The US is Bleeding Out

Bleeding Out

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:

chart (50)

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:

chart (51)

Some states have fared far better than others, please compare New York to Georgia:

chart (52)

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.

chart (53)

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:

chart (55)

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.

chart (57)

The Rocky Mountain region includes Colorado, Idaho, Montana, Utah, Wyoming. Peak was 3,199 in Jul 1998, low point 362 thousand gallons per day.

chart (59).png

Colorado has collapsed from a peak of 2100 thousand gallons in 1999 to 240 thousand gallons in December 2016:

chart (60)

And finally the West Coast region which includes Alaska, Arizona, California, Hawaii, Nevada, Oregon and Washington:

chart (62).png

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:

chart (65)

chart (63)

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)

Motor 2

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. 

chart (67)

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:

chart (66)

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:

chart (68)

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:

  1. The company is not competitive with other energy producers

  2. 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. 

US Refinery Chart Cropped (1)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.

BW Hill

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:

Sales 3

20 thoughts on “The US is Bleeding Out

  1. Shale Drillers still haven’t made any money.

    As long as there is lots of liquidity and shale players can keep borrowing money to drill wells that will never return a true economic profit the game can continue for a while. What most people don’t understand is the damage that the Fed has done to the US energy companies by sending a wrong price signal. By keeping prices for crude much lower than they would be if the shale industry had to consider real world economics, the Fed has reduced the profits of conventional players that will need new capital investments to make up for the natural depletion of their fields. But if the shale bubble is exposed for what it is, the cost for machinery and other inputs will rise very rapidly at a time when the support for the USD has been removed due to the fraud in the shale space. And as the US becomes much more dependent on energy imports and prices fall, you can expect domestic turmoil, particularly when the pension issue surfaces and is noticed by ordinary voters. What you have is a perfect storm that will consume much of the real world economy. The winner in all this will be the Russians, who have energy to export when prices rise and the Chinese, who used the low price environment to add to their strategic reserves and to invest in producers that have plenty of reserves once the short-term issues are resolved.

    Most people don’t understand shale. If they did, we would not have such a huge bubble that diverts investment into uneconomic production. The simple fact is that shale wells in the core areas of good formations can be very profitable for the producers but such core areas are small in number and are incapable of producing shale oil economically. To make the story work, the producers make unjustified assumptions about homogeneity of the formations and overestimate the ultimate recovery rates from the wells. That allows them to reduce depreciation costs to very low levels and can make production seem profitable as long as some lender steps up and funds the development costs needed to keep the game going. To see the true picture I suggest that you look at the Elm Coule and Bakken production data.

    The facts are pretty clear. The Bakken is now in decline and the debt taken by the producers will NEVER be paid off. What the naive optimists are assuming is homogeneity but we all know that the formations are heterogeneous. While the sweet spots are very profitable, once the players move further out, the wells become economic even at $60. Hedging won’t help because the debt load is too high and rates will head up as more and more lenders become concerned about the return of capital. I have been searching for cash-flow positive producers in the pure shale space for more than a decade. I have yet to find them.


    1. I’ve asked BW Hill to explain the bigger picture, on surface it appears affordability has collapsed. I’d say QE4 is needed to sterilise all the debt in Energy Sector that can’t be repaid–it’s probably already begun and if not they better start soon. The BOE is already directly financing industrial corporations in the UK, bypassing the market. I guess its hyper-inflation then.

      The Chinese continue to hammer the paper price of Gold and continue hoarding physical at record breaking levels.

      They decide the date of the Reset.


  2. Respectfully, I have a different interpretation of the EIA charts.

    The charts show “retail” gasoline sales to end users by the refiners. The drop off on those charts occurred as the refiners sold their retail gas stations to a middle man. IOW, the refiners no longer own and operate many retail gas stations anymore. They now sell product wholesale to a retail station .Therefore, it is not sold to an end user anymore and is not considered “retail”. This is why you no longer see many gas stations with oilco labelling such as Mobil, Exxon, Texaco, etc. The product is now retailed by mostly convenience stores.

    Gasoline consumption is still on the rise or, at worst, has plateaued in the USA.



    1. Hi Wratfink,

      I took account of that shift and have added that nuance to the article. Thank you by the way 😉

      It appears that refiners realised they were going out of business long ago and started selling assets before buyers would realise this fact. The above charts are for retail motor gasoline, if we take account of ALL bulk sales for the purpose of resale, the total decline began in Jun 2007:

      There has been a drop of 17% in volume sales by US refiners since Jun 2007. With respect to consumption, you’ll note huge increased volumes of imported finished motor gasoline and blending components for such.


    1. Marmico,

      This may be an emotional topic for you. If you read the analysis twice your reading comprehension may improve. It’s a very narrow analysis of a single node in the system: US based refinery. If you conflate the analysis to include Blenders, then I fear you’ll become confused. You’d need to take into account increase in imported finished motor gasoline and the very substantial increase in imports of gasoline blending components:


  3. Refined motor gasoline is blended with ethanol. 2016 U.S. refinery and blender net production (disposition) of motor gasoline is at record highs

    2016 U.S. motor gasoline supply (consumption) is at record levels.

    2016 U.S.motor gasoline supply (consumption) = refiner & blender net production (disposition) + imports – exports – adjustments.

    U.S. total vehicle miles travelled are at record levels.

    Look in the mirror to locate the confused one.


    1. I’m not sure what you’re trying to point out exactly? No one has claimed consumption is down. The analysis is of refineries only. I’m just analyzing domestic US refineries. When the US imports 1 million barrels of blending products per day and imports of finished motor oil then Blenders are consuming such.

      And by the way, what’s being exchanged for those imports? The printed dollar…aka…Treasury Reserve Notes AKA IOU’s.

      You do get the thrust of this article, right? Or are you just trolling?

      Liked by 1 person

  4. Marmico,
    This is a quiet corner of the Internet. We don’t attract attention, we’ve been studying various models and websites as we were preparing analysis of how Capitalism relates to the Natural System. So we meta-analysed Our Finite World, Rocco Report, Peak Oil etc.

    This site is just a node in a network of Global Capitalists; we prefer a low profile. I’ve censored your comments because they insult particular people. I do appreciate your input and enthusiasm but insults are not constructive.

    We don’t care if there are errors; mistakes are normal, this is not a competition; we just want errors to be pointed out so we can improve our understanding in a methodical way.


  5. A remedial student at the back of the room raises his hand. Am I reading you right that because of the decreasing quality of oil in to refineries from US shale oil producers, it is taking more oil to produce the final product – gasoline? As a result for a given input there is less output as time goes by. This says to me that more oil must be imported to make up the loss, to meet demand. The end result would have to be steadily rising gasoline prices at the pump.

    From what I have read, I understand that OPEC, Saudi Arabia in particular, has been keeping the price of oil down to beat down US shale oil producers whose costs of production are much higher. Your work would indicate that strategy is working and US shale oil production will soon look like it was a flash in the pan.

    Liked by 1 person

  6. Hi Clif,

    Personally, I’m happy with FED policy since the infinite debt (AKA Bullshit) kept the Shale Players in business. It bought us time and stability which I’ve enjoyed. All the bullshit in the media about Saudi strategy is just bullshit–it helps pass the time. Saudi Arabia is a US protectorate and subdued vassal–it does what it’s told to do–the 1970s ain’t going to happen again.

    In the above analysis, we focused on empirical data that couldn’t be double counted: Refinery Receipts and Refinery Sales. Simple: What’s goes in the gate and what leaves.

    If you start looking at the micro data; such as Refinery Utilization or Refinery Gross Inputs or Refinery Crude Inputs you’ll see in the glossary that that includes inputs to all sorts of refinery sub-systems: “input to crude oil distillation units and other refinery processing units (cokers, etc.).” That sort of data is too obscure and energy molecules can be double counted.

    My guess is that the crude being delivered to the refiners is of increasingly poor quality e.g. increased water cut, more sulfur etc. Also, I’m looking at the data of energy use by Refiner and that’s increasing as well. Shale peaked in April 2015 but stocks of crude keeps increasing? So the refinery is the choke point.

    So something doesn’t add up…

    My guess is that the refineries are lying through their fucking teeth. Or someone’s lying.

    I’d say the production figures are baked by flowing oil into and out off the SPR, making the US appear more self reliant than it actually is. Which would support the petrodollar.

    It’s all about the Dollar now, always was. When the above analysis is complete it’ll be added to volume three of our treatise on Capitalism. It’s a private book.

    About prices? Well read between the lines! The Refiners must buy more product to sell less. So ultimately, in the US, prices must drop because the Refiners can’t afford higher prices. The maximum price is determined by affordability. Unless that is, the Fed starts to (or has already begun to) provide direct financing to the Refiners. It’s what I’d advise them to do.

    Of course, my friends are interested to know the bullshit failure point for the petrodollar, the fate of humanity is not so important 🙂


  7. Cathal,

    Kudos for your challenging works.

    Your point about something not adding up is the same conundrum that I am trying to wrap my head around.

    While I am not a Pollyanna about incompetent business managers, I guess I am having a hard time wrapping my head around the construct that all of the capital allocators of shale companies have given themselves to the dark side and pumping capital in to negative IRR projects with no regard for the disastrous near-term results. I allocated capital for a cellular tower biz for that last decade of my career and while that MO doesn’t suffer from depletion, the IRR construct is a valid allocation method … 25-35% IRRs are quite productive for all involved from the wireless user back to the state receiving taxes on all the processes … as well as being mentally satisfying for me … vs what is broad implied by many as happening in the shale industry. Macro level discussions make broad points, but ultimately I find them only useful for the end-times/end-game situation and can’t help but wonder about just what is the spectrum or statistical distribution of real IRR numbers being generated at the micro or company level.

    I have seen many positions harping on Zero Hedge about rapid depletion of shale wells. While is it inarguable that new elephants are nearly gone, I keep coming around to the point of trying to develop a real feel for divide between the misallocators disregarding well project IRRs and those that remain good stewards of investors’ capital through ethical allocation processes.

    It seems time value of money never enters these discussions. To make the point through a technically absurd (for now) method, let’s say a Star Trek ‘molecule transport” technology was available. In one day, this new technology ‘beams out’ every hydrocarbon molecule from -300 to -30,000 feet. Depletion cannot see a shorter timeframe, however the IRR for the investors in this space case easily clears the return hurdle. In other words, what is the real picture for the bottom line for equity holders? With both my optimism and pessimism notwithstanding, I still and looking for the truth.

    So my question: In your research and discussions, do you believe that the majority of the shale company managements have abrogated their fiscal responsibility for doing the financial due diligence for their equity holders? Or direct knowledge of this?

    Clearly any heavily leveraged business greatly exposes equity holders capital to small changes in the underlying. Complicit bankers seeming should only be able to stave off their troubles for a short to medium period short of lying liar accounting. Unless it REALLY is that bad.

    Maybe I am being a Pollyanna in expecting equity providers to be pounding on the allocators’ heads about this, but you see my conundrum.

    Have we really sunk this low?

    Best regards,



    1. Bruce,

      Everyone is lying. That’s why the figures don’t add up.

      If you want to know how low, or desperate, things are at the Top then read volume 1. It’s a no bullshit take on what the US elite are thinking.

      I’ve been digging into the Oil data as it’s important to the concluding volume; and even though it’s baked, from the stuff that can’t be baked easily it’s clear that the sector is defunct and ward of the Empire.

      Read volume 1; you’ll understand.


  8. I’ve been watching this for years and it’s getting closer to the end. This collapse for lack of a better word has slowly been happening in stages and I’ve been preparing for it for sometime. I’m not sure what the outcome will look like but it won’t be good. If there wasn’t so much debt and leverage in the system I’d be less worried but people are living in a fantasy land and when that crumbles there will be a lot of pissed off people.


  9. >>>My guess is that the refineries are lying through their fucking teeth. Or someone’s lying.

    I am a professional psychic and I can generally see the EIA report accurately 3 -4 days beforehand. This is highly unusual because, normally, seeing 3-4 hours beyond the present moment in any given market is about my max limit. What that tells me is that those numbers are entirely falsified. Just my 2 cents, most people will not believe it. I don’t care.


  10. I have read that the Hills report isn’t accurate. Is that true? Also now the IEA is saying the world is going to face oil shortages by 2020. Do you believe that will happen?


    1. Hi Sean,

      I’m not an expert nor have I worked in the energy sector. But I’d trust output from guys that have worked oil for decades over a number cruncher on Wall Street. I mean, really, that analyst is probably on coke.

      I found the Hills Report to be good theory, and theory is just that, theory. It provides a very useful category of concepts pertaining to Depletion which are useful. Does it have predictive power? Yeah, it appears to. So it’s a good theory.

      Now these oil guys are freaks in their respective fields, but they can’t take account of other systemic actors such as the FED, and that’s why my output is actually the output of a large global network.

      Gail wrote me that debt will be used to buy gas and coal to refine the poor quality crude which should extend the Oil industries life cycle; this is true; she is correct; BUT she is not aware of the Imperial Power struggle that defends that Debt.

      So that’s why The Philosophy of Capitalism is a synthesis which includes her output as well as The Hills Group Report, as part of the Entire System.



      Volume one is authored by the Dominant Class of the USA:


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