if they don’t know you have it. So don’t tell your buddies, don’t store it in banks or IRA’s or even segregated storage, or else you will have many partners. When you buy it, pay cash and don’t give your name and don’t use counterfeit electronic money substitute crap that leaves a trail. Gold is no good to you if you don’t have it nearby or can access it quickly when you need it. The best place is buried deep in multiple locations or hiding in plain sight. Keep a little bit in a big safe that is in plain sight and hope they are happy with a few silver coins. Make sure you keep a treasure map so you can find all of your gold (not in the safe). One person I know melts gold and silver and recasts it into building materials such as lag bolts, small nails, and drywall screws that become part of his house, and is covered by three coats of ugly paint. The uglier the better. Try finding my gold, ya thievin bastards. A gold bullet works better than a lead one. If they come for it, memorize these words: “sorry mate, you’re too late. I spent my meagre stack to barter for food to feed my family. It’s all gone”. The key word is you “spent” it. Because it is a currency not a commodity. Listen to Farmer Joe and plan, plan, plan, and stockpile, stockpile, stockpile, and fortify, fortify, fortify, and populate your farm with many sharecroppers. Many bodies with Winchesters will deter would-be traveling looters, which especially includes revenuers. Fuck em! Release the hounds. And don’t forget to keep stacking real money. Happy Trails and don’t forget to pray.

  25. My guess is, yield on oil debt will go negative too. BAU will be stretched beyond imagination, only when currencies blow up, it’s over. That’s why there’s the € imho. To have more control over BAU. Importing cheap labor into the west is just another stretch of MOAR politics, just like overstretched debt and globalisation. Add a few wikileaks and Isis and there it is; the BAU-STEW we are being forced to eat.

  26. “The Maximum Consumer Price curve is curtailed at 2020 at $11.76/ barrel. At this point petroleum will no longer be acting as a significant energy source for the economy. Its only function will be as an energy carrier for other sources.”

    I don’t quite get what it says that petroleum’s only future function will be as an energy carrier for other sources. Please explain that. Thanks.

  27. “Watch for these oil companies to start cutting their dividends in a big way. Matter-a-fact (sic), ConocoPhillips already cut their dividend by a third from $0.74 a share down to a lousy $0.25.”

    How is 74 cents less one-third equal to 25 cents?

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