And That’s just the beginning….
From SRSRocco:

While the U.S. oil and gas industry struggles to stay alive as it produces energy at low prices, there’s another huge problem just waiting around the corner.  Yes, it’s true… the worst is yet to come for an industry that was supposed to make the United States, energy independent.  So, grab your popcorn and watch as the U.S. oil and gas industry gets ready to hit the GREAT ENERGY DEBT WALL.

So, what is this “Debt Wall?”  It’s the ever-increasing amount of debt that the U.S. oil and gas industry will need to pay back each year.  Unfortunately, many misguided Americans thought these energy companies were making money hand over fist when the price of oil was above $100 from 2011 to the middle of 2014.  They weren’t.  Instead, they racked up a great deal of debt as they spent more money drilling for oil than the cash they received from operations.

As they continued to borrow more money than they made, the oil and gas companies pushed back the day of reckoning as far as they could.  However, that day is approaching… and fast.

According to the data by Bloomberg, the amount of bonds below investment grade the U.S. energy companies need to pay back each year will surge to approximately $70 billion in 2017, up from $30 billion in 2016That’s just the beginning…. it gets even worse each passing year:

As we can see, the outstanding debt (in bonds) will jump to $110 billion in 2018, $155 billion in 2019, and then skyrocket to $230 billion in 2020.  This is extremely bad news because it takes oil profits to pay down debt.  Right now, very few oil and gas companies are making decent profits or free cash flow.  Those that are, have been cutting their capital expenditures substantially in order to turn negative free cash flow into positive.

Unfortunately, it still won’t be enough… not by a long-shot.  If we use some simple math, we can plainly see the U.S. oil industry will never be able to pay back the majority of its debt:

Shale Oil Production, Cost & Profit Estimates For 2018

REVENUE = 5 million barrels per day shale oil production x 365 days x $50 a barrel = $91 billion.

EST. PROFIT = 5 million barrels per day shale oil production x 365 days x $10 a barrel = $18 billion.

If these shale oil companies do actually produce 5 million barrels of oil per day in 2018, and were able to make a $10 profit (not likely), that would net them $18 billion.

However, according to the Bloomberg data, these companies would need to pay back $110 billion in debt (bonds) in 2018.  If they would use all their free cash flow profits to pay back this debt, they would still owe $92 billion.

Yes, it is true, I am not including all U.S. oil and gas production, but I am just trying to make a point here.  We must remember, this debt is below investment grade and is likely more of the shale oil and gas producers.  Furthermore, these shale oil and gas producers are using most of their free cash flow to drill more wells to produce more oil.  So, in all reality, they would not take most all of their profits or free cash flow to pay down debt.  They just wouldn’t have the funds to continue drilling.

The Bloomberg data on the U.S. oil and gas companies outstanding debt (bonds) came from the following chart:

I made my own chart (shown at the top of the article) by estimating Bloomberg’s debt figures (they did not provide actual figures) as it seemed more fitting to show U.S. energy debt in a BRIGHT RED color.  Their chart seemed a tad boring, so I thought it would be nifty to jazz it up a bit.  While I have reproduced their data in my own chart, I give them full credit for the figures.

That being said…. there is no way in hell the U.S. oil and gas companies are going to be able to pay back this debt.  NO WAY…. NO HOW.  So, we could either see a lot more bankruptcies, companies rolling over the debt to a later date, or Uncle Sam could come in and buy the debt.  However, all these options won’t change the dire situation the U.S. energy sector will face as it becomes more difficult and less profitable to produce oil and gas in the future.

I would kindly like to remind all the precious metals investors as well as those who follow the alternative media…. ENERGY IS THE KEY PROBLEM…. not the debt.  The debt is a symptom of the Falling EROI of energy.  For some strange reason, a lot of people still don’t get that.  We must remember the following:

DEBTS = UNBURNED ENERGY OBLIGATIONS

For example, a home mortgage is a debt owed by the homeowner.  Energy must be burned every day, week, month and year(s) to create the economic activity that pays the homeowner a salary to pay off the home mortgage over the 20-30 year period.  Thus…..

HOME MORTGAGE = UNBURNED ENERGY OBLIGATION

Now, I can go on and on by using other examples such as car loans, boat loans, RV loans, credit cards, second mortgages, company and public debt.  All of these debts are “Unburned Energy Obligations.”  When you can finally look at the market in the terms of “ENERGY”, and not “FIAT MONEY”, “ASSETS” or “DEBTS”,  then you will finally understand why the debt is not the real problem.

Why?  Because, even if we could get wipe away all the debt, that would still not solve the Falling EROI – Energy Returned On Investment of our oil and gas sources or the declining net energy that is available to the market.  The massive increase in debt has just postponed the inevitable a while longer.

Lastly, precious metals investors who “wrongly assume” that falling oil and natural gas production is bad for gold and silver investments or stores of wealth, you are sadly mistaken.  Gold and silver have been providing a store of wealth for 2,000+ years before oil and natural gas came onto the world market.  Precious metals were storing mostly economic energy of human and animal labor (as well as capital created from human and animal labor).

So, when oil and natural gas production really starts to decline, the value of most STOCKS, BONDS & REAL ESTATE (where 99% of investors have their money tied up) will implode.  Thus, only a 1% movement of that wealth into gold and silver will push them to values never seen before in history.

I will be publishing some very interesting articles over the next few weeks and I am doing preliminary work on a new PAID REPORT on Bitcoin, Gold & Silver.  There is a lot about these assets-investments that most people do not understand.

  1. If banks are too big to fail with just the financial services that they provide for the country then so it will be with the energy industry which actually performs some semblance of work.  You can see this one from a mile away. They will get bailed out.  The money will be in clean water.  That is after they poison as much of the ground water supply as they can. They probably already positioned their portfolio to reflect it.   You know this.

    • At some point in all this financial balderdash, we will all need to do a cost vs. benefit analysis of “the banks”.  Seems to me and my limited analysis that the downside of the banking system FAR outweighs the small benefit upside they create.  Are they doing anything that a state-run monetary PUD could not do?  And at FAR lower cost not to mention NO threat of collapsing the entire economy via their shenanigans?  There is a State Bank of North Dakota that seems to be doing a good job and all without any control from the banksters.  More of that would be good… along with a LOT less of the big NYC banks and their bought-and-paid-for shills and their even less desirable hangers-on.

       

  2. SRS, you’re a broken record with your myopic EROI analysis. It might not be next week, or the week after, but you can bet your life that at some time in the near future, fossil fuels and conventional nuclear reactions will not power the world. There is too much ‘smoke’ around recent LENR research for there not to be eventual ‘fire’. To believe that energy technology begins and ends with oil is just naive and ignoring the exponential rate of increasing scientific knowledge in the past 100 years. Granted, factoring in the future to an EROI equation is problematic at best, but the statistical probability of a new energy source is extremely high.

    • “Just try running mining trucks with solar panels and see what (doesn’t) happen!”

      No doubt that comment was also made when trucks first came into use instead of horses.  😉

      There are uses for solar and wind.  Unfortunately, those uses do not include massive creation of terawatts of electrical energy.  The real future for power in this world will be via fusion reactors.  They have the potential for huge power creation with virtually no pollution.  The science so far is good but both it and the technology of fusion power need considerable development.  That requires four things to be available:  1) brain-power; 2) money; 3) time; and 4) the desire to achieve this substantial goal.  The fossil fuels out there are not unlimited.  They will run out one day.  We’d best be working on a replacement technology LONG before we truly need it because it isn’t going to be cheap, quick, or simple to get it to the point where world energy needs can be met by it in a safe, reliable, and cost effective manner.

       

    • @Ed_B

      Very true Ed. Most proponents of solar/wind seem unaware that these are low energy solutions with a finite lifespan, won’t be powering heating/cooling applications, and have to be paid for up front, and any savings amortized over their lives!

    • @redrubberball

       

      “Most proponents of solar/wind seem unaware that these are low energy solutions with a finite lifespan, won’t be powering heating/cooling applications, and have to be paid for up front, and any savings amortized over their lives!”

       

      Agreed.  These things can be of considerable use in off-grid applications or as augments to a conventionally powered homes and businesses.  Solar can power vents, fans, LED lighting, and other low-current applications but they cannot handle air conditioning, heating, cooking, and clothes drying unless they are unaffordably huge.  The typical $25-30k solar system in homes today cannot handle the loads that these high wattage appliances require, especially not when some of them are running concurrently.  But they can do a decent job with low-power appliances and work pretty well there as adjunct power sources.  The trick with solar and wind is to use them appropriately; which is to say to power the things that they can power and to use them in areas where they work best.  Ranchers have used backyard windmills to pump water for well over 150 years.  It does a good job of that as long as the aquifer is not too deep.  Solar also works well in areas that have a good amount of sunshine.  But trying to fit these low-power sources everywhere is a mistake.  They are not suitable everywhere.  But where they are suitable, they can be quite useful.

      One concept that I try to tell people about is that of “energy density”.  This is the amount of energy that a technology can produce per unit of time.  The greater its power and the longer it can sustain that power, the more dense it is as a power source.  Size is also a consideration in that in that a small unit that can produce a lot of power is more dense than a much larger unit that produces the same amount or less of power.  Nuclear fission, for example, is extremely dense as a power source.  But it must be sited, built, operated, and maintained with GREAT care.  If it is not, then some terrible problems can and likely will occur.

      Solar power stations use a much lower energy source, so much be MUCH larger and very often have a lower power output.  Solar only works when the sun is shining, so no power from it at night.  Still, it can contribute to the overall power system IF it is used in areas that have LOTS of bright sunshine.  Most of the southern US states, for example, are good places to site solar energy installations if there is enough land available for them where they are needed.

      But fusion power is pretty much the holy grail of massive energy production.  Not only is it a great many times more powerful than fission but it is inherently clean.  If its magnetic confinement field becomes unstable, the fusion reaction simply stops running.  There can’t be any such thing as a run-away reaction, as can happen with fission power reactors.  It has been estimated by some that there is enough deuterium in the Earth’s oceans to power the entire planet at today’s power consumption level for at least 30,000 years.  Even if the rate of consumption increases, that is still a VERY long time.

      Long before then, other means for large-scale power generation will be discovered and developed.  If they are not, then there will be a very high price paid by everyone living through such an awful time.

       

  3. The rich bastages killing it on the current energy paradigm will milk it dry then switch to something new that they just happen to own and control.  Like what they did with R12 and R22.  Funny how the ozone needed saving just as their old patents were set to expire.  You gotta understand that these cats have so much wealth that there is nothing anybody can do to stop them.  Game, set, match.  If the common man can earn enough of a living to provide for his family and make them comfortable he should be thankful.  Robots are taking over so if your work is susceptible, make hay while you can.   Luck to all.

    • @fleepunyhumans Agreed, make hay while you can, as another Dark Ages is on the way, with plebes and their masters. The middle class has all but disappeared everywhere. The caste system of India in the past is our future.

       

    • “Robots are taking over so if your work is susceptible, make hay while you can.”

       

      lol… forget making hay and start learning robot repair and troubleshooting.  That’s a job that is likely to be around for a good long time… until some AI robot takes it over, of course.

       

  4. Stacking the pm phyzz is an equalizer on a unequal playing field. Stacking the stack, so someday will be worth sum Jack… It”s all good.

    Kudos to all the US veterans this Memorial Day weekend. Freedom isn’t free.

    • Freedom isn’t free.”

      No, it’s not.  In fact, it is the 2nd most expensive thing there is. It can’t even be purchased, only rented… until the next ding-dong comes along and upsets everyone’s apple cart and then we are off to the races yet again.  🙁

       

  5. There might be some more bankruptcies, but the wells, refineries, gas and oil in the ground, etc., will not go anywhere.

    This guy is a clown.

    I would say that it must have already gotten pretty ugly if there are people who pay for economic prognostications from a guy who has not yet mastered English, and doesn’t know the difference between GDP and exports.

  6. Personally, I think SRSRocco is one of the best sites out there for a view of the future. No one can dispute that energy holds everything together and that gold and silver cannot go below the price of production, which Steve St. Angelo instructs us.

     

    • @Yohanan

      1. Do you understand the difference between total cost of production and marginal cost of production??

      Companies don’t generally stop producing until price drops below marginal cost of production, as anything above marginal cost helps pay fixed costs.

      For gold mines, I would guess that marginal costs are about half of total costs, maybe $500 an ounce.

      For mines that produce gold as a by-product, it would be much, much less.

      I believe there would still be some by-product gold produced at $100 an ounce.

      2. In rough numbers, there are 3,000 tons of gold produced per year.

      Gold is unique among commodities in that the global supply that has already been produced and is still around is some 60 years worth of production.

      If gold production ceased completely, the global “supply” would change very little.

      Switzerland is a major global refining center.

      Take a look at where their gold is imported from.

      The largest suppliers each month are typically countries that mine no gold at all, like the UAE, or the UK (sometimes a supplier, sometimes a customer.)

      I sincerely hope that you don’t invest based on your infatuation with these clowns.

      Or is it possible that “Yohanan” is actually either Rocco or St. Angelo writing fake reviews???

      It wouldn’t surprise me.

       

       

       

       

  7. @Faranginkorat Your response is interesting, but impractical. The fact is that gold and silver prices have not gone below the total cost of production for several years, not to mention that there is a premium associated with these metals. In the case of silver, it has a large commodity component, which requires more mining. In addition, much of silver produced in the past is non-recoverable. As a byproduct of the mining of base metals, silver and gold production will fall as the sales of base metals will fall in the future, not to mention that the amount of gold and silver is not nearly large enough to accommodate the coming avalanche of demand for it as an investment when stocks, bonds, and real estate tank. Thus, gold and silver will skyrocket, and as David Stockman points out, it could be as soon as this coming fall. Anyone who hasn’t bought at least some gold and silver will be in terrible shape, and now is the time to buy. No, “Yohanan” is not SRSRocco or Steve St. Angelo. I have nothing to do with him and don’t know him; I just think that his analysis is worthy of review.

  8. I’ll say it again. Recent “analysis” by the author showed a close correlation between oil and gold prices. He apparently now foresees oil prices to be perniciously LOW for a protracted period of time I think because of low demand. If oil and PMS have been linked perfectly in price, why would we expect the linkage to break now?That is – why buy PMS if the correlate with oil and oil prices are going to remain low?

    Or have we switched back to the idea that somehow a world awash in oil ( despite protests of the peak oil chicken littles ) is going to find itself seeing new record high oil prices?

    In addition to being perniciously wrong ( even if, at times driven by seemingly logical data ) I feel the swings in the predictions resulting from the analysis would be something someone with MPD / DID would come up with.

    Dirtlump’s rule – buy gold and silver to get your S**T out of the system because the system is a piece of S**t – and after the years of wrong predictions by the best and brightest in our industry, at least the S**T is cheap.

    Use that rule, not technical analysis in a broken market, or graphs which lead exactly nowhere.

     

     

    • “Dirtlump’s rule – buy gold and silver to get your S**T out of the system because the system is a piece of S**t – and after the years of wrong predictions by the best and brightest in our industry, at least the S**T is cheap.”

       

      Man-o-man… what a sh***y way to look at things!  😀

       

  9. Hurray for Dirtlump’s rule ! I thoroughly agree to get out of the system. I don’t trust:

    Central bankers

    Politicians

    Fiat currencies

    Any banks

    Central Texan’s got it straight: stack the shiny.

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