Tesla semis and the laws of physics

23 11 2017

 

ANOTHER excellent and well researched article from Alice Friedemann. This pretty well confirms everything I told our mate Eclipse who believes in all this techno crap, because that’s all it is. I find it baffling how people get taken in by such rubbish.  Even if these trucks were going to be built, it would be a HUGE waste of Lithium batteries, because they are needed elsewhere, in things that we need to carry around for doing useful things…….

Loads of interesting links in the references at the bottom

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electric-semi-Nikola-One

Tesla Truck

Preface: Most people think that electric truck makers need to tell us the specs — the battery kWh, price, performance, and so on — before we can possibly know anything about their truck.

But that’s simply not true.  We know what lithium-ion batteries are capable of. And we know the kWh, size, and weight of the battery needed to move a truck of given weight a certain number of miles.  That makes it possible for scientists to work backwards and figure out how many kWh the battery would need to be to go 300 to 500 miles, what it would weigh, and the likely price for the battery needed for a truck at the maximum road limit of 80,000 pounds. [in Australia it’s 40 tonnes – our trucks have more wheels! We also have B doubles, some with 9 axles that can haul 64.5 tonnes https://www.nhvr.gov.au/files/201707-0577-common-heavy-freight-vehicles-combinations.pdf ]

S. Sripad and V. Viswanathan (2017) at Carnegie Mellon have done just that.  They published a paper in the peer-reviewed American Chemical Society Letters at the following link: Performance metrics required of next-generation batteries to make a practical electric semi truck.  Below is my review of their paper along with some additional cited observations of my own.

 — Alice Friedemann   www.energyskeptic.com  author of “When Trucks Stop Running: Energy and the Future of Transportation”, 2015, Springer and “Crunch! Whole Grain Artisan Chips and Crackers”. Podcasts: Derrick JensenPractical PreppingKunstlerCast 253KunstlerCast278Peak Prosperity , XX2 report

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Authors S. Sripad and V. Viswanathan felt compelled to write their paper because there are so many guesstimates of the likely cost and performance of an electric class 8 semi-truck in the media. But these hasty calculations don’t take into account critical factors like the specific energy density of the battery pack, vehicle weight, drag, rolling resistance, battery kwH to go a given distance, and weight of the batteries given current Li-ion battery technology.

The definition of class 8 trucks is their weight of 33,000 pounds or more.  We can assume electric class 8 trucks would have the same basic truck weight, because building them with light-weight aluminum or carbon fiber is too expensive. And unlike cars, where the average income of an electric car buyer is $148,158 (NRC 2015), and the amount of aluminum needed to light-weight the car is a small fraction of what a truck would require, the trucking industry is a cut throat business with razor thin profits.  Light-weighting them is out of the question.

The maximum weight of a truck allowed on the road is 80,000 pounds, so if the body weight of the truck is the minimum 33,000 pounds, then the maximum amount of cargo that can be carried is 47,000 pounds.

The authors found that a 900 mile range [to arrive at kms, just multiply by 1.6] is simply not possible with today’s batteries, because the weight of the battery pack required is 54,000 pounds plus 33,000 pounds truck weight, which is 87,000 pounds, well over the maximum road weight limit of 80,000 pounds. And this truck that can not haul cargo will set you back $500,000 to $650,000 dollars for the battery alone.

A 600 mile range isn’t commercial either. For starters, the battery pack would cost $320,000 to $420,000 dollars, and on top of that you’ll need add another $100,000 for the body of the truck. To move a truck 600 miles requires a 36,000 pound battery + 33,000 pound truck weight and the truck can only carry 11,000 pounds, which is 36,000 pounds less than a diesel truck can carry.

Musk claims the range of the truck can be as much as 500 miles.  Based on the figures in Table 1, that means the battery would cost $267,000 to $350,000 (also add on $100,000 for the truck body), and the battery will weigh 30,000 pounds + 33,000 pound truck weight and be able to carry only 17,000 pounds of cargo, which is 30,000 fewer pounds than a diesel truck.

Even if the range is on the low end of 300 miles, the battery will still be very heavy, 18,000 pounds + 33,000 pounds truck weight and and only be able to carry 29,000 pounds of cargo, which is 18,000 pounds less than a diesel truck.

The bottom line according to the authors, is that a 600 to 900 mile range truck will use most or all of their battery power to move the battery itself, not the cargo. The cost of the battery is $160,000 to $210,000 plus $100,000 for the truck body, so overall $260,000 to $310,000, which is $140,00 to $190,000 more than a new $120,000 diesel truck — considerably more than used diesel class 8 truck, which can cost as little as $3,000.

If anyone in the trucking industry is reading this, I’d like to know if a 300 mile range with just 18,000 pounds of cargo is acceptable.  I suspect the answer is no, because the Port of Los Angeles explored the concept of using an all-electric battery drayage (short-haul) truck to transfer freight between the port and warehouses, but rejected these trucks because the 350 kWh battery weighed 7,700 pounds and reduced cargo payload too much. Nor was the 12 hours or more to recharge the battery acceptable. Ultra-fast 30 min recharging was considered too risky since this might reduce battery lifespan, and bearing the cost of replacing these expensive batteries was out of the question (Calstart 2013).

Even if a way has been found to charge a truck in half an hour without reducing battery life, the amount of power needed to do that is huge, so new transmission, voltage lines, upgrading many substations with more powerful transformers, and new natural gas generating power plants will need to be constructed.  Across the nation that’s many billion dollars.  Who will pay for that?

It shouldn’t be surprising that a truck battery would weigh so much.  Car batteries simply don’t scale up — they make trucks too heavy.  The authors calculated that a 900 mile electric class 8 truck would require a battery pack 31 times the size and weight of a 100 kWh Tesla Model S car not only because of weight, but all the other factors mentioned above (aerodynamics, rolling resistance, etc).

If the Tesla Semi or any other truck maker’s prototype performs better than this, there are additional questions to ask.  For example, new diesel trucks today get 7 miles per gallon. But the U.S. Super Truck program has built trucks that get an amazing 12 mpg. But those trucks are not being made commercially.  I don’t know why, but it could be because this achievement was done by making the prototype truck with very light weight expensive materials like carbon fiber or aluminum, costly tires with less rolling resistance, and other expensive improvements that were too expensive to be commercial.

Performance can also be gamed – a diesel truck going downhill or on level ground, with less than the maximum cargo weight, going less than 45 miles per hour with an expert driver who seldom brakes, can probably get 12 mpg even though they’re not driving a Super Truck.

Who’s going to buy the Tesla Semi, Cummins EOS, Daimler E-FUSO, or BYD all-electric semi-trucks?

Most trucking companies are very small and can’t afford to buy expensive trucks: 97% of the 1.3 million trucking companies in the U.S. own 20 trucks or less, 91% have six or fewer. They simply aren’t going to buy an electric truck that costs roughly 2.5 times more than a diesel truck, carries half the weight, just 300 miles (diesel trucks can go 1,800 miles before refueling).

Nor will larger, wealthier trucking companies be willing to invest in electric trucks until the  government pays for and builds the necessary charging stations. This is highly unlikely given there’s no infrastructure plan (Jenkins 2017), nor likely the money to execute one, given the current reverse Robin Hood “tax reform” plan. With less money to spend on infrastructure, charging stations might not even be on the list.

The big companies that have bought (hybrid) electric class 4 to 6 trucks so far only did so because local, state, and federal subsidies made up the difference between the cost of a diesel and (hybrid) electric truck.  The same will likely be true of any company that makes class 8 long-haul trucks.

I constructed Table 1 to summarize the averages of figure 2 in this paper, which has the estimated ranges of required battery pack sizes, weights, cost, and payload capacities of a 300, 600, or 900 mile truck.

Range (miles) Battery kWh required Battery Pack Cost at $160-$210 per kWh Battery Weight kg / tons Max Payload
300 1,000 $160 – 210,000   8,200 /   9 8.5
600 2,000 $320 – 420,000 16,000 / 18 5.5
900 3,100 $500 – 650,000 24,500 / 27 0

Table 1. All electric truck data from figure 2 of Sripad (2017).   A diesel truck Max payload is 23.5 tons.  The max payload (cargo weight) is derived from the max truck road weight of 40 tons, minus battery weight, minus weight of the truck (17.5 tons).

As to whether the Tesla Semi will perform as well as Elon Musk says, it is not certain he will still be in business in 2019, because Musk and other electric car makers are competing for very few potential electric car buyers and with each other as well. There will never be enough electric car buyers because of the distribution of wealth. Sixty-nine percent of the United States population has less than $1,000 in savings (McCarthy 2016). At best the top 10% can afford an electric car, but many of them don’t want an electric car, don’t have a garage, prefer Lyft or mass transit, are saving to buy a house or survive the next financial crash.  And if states or the Trump administration end subsidies that will further dent sales.

Nor will there ever be completely automated cars or trucks, because unlike airplanes, where pilots have 8 minutes of grace before the crash to go back to manual controls, there is only a second for a car or truck driver to notice that an accident is about to occur and override the system.  The better the system is automated, the less likely the driver is to even be paying attention.  So the idea that the poor bottom 90% can order an automated electric car to their doorstep isn’t going to happen.  Nor can it happen with a driver – there is simply too little time to notice and react.

Just imagine if an automatic truck were hacked or malfunctioned, it would be like an attack missile with that much weight and momentum behind it.

Even if the Tesla semis are built in 2019, we won’t know until 2024 if charging in just half an hour, cold weather, and thousands of miles driven reduces driving range and battery life, if the battery can withstand the rough ride of roads, and be certain that lithium is still cheap and easily available.

The only thing going for the Tesla Semi is that electricity is cheap, for now.  But at some point finite natural gas will begin to decline and become very expensive, even potentially unaffordable for the bottom 90%.  As gas decline exponentially continues, all the solar and wind power in the world does no good because the electric grid requires natural gas to balance their intermittent power. There is no other kind of energy storage in sight.  Utility-scale batteries are far from commercial.  Although compressed air energy storage and pumped hydro storage dams are commercial, there are so few places to put these expensive alternatives that they can make little, if any meaningful contribution, ever.

Meanwhile, this hoopla may drive Musk’s stock up and distract from his lack of meeting the Model 3 goals, but investors have limited patience, and Musk has over $5 billion in debt to pay back.  It may be that Elon Musk is banking on government subsidies, like the $9 million State of California award to the BYD company for 27 electric trucks — $333,000 per truck (ARB 2016), and the Ports of Los Angeles and San Pedro who will subsidize a zero emission truck that can go at least 200 miles.

References

ARB. 2016. State to award $9 million for zero-emission trucks at two rail yards, one freight transfer yard in Southern California. California Air Resources Board.

Calstart. 2013. I-710 project zero-emission truck commercialization study. Calstart for Los Angeles County Metropolitan Transportation Authority. 4.7

Jenkins, A. 2017. Will anybody actually use Tesla’s electric semi truck? Fortune.

McCarthy, N. September 23, 2016. Survey: 69% Of Americans Have Less Than $1,000 In Savings. Forbes.

NRC. 2015. Overcoming barriers to deployment of plug-in electric vehicles. Washington, DC: National Academies Press.

Sripad, S.; Viswanathan, V. 2017. Performance metrics required of next-generation batteries to make a practical electric semi truck.  ACS Energy Letters 2: 1669-1673.

Vartabedian, M. 2017. Exclusive: Tesla’s long-haul electric truck aims for 200 to 300 miles on a charge. Reuters.

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AND the shale oil rout continues unabated…….

16 11 2017

Republished from SRS Rocco Report….  for those of you who don’t know it exists!

U.S. SHALE OIL PRODUCTION UPDATE: Financial Carnage Continues To Gut Industry

As the Mainstream media reports about the next phase of the glorious U.S. Shale Oil Revolution, the financial carnage continues to gut the industry deep down inside the entrails of its horizontal laterals.  The stench of fracking fluid must be driving shale oil advocates utterly insane as they are no longer able to see financial wreckage taking place in these companies quarterly reports.

This weekend, one of my readers sent me the following Bloomberg 45 minute TV special titled, The Next Shale Revolution.  If you are in need of a good laugh, I highly recommend watching part of the video.  At the beginning of the video, it starts off with President Trump stating that the U.S. has become an energy exporter for the first time ever.  Trump goes on to say, “that powered by new innovation and technology, we are now on the cusp of a new energy revolution.”  While I have to applaud Trump’s efforts for putting out some positive and reassuring news, I wonder who is providing him with terribly inaccurate energy information.

I would kindly like to remind the reader; the United States is still a NET IMPORTER of oil.  We still import nearly six million barrels of oil per day, but we export some finished products and a percentage of our shale oil production.  Thus, we still import a net of approximately three million barrels per day of oil.

A few minutes into the Bloomberg video, both Pioneer Resources Chairman, Scott Sheffield, and Continental Resources CEO, Harold Hamm, explain how advanced technology will revolutionize the shale oil industry and bring down costs.  I find that statement quite hilarious as Continental Resources and Pioneer continue to spend more money drilling for oil and gas then they make from their operations.  As I stated in a previous article, Continental Resources long-term debt ballooned from $165 million in 2007 to $6.5 billion currently.  So, how did advanced technology lower costs when Continental now has accumulated debt up to its eyeballs?

Of course… it didn’t.  Debt increased on Continental Resources balance sheet because shale oil production wasn’t profitable… even at $100 a barrel.  So, now the investor who purchased Continental bonds and debt are the Bag Holders.

Regardless, while U.S. oil production continues to increase at a moderate pace, there are some troubling signs in one of the country’s largest shale oil fields.

Shale Oil Production At the Mighty Eagle Ford Stagnates As Companies’ Financial Losses Mount

It was just a few short years ago that the energy industry was bragging about the tremendous growth of shale oil production at the mighty  Eagle Ford Region in Texas.  At the beginning of 2015, Eagle Ford oil production peaked at a record 1.7 million barrels per day (mbd).  Currently, it is nearly 500,000 barrels per day lower.  According to the EIA – U.S Energy Information Agency’s most recently released Drilling Productivity Report, oil production in the Eagle Ford is forecasted to grow by ZERO barrels in December:

The chart above suggests that the companies drilling and producing oil in the Eagle Ford spent one hell of a lot of money, just to keep production flat.  Even though the shale oil producers were able to bring on 88,000 barrels per day of new oil, the field lost 88,000 barrels per day due to legacy declines.  We need not take out a calculator to understand production growth at the Eagle Ford is a BIG PHAT ZERO.

Here are the five largest shale oil and gas producers in the Eagle Ford where:

  1. EOG Resources
  2. ConocoPhillips
  3. BHP Billiton
  4. Chesapeake Energy
  5. Marathon Oil

The company that doesn’t quite fit in the energy group above is BHP Billiton.  BHP Billiton is one of the largest base metal mining companies in the world.  Unfortunately for BHP Billiton, the company decided to get into U.S. Shale at the worst possible time.  BHP Billiton bought shale oil properties when prices were high and eventually had to liquidate when prices were low.  A Rookie mistake made by supposed professionals.  I wrote about this in my article; DOMINOES BEGIN TO FALL: BHP Chairman Says $20 Billion Shale Investment “MISTAKE.”

I decided to take a look at the current financial reports published by the five companies listed above.  The largest player in the Eagle Ford is EOG Resources.  I went to YahooFinance and created the following Cash Flow table for EOG:

In the latest quarter (Q3 2017), EOG reported $961 million in cash from operations.  However, the company spent $1,094 million on capital (CAPEX) expenditures and another $96 million in shareholder dividends.  Applying simple arithmetic, EOG spent $229 million more on CAPEX and dividends than it made from its operations.  Maybe someone can tell me how advanced technology is bringing down the cost for EOG.

The next largest player in the Eagle Ford is ConocoPhillips.  If we look at ConocoPhillips net income at its different business segments, we can see that the company isn’t making any money producing oil and gas in the lower 48 states:

While ConocoPhillips enjoyed a $103 million profit in Alaska, it suffered a $97 million loss in the lower 48 states.  Thus, the third largest oil company in the U.S. isn’t making any money producing oil and gas in the majority of the country.  According to the data, ConocoPhillips produced twice as much oil and gas in the lower 48 states then what they reported in Alaska, but the company still lost $97 million.

The third largest company producing oil in the Eagle Ford is BHP Billiton.  Instead of providing financial results, I thought this chart on BHP Billiton’s Return On Capital Employed was a better indicator of how bad their U.S. Shale assets were performing.  If we look at the right-hand side of the chart, BHP Billiton’s shale oil resources have become one hell of a drag on the company’s asset portfolio:

While BHP Billiton is enjoying a healthy positive Return On Capital Employed on most of its assets, shale oil resources are showing a negative return.  Furthermore, the company makes a note to above stating, “Detailed plans to improve, optimize or EXIT.”  I would bet my bottom Silver Dollar that their decision will end up “EXITING” the wonderful world of shale energy, with the sale of their assets for pennies on the dollar.

Moving down the list to the next shale company, we come to Chesapeake.  While Chesapeake is the country’s second-largest natural gas producer, the company has been losing money for more than a decade.  Unfortunately, the situation hasn’t improved for Chesapeake as its current financial statement reveals the company continues to burn through cash to produce its oil and gas:

Chesapeake’s net cash provided by its operating activities equaled $273 million for the first three-quarters of 2017.  However, the company spent a whopping $1,597 million on drilling and completion costs (CAPEX).  Thus, Chesapeake spent $1.3 billion more on producing its oil and natural gas Q1-Q3 2017 than it made from its operations.  Again, how is advanced technology making shale oil and gas more profitable?

If it weren’t for the asset sale of $1,193 million, Chesapeake would have needed to borrow that money to make up the difference.  Regrettably, selling assets to fortify one’s balance sheet isn’t a long-term viable business model.  There are only so many assets one can sell, and at some point, in the future, the market will realize those assets will have turned into worthless liabilities.

Okay, we finally come to the fifth largest player in the Eagle Ford…. Marathon Oil.  The situation at Marathon isn’t any better than the other companies drilling and producing oil in the Eagle Ford.  According to the companies third-quarter report, Marathon suffered a $600 million net income loss:

Again, we have another example of an energy company losing a lot of money producing shale oil and gas.  You will notice how high Marathon’s Depreciation, depletion, and amortization are in both the third-quarter and nine months ending on Sept 30th.  While some may believe this is just a tax write off for the company… it isn’t.  Due to the massive decline rate in producing shale oil and gas, PLEASE SEE the FIRST CHART ABOVE on the EAGLE FORD GROWTH OF ZERO, these companies have to write off these assets as it represents the BURNING of CASH.

For example, Marathon reported cash from operations of $1,487 million for Q3 2017.  However, it spent $1,305 million on CAPEX and $128 million on dividends for a total of $1,433 million.  Thus, Marathon actually enjoyed a small $53 million in positive free cash flow once dividends were deducted.  But, that is only part of the story.  If we go back to 2005 when the oil price as about the same as it is today, Marathon was reporting quarterly profits, not losses.

In the first quarter of 2005, Marathon earned a positive $324 million in net income.  It also reported a $258 million net income gain in 2004, even at a much lower oil price of $38 a barrel versus the $48-$50 during Q3 2017.  So, the Falling EROI – Energy Returned On Invested is killing the profitability of shale oil and gas companies today, whereas they were making profits just a decade ago.

Now, I didn’t provide any data on the other shale oil fields in the U.S., but production continues to increase in several regions, especially in the Permian.  However, one of the largest players in the Permian, Pioneer Resources, isn’t making any money either.  If we look at their financials, we can see that Pioneer continues to spend more money on CAPEX than they are receiving from cash from operations:

In all three quarters in 2017, Pioneer spent more money on capital expenditures than it made from its operating activities.  Pioneer spent $400 million more on CAPEX spending than from its operations for the first nine months of 2017 ending on Sept 30th.  So, here is just another example of a U.S. shale oil producer who partly responsible for the rising production in the Permian, but it still isn’t making any money.

Now, some investors or readers on my blog would say that the situation will get better when the oil price continues towards $60, $70 and then $80 a barrel.  Well, that would be nice, but I believe we are heading towards one hell of a market crash.  Even though some economic indicators are looking rosy, this market is being propped up by a massive amount of debt and the largest SHORT VIX trade in history.  When the markets start to go south as the massive VIX TRADE reverses… well, watch out below.

Thus, as the markets crash, the oil price will head down with it.  Unfortunately, this will be the final blow to the U.S. Shale Oil Ponzi Scheme and with it… the notion of Energy Independence forever.





Major Oil Companies Debt Explode Since The GFC

15 10 2017

WORLD’S LARGEST OIL COMPANIES: Deep Trouble As Profits Vaporize While Debts Skyrocket

The world’s largest oil companies are in serious trouble as their balance sheets deteriorate from higher costs, falling profits and skyrocketing debt.  The glory days of the highly profitable global oil companies have come to an end.  All that remains now is a mere shadow of the once mighty oil industry that will be forced to continue cannibalizing itself to produce the last bit of valuable oil.

I realize my extremely unfavorable opinion of the world’s oil industry runs counter to many mainstream energy analysts, however, their belief that business as usual, will continue for decades, is entirely unfounded.  Why?  Because, they do not understand the ramifications of the Falling EROI – Energy Returned On Invested, and its impact on the global economy.

For example, Chevron was able to make considerable profits in 1997 when the oil price was $19 a barrel.  However, the company suffered a loss in 2016 when the price was more than double at $44 last year.  And, it’s even worse than that if we compare the company’s profit to total revenues.  Chevron enjoyed a $3.2 billion net income profit on revenues of $42 billion in 1997 versus a $497 million loss on total sales of $114 billion in 2016.  Even though Chevron’s revenues nearly tripled in twenty years, its profit was decimated by the falling EROI.

Unfortunately, energy analysts, who are clueless to the amount of destruction taking place in the U.S. and global oil industry by the falling EROI, continue to mislead a public that is totally unprepared for what is coming.  To provide a more realistic view of the disintegrating energy industry, I will provide data from seven of the largest oil companies in the world.

The World’s Major Oil Companies Debt Explode Since The 2008 Financial Crisis

To save the world from falling into total collapse during the 2008 financial crisis, the Fed and Central Banks embarked on the most massive money printing scheme in history.  One side-effect of the massive money printing (and the purchasing of assets) by the central banks pushed the price of oil to a record $100+ a barrel for more than three years.  While the large oil companies reported handsome profits due to the high oil price, many of them spent a great deal of capital to produce this oil.

For instance, the seven top global oil companies that I focused on made a combined $213 billion in cash from operations in 2013. However, they also forked out $230 billion in capital expenditures.  Thus, the net free cash flow from these major oil companies was a negative $17 billion… and that doesn’t include the $44 billion they paid in dividends to their shareholders in 2013.  Even though the price of oil was $109 in 2013; these seven oil companies added $45 billion to their long-term debt:

As we can see, the total amount of long-term debt in the group (Petrobras, Shell, BP, Total, Chevron, Exxon & Statoil) increased from $227 billion in 2012 to $272 billion in 2013.  Isn’t that ironic that the debt ($45 billion) rose nearly the same amount as the group’s dividend payouts ($44 billion)?  Of course, we can’t forget about the negative $17 billion in free cash flow in 2013, but here we see evidence that the top seven global oil companies were borrowing money even in 2013, at $109 a barrel oil, to pay their dividends.

Since the 2008 global economic and financial crisis, the top seven oil companies have seen their total combined debt explode four times, from $96 billion to $379 billion currently.  You would think with these energy companies enjoying a $100+ oil price for more than three years; they would be lowering their debt, not increasing it.  Regrettably, the cost for companies to replace reserves, produce oil and share profits with shareholders was more than the $110 oil price.

There lies the rub….

One of the disadvantages of skyrocketing debt is the rising amount of interest the company has to pay to service that debt.  If we look at the chart above, Brazil’s Petrobras is the clear winner in the group by adding the most debt.  Petrobras’s debt surged from $21 billion in 2008 to $109 billion last year.  As Petrobras added debt, it also had to pay out more to service that debt.  In just eight years, the annual interest amount Petrobras paid to service its debt increased from $793 million in 2008 to $6 billion last year.  Sadly, Petrobras’s rising interest payment has caused another nasty side-effect which cut dividend payouts to its shareholders to ZERO for the past two years.

Petrobras Annual Dividend Payments:

2008 = $4.7 billion

2009 = $7.7 billion

2010 = $5.4 billion

2011 = $6.4 billion

2012 = $3.3 billion

2013 = $2.6 billion

2014 = $3.9 billion

2015 = ZERO

2016 = ZERO

You see, this is a perfect example of how the Falling EROI guts an oil company from the inside out.  The sad irony of the situation at Petrobras is this:

If you are a shareholder, you’re screwed, and if you invested funds (in company bonds, etc.) to receive a higher interest payment, you’re also screwed because you will never get back your initial investment.  So, investors are screwed either way.  This is what happens during the final stage of collapsing oil industry.

Another negative consequence of the Falling EROI on these major oil companies’ financial statements is the decline in profits as the cost to produce oil rises more than the economic price the market can afford.

Major Oil Companies’ Profits Vaporize… Even At Higher Oil Prices

To be able to understand just how bad the financial situation has become at the world’s largest oil companies, we need to go back in time and compare the industry’s profitability versus the oil price.  To find a year when the oil price was about the same as it was in 2016, we have to return to 2004, when the average oil price was $38.26 versus $43.67 last year.  Yes, the oil price was lower in 2004 than in 2016, but I can assure you, these oil companies weren’t complaining.

In 2004, the combined net income of these seven oil companies was almost $100 billion….. $99.2 billion to be exact.  Every oil company in the group made a nice profit in 2004 on a $38 oil price.  However, last year, the net profits in the group plunged to only $10.5 billion, even at a higher $43 oil price:

Even with a $5 increase in the price of oil last year compared to 2004, these oil companies combined net income profit fell nearly 90%.  How about them apples.  Of the seven companies listed in the chart above, only four made profits last year, while three lost money.  Exxon and Total enjoyed the highest profits in the group, while Petrobras and Statoil suffered the largest losses:

Again, the financial situation is in much worse shape because “net income” accounting does not factor in the companies’ capital expenditures or dividend payouts.  Regardless, the world’s top oil companies’ profitability has vaporized even at a higher oil price.

Now, another metric that provides us with more disturbing evidence of the Falling EROI in the oil industry is the collapse of  the “Return On Capital Employed.”  Basically, the Return On Capital Employed is just dividing the company’s earnings (before taxes and interest) by its total assets minus current liabilities.  In 2004, the seven companies listed above posted between 20-40% Return On Capital Employed.  However, this fell precipitously over the next decade and are now registering in the low single digits:

In 2004, we can see that BP had the lowest Return On Capital Employed of 19.68% in the group, while Statoil had the highest at 46.20%.  If we throw out the highest and lowest figures, the average for the group was 29%.  Now, compare that to the average of 2.4% for the group in 2016, and that does not including BP and Chevron’s negative returns (shown in Dark Blue & Orange).

NOTE:  I failed to include the Statoil graph line (Magenta)  when I made the chart, but I added the figures afterward.  For Statoil to experience a Return On Capital Employed decline from 46.2% in 2004 to less than 1% in 2016, suggests something is seriously wrong.

We must remember, the high Return On Capital Employed by the group in 2004, was based on a $38 price of oil, while the low single-digit returns by the oil companies in 2016 were derived from a higher price of $43.  Unfortunately, the world’s largest oil companies are no longer able to enjoy high returns on a low oil price.  This is bad news because the market can’t afford a high oil price unless the Fed and Central Banks come back in with an even larger amount of QE (Quantitative Easing) money printing.

I have one more chart that shows just how bad the Falling EROI is destroying the world’s top oil companies.  In 2004, these seven oil companies enjoyed a net Free Cash Flow minus dividends of a positive $34 billion versus a negative $39.1 billion in 2016:

Let me explain these figures.  So, after these oil companies paid their capital expenditures and dividends to shareholders, they had a net $34 billion left over.  However, last year these companies were in the HOLE for $39.1 billion after paying capital expenditures and dividends.  Thus, many of them had to borrow money just to pay dividends.

To understand how big of a change has taken place at the oil companies since 2004, here are the figures below:

Top 7 Major Oil Companies Free Cash Flow Figures

2004 Cash From Operations = …………$139.6 billion

2004 Capital Expenditures = ……………..$67.7 billion

2004 Free Cash Flow = ………………………$71.9 billion

2004 Shareholder Dividends = …………..$37.9 billion

2004 Free Cash Flow – Dividends = $34 billion

2016 Cash From Operations = ……………..$118.5 billion

2016 Capital Expenditures = ………………..$117.5 billion

2016 Free Cash Flow = …………………………..$1.0 billion

2016 Shareholder Dividends = ……………….$40.1 billion

2016 Free Cash Flow – Dividends = -$39.1 billion

Here we can see that the top seven global oil companies made more in cash from operations in 2004 ($139.6 billion) compared to 2016 ($118.5 billion).   That extra $21 billion in operating cash in 2004 versus 2016 was realized even at a lower oil price.  However, what has really hurt the group’s Free Cash Flow, is the much higher capital expenditures of $117.5 billion in 2016 compared to the $67.7 billion in 2004.  You will notice that the net combined dividends didn’t increase that much in the two periods… only by $3 billion.

So, the lower cash from operations and the higher capital expenditures have taken a BIG HIT on the balance sheets of these oil companies.  This is precisely why the long-term debt is skyrocketing, especially over the past three years as the oil price fell below $100 in 2014.  To continue making their shareholders happy, many of these companies are borrowing money to pay dividends.  Unfortunately, going further into debt to pay shareholders is not a prudent long-term business model.

The world’s major oil companies will continue to struggle with the oil price in the $50 range.  While some analysts forecast that higher oil prices are on the horizon, I disagree.  Yes, it’s true that oil prices may spike higher for a while, but the trend will be lower as the U.S. and global economies start to contract.  As oil prices fall to the $40 and below, oil companies will begin to cut capital expenditures even further.  Thus, the cycle of lower prices and the continued gutting of the global oil industry will move into high gear.

There is one option that might provide these oil companies with a buffer… and that is massive Fed and Central Bank money printing resulting in severe inflation and possibly hyperinflation.  But, that won’t be a long-term solution, instead just another lousy band-aid in a series of band-aids that have only postponed the inevitable.

The coming bankruptcy of the once mighty global oil industry will be the death-knell of the world economy.  Without oil, the global economy grinds to a halt.  Of course, this will not occur overnight.  It will take time.  However, the evidence shows that a considerable wound has already taken place in an industry that has provided the world with much-needed oil for more than a century.

Lastly, without trying to be a broken record, the peak and decline of global oil production will destroy the value of most STOCKS, BONDS and REAL ESTATE.  If you have placed most of your bests in one of these assets, you have my sympathies.

IMPORTANT UPDATE: TO MY FOLLOWERS:

I want to thank the new and existing supporters of the SRSrocco Report site.  In just the past week, I have received 11 new Patrons and several new members on the SRSrocco Report site.  Your support allows me to continue posting articles for the entire public.  I have noticed over the past few years, more analysts have decided to put their articles and content behind a subscriber paywall.  Unfortunately, that shuts off the information to many followers who do not have the funds to support that paid content.

I believe the economic and financial situation in the U.S. and world will continue to deteriorate over the next two years and will only get increasing worse going forward.  Those who understand the root cause of it all, ENERGY, will be better prepared or less shocked (or both) when the collapse picks up speed.

I want to thank everyone who participates in the comment section of the site… even those I disagree with… LOL.  We like to keep the debate open for everyone.  So, if you have been a follower of the SRSroccoReport site for a while, but haven’t participated in the comment section, please let us know what you are thinking.

HOW TO SUPPORT THE SRSROCCO REPORT SITE:

My goal is to reach 500 PATRON SUPPORTERS.  Currently, the SRSrocco Report has 138 Patrons now!   Thank you very much for those who became new members and new Patrons of the SRSrocco Report site.

So please consider supporting my work on Patron by clicking the image below:





From oilslick to tyranny

10 10 2017

A prosperous society is an orderly society.

Just found this……  says it all really.  I expect that one day Australia will also be ‘disunited’, I can see how easily Tasmania would cease to trade with the rest of Australia for starters…. republished from ExtraNewsfeed.

People with full bellies, stable homes and secure employment do not allow themselves to be involved in civil disorder. Unfortunately we are living on borrowed money in a bankrupt society. When our debts catch up with us, society will collapse, violent disorder will ensue and martial law will be inevitable. Pre-oil, despotic rule was the norm and democracies did not exist; we are going to return to that era.

The hallmark of the tyrant is already being stamped on the nation for anyone willing to recognise it. Suppression of truth is already in hand, information on climate change has been removed from government websites. It is the preparation for your future governance. No names are given here, because no-one will recognise the opportunist until he makes his grab for ultimate power. It will not be who you expect it to be.

forget Wall St., this is what world bankruptcy looks like:

Oil is our prime source of energy, ‘alternatives’ cannot power our industrial infrastructure.

Any business that continually burns through its assets at ten times the rate of replacement can be said to be bankrupt; that describes the global economy. Fossil fuels are the only asset we have, because everything else is a derivative of coal oil and gas inputs. Without heat, nothing can be manufactured. We elect politicians to lie on our behalf, because we want to be told that our resources and growth are infinite. In return for our votes, they are happy to do this. Everyone is complicit in the grand deceit, to accept the truth would destroy the existence of all of us.

So to perpetuate that lie there is a collective insistence that the global economy must continue to function to a very simple (but ultimately nonsensical) formula:

the more fuel we burn, the greater our gross domestic product. The faster we burn it, the higher our percentage growth.

Our machines and the (finite) fuels that move them now form the sinews that hold all nations together. They feed us, provide heat, light and transport, and with equal importance, stabilise international democracies and political systems.

No matter how complex or mundane your current job, whether garbage collector or brain surgeon, someone, somewhere is producing sufficient surplus energy to support it.

Prosperity is not an infinite right

Collective prosperity at the global level depends on cheap surplus fossil fuel energy. For 2 centuries we have been able to use those fossil fuels as collateral for future debt, to build ever bigger machines to extract elemental resources from the earth. This has been our great burning, because extracted materials of themselves are of no use to us unless we use heat to process them into desirable commodities.

That excess heat is altering our climate beyond human tolerance.

But heat provides our industrial growth economy: fuels must be consumed to sustain it and provide continued employment to make things that are ultimately thrown away in order to consume more to enable our debts to be continually carried forward. Our system of rolling debt depends on increasing energy input ad infinitum. So the one who asserts that climate change is a hoax gets voted into office, granting permission to burn our planet forever.

Without economic stability, democracy cannot survive.

Fuel resources have been a once-only gift of nature, and there are no viable substitutes. When they are no longer freely available, the effects will be catastrophic and force the events outlined here because the availability of surplus energy directly underpins our economic system. Without surplus energy you cannot have a modern democratic society. Be under no illusions, on current trends the events outlined here are certain. Only timing is in question by a few years either way.

Our global bank balance in oil has been falling for 70 years.

We are living on legacy oil. Oilwells cannot be refilled by votes, prayers or money.

We have created an industrial economy that is entirely predicated on a single factor: converting explosive force into rotary motion. Those six words separate us from the economics of the horsedrawn cart, windmill and sailing ship. They also separate us from the disease and deprivation that was the lot of our forebears only a century or two ago. Only fossil fuels can supply that explosive force at the rate we need.

The global industrial economy is now an interlocked progressive whole. It will not allow isolationism to function, neither will it allow a return to a previous era and downsized economic environment. We demand more, you have heard the aspiring tyrant’s words that promise more.

Political promises evaporate when there is insufficient energy to support them.

The notion of “Saudi America” is reassuring, but the facts are not.

Despite the rhetoric and posturing, reality cannot be ignored: the USA produces around 9 Million barrels of oil a day, but uses 0ver 19MBd. (2016). This imbalance is not going to change, despite collective belief to the contrary.

Price fluctuations and the ebb and flow of gluts should be ignored. If the cost of oil rises to a level that sustains the producers, users can’t afford to buy it; if it falls, oil producers can’t afford to extract it. This is the economic vice that is inexorably crushing the global industrial system as oil supplies decline.

Real wages fall in lockstep with oil depletion.

As surplus energy falls away, so does real income. We have substituted debt for income and allowed that debt to grow to mask the reality of our situation. We are stealing from our own future and from generations unborn to stay solvent. It might be called intergenerational larceny. When our great grandchildren arrive they will find nothing left for them to burn.

We are already in the phase of expending too much energy to get energy, which is why real income has been static for 30 years. We live in an energy economy, not a money economy. Wages are paid from energy surpluses, not printing presses, and that surplus has been gradually reducing.

The mirage of infinity.

The killer factor is Energy Return on Energy Invested, EROEI. Over the last 150 years civilisation has been built based on coal that returned an EROEI of 50:1, and oil that returned 100:1. Those ratios of return provided the cheap surplus energy that created our industrial infrastructure, and led to the expectation of infinite affluence.

We cannot maintain our current lifestyle using expensive fuels which give a return ratio of only 20:1 (and falling), which is what the best oilwells deliver.

Around 14:1 our society might hold together in a rudimentary sense if consumption could be balanced at that level, but 80 million new people arrive on the planet each year. They demand to be housed clothed and fed, spreading available resources even thinner. The mothers of the next 2 billion people are alive now. They will reproduce as a matter of personal survival, taking global population beyond 9 billion by mid century, guaranteeing our fall off the ‘energy cliff’.

The Energy Cliff:

There are numerous interpretations of the ‘energy cliff’, offering different return ratios that will supposedly allow our industrial society to function. 14:1, 12:1 even 8:1. The exact figure is irrelevant, right now we are entering the ‘elbow curve’ of the cliff, pinning our energy hopes on PV, wind, nuclear and tarsands; the ultimate downturn is inescapable. Wind and solar farms cannot supply sufficient concentrated energy to replace oil.

oil-gas-war-graffitiWe are 7.5 billion people on a planet that, pre-oil, supported between 1 and 2 billion. By any reckoning, 5 billion people do not have a future, let alone 2 billion more due over the next 30 years.

We must burn fuel to maintain what we have, but the act of burning destroys what we have. This is contrary to human instinct, so the only recourse will be armed conflict to take what others have. All wars are about survival and acquisition of resources. Conflict will drain what little energy we have left and finally exhaust any survivors.

When we reach the point of having only shale or tar sand oil or wind turbines returning 5:1, there will not be enough surplus energy in our industrial systems to provide the economic momentum we need, and maintain the necessary machinery to power the system.

When our wheels stop turning, we stop eating. Our situation is as brutally simple as that. Electric vehicles cannot function outside a hydrocarbon based infrastructure, and no transportation can exist beyond the extent of its purpose. A collapsed economy removes any such purpose. Battery power will not deliver fresh water and remove your wastes, and there isn’t going to be a bucolic utopia where we all become rural gardeners. We don’t know how, there isn’t enough room and probably not enough time. Hungry people will not allow a second harvest.

But the demand for answers will persist, a search for those responsible for our misfortunes, and insistence that our lives are restored to the ‘normality’ of previous times. Already the finger pointing rhetoric of the despot is being cheered on a wave of ignorance and bigotry: lock up opponents and dissenters, suppress the media, remove the unwanted, ignore the laws.

When that (and more) is done, all will be well. They are words from recent history, overlaid on our own time. We thought fascism was impossible in civilised nations; as long as prosperity held for all, that was true. As prosperity fails, it is stirring again, with an appetite easily fed but never sated.

Secession

As energy supplies deplete, the industrial economy will enter its terminal phase, still under collective denial. But no nation can hold together without the fuel sources that created it. Secession will become inevitable, into five, six, seven or more regions in the USA, along racial, religious, political and geographic lines. The faultlines are already there, with no energy base there will be nothing to stop ultimate breakup. Other conglomerations of states and provinces will also disintegrate. The EU, Russia, China, Africa will react and deny, but the end result will be the same: Energy depletion = social collapse.

As civil unrest takes hold, governments will act in the only way they know how: violent suppression to restore order. This will mean military intervention and imposition of martial law as civil breakdown becomes widespread.

At that point your elected leader will assume the role of dictator and suspend the constitution. Once established, godly certainties among those around him will cloak this in righteousness and subvert it into a theocracy of the worst kind. That will make it easier to identify the heathen and justify any form of retribution. It will be fascism cloaked in holy orders. It will not be the first time: Hitler’s army had “Gott Mitt Uns” stamped on their belt buckles.

Those who support him will become part of the new order. Those who do not will be dismissed from office, either voluntarily or by force. Police and military will fall in behind whoever pays their wages, and enforce the new regime. Totalitarian states have shown that there is never a shortage of willing hands to perform unpleasant tasks. They are always ready and waiting to be recruited.

The inevitability of regional secession will inflame regional differences, and spark civil war(s). It will be the time of petty states and tyrannies, each regime desperate to resist the decline into a different lifestyle, certain that the mess can be ‘fixed’, and only ‘they’ can fix it by enforcement of ideology. Yet without the power of fossil fuels there will be an inexorable regression to the brutalities of medievalism, with power resting only in the command of muscle.

Eventually they will be forced to accept each other’s existence, for no better reason than there will be insufficient means to do anything about it.

Welcome to the (dis) United States of America.

So what of the years to come? The dictator’s power will grow for a time, and make life unpleasant for millions, but ultimately his Reich will extend only to the door of his bunker. No doubt he will remain in his seat of imagined power for as long as possible, issuing incoherent commands that cannot be fulfilled because there will be insufficient energy to do so, just as his predecessor discovered 75 years ago.

You can follow me on twitter

or my book “The End of More” https://www.amazon.co.uk/dp/B00D0ADPFY

might give a clearer insight into how we got into the mess in the first place.





YOU HAVE BEEN WARNED: The Situation In The Markets Is Much Worse Than You Realize

11 09 2017

Reblogged from the SRS website……. between this item and Raul’s which I posted yesterday, I’d say the US economy has to hit the wall very soon now. Hang onto your seats folks….

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It’s about time that I share with you all a little secret.  The situation in the markets is much worse than you realize.  While that may sound like someone who has been crying “wolf” for the past several years, in all honesty, the public has no idea just how dire our present situation has become.

The amount of debt, leverage, deceit, corruption, and fraud in the economic markets, financial system, and in the energy industry are off the charts.  Unfortunately, the present condition is even much worse when we consider “INSIDER INFORMATION.”

What do I mean by insider information… I will explain that in a minute.  However, I receive a lot of comments on my site and emails stating that the U.S. Dollar is A-okay and our domestic oil industry will continue pumping out cheap oil for quite some time.  They say… “No need to worry.  Business, as usual, will continue for the next 2-3 decades.”

I really wish that were true.  Believe me, when I say this, I am not rooting for a collapse or breakdown of our economic and financial markets.  However, the information, data, and facts that I have come across suggest that the U.S. and global economy will hit a brick wall within the next few years.

How I Acquire My Information, Data & Facts

To put out the original information in my articles and reports, I spend a great deal of time researching the internet on official websites, alternative media outlets, and various blogs.  Some of the blogs that I read, I find more interesting information in the comment section than in the article.  For example, the Peakoilbarrel.com site is visited by a lot of engineers and geologists in the oil and gas industry.  Their comments provide important “on-hands insight” in the energy sector not found on the Mainstream Media.

I also have a lot of contacts in the various industries that either forward information via email or share during phone conversations.  Some of the information that I receive from these contacts, I include in my articles and reports.  However, there is a good bit of information that I can’t share, because it was done with the understanding that I would not reveal the source or intelligence.

Of course, some readers may find that a bit cryptic, but it’s the truth.  Individuals have contacted me from all over the world and in different levels of industry and business.  Some people are the working staff who understand th reality taking place in the plant or field, while others are higher ranking officers.  Even though I have been receiving this sort of contact for the past 4-5 years, the number has increased significantly over the past year and a half.

That being said, these individuals contacted me after coming across my site because they wanted to share valuable information and their insight of what was going on in their respective industries.  The common theme from most of these contacts was…. GOSH STEVE, IT’S MUCH WORSE THAN YOU REALIZE.  Yes, that is what I heard over and over again.

If my readers and followers believe I am overly pessimistic or cynical, your hair will stand up on your neck if you knew just how bad the situation was BEHIND THE SCENES.

Unfortunately, we in the Alternative Media have been lobotomized to a certain degree due to the constant propaganda from the Mainstream Media and market intervention by the Fed and Central Banks.  A perfect example of the massive market rigging is found in Zerohedge’s recent article;Central Banks Have Purchased $2 Trillion In Assets In 2017 :

….. so far in 2017 there has been $1.96 trillion of central bank purchases of financial assets in 2017 alone, as central bank balance sheets have grown by $11.26 trillion since Lehman to $15.6 trillion.

What is interesting about the nearly $2 trillion in Central Bank purchases so far in 2017, is that the average for each year was only $1.5 trillion.  We can plainly see that the Central Banks had to ramp up asset purchases as the Ponzi Scheme seems to be getting out of hand.

So, how bad is the current economic and financial situation in the world today?  If we take a look at the chart in the next section, it may give you a clue.

THE DEATH OF BEAR STEARNS: A Warning For Things To Come

It seems like a lot of people already forgot about the gut-wrenching 2008-2009 economic and financial crash.  During the U.S. Banking collapse, two of the country’s largest investment banks, Lehman Brothers, and Bear Stearns went belly up.  Lehman Brothers was founded in 1850 and Bear Stearns in 1923.  In just one year, both of those top Wall Street Investment Banks ceased to exist.

Now, during the 2001-2007 U.S. housing boom heyday, it seemed like virtually no one had a clue just how rotten a company Bear Stearns had become.  Looking at the chart below, we can see the incredible RISE & FALL of Bear Stearns:

As Bear Stearns added more and more crappy MBS – Mortgage Backed Securities to its portfolio, the company share price rose towards the heavens.  At the beginning of 2007 and the peak of the U.S. housing boom, Bear Stearns stock price hit a record $171.  Unfortunately, at some point, all highly leveraged garbage assets or Ponzi Schemes come to an end.  While the PARTY LIFE at Bear Stearns lasted for quite a while, DEATH came suddenly.

In just a little more than a year, Bear Stearns stock fell to a mere $2… a staggering 98% decline.  Of course, the financial networks and analysts were providing guidance and forecasts that Bear Stearns was a fine and healthy company.  For example, when Bear was dealing with some negative issues in March 2008,  CBNC’s Mad Money, Jim Cramer made the following statement in response to a caller on his show (Source):

Tuesday, March 11, 2008, On Mad Money

Dear Jim: “Should I be worried about Bear Stearns in terms of liquidity and get my money out of there?” – Peter

Jim Cramer: “No! No! No! Bear Stearns is fine. Do not take your money out. Bear sterns is not in trouble. If anything, they’re more likely to be taken over. Don’t move your money from Bear. That’s just being silly. Don’t be silly.”

Thanks to Jim, many investors took his advice.  So, what happened to Bear Stearns after Jim Cramer gave the company a clean bill of health?

On Tuesday, March 11, the price of Bear Stearns was trading at $60, but five days later it was down 85%.  The source (linked above) where I found the quote in which Jim Cramer provided his financial advice, said that there was a chance Jim was replying to the person in regards to the money he had deposited in the bank and not as an investment.  However, Jim was not clear in stating whether he was talking about bank deposits or the company health and stock price.

Regardless, Bear Stearns stock price was worth ZERO many years before it collapsed in 2008.  If financial analysts had seriously looked into the fundamentals in the Mortgage Backed Security market and the bank’s financial balance sheet several years before 2008, they would have realized Bear Stearns was rotten to the core.  But, this is the way of Wall Street and Central Banks.  Everything is fine, until the day it isn’t.

And that day is close at hand.

THE RECORD LOW VOLATILITY INDEX:  Signals Big Market Trouble Ahead

Even though I have presented a few charts on the VIX – Volatility Index in past articles, I thought this one would provide a better picture of the coming disaster in the U.S. stock markets:

The VIX – Volatility Index (RED) is shown to be at its lowest level ever when compared to the S&P 500 Index (GREY) which is at its all-time high.  If we take a look at the VIX Index in 2007, it fell to another extreme low right at the same time Bear Stearns stock price reached a new record high of $171.  Isn’t that a neat coincidence?

As a reminder, the VIX Index measures the amount of fear in the markets.  When the VIX Index is at a low, the market believes everything is A-OKAY.  However, when the VIX surges higher, then it means that fear and panic have over-taken investment sentiment, as blood runs in the streets.

As the Fed and Central Banks continue playing the game of Monopoly with Trillions of Dollars of money printing and asset purchases, the party won’t last for long as DEATH comes to all highly leveraged garbage assets and Ponzi Schemes.

To get an idea just how much worse the situation has become than we realize, let’s take a look at the energy fundamental that is gutting everything in its path.

WHY THE BIG MARKET COLLAPSE IS COMING:  It’s The Energy, Stupid

Even though I belong to the Alternative Media Community, I am amazed at the lack of understanding by most of the precious metals analysts when it comes to energy.  While I respect what many of these gold and silver analysts have to say, they exclude the most important factor in their forecasts.  This critical factor is the Falling EROI – Energy Returned On Investment.

As I mentioned earlier in the article, I speak to many people on the phone from various industries.  Yesterday, I was fortunate enough to chat with Bedford Hill of the Hill’s Group for over 90 minutes.  What an interesting conversation.  Ole Bedford knows we are toast.  Unfortunately, only 0.01% of the population may understand the details of the Hill’s Group work.

Here is an explanation of the Hill’s Group:

The Hill’s Group is an association of consulting engineers and professional project managers. Our goal is to support our clients by providing them with the most relevant, and up to-date skill sets needed to manage their organizations. Depletion: A determination for the world’s petroleum reserve provides organizational long range planners, and policy makers with the essential information they will need in today’s rapidly changing environment.

I asked Bedford if he agreed with me that the hyperinflationary collapse of Venezuela was due to the falling oil price rather than its corrupt Communist Government.  He concurred.  Bedford stated that the total BTU energy cost to extract Venezuela’s heavy oil was higher than the BTU’s the market could afford.  Bedford went on to say that when the oil price was at $80, Venezuela could still make enough profit to continue running its inefficient, corrupt government.  However, now that the price of oil is trading below $50, it’s gutting the entire Venezuelan economy.

During our phone call, Bedford discussed his ETP Oil model, shown in his chart below.  If there is one chart that totally screws up the typical Austrian School of Economics student or follower, it’s this baby:

Bedford along with a group of engineers spent thousands and thousands of hours inputting the data that produced the “ETP Cost Curve” (BLACK LINE).  The ETP Cost Curve is the average cost to produce oil by the industry.  The RED dots represent the actual average annual West Texas Oil price.  As you can see, the oil price corresponded with the ETP Cost Curve.  This correlation suggests that the market price of oil is determined by its cost of production, rather than supply and demand market forces.

The ETP Cost Curve goes up until it reached an inflection point in 2012… then IT PEAKED.  The black line coming down on the right-hand side of the chart represents “Maximum Consumer Price.”  This line is the maximum price that the end consumer can afford.  Again, it has nothing to do with supply and demand rather, it has everything to do with the cost of production and the remaining net energy in the barrel of oil.

I decided to add the RED dots for years 2014-2016.  These additional annual oil price figures remain in or near the Maximum Consumer Price line.  According to Bedford, the oil price will continue lower by 2020.  However, the actual annual oil price in 2015 and 2016 was much lower than estimated figures Bedford, and his group had calculated.  Thus, we could see some volatility in the price over the next few years.

Regardless, the oil price trend will be lower.  And as the oil price continues to fall, it will gut the U.S. and global oil industry.  There is nothing the Fed and Central Banks can do to stop it.  Yes, it’s true that the U.S. government could step in and bail out the U.S. shale oil industry, but this would not be a long-term solution.

Why?  Let me explain with the following chart:

I have published this graph at least five times in my articles, but it is essential to understand.  This chart represents the amount of below investment grade debt due by the U.S. energy industry each year.  Not only does this debt rise to $200 billion by 2020, but it also represents that the quality of oil produced by the mighty U.S. shale oil industry WAS UNECONOMICAL even at $100 a barrel.

Furthermore, this massive amount of debt came from the stored economic energy via the various investors who provided the U.S. shale energy industry with the funds to continue producing oil at a loss.   We must remember, INVESTMENT is stored economic energy.  Thus, pension plans, mutual funds, insurance funds, etc., had taken investments gained over the years and gave it to the lousy U.S. shale oil industry for a short-term high yield.

Okay, this is very important to understand.  Don’t look at those bars in the chart above as money or debt, rather look at them as energy.  If you can do that, you will understand the terrible predicament we are facing.  Years ago, these large investors saved up capital that came from burning energy.  They took this stored economic energy (capital) and gave it to the U.S. shale oil industry.  Without that capital, the U.S. shale oil industry would have gone belly up years ago.

So, what does that mean?  It means… IT TOOK MORE ENERGY TO PRODUCE THE SHALE OIL than was DELIVERED TO THE MARKET.  Regrettably, the overwhelming majority of shale oil debt will never be repaid.  As the oil price continues to head lower, the supposed shale oil break-even price will be crushed.  Without profits, debts pile up even higher.

Do you all see what is going on here?  And let me say this.  What I have explained in this article, DOES NOT INCLUDE INSIDER INFORMATION, which suggests “The situation is even much worse than you realize… LOL.”

For all my followers who believe business, as usual, will continue for another 2-3 decades, YOU HAVE BEEN WARNED.  The energy situation is in far worse shape than you can imagine.





Transportation: How long can we adapt before we fall off the Net Energy Cliff?

24 08 2017

This is an older post (2014) from Alice Friedemann’s blog, which somehow flew under the radar……. There is one bullet point in this that stunned me:

  1. America is likely to be outbid by China, India, etc., for oil exports.  At China’s current growth rate, China alone would consume ALL exported oil by 2020.

IF you have been following this humble blog long enough, you might know that I’ve been ‘forecasting’ that Australia will be totally out of oil by around 2020, and will therefore need to import 100% of our liquid fuel needs…….  what happens then?

When I asked Alice for more details, she replied “I suspect when I wrote this it was common knowledge, they’re rising empires as other nation fade. But now with China’s housing and other bubbles, and the corruption in both China and India, and ecological destruction, it’s probably not true now. I’ve met Australians who fear a China invasion someday but don’t know how realistic that is.”

Furthermore, as China’s spectacular growth rates have somewhat shrunk, we may get a few more years relief…. but how long will it last? Here’s Alice’s post, very interesting as usual….

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alice_friedemannThe problem we face is a liquid fuel crisis.  Absolutely essential vehicles, such as agricultural tractors and combines, railroads, and trucks run on diesel fuel, ships on bunker fuel.  They can never be battery or fuel-cell operated or electrified, nor do we have the decades it would take to build a new fleet even if there were a solution.

In 2011, the United States burned 29021 trillion BTU’s of mainly petroleum for transportation to move 13 billion tons of freight, worth $11.8 trillion, for 3.5 trillion ton-miles:

  • Trucks: 69%  1.4 trillion miles  9.0 billion tons
  • Trains: 15%   1.3 trillion miles  1.9 billion tons
  • Ships:   3%

Non-essential Transportation Fuel can be given to Trucks & Trains (see Table 1 below)

1) Cars (28%) and light trucks (26%) use 55% of transportation fuel.  All of that 55% could be shifted to essential vehicles.  Implication: That would force anyone who wasn’t 100% self-sufficient to move to a town or city because country gas stations will be closed (though rural freeway stations would remain open for essential long-distance trucks).  Also, petroleum will mainly be refined into diesel (this is already happening actually), which gasoline cars can’t burn.

2) Let’s give most of this fuel to essential vehicles: 7% air travel, 1% recreational water boats, 3% Construction and Mining, 1% recreational vehicles (snowmobiles, etc).  That’s another 11% shifted to essential vehicles (leaving 1% for the above, mainly to maintain and fix infrastructure).

3) Essential vehicles: 20% Medium (class 3-6) and Heavy trucks (class 7-8), 4% ships, 2% rail freight, 3% pipelines, 2% agricultural.  A lot of this freight isn’t essential, so about half of this, 15%, can be saved by not shipping non-essential cargo and shipping essential goods shorter distances.

Essential transportation has been given 81% of diesel from other non-essential sources (55% + 11% + 15%).

Meanwhile, production of oil will be dropping off rapidly, because:

  1. Global peak oil production was reached in 2005
  2. Oil producing countries will export less because they’re using more oil themselves (ELM model)
  3. America is likely to be outbid by China, India, etc., for oil exports.  At China’s current growth rate, China alone would consume ALL exported oil by 2020.
  4. The net energy cliff and the decline in the RATE of what we can get out of the ground now that petroleum is gunky and in remote places.
  5. The financial system can interfere with oil production —  when credit dries up after the next financial crash, the money to drill won’t be available.

Optimistic scenario: 20 years before we hit the wall 

The likely decline rate is expected to accelerate. We’ve been on a plateau since 2005, but once production heads downhill, here’s a guess at what the decline rate might be per year: 4%, 5%, 6%, 7%, 8%, 9%, and 10% from then on.

But not to worry, we’ve got some wiggle room. Remember, of the grand total of 29021 trillion BTU’s of petroleum burned in America (Table 1 below), 81% was reassigned from non-essential vehicles and cargo to essential agriculture, railroads, trucks, industrial infrastructure equipment, and miscellaneous important vehicles (ambulances, police cars, military, etc).

The other 19% — 5,541 trillion BTU — is the rock-bottom amount we need to  keep society going.

With a 4/5/6/7/8/9/10/10 /10/….. decline rate scenario, we’ll dip below the essential transportation fuel needed 16 years from now.

Of course, we can import/export less cargo, grow food locally, stop immigration, encourage 1-child families, ship goods shorter distances, and many other oil-reducing strategies as well.  This is when techno-optimists have a chance to shine, and Postcarbon, Bay Localize, Transition Towns, and many other groups help governments and communities adapt.  If all goes well, panic is avoided, and diesel fuel can be stretched out even further, that could delay collapse another 4 years.

Pessimistic scenario: 1-12 years before we hit the wall

What if states that produce energy and/or have refineries stop sharing diesel and gasoline with other states at some point? In that case, Alaska, California, Texas, Louisiana, etc., might last longer than 20 years and other states would hit the wall sooner.

Also, there are many black swans.  Here’s some wild guesses about how soon collapse might come if one of them strikes:

1 year if there’s a small nuclear war, China or some other nation takes down America’s electric grid(s) in a cyberwar, or a world war erupts.

2-5 years if there’s a major disaster, because that will probably bring down the financial system and also drive up prices of oil, natural gas, electricity, wood, cement, steel, and other resources needed to recover with.

3-8 years if the financial system collapses and several other events are triggered, such as social chaos, no credit left for new oil wells to be drilled, and other knock-on effects.

5 years if nations go back to negotiating deals between producing and non-producing nations and bypass the international oil market. That could suddenly cut off America’s oil imports. We’re already seeing this with the historic deal Russia and China just cut for natural gas. China, India, and other countries can afford to pay more than the United States for oil. Other nations are far closer to Russia and OPEC nations, where 83% of world reserves lie.

8-10 years if America decides to go back to the Middle east to keep other nations from getting the 2/3 of oil reserves there. Our military can’t fight without oil, so that means a lot less for everyone else

Okay. I’m going to stop guessing.  I have no idea how much sooner collapse would occur given various events, or what the actual decline rates will be.  But here are a few more black swans to think about:

  • Oil shocks make investors “Peak Oil Aware” and world-wide stock markets crash
  • Decline rates even higher than posited above due to a combination of the Export Land Model and middle eastern countries having lied about how much oil reserves they had.
  • Oil choke-points are blocked by terrorists or nearby nations
  • War breaks out in the Middle East
  • Peak coal, peak natural gas, peak uranium, peak sand, peak water, peak topsoil, peak phosphorous, etc
  • Electric grid outages increasingly common
  • Our infrastructure is falling apart, many bridges are beyond their life-span or dangerously in need of repair, ports, energy pipelines, water treatment, sewage treatment, and other essential infrastructure has a life-span less than 50 years. The steel is rusting and the concrete is falling apart.

So, what do you think?





More Peak Oil bad news…..

15 06 2017

There have been no end of new articles on the demise of the oil industry lately. I’ve been so busy building that it’s only now I can catch up with some blogging, so here’s your lot for the time being.

From the srsroccoreport.com website comes this unbelievable analysis…:

While the Mainstream media continues to put out hype that technology will bring on abundant energy supplies for the foreseeable future, the global oil and gas industry is actually cannibalizing itself just to stay alive.   Increased finance costs, falling capital expenditures and the downgrade of oil reserves are the factors, like flesh-eating bacteria, that are decimating the once great oil and gas industry.

This is all due to the falling EROI – Energy Returned On Investment in oil and gas industry.  Unfortunately, most of the public and energy analysts still don’t understand how the Falling EROI is gutting the entire system.  They don’t see it because the world has become so complex, they are unable to connect-the-dots.  However, if we look past all the over-specialized data and analysis, we can see how bad things are getting in the global oil and gas industry.

Let me start by republishing this chart from my article, Future World Economic Growth In Big Trouble As Oil Discoveries Fall To Historic Lows:

The global oil industry only found 2.4 billion barrels of conventional oil in 2016, less than 10% of what it consumed (25.1 billion barrels).  Conventional oil is the highly profitable, high EROI oil that should not be confused with low quality “unconventional” oil sources such as OIL SANDS or SHALE OIL.  There is a good reason why we have just recently tapped in to oil sands and shale oil…. it wasn’t profitable for the past 100 years to extract it.  Basically, it’s all we have left…. the bottom of the barrel, so to speak.

Now, to put the above chart into perspective, here are the annual global conventional oil discoveries since 1947:

You will notice the amount of new oil discoveries (2.4 billion barrels) for 2016 is just a mere smudge when we compare it to the precious years.  Furthermore, the world has been consuming about an average of 70 million barrels per day of conventional oil production since 2000 (the total liquid production is higher, but includes oil sands, deep water, shale oil, natural gas liquids, biofuels and etc).  Conventional oil production has averaged about 25 billion barrels per year.

As we can see in the chart above… we haven’t been replacing what we have been consuming for quite a long time.  Except for the large orange bar in 2000 of approximately 35 billion barrels, all the years after were lower than 25 billion barrels.  Thus, the global oil industry has been surviving on its past discoveries.

That being said, if we include ALL liquid oil reserves, the situation is even more alarming.

Global Oil Liquid Reserves Fall In 2015 & 2016

According to the newest data put out by the U.S. EIA, Energy Information Agency, total global oil liquid reserves fell for the past two years.  The majority of negative oil reserve revisions came from the Canadian oil sands sector:

Of the 68 public traded energy companies used in this graph, total liquid oil reserves fell from 116 billion barrels in 2014 to 100 billion barrels in 2016.  That’s a 14% decline in liquid oil reserves in just two years.  So, not only are conventional oil discoveries falling the lowest since 1947, companies are now forced to downgrade their total liquid oil reserves due to lower oil prices.

This can be seen more clearly in the EIA chart below:

The “net proved reserves change” is shown as the black line in the chart.  It takes the difference between the additions-revisions, (BLUE) and the production (BROWN).  These 68 public companies have been producing between 8-9 billion barrels of oil per year.

Because of the downward revisions in 2015 and 2016, net oil reserves have fallen approximately 16 billion barrels, or nearly two years worth of these 68 companies total liquid oil production.  If these oil companies don’t suffer anymore reserve downgrades, they have approximately 12 years worth of oil reserves remaining.

But… what happens if the oil price continues to decline as the global economy starts to really contract from the massive amount of debt over-hanging the system?  Thus, the oil industry could likely cut more reserves, which means… the 12 years worth of reserves will fall below 10, or even lower.  My intuition tells me that global liquid oil reserves will fall even lower due to the next two charts in the following section.

The Coming Energy Debt Wall & Surging Finance Cost In The Energy Industry

Over the next several years, the amount of debt that comes due in the U.S. oil industry literally skyrockets higher.  In my article, THE GREAT U.S. ENERGY DEBT WALL: It’s Going To Get Very Ugly…., I posted the following chart:

The amount of debt (as outstanding bonds) that comes due in the U.S. energy industry jumps from $27 billion in 2016 to $110 billion in 2018.  Furthermore, this continues higher to $260 billion in 2022.  The reason the amount of debt has increased so much in the U.S. oil and gas industry is due to the HIGH COST of producing Shale oil and gas.  While many companies are bragging that they can produce oil in the new Permian Region for $30-$40 a barrel, they forget to include the massive amount of debt they now have on their balance sheets.

This is quite hilarious because a lot of this debt was added when the price of oil was over $100 from 2011 to mid 2014.  So, these companies actually believe they can be sustainable at $30 or $40 a barrel?  This is pure nonsense.  Again… most energy analysts are just looking at how a company could producing a barrel of oil that year, without regard of all other external costs and debts.

Moreover, to give the ILLUSION that shale oil and gas production is a commercially viable enterprise, these energy companies have to pay its bond (debt) holders dearly.  How much?  I will show you all that in a minute, however, this is called their DEBT FINANCING.  Some of us may be familiar with this concept when we have maxed out our credit cards and are paying a minimum interest payment just to keep the bankers happy.  And happy they are as they are making a monthly income on money that we created out of thin air… LOL.

According to the EIA, these 68 public energy companies are now spending 75% of their operating cash flow to service their debt compared to 25% just a few years ago:

We must remember, debt financing does not mean PAYING DOWN DEBT, it just means the companies are now spending 75% of their operating cash flow (as of Q3 2016) just to pay the interest on the debt.  I would imagine as the oil price increased in the fourth quarter of 2016 and first quarter of 2017, this 75% debt servicing ratio has declined a bit.  However, people who believe the Fed will raise interest rates, do not realize that this would totally destroy the economic and financial system that NEEDS SUPER-LOW INTEREST RATES just to service the massive amount of debt they have on the balance sheets.

As an example of rising debt service, here is a table showing Continental Resources Interest expense:

Continental Resources is one of the larger energy players in the Bakken oil shale field in North Dakota.  Before tapping into that supposed “high-quality” Bakken shale oil, Continental Resources was only paying $13 million a year to finance its debt, which was only $165 million.  However, we can plainly see that producing this shale oil came at a big cost.  As of December 2016, Continental Resources paid $321 million that year to finance its debt…. which ballooned to $6.5 billion.  In relative terms, that is one hell of a huge credit card interest payment.

The folks that are receiving a nice 4.8% interest payment (again… just a simple average) for providing Continental Resources with funds to produce this oil at a very small profit or loss… would like to receive their initial investment back at some point.  However….. THERE LIES THE RUB.

With that ENERGY DEBT WALL to reach $260 billion by 2022, I highly doubt many of these energy companies will be able to repay that majority of that debt.  Thus, interest rates CANNOT RISE, and will likely continue to fall or the entire financial system would collapse.

Lastly…. the global oil and gas industry is now cannibalizing itself just to stay alive.  It has added a massive amount of debt to produce very low-quality Shale Oil-Gas and Oil Sands just to keep the world economies from collapsing.  The falling oil price, due to a consumer unable to afford higher energy costs, is gutting the liquid oil reserves of many of the publicly trading energy companies.

At some point… the massive amount of debt will take down this system, and with it, the global oil industry.  This will have an extremely negative impact on the values of most STOCKS, BONDS & REAL ESTATE.  If you have well balanced portfolio in these three asset classes, then you are in serious financial trouble in the future.

Then…….  on ABC TV’s lateline (I’m rarely up late enough to watch it, so this was an omen…) this interview came up. I have to say, I found the whole Qatar thing rather bizarre, but this commentator thinks that Saudi Arabia is already in trouble

http://www.abc.net.au/lateline/content/2016/s4682983.htm

And now Zero Hedge has this to say as well….

Oil Prices Suffer First ‘Death Cross’ Since 2014 Collapse

For the first time since September 2014, after which oil prices collapsed almost 75%, Brent and WTI Crude futures both just flashed a ‘death cross’ signal as the 50-day moving-average crossed below the 200-day moving-average.

The crossover is typically seen a loss of short-term momentum and last occurred in the second half of 2014, when prices collapsed due to oversupply amid surging U.S. shale oil production.

 

As Bloomberg notes, OPEC and its partners will be hoping their efforts to curb output will be enough to support prices and counteract any fears of growing downside risk.

 

However, this morning’s news of “real” OPEC production may raise more doubts about the cartel’s commitment (and going forward, the Qatar debacle won’t help).