If gasoline is the lifeblood of commerce, then the US is bleeding out.
As part of our final analysis of Capitalism the respected BW Hill argues against the World War solution:
‘The world’s petroleum industry has now accumulated $2.5 trillion in debt. That debt is backed primarily by the value of their reserves. Upon becoming apparent that the value of those reserves will rapidly be approaching zero, havoc will break out in the financial sector. There will be $100s of trillions in the derivatives market that will suddenly have no solvent counter party.
Viewing the reported growth in inventory builds, and how much the ETP Model informs us that the inventory must be increasing, we expect this situation to reach a crisis point sometime in 2017 or 2018. It seems highly unlikely that either of the world’s nuclear super powers, the US and Russia, will revert to open warfare as a result. Neither would have anything to gain by such action, and much to lose. It does seem likely that the Middle Eastern powers will use the situation as an excuse for attempting to destroying each other. In other words we expect devastation to result for the Middle East.
With the Middle East in flames, and much of their capacity to produce destroyed the world will suddenly see a massive decline in petroleum supplies. Price should increase, but the Maximum Affordability Function informs us that will be short lived. The end result will be that Russia, and a few high quality Western fields will remain as the sole sources for the world’s petroleum supply. The economy will be in shambles, and there will be little incentive, and even less means to support wide spread, high tech warfare.’
What does BW Hill mean by the ‘Maximum Affordability Function’? The price limit of any good is affordability, if you can’t produce at a price potential buyers can bear then you’ll make no sales and be bankrupted quite quickly. The maximum price they can bear is determined by their income. And their income is ultimately determined by the amount of net energy gain available to their social group.
The Dominant Class knows this. “But what if your customer has a printing press and can run dual deficits?” I hear you plead. Yes, we know this also, which is why the Government’s share of GDP in the US is far larger than in China—a Communist country.
US Governmental and Financial elites have successfully controlled the market since the early 70s via their full spectrum dominance strategy funded by the FIAT—the petrodollar. But as the following charts show; the role of oil is in terminal decline and should no longer play a significant role in the general economy after 2020-2022, if current trends continue. They appear in harmony with predictions put forth in the Hills Group Report. Our concluding analysis explores the result of such for humanity.
Essentially the globalized market shall collapse when the US loses control of such, which now appears inevitable in the near future. Below are charts supplied by the US Government via the Energy Information Agency. These charts track total gasoline sales to end users by US refiners. End users includes bulk consumers, such as agriculture, industry, and utilities, as well as residential and commercial consumers. Data for recent years is being withheld for most states; but the broader picture is quite clear:
Figures from the East Coast region includes Connecticut, Maine, Massachusetts, Massachusetts, Rhode Island, Vermont, Delaware, District of Columbia, Maryland, New Jersey, New York, Pennsylvania, Florida, Georgia, North Carolina, South Carolina, Virginia and West Virginia:
Some states have fared far better than others, please compare New York to Georgia:
Retail sales by refiners to end use consumers in Georgia hit a peak of 2300 thousand Gallons in Dec 1999, and was 75 thousand gallons in November 2016.
The Midwest region includes the states of Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, Nebraska, Ohio, Oklahoma, South Dakota, Tennessee and Wisconsin. Data by individual state is being withheld:
The Gulf Coast Region includes Alabama, Arkansas, Louisiana, Mississippi, New Mexico, Texas and has fallen dangerously. The Gulf Coast region hit a peak of 10,562 thousand gallons per day in Jul 1998. The low point was 496 thousand gallons in Jan 2014.
The Rocky Mountain region includes Colorado, Idaho, Montana, Utah, Wyoming. Peak was 3,199 in Jul 1998, low point 362 thousand gallons per day.
Colorado has collapsed from a peak of 2100 thousand gallons in 1999 to 240 thousand gallons in December 2016:
And finally the West Coast region which includes Alaska, Arizona, California, Hawaii, Nevada, Oregon and Washington:
In June 2007 California stood at 8,963 with a low of 4,291 in Dec 2014. Data for 2016 is being withheld. Data on other states is withheld:
Now you’re wondering why the roads aren’t all empty 😉 When the refiners realized they were going out of business they sold parts of their retail networks which explains the sharp drop offs in some states. So when we add in bulk sales for the purpose of resale the picture is not so cataclysmic. After crunching the numbers for all grades and formulations—for sales to end users and sales for the purpose of resale—between Jun 2006 and Jun 2016: The total decrease is 16%. (Source, EIA)
It’s possible that production was shifted to candle wax but that’s not the case, motor gasoline as a percent of yield is flat at around 45%. (Source, EIA) And sales by volume of other petroleum products are also down (around 4%, EIA).
But here’s the killer—refinery receipts of crude oil keeps increasing. In 2009 they received 5,261,068 thousand barrels whereas the 2015 figure was 6,004,798 barrels. That’s an annualized increase in inputs of 2.2% alongside annualized decrease in sales of 1.45%. Let’s call this The Oil Crunch.
In the words of BW Hill:
‘The ETP Model is informing us that crude inventories will continue to expand as the petroleum industry’s requirement for energy to produce petroleum continues to grow. As a result less energy will be delivered to the non energy producing sector of the economy.’
This is what that looks like:
The refineries are the choke point in the system. Even though shale oil production peaked in April 2015, the stock of crude (excluding the strategic reserve which is at 95% capacity) has increased from 326,737 thousand barrels in Mar 2014 to 533,110 barrels in Mar 2017. Please note the rapid and inverse decrease in stocks of finished motor gasoline:
This will result in one of two events occurring:
1) The price will decline until producers can no longer meet the cash flow requirements needed to continue operations; that is, they will then begin to be shut-in.
2) Producers will find that there is insufficient market for their production as inventories reach their maximum affordable level, and will consequently be shut-in.’
In the last analysis, we concentrated on volume of Refinery Receipts and Refinery Sales since such can’t be double counted by refinery sub-systems. Having completed the number crunching, and double checked the figures today, it appears the model has predictive power.
Central to the model is the Refinery; it would be forced to receive increasingly poor quality inputs (e.g. increasing impurities) as oil fields entered terminal depletion; so an increasing share of such inputs would be discarded or consumed by the energy intensive refining process; thus volume of inputs and stock would increase and sales volume decrease. The empirical data confirms these predictions. Since the refineries are receiving more and selling less they can only afford lower prices (at constant dollar prices unless supported by Federal Reserve Notes aka the petrodollar AKA IOUs printed by the Fed).
This picture paints the Fed into a very difficult position going forward. Without endless liquidity the Shale Industry would be exposed for the fraud that it is which would undermine support for the Dollar. At the framework level, if a company is running at a loss it requires debt, this can mean the following:
The company is not competitive with other energy producers
The company is not able to add value to inputs purchased
Essentially shale producers are promising to deliver net energy gain to the general economy which simply isn’t happening. It doesn’t matter how many rigs there are; it doesn’t matter how much oil leaves the well head; the only thing that matters is the amount of net energy gain delivered from the Energy Sector to the general economy. This energy gain is transferred via energy exchange into tools and such which increase productivity, which then increases income. Essentially the Oil Industry in the US is becoming increasingly ‘shut-in’, in the sense that ever less oil is getting to the population. Now with production from North Dakota in decline lenders shall soon realize the debts can’t be repaid. All this while China stockpiles physical Gold—a very difficult situation—to be decided by Imperial Power.
Meta-analysis by subject expert BW Hill
Your charts are very revealing; they indicate what we expect to occur as petroleum loses its capacity to power the economy. That is now occurring at a rate of 1,822 BTU/ gallon, or 76,500 BTU/ barrel per year. To fully appreciate this situation it must be understood that the economy buys energy; only refiners purchase oil. The general user of petroleum products has no reason to buy raw crude. Without adequate processing its value to the economy is essentially zero.
The petroleum industry’s ability to convert raw crude into a usable finished product is declining rapidly. As shown in the above chart the quantity of crude needed to produce a barrel of finished product has increased by 31% over the last 11 years. In 2005 it required 1.08 barrels of crude to produce a barrel of finished product, by 2015 that had increased to 1.61 barrels. As 85% of a refiner’s operating cost is the cost of the crude that they use the price of the crude must decline to compensate for the increasing raw material cost.
The value of petroleum to the economy is simply its ability to power that economy. The more economic activity it can power the greater its value; the inverse is also true. As the energy in a unit of petroleum is fixed by its molecular structure, the greater the energy requirements to produce it, the less that is available for use to generate economic activity. Over the last 56 years that has fallen by 48%. As petroleum supplies less energy per unit the economy can afford to pay less for it. The economy can pay no more for a unit of petroleum than the amount of economic activity it can power. The economy could not pay $1.14 for oil that can only powered a $1 in economic activity without borrowing the extra 14¢ from somewhere else. That is exactly what is now taking place.
This all relates to the ongoing entropic decay of the Petroleum Production System. Just like an old clock, or an old car it will eventually wear out. The development of the Etp Model was to map the rate of the Production System’s entropic decay (wearing out process). The process has now operated through 80% of its maximum theoretical cycle. The theoretical cycle is exactly that; theoretical. Its full life cycle will undoubtedly be less. Somewhere between now, and its maximum the process will stop if left on its own. By our calculations that will require that the world provide $39 trillion by 2030 to keep the process operating. 2030 is its maximum theoretical time line. To keep the process working beyond its 2030 date would require the energy equivalent of 1.62 times all the natural gas produced.
To determine a better estimate than the theoretical one as to when the process will stop we must now look past the Model to more empirical information. We can see it in refinery yields, corporate profits, and an industry that has become so poor that it can not even replace the reserves that it is extracting. Not replacing reserves for an extractive resource industry is an admission that it is going out of business.
Your gasoline usage charts are exactly the kind of high quality empirical data that we are seeking. Thank you for your very valuable contribution.
The Hill’s Group
By all means share and reproduce. For those subject experts who wonder about decrease by formulation and grade. The blue is by grade, the green by formulation. Note that sales of premium increased: