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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46 Comments on "THE HILL’S GROUP: Gold Mines vs Oil Depletion"

  1. 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?

    • “how do you guys stay positive?”

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

      • 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

        • 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 day, and we have time to get ready. watching the “prepper” people shift from a lone wolf in the woods mentality to a village mentality has been very encouraging.

          yeah, it’s gonna be tough. be a man, follow god, do your best.

    • “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 the most scary thing for me is climate change that is what makes me often depressive

      • 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.

    • 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

    • [“It’s war or class war.”]

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

  2. Johny Comelately | November 29, 2016 at 4:18 pm | Reply

    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 we move to? Should we buy a new home or car when prices drop or rent and lease till there’s no bid? The ETP model raises so many questions! While gold and silver are good, it doesn’t provide all the answers.

    • “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.

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

      • lastmanstanding | November 30, 2016 at 2:07 pm | Reply

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

        The sooner one understands it, the better.

  3. 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. A high viscosity fluid will flow at a lower rate than a low viscosity fluid, all other factors being constant. The mischaracterization of the basic relationship between viscosity and API gravity is concerning considering the Hill Group is an expert on the matter.
    EROI is a great concept that can shed a lot of understanding to otherwise complex processes, but it can also be misleading in rare circumstances. An example; I worked in an oilfield where salty formation water from one zone could be dumped to another deeper horizon for a water flood and pressure maintenance. Energy would have been taken from the upper zone at essentially no cost and no energy diverted from other projects. It would have been energy free only in the sense that the energy consumed had no other viable use. The project did not move forward due to regulatory issues.
    I am very appreciative of Steve’s documentation of peak oil, shale oil production characteristics and particularly the rapid declines and of course all the PM information. I do have trouble getting my head around lower oil prices with lower supply given the supply demand equation being equalized by price. It seems that the demand will diminish with increasing prices due to less supply.

  4. 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.

    • 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).

      • 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 around like an angry drunk.

        Cities, particularly mega cities, will disintegrate quickly.

        But I agree with gman, don’t lose faith, do your best.

  5. 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.

    • Cathal,

      The Hills Group, Louis Arnoux and another gentlemen are writing a white paper on their “Thermodynamic Oil Collapse Model” for the Royal Society. They state that once the paper is accepted, then of course revisions and improvements can be done.

      However, I don’t believe the timeline is off by much… certainly not decades.

      That being said, the situation will continue to deteriorate as the oil price declines due to the falling Net Energy remaining in the barrel. Individuals need to look at the falling net oil remaining in a barrel of oil the same as say a 15 year old car. Why would someone pay a HIGH PRICE for a 15 year old car when all the embedded energy in its parts have been greatly depreciated and warn out?

      steve

      • Yeah, the timeline is looking very accurate. Scarily so. 2020 will be a big year, but expect a lot of violence before then.

        I don’t think the Royal Society matters much, I can tell you your output is brilliant, but the entire establishment is in the know, is terrified and will suppress any info that could knock confidence.

        Everyone is bankrupt so everyone needs to keep pretending.

        Best, C

      • Steve,

        The hardest part for me to understand of what you propose is that as EROI of Oil falls then so does the market value of Oil. I have read your articles and I don’t get it. Surely if EROI is positive and there is market demand / oil utility then Oil will have a price. In my mind falling EROI correlates to an increasing price. The energy density and energy accessibility of oil means that it will for the foreseeable future have a demand. This combined with falling supply surely means price rises. Correct me?

        • Rob,

          The one thing it seems you don’t get is that ENERGY = MONEY. When the net energy in a barrel falls, so does MONEY available to the market. We don’t see it because of the massive money printing by the Fed & Central Banks.

          The CONNECTION of ENERGY = MONEY has been lost. People think they have all this cash that they can bid up the price of oil.

          TRY TO UNDERSTAND THIS… the real money comes from the net energy. So it will be impossible to bid up the price of oil as the net energy continues to fall, as it is.

          Also, think of the falling net energy like the value of a 15 year old car compared to a brand new one. A brand new one is worth say, $30,000 while a 15 year old car goes for $7,000. All the energy in the embedded parts in the car have depreciated. It would make no sense to price the 15 year old car higher than what it is worth… what it can DO AS WORK for the one who owns it.

          You need to go back and read my energy articles.

          steve

          • Steve,

            Thanks for taking the time to answer my question. I have read and will reread your articles. As you said it took you time to understand what the Hills group had detailed. I am on that journey so bear with me and forgive me the following question.

            Net energy only applies to Oil in the ground. If EROI is 0 then it is not worth bringing up (except perhaps as a store of energy – convert a less dense or difficult energy to store. i.e. expend 10 kWh of Solar to say 5 kWh of Oil). But for a barrel above ground net energy is irrelevant to the price as long as there is demand it will have a price. Oil’s utility is that it is such a good store of energy and is easily converted to Power. So my question is this. Consider the Cushing storage facility and that it contained the last remaining above ground or accessible Oil. Its price would not be determined by its Net Energy but by its perceived value? Which if this scenario played out when we were dependent on Oil (which I hope we can both agree is for the foreseeable future) would be very high.

  6. Thanks Steve, regards

  7. 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 | November 30, 2016 at 10:39 am | Reply

      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.

      • 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 | December 3, 2016 at 12:35 am | Reply

          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 needed. And still this doesn’t mean that we have to go for horses! We as humans will ADJUST, we know how to adjust – it is in our nature.
          And don’t worry, people will be working even if GDP will be dropping 20% yearly. This bubble must pop and it will hurt, but it doesn’t mean that noone will make any money and we all are going to sit and wait for death. People will adjust.
          And at the end – some people will be thrown out of the equation and they will be forced to stop using oil – for sure. But still this doesn’t mean that all of us will decide to go for horses rides as 300 years ago. We will bid much higher prices not to lose privilage of comfortable and quick way of travelling.

          • Bryan Sellars | December 6, 2016 at 9:01 pm |

            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 local food production as a goal, or we have no future, but we should have started a transition away from fossil fuels back in the 1980’s.

  8. 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 in the Hills model, we are likely to see a surge in incomes and prices of consumer and capital goods.

    So what I am saying is if TPTB decide to go for aggressive reflation, we could see a higher oil price.

  9. CFO point of view | November 30, 2016 at 10:28 am | Reply

    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 use it for transporting by car.
    And maybe, just maybe most of people will change their behaviour of travelling to work by car into travelling by Public Transport – this would allow use oil, which would be 8 times more costly, instead of going by foots.

    But maybe this Hills Group are right – maybe all of humans will go crazy and stop using oil, and even maybe we will come back to caves…

    • 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 | December 3, 2016 at 12:21 am | Reply

        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 flaw IMO in thinking that people will just leave possibility to use oil and go back 300 years in time.

  10. 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 times.

  11. 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.

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

  12. 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.

  13. 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 null hypothesis if you will.

    • 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.

  14. 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 to give in the future.

    The argument made by the Hill group is correct even if it turns out that their numbers are wrong. I would not bet on their prediction that oil production will stop in 6 years of time. I am willing to bet $1000 that this prediction will turn out (like many others before) to be wrong. But that is a minor detail in comparison to the principal argument which is of course correct.

  15. 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 gold rises to $100,000 per ounce, there will be demand in the market for that gold. The demand will be of course much smaller than at a spot price of $1,000. This means that the business of gold mining will never cease regardless of price. Gold mining will continue until a method is found to produce gold artificially. Such a method is not known as of today. Only those gold mines will shut down which can not compete against the cheapest producers, But it is wrong to claim that all gold mines will close. That is a logical fallacy.

    However, oil can be produced artificially using energy, water and carbon dioxide. The cost of that artificial production is the ultimate barrier for the production of crude oil. As long as the production of crude oil can be done at a lower cost than the cost of artificial oil production, I think the pumping of crude oil will continue, simply because the demand for oil will never stop regardless of price. For instance the petrochemical industry needs oil as a feedstock for many important products. That is a completely different story than burning oil in a combustion engine in order to drive a car or a truck. But oil is not only used as a transportation fuel.

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

    Did you know about this, Steve?

    Did you????

  17. No, exponential goes hyperbolic or the other way around 😉

    It’s a funny auld World

  18. 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.

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