Peak Silver & Peak Mining by a Falling EROI

EROI = Energy Returned on Energy Isnvested, Part 2

by Steve St. Angelo. November 11, 2009

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The Peaking of Silver will be the Canary in the Coal Mine. Once we have a peak in silver production it will signify the peaking of the global mining industry as a whole. In Part 1 of Peak Silver & Peak Mining by a Falling EROI, I explained how global ore grades have been falling since ancient times, especially in the past 150 years. Furthermore, as ore grades continue to fall, it takes exponentially more energy and resources to mine this lower grade ore. Due to a falling EROI with decreased Net Energy available to the mining industry in the future, lower grade ores will becme increasingly uneconomical. To get an idea on why global mining will be peaking soon, we need to look at the past mining discoveries as they compare to those in the energy sector.

Energy and Mining Discovery Rates: a comparison

During the exploration oil boom of the early to mid 1900’s, the world was finding more oil than it knew what to do with. Those were the days when the massive discoveries of the Burgan Field in Kuwait (1938), and the Ghawar Field in Saudi Arabia (1948) added to the huge world reserves. Oil contracts at this time were done on long term fixed price contracts. For five years from 1948 to 1952 the price of crude oil was fixed at $2.77 a barrel. Here are the world discovery rates of conventional crude compared to production. Except for the two large blips in the late 1930’s (Burgan Field-Kuwait) and the late 40’s (Ghawar field-Saudi Arabia), the peak of discovery takes place in the 1960 decade.

(Source: Peak Oil Primer-Energy Bulletin, ASPO Ireland)

Even though the world peaked in oil discoveries in 1965, it did not peak in conventional production until approximately 40 years later. According to Matt Simmons of Simmons International, the actual peak of conventional crude was in May 2005 at 74.3 million barrels a day. There is a lag from peak discovery to peak production of 40 years. If we compare the discovery of world oil fields to that of global mining deposits, a similar trend is taking place.

(Source: Dr. A.M. Diederen, TheOilDrum: Europe)

According to this slide, world class mineral discoveries peaked in 1981, whereas the number of major deposits peaked in 1988. As one travels along the horizontal axis of the graph up to the year 2000 and onwards, discoveries of both world class and major deposits fall off a cliff. Matter-a-fact, once you pass 2001, there aren’t any. ZIPP. This indeed is a telltale sign similar to the World Oil-Discovery-Production-Decline story. All that is left to complete the last chapter of this book is to give the details as to the exact date when Global Mining Production will peak. It is always easier to point out the peak from a rear view mirror as it was when the United States peaked in oil production in 1970.

The exploration expense during the years between 1995-98 peaked at $5 Billion dollars producing approximately 7 major deposits, but when we look at 2004 and onwards, $7 Billion dollars was spent with no major deposits discovered whatsoever. This is just as depressing as what is taking place in the Big Oil Companies. Last year ExxonMobil, Chevron and ConocoPhillips spent more money buying back their stock then they spent on new exploration. Maybe the oil companies know something we don’t. They probably realize that there is no money made drilling lots of dry holes. We have to remember, oil companies are not in the business to find oil, they are in the business to make money.

Resource and Resource Base: Nothing but Bad News

The USGS, Energy Analysts and Wall Street Media talking heads will always drum up wonderful news about new large resource discoveries to the market. The Jack Field in the Gulf of Mexico and the Tupi Oil Field off the coast of Brazil comes to mind. For a few days the euphoria gives the public a new sense that EVERYTHING IS GOING TO BE OKAY. But after the Brainstem Buzz is gone, it’s back to good old fashion reality……and that is, we’ve got some serious resource constraints coming dead ahead. This is terrible news for the Suburban Retail Leech and Spend Economy of the United States.

Unfortunately, many analysts and geologists are putting a present value on future low grade-high volume mines to be the saviors as replacements for existing mines which will be depleting each and every passing year. This is sure folly as a falling EROI ratio will curtail future net energy, making these kind of deposits increasingly uneconomical. The value of a mine that a bank will lend, is tied to its PROVEN and PROBABLE RESERVES, not its FUTURE INDICATED and INFERRED RESOURCES. Furthermore, a large portion of the so called resources and resource base of many commodities we see listed on the USGS website will become uneconomical as the effects of declining net energy head into high gear.

(Source: Dr. A.M. Diederen, TheOilDrum: Europe)

For those readers who have just come across this new information, it sure can be an eye opener. As for others who might be skeptical, it seems quite unbelievable. At first glance it does seem a bit inconceivable, but when you take a detailed look at the future possible trends of the United States and Global EROI ratios, it is down right depressing.

A Falling EROI Ratio and Declining Net Energy

I put a link to my article above which describes this in length, but I will reproduce 2 graphs again, as these are necessary to get the point across. The first graph is a forecast of net energy declines plugging in Cutler Cleveland’s figures of past USA EROI estimates on the future of United States oil production.

United States Gross & Net Oil Production Estimates

(in thousands of barrels)

Red is Gross Production, Blue is Net
(Source: Nate Hagens, The Oil Drum)

According to the estimates in this graph, by 2010, the gross production for the United States will be approximately 1.7 Billion barrels a year with 1.5 Billion net for use in the market. The Gross production estimate for 2010 seems very reasonable as the EIA (Energy Information Agency) has reported the following annual crude oil production figures for the United States. Figures can be found from the EIA website:

USA Annual Crude Oil Production

2001…..2.12 Billion barrels
2002…..2.09 Billion barrels
2003…..2.07 Billion barrels
2004…..1.98 Billion barrels
2005…..1.89 Billion barrels
2006…..1.86 Billion barrels
2007…..1.85 Billion barrels
2008…..1.81 Billion barrels

Taking the 2010 gross minus net estimates we come up with approximately 200 million barrels in US Dollar figures as the cost from wellhead….roughly speaking. This seems quite reasonable as we will be receiving 88% net energy returned. Unfortunately, that is the good news. When we fast forward to 2025, a decade a half later, the numbers become bleak. By 2025 the gross production estimate for U.S. crude oil will be about 1.2 billion barrels and the net will only be 500 million. The EROI ratio has fallen off a cliff as well as the net energy available for use in the market. This not only means that 700 million barrels in US Dollars (if the dollar is still around) will be absorbed by the cost of the energy itself, but the United States has now past the break-even point. It cost more to produce the oil, than you get from using it. It is a NET LOSS. Basically GAME OVER for the USA.

Alright, so we now know the United States might be in serious trouble in a few years, what about the Global EROI ratio? The second graph below produces the same result, just a few years later. Nathan Gagnon, Charles Hall, and Lysle Brinker recently presented a paper to the Energies journal called “The Preliminary Investigation of Energy Return on Energy Investment for Global Oil and Gas Production.” They estimate that the EROI at the wellhead was roughly 26:1 in 1992, increased to 35:1 in 1999, then decreased to 18:1 in 2006.[7] If we take the calculations on a chart and superimpose them on a graph showing a possible future extrapolation, this is the outcome:

Linear Extrapolations of Historic Global EROI Trends

(Source: reprinted by David Murphy, The Oil Drum)

The zigzag graph with the dots represents the change in Global EROI ratio. The two dashed lines are the extreme minimum and maximum that the EROI could follow. The solid black line is the probable extrapolation based on current estimates. Based on that estimate, the Global EROI ratio hits 1:1 on approximately 2036, only a decade and a half after the United States. Of course the 2 graphs shown above are only estimates based on the limited information gathered in a very complex and rapidly changing Geopolitical and economic world. Much more research needs be done to get a better understanding as to where we are heading.

On the other hand, due to the probable rigging of the US Dollar, US Treasuries, and Interest Rate Markets over the past several decades, these future EROI estimates presented might turn out to be quite conservative. Do not forget, the EROI estimates shown in this article are based on converting energy figures into US Dollars. Most countries don’t have huge amounts of Gold bullion in their Central Banks, but boat loads of U.S. Treasuries. They classify these U.S. Treasuries as assets on their balance sheets.

When the US Ponzi Finance system comes tumbling down, and all those $trillions of dollars of paper capital (US Treasuries, 401K’s, CD’s, Pension Plans, Muni Bonds, etc and etc) vaporizes into thin air, where will the real capital come from to invest into exploring, drilling and producing energy for the future?? This is a question I doubt many newsletter writing analysts ever ponder as they cash the next check they receive from their extremely uninformed subscribers when it comes to this topic. Believe me, I am not discouraging the newsletter for hire as a form of business, rather I am just amazed at the lack of insight and comprehension many of these analysts share when it comes to the seriousness of a falling EROI ratio in the future energy and mining environment.

PEAK SILVER: The Canary in the Coal Mine

Okay…here is the information on PEAK SILVER. Always best to keep the best for last. Unless some Alien mining ship comes crashing down on earth unscathed and we have the smartest minds reverse engineer the technology within the next several years, in all likelihood, the world peaked in Global Gold Production in 2001 at 2,604 tonnes. Because gold is a special case due to its ranking as the King Monetary Metal, its peaking is not as significant as the global peaking of silver production.

Increased production of precious and industrial metals can not go on forever. When these metals, especially silver head in an exponential production projectory, it is just a matter of time before the collapse take place. Nothing that abides by the laws of nature on earth can continue in this fashion. Looking at the exponential increase of Australian mining production, we can see this taking place. Silver in Grey has the finest exponential graph of them all.

Increasing Annual Australian Mining Production
(Source: Gavin Mudd, Department of Civil Engineering, Monash University)

As most of you already know, silver is not only a monetary metal, it is also an industrial metal in high demand. Many economists and pit traders will tell you that silver is just a mere commodity. They say, its monetary status was lost decades ago. I would like to inform this kind of mindset, when the price of silver goes ballistic, amnesia, stupidity or ignorance won’t be acceptable excuses.

A far larger percentage of silver world production comes from by-product mining compared to gold. It is this very reason why silver will show the world when the production of world industrial mining is peaking. Huge copper or lead-zinc mines are not going to ramp up production just to produce more by-product silver if prices of silver head much higher. Mining companies will only increase base metal production if there is a demand for the base metal they are currently producing as the major source. How about this for an example. If you went to the store to buy red maraschino cherries, and they were out of jars of these cherries, you’re not going to buy a dozen cakes with the cherries on top just to get the amount of cherries you need. Not only is this extremely uneconomical….it’s insane as well.

Understanding the ramifications of a falling EROI ratio upon the mining industry, it becomes very apparent that the silver reserves will be the only portion available for extraction and the majority of resources and the resource base will not. If the estimates in the graphs above for US and Global future EROI ratios are accurate, then we can assume only the reserves+ may be economical in the future.

(Source: Dr. A.M. Diederen, Presentation at The Oil Drum: Europe)

Besides Strontium (Sr), Silver (Ag) has the least amount of world reserves remaining. In a recent article on kitco commentaries, David Morgan put some highlights of what Adrian Douglas had stated in a recent interview about silver (article found here):

There’s very little left on the planet. The U.S. Geological Society said just a couple years ago that silver would be the first element in the periodic table that would become extinct. It’s incredibly bullish. The USGS said that would happen by 2020. So if we’re in the situation where we can run out of silver, the price clearly has to go up, because you can’t obviously run out of silver. What will happen is, the price will have to go to a price level where it’s economic to recycle it.. (emphasis mine)

We have seen history in the making here. Normally whatever the government states, we know as of late is false. But here, we have some honesty from the USGS. Unfortunately, as energy becomes more expensive due to less net energy available due to a falling EROI ratio, even recycling will become expensive and prohibited. There will be plenty of challenges in the future for the modern technological society we live in as we transition to a world with less of everything right at the time when China and India are westernizing.

Conclusion and Final Comments

The world is peaking in global oil production. The downside slope of the graph is much worse when you factor a falling EROI (energy returned on invested) into the mix. If the certain data listed above is correct we may see the USA hit a 1:1 EROI ratio by 2020’s and the world by the 2030’s. The real damage to a modern society starts when the EROI figures reach 3-5:1. When 1:1 is reached….the movie has been over for quite a while and the theater is officially closed for business.

Liquid energy fuels are such an important part of our way of life, to transition to another type of technology or energy would cost countless trillions of dollars in an upgrade. People talk about changing the auto fleet to electric. This sounds nice on paper, but the economics, cost and logistics would make this theory, DEAD IN THE WATER. We have to start making wise decisions with the resources we have left. Until we find ZERO POINT ENERGY or some poor Alien Slob crashes his ship here on earth, we are going to have to tighten the belts, bite the bullet and get to work.

The mining industry will follow the peaking of global oil and natural gas production. There was a peak in conventional oil discoveries in 1965 and a peak in conventional production in 2005. There was also a peak in world class mine discoveries in 1981. A great deal of capital has been invested in the past several years in both the oil and mining industry, but very little to show for it. The world is surviving on the back of large depleting oil fields and declining world class mines.

The peaking of world silver production will be the Canary in the Coal mine. Soon after, we will see the peaking of world industrial production. Even though the USGS states that there are over 550 million tons of copper reserves in the world supplying 35 years production at current rates, a rapidly falling net energy supply will very quickly erode the annual production rate. Sure there might be plenty of silver in the Mexican mountains, but it will be mined in the future at a very smaller annual rate. Many people confuse the Peaking of Oil with running out. This is not the case. It is the FLOW RATE that peaks. To add insult to injury, adding the falling EROI ratio to the equation, you’ll have a lot less oil flowing a heck of a lot slower as time goes by.

I stated in the beginning of the article that I believe the world silver production peak may have occurred in 2008. The disintegration of the global economy has put a damper on base metal production along with by-product silver. I don’t see the global economy recovering anytime soon with money printing and derivative game playing as the primary source of real capital. If we don’t have a peak in world silver production in 2008, it will plateau and decline soon there after.

Reference:

[6] Metals Mineral Scarcity and the Elements of Hope, Rembrandt-TheOilDrum.com Europe/node 5559, July 9, 2009

[7] A Preliminary Investigation of Energy Returned on Energy Investment for Global Oil and Gas Production, by Nathan Gagnon, Charles A.S. Hall, and Lysle Brinker, Energies 2009, 2, Pages 490-503

Gold Mining and Sustainability: a critical reflection, Lead author- Gavin Mudd, The Encyclopedia of Earth, Sept. 12, 2008

Research Report 5 : The Sustainability of Mining in Australia - Key Production Trends and Their Environmental Implications for the Future, by Gavin Mudd, Released October 2007, Revised April 2009

Note: [6] was from part 1 of the article.

© 2009 Steve St. Angelo

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