Following the masses on Wall Street and in the financial markets has worked out pretty well for most people over the past several years, however there is something to be said for being the contrarian.
The contrarians are usually the people that do manage to hedge their bets and protect themselves fiscally before a large crash. There are many such people around, and each has their different take and reasoning on what may unfold soon for the American economy. One such thinker is Steve St. Angelo, of the SRSrocco Report and a regular contributor to an investment news website.
St. Angelo has been a precious metals investor and researcher since 2002, and in 2008 began studying something called the Falling EROI (Energy Returned on Investment). The EROI, he claims, is what will likely hinder and possibly doom the American (and world) economy. “The falling EROI is now causing a great deal of stress and trouble in the global markets, and understanding this fact is critical,”.
EROI is essentially the Law of Thermodynamics, which most people intuitively know even though they are not scientists. St. Angelo explains “it is the basic equation that allows life or death of a single celled organism, plant, animal, human, business, corporation, government or empire. When the system is consuming more energy than it can acquire, the organism dies or the business goes bankrupt. While the Energy Returned On Investment for a human is measured in how much food it can acquire to stay alive, for a business, it pertains to its profits.
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No business, or industry, can survive for long if it is spending more than it earns. One could also say that about a government, but of course that gets a little more complicated. With a federal government, if it is in the Red it can borrow money almost endlessly. That is, until the debt burden becomes unaffordable. This often happens when interest rates rise- as they are starting to now.
The world economy runs on fossil fuels- oil and natural gas mostly. The easy gains and productivity appear to have vanished. Would we be drilling offshore if we did not have to?
“In the 1930’s, the U.S. Oil Industry was producing oil at a 100/1 EROI. This means, the oil industry was providing 100 barrels of oil to the market for the energy cost of one barrel.
Over the past 80+ years, the EROI of U.S. oil production has continued to decline as the production of shale oil has a very low EROI of 5/1. Not only is the EROI of shale oil too low to maintain our current standard of living, the industry as a whole hasn’t made any money producing shale since it started in 2007. To be able to produce this unconventional, low-quality oil, the shale oil industry resorted to selling shares and piling on a massive amount of debt,”.
St. Angelo contends that our economy is run on energy, not finance. Thus we need a high EROI of oil/ natural gas to sustain our modern high-tech economy and society. “Unfortunately, alternative energy solutions such as wind and solar power will not work because they are fossil fuel derivatives. Without the burning of a massive amount of oil, natural gas and coal, wind-solar power would not be possible,”.
If he is correct, worldwide oil and natural gas production will decline- just as populations increase and more portions of the population catch up to the USA and Europe in their desired quality of living. Central banks can print money, but they cannot print barrels of oil. “Falling oil supply results in less economic activity. Just think about how a 50% drop in petroleum consumption by Americans would impact businesses and real estate values in large cities like Chicago, New York, Los Angeles and Dallas?”.
Ideally, according to St. Angelo, the best solution (barring a miracle in new technology or an ultra-powerful new energy solution/fuel) is for worldwide managed “de-growth”. This would allow for the world and economies to regress and take a step backwards in order to collectively use much less fossil fuels than in 2018. The likelihood of this happening in a far-reaching and voluntary manner is not good. St. Angelo believes what is more likely to occur, sometime in the next 10-15 years, is that much of the world (including the USA) will be forced to use significantly less energy. Our economy and quality of living will be changed for the worse. “Within a relatively short period of time, the world will become a much different place”.
Others have differing opinions and analysis, but it is wise to review contrarian arguments- even if you don’t want to believe them. Use your judgment to determine your own best fiscal course of action, acknowledging that there is no crystal ball. Following the herd mentality works… until it doesn’t.
The views expressed in this opinion article are solely those of their author and are not necessarily either shared or endorsed by EagleRising.com