THE HILL’S GROUP: Gold Mines vs Oil Depletion

(The Hill’s Group)

“Gold mines usually don’t run out of gold, and tin mines usually don’t run out of tin, but they are often shut down. They close their doors and go out of business. That is because the quality of the ore remaining fell too low for them to be worked economically.

The 2000 WEO (World Energy Outlook) placed liquid hydrocarbon resources at as much as 4,300 Gb (billion barrels). The world in the last 158 years has extracted less than 1,700 Gb. “Running “Out is an oxymoron. Going out of business isn’t!

Gold mines, tin mines and oil wells are operated to make a profit. Investor put up money, and expect a return on their investment. If they don’t get it the business is sold, or scrapped out. It is that return that determines if an operation is continued, or shut in. It has absolutely nothing to do with the quantity of resource that remains in the ground?

The Bell Weather of the petroleum industry, EXXON, has seen its ROA (return on assets) decline by 65% in the last four years. It has fallen from 13.45% to 4.8%. The decline for the return on its assets went down right along with the price of oil; which fell from $94.05 in 2012 to $48.67 in 2015. If it follows that trend its ROA will hit zero at about $30. During the first 10 months of 2016 the price of WTI (West Texas Crude oil) averaged $39.40. At an ROA of zero its investors will see no benefit from their investment; except perhaps for the company’s scrap value.

Click here for: Financial data on Exxon.

As we have been saying for the last three years, the long term trend for the price of oil is down:

hills-group-etp-oil-price-chart

The price of petroleum is controlled by two factors:

1) The cost of production.
2) The $ amount that the end consumer (the NEGs) can afford to pay for it.

What the end consumer pays must be sufficient to cover the cost of production. All production cost must be borne by the end consumer, who includes the end buyer, and the societal cost required to produce petroleum, and its products.

The Petroleum Price Curve, shown below, reflects the two factors that have, and will continue to control petroleum prices. The ETP derived Cost Curve is constructed from the ETP model, and has mapped the price of petroleum since 1960 with a correlation coefficient of 0.965. It is the most accurate pricing model that has ever been developed, (see report)*.

The Maximum Consumer Price curve was also developed from the ETP model. It represents the maximum price that the end consumer can pay for petroleum. It is based on the observation that the price of a unit of petroleum can not exceed the value of the economic activity that the energy it supplies to the end consumer can generate.

Read More from The Hills Group: The Oil Price Model

The quality of the resource (measured by its ability to deliver energy) has fallen low enough that its ROA is rapidly approaching zero. The 158 year history of the commercial industrial oil age has been spearheaded by a quest for the very best that could be found. What remained was of lower quality. That resulted in lower production wells, higher levels of contaminates, much higher or much lower viscosity, and ever increasing water cut. The overall reserve has declined in quality.

We project that there is absolutely no possibility of the world running out of oil in the foreseeable future. The possibility of investors (who ever they are) running out of patience is a totally different matter!

Article courtesy of: The Hill’s Group


This short article was based on another brief comment from The Hill’s Group.  The important take-away from this article is that a lot of gold ore or oil will remain in the ground because they are not commercially viable.

The Hill’s Group Oil ETP Model forecasts why most of the supposed trillions of barrels of supposed oil resources will never be extracted.

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Cathal Haughian
Guest

The only thing that matters is the Ponzi. No Ponzi, no economy. Don’t worry, TPTB know this, and normal people tend to underestimate what will be done to keep the market moving. By normal I mean moral.

What to watch? Note who gets selected for secretary and UNDER secretary for defense and state. That’ll tell you what Trump has decided since he now knows the true state of affairs. It’s war or class war.

Recall that Obama appeared peaceful until he invited the neocons into the White House.

Question: how do you guys stay positive? This is really pessimistic stuff?

gman
Guest
gman

“how do you guys stay positive?”

humanity has faced far worse than this. be a man, follow god, do your best.

Cathal Haughian
Guest

Gman,

I’ve been reading the old articles here and have enjoyed your old comments. Very entertaining and accurate, but this time I’m not so sure.

Has humanity ever faced a global meltdown, global overpopulation crisis and with no hope of recovery? Gee, I thought I had problems before but now!

It’s gonna be tough 😉
Cathal

gman
Guest
gman

during the black plague russia lost 90% of its population. there was a period in chinese history where they took a census and counted 600 million people, and a similar census 20 years later counted 200 million people. the first united states pilgrims had a survival rate of 10%. in some ways this will be worse. never before has a population been so dependent on so large a complex system outside of its control for mere survival. but in some ways it will be easier. we know some history, we see what is coming, it won’t happen all in one… Read more »

Juergen Heil
Guest
Juergen Heil

“how do you guys stay positive?” I follow Steve’s work from the beginning on I think. I began to prepare for the economic meltdown in 2007 but the Ponzi was saved and the bubbles pumped up again. After many years of the expectation of a total economic meltdown you get used to it, you learn how to live with it, the same as you learn to live with the the knowledge that you will die and you don’t live forever. What makes it much easier is that you can prepare for the financial outcome and save your own ass. But… Read more »

ol' Pappy
Guest
ol' Pappy

If climate change concerns you, and it should, then you should understand that it is engineered, created, by this: http://www.geoengineeringwatch.org Hegelian Dialectic at work right in front of our eyes and yet people just cannot seem to see it because it’s not reported on the nooz. LOL. What a pathetic species we are. Most of us deserve to be culled and that’s exactly how the elite see the situation. Until folks wake up to the fact we are being sprayed like insects with toxic metals and chemicals and anything else they can effectively deliver then there really is no hope.

r sinclair
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r sinclair

watch this for enlightenment. https://youtu.be/Z4OP–ZXOjc My last comment appeared to have been taken down what does that say? See if this gets wiped

r sinclair
Guest
r sinclair

i found the comment it was on the last article sorry.

UnhingedBecauseLucid
Guest

[“It’s war or class war.”]

He’ll probably “have to” go with both…

Johny Comelately
Guest
Johny Comelately

I am agreeing with this analysis the more I digest it. I’m having trouble with the ramifications of it. Lower oil prices will cause the derivatives to blow up. It will cause the bond market and petrol-dollar to implode. It will destroy markets. What can or should we do now? Is it wise to invest in solar today if oil is so cheap we can run our generators and oil furnaces much cheaper in the future? If most people lose their jobs, what sectors will survive and how do we position our business or employment vocation to survive? Where should… Read more »

gman
Guest
gman

“how do we position our business or employment vocation to survive?”

you must successfully navigate two mutually incompatible goals.

1) independence. ability to function outside the larger economy. (“larger” meaning “outside economic interaction range”)

2) dependence. ability to work with and mutually support and be supported by the local population. (“local” meaning “within economic interaction range”)

good luck.

houtskool
Guest
houtskool

Those who cannot adapt, will die. Good luck indeed. And forget about ‘renewables’.

lastmanstanding
Guest
lastmanstanding

“Those who cannot adapt, will die”. That is how the planet works and man is NOT exempt.

The sooner one understands it, the better.

Dave
Guest
Dave

part five of the Hill Group’s “The Energy Factor”, one can find this statement: “EIA data tells us that the viscosity of the average barrel over the last decade has been an API of 35.7�. This results in an energy content (exergy) of 140,000 BTU/gallon, or 5.88 million BTU/barrel.” in the second paragraph. I find the subscript ‘?’ interesting as viscosity is completely different from API gravity. As API gravity increases, density is lower thus high API gravity oils are considered light oils and generally have lower viscosities. Viscosity is a measure of the resistance to flow of a fluid.… Read more »

Cathal Haughian
Guest

Incorrect. The price will fluctuate so that it is unaffordable for an increasing percentage of the population while not high enough to justify new field development.

Hubbs
Guest
Hubbs

Demand destruction vs drilling destruction (not profitable to drill), so the traditional supply and demand rule of economics fades into meaninglessness. There is no demand, there is no supply. (At least on the margins).

Cathal Haughian
Guest

Yeah, it’s going to get very interesting near the end. And too complex to model. Recall that supply/demand theory is the result of observed behavior. But I’m not aware of observed price data when a primary energy source depletes. I’d expect hoarding. Also, resources will be directed toward alternatives. Such as biofuels like rapeseed and sunflower oil. Theory would suggest they’ll become very expensive but BUT there’ll be price controls put in place. Thorium will be mixed with recycled spent fuel, etc. But it’s the wars and revolutions that will end all talk. Big countries, like the USA, will stumble… Read more »

Cathal Haughian
Guest

The Hill model is not perfect but it’s pretty darn good. Obviously, it doesn’t account for the political and military power of Big Oil, and possible subsidies by other energy sources as price goes real low.

And the US has a lot of Thorium stored, which they’re probably keeping as insurance.

But honestly, the only thing that matters is the Ponzi. No Ponzi. No economy.

Bhavesh Modi
Guest
Bhavesh Modi

Thanks Steve, regards

joe lindell
Guest
joe lindell

Why does this cite predict lower oil prices? Shouldn’t the oil price rice as cost to produce rise? What
am I missing. If it costs $80 to bring out a barrel of oil, why are the selling it for $40? Demand for
oil will be there, so oil prices must rise or the Exxons won’t bring it to market?

CFO point of view
Guest
CFO point of view

You miss nothing – it’s obvious that we as humans will bid much higher prices for oil/gas to keep using it for our convenience. It’s just Hills Group who has some horses to sell are promoting new ideas 😉

People will adjust – with higher oil price, we will travel less, use public transport, live more locally, produce more locally. It all will happen – globalisation will disapear. But people will use oil as long as they will not find something better to use as convenient source of energy or oil EROI will not drop below 2.

Cathal Haughian
Guest

How can you bid with no income?

Only the ‘haves’ have an income and they’ll bid but they’re a small number and getting smaller.

The ‘have nots’ don’t matter.

In a consumer economy, if you can’t consume you don’t exist.

CFO point of view
Guest
CFO point of view

Of course there will be big adjustment that is required for economy to go further. What this big adjustment will look like, we will see. But forecast that in 5-6 years people will just leave existing infrastracture and go for horses makes me laugh 🙂 We as humans will pomp oil until we find anything better or marginal EROI will drop below 2. That is my prediction, and price will be adjusted in real terms throught all the time as EROI will be dropping. First it will be $100 again, then $140 again, then $200, then $300, then $400 if… Read more »

Bryan Sellars
Guest
Bryan Sellars

If you remember back to the oil shocks of 1979 that was caused by a production drop of only 4% and yet the world went into recession, on top of which we can’t keep pumping and burning oil and gas if we want a planet that is habitable. As sea levels rise the ports become unusable and there is no way a world in depletion will have the resources to rebuild them. We have to ditch the car and road transport as soon as we can and focus on less energy intensive methods like public transport, cycling and walking with… Read more »

mr inflation
Guest
mr inflation

Very interesting model. But I was wondering how they factor in a decision to change monetary policy, so for example, the Fed (under Trump) decides to move inflation target to 4%. This will over time have the desired effect of effectively monetising the huge debt owed by the US Government and others. It will also lead to higher inflation (they will overshoot their target) which will see a weaker dollar. In this case, other things being equal, the oil price (in $) will of course rise back towards the $75-100 range. In order to meet the end customer affordability constraint… Read more »

CFO point of view
Guest
CFO point of view

Yes the price will go to zero and we will see 0,1% richest people who poses half of the world walking on their foots, or maybe traveling with stagecoaches instead of paying 0,00000001% of their welth to travel using car, yeah! And maybe, just maybe also me – who is not really rich one, I will also decide to use car even if this will cost me 8 times more then now. Of course I will decide to travel less, find my work closer and so on. But I will bid much higher for gas then it is now to… Read more »

Adam
Guest
Adam

My take on the ETP model is you must get out of mindset that money is everything. The return of energy on a barrel is dropping on average, meaning more resources must be spent in the production of energy. This process is ongoing and irreversible and over time leaves less left over for the rest of our hyper-complex society.

The system as a whole needs to function, the wealthy among us need the system just like everyone else.

CFO point of view
Guest
CFO point of view

As I wrote. With MARGINAL oil EROI <2 we all have a problem unless we find something else. And word MARGINAL is very important, as all the time we discuss total EROI, starting from investment. But if you can pomp oil on existing infrastracture and this oil EROI is above 5 (marginally) then I think people will adjust to higher costs of pomping and they will bid price higher and change their behavior (more efficient usage) instead of going for riding horses instead of adjusting. Nothing more. You shouldn't avoid EROI thinking, when you consider future, but there is huge… Read more »

James Fraser
Guest

Can I share this on my site http://www.pennyminingstocks.com? Thanks

CHX
Guest
CHX

For now I still don’t see it happening. OPEC seems to cut down production a bit combined with the ever-pumping of debt and oil prices will rise (to bail out the under-water fracking and shale industry). Yes, lower EROEI will be an increasing an unavoidable problem (and the ultimate coup de grace for the global fiat-based eonomoponzy), but so is the depletion of any limited and important resource that cannot be replaced. At least after today we’re once again closer to the 60ies than the 20ies, but black gold is trading so wickedly, it’s become like silver on steroids. Interesting… Read more »

mr inflation
Guest
mr inflation

I am interested to know how the Hill’s Group model can deal with either central banks (or the IMF via the SDR) increasing the money supply, which will lead to more $ floating around in the system. When this happens we will have higher inflation rates and the oil price will be rising towards $75 and more.

Hills model does not appear to make an allowance for changes in both base money and total revolving credit.

houtskool
Guest
houtskool

You cannot solve thermodynamic consequences with more currency. The only thing that will happen is that exponential curves become more exponential, faster.

joey
Guest
joey

I told you Oil was not running out?? By the time it does, we’ll be a type 2 civilization and would have developed other means.

Go Live your life while you can.

Hubbs
Guest
Hubbs

Still trying to grapple with above comment I made and understanding the fact that only a barrel of oil can get another barrel out of the ground. (I am not trying to enter a nit pick argument like solar panels supplying power to run the drills and pumps). The consumer can’t pay, because his job won’t pay enough and he is already borrowed out to the hilt. Conversely, even if the oil drillers could borrow more money to drill more wells, they still need oil to get the oil out of the ground. It violates the laws of thermodynamics. A… Read more »

houtskool
Guest
houtskool

Yes. In the beginning there was profit. Next came the debt. Now the debt yields go to zero. Tomorrow the oil debt will be monetized, like all other debts. You see? Exponential hubris and desperation. The chart is there for those who can see. Prepare. And watch out for our legalized overlords.

Robert Happek
Guest
Robert Happek

The basic argument is that every form of energy (fossil or nuclear) is finite because the planet is finite. The eventual decline of energy supply is therefore on a collision course with the growing world population. In the past, humanity was much smaller in size and it was possible for human civilization to survive on whatever solar radiation provided in form of food and wood as a main source of energy. The tragedy is that our present population size can not survive on solar radiation alone. it is just not enough to support our present life style. So something has… Read more »

Robert Happek
Guest
Robert Happek

The opening statement: “Gold mines usually don’t run out of gold, and tin mines usually don’t run out of tin, but they are often shut down. They close their doors and go out of business. That is because the quality of the ore remaining fell too low for them to be worked economically.” is misleading if not incorrect. It is true that those gold mines which can not produce gold below the prevailing market price (spot price) of gold will shut down. However, the demand for gold will not stop at a certain price. Even if the production cost of… Read more »

Benito Camela
Guest
Benito Camela

https://www.youtube.com/watch?v=aShimWnbiu4

Did you know about this, Steve?

Did you????

Benito Camela
Guest
Benito Camela

(In short: Auto-tune was invented by an engineer in order to locate oil reserves…)

Cathal Haughian
Guest

No, exponential goes hyperbolic or the other way around 😉

It’s a funny auld World

silverfreaky
Guest
silverfreaky

There is the possibility that Italy vote against the euro.What makes the save hafen gold and silver?It falls like a stone.

What about the miner stocks?Much more worse that the metal itself.