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Here is Part II of Yumbo's Energy & Trade Post
The Energy Cliff as a Diagnostic Tool in Trade Wars – Part II
6. Energy Musical Chairs For Fun and Profit
The map and chart below shows how global energy is traded and which regions have primary energy assets (reserves of oil & gas); these regions can survive the current EROI energy crisis by de-linking from the petrodollar and trading energy in local currencies or the gold standard.
The map shows producer countries of oil – gas assets vs. consumer nations. All oil products are not equal. Heavy and medium crude from Middle East is required for heavy industries in Europe and North America. EROI from Middle Eastern countries is high, but OPEC sets the price artifically high to maximise profit.
For Eurasia, Russia, Iran, Syria and Iraq provide the heavy oils used for manufacturing in national currencies at well below EROI cost set by OPEC for the EU and United States.
The next figure shows the producers of energy assets and those that depend on securing a viable energy source. It is often thought that North America has large deposists of oi lreserves. However the actual fact is a combination of factors has made this region energy inefficient.
This includes the largest demand in the world, the low EROI ratio of shale oil deposists, the use of fiat currency to debt-fund the extraction process and the depreciating petrodollar as a result of 20 trillion deficit spending.
Regions without primary resources need to attain energy sufficiency by
access to primary markets through the petrodollar. This means linking trade to the United States or taking loans from the IMF to purchase petrodollars, while taking on the energy defaults when the EROI ratio reduces to unsustainable levels.
bilateral energy agreements with non-US supporting cartels dealing in local currencies. The alternative is to link up with local or regional energy players to trade in products and purchase energy in alternative currencies (or possibly a gold standard) and negotiate for a higher EROI ratio.
These regions need to maintain large surpluses or reserves for short term destabilisation in oil prices from disruption of supplies or other related factors (such as civil disturbances, currency destruction [hyperinflation] or sanctions).
They also require refineries, long term transportation and distribution systems. These need to be built with significant amounts of oil & gas energy as well!
The following chart shows the projected use of energy (principally oil and gas) for the next twenty years. If the current petrodollar system continues, EROI depreciation will achieve critical levels and world growth will be severely affected. Therefore Eurasia is de-linking from US dollar hegemony as a priority.
The following events took place since ‘peak oil’ EROI was achieved in about 1960:
1960’s – 1971: The Europeans (EEC) exchange excess US dollars for gold to achieve energy trade autonomy. The United States loses 14000 tonnes of gold trying to keep the gold-dollar peg set during Bretton Woods agreement via LIBOR.
1971: The United States breaks the gold peg to finance EROI with inflated fiat currency. The US Dollar becomes the US Federal Reserve Note – with no real asset backing,
1973: The United States creates the petrodollar with Saudi Arabia. This requires countries to purchase the US Reserve Note to buy OPEC energy and the effect is to export US inflation worldwide, which artificially links the EROI of the United States to the rest of the world through the petrodollar.
1978: Emergence of China as an industrial power from high EROI fundamentals during its formative years of major industrialisation after WWII.
1979 – 2008: Recessions and bubbles follow the US Federal Reserve manipulation of interest rates to control economic growth and inflation.
2001: Bank of Japan starts Quantitative Easing as EROI drops to unsustainable levels
2001: China creates the Shanghai Cooperation Organization to bypass Washington’s IMF and BIS in doing business with emerging markets and setting its own EROI ratios not subject to the petrodollar.
2007 - 2016: United States initiates Quantitative Easing (QE1) and ZIRP to save banks and conglomerates from unsustainable EROI. This is Currency War III. The effects of excess petrodollars decreases the EROI ratio as demand drops but supply side fundamentals have not changed.
2007 - 8: The United States experiences a stock market crash as the banking-housing sector EROI crashes
2014: China signs ongoing trade deals with Russia for most of its current and future energy needs. Prior to this China buys most of its oil from OPEC, Venezuela & Iran
2015: China creates the Asian Infrastructure Investment Bank (AIIB) to bypass the IMF in setting loans in alternative currencies to Eurasian countries, which removes the need to buy or trade in petrodollars for emerging markets hard hit by imported inflation in EROI and in-parallel protecting local financial systems from IMF-sanctioned American banking cartels requiring access to local markets defaulting on loan payments.
2015: China builds CIPS to bypass SWIFT for bilateral trade in its national currency and extend it to the EAEU, BRICS, Iran, Turkey and Vietnam. This will eventually be offered to North Korea, Japan and Venezuela to stabilise energy trade in yuan, roubles or alternate currencies.
2015: The European Union begins Quantitative Easing to head off a recession from debts accrued in conglomerates invested into member nations Greece, Italy, Spain and Cyprus with failed or failing EROI systems.
2016 - 2019: United States ends Quantitative Easing and starts Quantitative Tightening and increasing interest rates to combat low growth. However this removes support from EROI projects that show systemic collapse behaviour. J. Powell may return to QE but this will not solve the EROI problem.
2016 : India’s Narendra Modi declares India’s currency as invalid to kill off a high-EROI shadow-economy that keeps money out of the low-EROI banking system. New currency needs to be kept in banks or financial institutions. Gold is confiscated as it is an untraceable high-EROI proxy in India to circumvent fiat currency transactions.
2017: China starts the Shanghai Gold Exchange to trade physical-only gold and silver thus de-linking the metal from the LGX /Libor paper-gold trade. The SGX is backed by 100% reserves and stringent trading and storage requirements. This creates a medium of real wealth trading and price discovery outside the paper gold trade of Wall Street and London’s LGX.
2017: Russia rolls out the MIR payments system for domestic use and bilateral trade in its national currency and extends it to the EAEU group of nations.
2018: China is reducing US Treasury holdings, investing in the Euro and is known to be supporting the IMF’s SDR (XDR) as the possible successor to the petrodollar. (No – China is not so stupid as to want the yuan to be the world reserve currency -what are you thinking?)
Japan joins the OBOR initiative with energy deals from Russia to kick-start its unsustainable EROI
2018: Russia holds significant part of resource-rich Arctic region, and has offered India access to the Northern Sea including additional supplies of natural gas and joint development of gas fields to meet New Delhi’s growing energy needs
2018: China creates the first international yuan-oil futures contract for its domestic markets. The payment is made in yuan but convertible to physical gold on the London Gold Exchange (removing physical gold from the LGX and into the permanent orbit of the yuan futures oil trade)
2019: China signs another deal with Saudi Arabia to buy oil in yuan, breaking the petrodollar monopoly at the source, as well as on nuclear energy.
2019: China signs a nuclear power contract with Saudi Arabia to build two nuclear reactors and SA agrees to exports more oil to China
2019: Saudi Arabia reduces oil exports to United States citing OPEC+ reductions, however increases exports to China. Stabilises oil price to maintain EROI
2019: The United States seeks regime change in Venezuela, which have the largest proven oil reserves on the planet. This will be followed by Bolivia and Nicaragua which have significant reserves in their own right.
2019: Germany and Russia are completing Nordstream II, which will bypass the petrodollar trade by payment in roubles or Euro, and provide low cost gas to Germany.
2019: Moscow has completely liquidated its holdings of US treasuries to a few billion. Trade is made through roubles or other approved currencies. China and Japan are following suit but more cautiously.
2019: Syria, Qatar, Iran and Iraq continue to keep a lid on oil price volatility and provide regional stability.
2019: India is the largest buyer of Iranian oil and is expanding its purchases in 2019 regardless of US sanctions.
This small sample of geopolitical events since ‘peak oil’ shows the race is on to create economies that depend on maximising EROI in trade, based on local fiat currencies and finally shifting to a gold-backed standard to put a floor under the falling EROI – which is the basis for all failing international trade and the inevitable currency wars and then shooting wars.
Those countries that rely on the petrodollar system and have limited alternatives will be severely affected when the energy supply chain breaks down due to falling EROI. When energy supply stops everything else stops, and the petrodollar trade would become meaningless.
Renewables are a moot point in EROI, regardless of fanfare from bleeding heart environmentalists. It is often overlooked (or conveniently forgotten) that the initial energy outlay into renewables will require a huge energy investment in oil and rare earth metals to create the infrastructure for the system; some energy alternatives (like electricity) generally still requires oil as the basis for generation even after.
This practically changes nothing in terms of oil consumption and indeed demands significant wastage of energy in the outlay. There is a huge overhead in the existing technology for renewables that does not currently achieve a significant advantage over oil and gas if the total energy in the system is not discounted.
Therefore renewables will not appreciably change energy dynamics at the current time. The cold hard fact is that oil and gas will continue to be the main source of energy well into this century and this is a reality that needs to be managed immediately.
7. GDP and EROI
While official sources forecast U.S. Gross Domestic Product (GDP) to surpass $20 trillion this year, the real figure is probably much less. If we factor in energy consumption and the increase in total public debt, U.S. GDP is likely less than half of the current figure.
If we go by the data that shows the growth of Global GDP is related to the growth of Global Oil Supply, then it is quite easy to spot inflated GDP figures. However, you have to be able to understand this essential ENERGY=GDP relationship. Of course, this is not taught in business or economic classes in high school or college
In looking at the following chart by Gail Tverberg, the increase in Global GDP corresponds to the rise in Global Oil Supply:
As the annual growth percentage of World Oil Supply declined in the periods shown in the chart above, the same trend took place in World GDP. If we can understand the OIL-GDP relationship figures in the chart, then it is impossible for a country to grow its GDP if it does not increase its energy consumption. A perfect example of a country that increased both its energy consumption and GDP, is China. We can clearly see that as China’s total energy consumption increased from 2000 to 2011, so did its GDP
Compare this with US GDP
Energy is a factor in both demand and production. Any increase in GDP without a corresponding increase in energy is a fudged outcome. As EROI is a decreasing factor over time, we would expect energy costs to increase and approach demand costs over the same measured period; GDP would correspondingly only measure a falling differential between the two costs. However this conditional is present only in China’s GDP growth. The US GDP chart shows no signs of this
However, the US GDP compared to Government Debt shows this:
Axiom: GDP is a qualitative measure of EROI from demand and production. However the use of debt to artificially increase GDP figures is inconsistent with the measure of real growth and does not affect real production or demand. When EROI falls growth or expansion is not possible. The system enters an economic recession.
The United States therefore has not increased its level of economic well-being since 2008 in real terms. The falling EROI suggests energy created in production far exceeds the energy recouped in demand. The system needs to ‘borrow’ energy from countries with high-EROI fundamentals to sustain its failing EROI or else revert to a more fundamental energy –efficient economy.
Axiom: In an EROI system energy costs in production and demand rise together. This is why high oil prices or Quantitative Easing do not affect EROI. The excess costs increase supply and demand asset values for all components of the system at the same time but have no effect on the process or on system efficiency.
8. The China – United States 2018- Trade War
Trade between any country and the United States is exemplified by this piece. The same fundamentals are found in everywhere else. Before we come to the trade war proper, we need to understand what drives China (or any other country) to trade with the United States in the first place – even when they lose in the process , which is 90% of the time.
Let us look at the products of trade that the Chinese and Americans buy from one another:
The items exported by China to the United States are production-intensive day-to-day finished goods (or near-to), used by general businesses and end-consumers. The items China imports are mainly industrial raw materials and agricultural produce such as animal feed.
It appears unlikely that China needs such import items from the United States anyway; there are more EROI-efficient alternatives on the international markets. However, as we discussed before, China needs energy voraciously, and international trade is still carried out primarily with US dollars. In order to maintain its open market operations, China has no choice but to trade with the United States to build up a reserve position for energy, external investment and to provide guarantees for investors within the country. That changeover is expected in the near future.
In terms of economic activity, the United States accounts for only 14% of China’s trade, the rest is split among Asian countries and the EU. Any change in trade dynamics (such as tariffs) will affect less than 2% of China’s overall goods and services as China is a high EROI-ratio country and can easily absorb the tariff cost into its production margins to reduce prices to compensate.
However this means wastage of energy resources which is not acceptable in the context of businesses invested in the United States.
It is amusing to hear the US & EU MSM make a big deal about the US trade wars– but in China and elsewhere in Asia it is not a real issue. Inconvenient? – yes. Irritating?– yes. Worrisome? – maybe. A real problem? – no, not by any means.
The reality is China cannot decouple from the petrodollar without affecting its economic and energy positions with other trading partners. Of course, this decoupling will take time – but the process is well underway and until then, China can literally ignore pressure from the United States on its trade position. Let us look at why this is so. In the interim China is building up energy independence by trading oil in renminbi (or gold) and using that position to conduct regional and bilateral trade.
Let us look at the trade specifics and why Washington’s demands cannot be met by any country, including China.
Washington has demanded that China reduce the existing “trade deficit” by over $200 billion annually with the U.S. by reducing tariffs and allowing more goods to flow into China for purchase. Amitrajeet Batabyal recently explained the problem quite well and why the whole scenario is quite implausible. I will look at the problem from the energy perspective.
“With China, the U.S. imports a whopping $382 billion more than it exports. How could it whittle that down to $175 billion? There are three ways.
- First. Americans could buy less Chinese products (high-EROI to low –EROI)
The kinds of Chinese goods that Americans buy tend to be relatively inexpensive consumer goods, so a dramatic decline is unlikely since Chinese products are much cheaper and diverse than those made locally in the United States.
The EROI-ratio for goods made in China is far higher than the United States, which make American consumables cost more to produce and sell. The American industrial sector that has vanished had reached minimal EROI’s of less than 5/1 and could not meet their continued energy costs in production. If these sectors are restarted to fill an obsolete niche, then Americans would simply be using more energy – i.e., expending hard earned currency taken from profitable ventures to keep afloat non-profitable ones running at below the EROI 5/1; this scenario therefore is unlikely to happen.
Tariffs simply steal energy from the consumer to fund the low-EROI productions within the United States. They do not affect the energy processes in either country. They make the consumer contribute to the higher energy expenditure of local production. This is of no benefit to the local consumer. This is why American businesses went to China in the first place.
Second. China could buy more U.S. goods and services
Firstly, for this to happen, without upsetting other trade balances, the American economy would have to make a lot more than it currently produces, something that isn’t possible. The American production system has reached minimal EROI-ratios (refer to GDP vs total energy consumption chart). Any additional capacity must be created with huge amounts of unpayable debt. This is not likely as the energy in further production cannot be sustained without continuous external inputs (loans or tariffs) to keep the production afloat.
Secondly, if there are existing production facilities in the United States that are repurposed to fulfil the extra purchases by China, this will reduce the purchases of other countries. The total export capacity of the United States still stays the same. The EROI of the United States cannot grow without structural changes to its production.
Thirdly – why would China want to purchase more from the United States, other than to meet energy and trade conditions in using the petrodollar? Any excess petrodollars will have to be reinvested into Treasuries and boost US deficit spending and increasing their EROI, while China has less to spend elsewhere, reducing China’s EROI. This is exporting an EROI deficiency to China.
Fourth – even if China could buy more from the United States, the nett growth of American goods overall will still be zero. Americans will not see any benefit as their production capacity has maximised (EROI less than 5/1)
Finally, both actions could happen simultaneously.
China’s trade surplus with the United States will only get worse (not better) as China reduces its imports of US products and further relies on its own currency for local consumption.
This is seen in the trade figures that showed the trade deficit increased from 375 billion to 382 billion YOY despite the trade tariffs.
Due to China reducing its dependence on the United States for energy and trade in petrodollars, China has also been selling off its Treasuries to invest more in other regions and trade directly with OPEC.
The OBOR project and reliance on a gold-backed currency will ensure that China’s energy and trade needs are met well into the 21st century.
Unless the United States adopts a more immediate and pragmatic approach to EROI, there can be no improvement in real energy management, which will not see a change in dependency on foreign imports and energy dependency.
The final nail in the petrodollar coffin is Europe. Huawei is integral in this metamorphosis. China needs to incorporate Europe into OBOR to enable high EROI end-markets via Russian energy and Eurasian production houses.
In economic terms, China has offered Europe (with Greece as a prime example) full integration into the Belt and Road Initiative (BRI), a project with vast possibilities for increasing trade among dozens of countries. Europe will become the main market for Chinese goods, but at the moment one of the greatest obstacles to be overcome can be seen in the freight trains, which often start their journey towards Europe full but are half-empty on their return journey to China. Beijing and the major European capitals are well aware that to make the BRI project economically sustainable, this exchange must go in both directions so that both sides gain.
The technological interconnection between China and Europe is already happening thanks to Huawei devices that are being purchased by European companies in increasing numbers. The absence of back doors in Huawei systems, in contrast to what Snowden has shown with other Western systems, is the real reason why Washington has declared war on this Chinese company. Industrial espionage is a priceless advantage enjoyed by the United States, and the presence of backdoors on Western systems, to which the CIA and NSA have access, guarantees a competitive advantage allowing Washington to excel in terms of technology. With the spread of Huawei systems this advantage is lost, to the chagrin of Washington's spy apparatus. European allies understand the potential advantage to be gained and are protecting themselves with the Chinese systems.
In technological terms, Beijing's efforts are proving very successful in Europe and are paving the way for future physical integration in the BRI. In this sense, the participation of such European countries as the UK, France, Germany and Italy in the Chinese-led Asian Infrastructure Investment Bank (AIIB) also shows how the prospect of Chinese capital investments are of great interest to troubled European economies.
The biggest thing that I see in this is the need for a new type of energy and the reluctance of having a new type of fuel out of concern of collapse.
We are facing a conundrum, as change that is needed might also bring the collapse. The movement to Geothermal plants is not spoken of much, but could be a great answer, except the for the risk of making volcanoes unstable and causing eruptions. Solar energy being harvested is still something that doesn't have a good cost to benefits trade-off. Wind energy is a complete bust. Ocean and tidal energy is becoming a bust due to upkeep costs.
I believe there is a scientific answer already found, though not pursued due to the impact of it becoming predominant. I also believe that the first nation to make that push to the new energy will be the fastest to recover from the impact on the market and value system, but no nation is safe from the economical impact, as too much was put into the value of oil.
"Remember, you're fighting for this woman's honor, which is probably more than she ever did."
Groucho Marx: Duck Soup (1933)
We should be able to use quantum mechanics and harness the power of the atom, extracting energy out of ANY substance.
I am thinking, in particular, an energy device that has already been thought of. Introducing the Mr. Fusion Unit...
Do NOT chase tail. Turn yours around and live FREE!