The Empty Sea: What Future for the Blue Economy? A New Book by Ugo Bardi and Ilaria Perissi

Cover of the Italian version by Viola, Ilaria's daughter, 7 years old. 

Note of January 2019 -- the Italian version of this book is a little delayed, but still in progress. But the English version is progressing very well, it will be published by Springer.  Both versions should appear more or less together this Spring.


For this Monday post, I can only put together a very short text. We (myself and Ilaria) have been very busy with the last retouched of the manuscript for our new book that we hope to be able to ship to the publisher ("Editori Riuniti") maybe tomorrow. It should be available for purchase before Christmas.

We spent a lot of time on this book, and I can tell you that we like it a lot. We hope that the readers will like it, too. I am sorry that this first version is only in Italian, but we are planning a version in English to appear as soon as possible. In the meantime, let me pass to you a text that should appear on the back cover, translated into English.

What you will learn from this book

• How humans have been gradually discovering the sea and its resources from the time of our remote ancestors
• What is the “fisherman’s curse,” why fishermen have always been poor, and they still are!
• Why humans tend to destroy the resources that make them live: how overexploitation has destroyed many fish stocks and is still destroying them
• How pollution is affecting the sea: from the great plastic gyre to the rising sea levels
• Why aquaculture may not be the magic solution to feed the world and what we can expect from the future of fisheries.
• Can we really extract minerals and energy from the sea? It may be much more difficult than the way it is sometimes described.
• What are the limits to resources of the sea and what can we realistic expect for the future?

In addition, you will learn how the Neanderthals crossed the sea on their canoes, how it was possible that five men on a small boat could kill a giant whale, what kind of oil did the virgins of the Gospel put into their lamps, how a professor of mathematics, Vito Volterra, discovered the “equations of fishing,” of the return of sailing ships for transportation, and why it has become so easy to be stung by a jellyfish while swimming in the sea. And much, much more. You will also learn how to play the “Moby Dick game,” a simple boardgame that simulates the overexploitation of natural resources.

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Why Agriculture and Forestry Are Dead or Obsolete the Way They Are Practiced Nowadas

A post by Greg Horrall


ATTENTION: SOIL AGRICULTURE INCLUDING FORESTRY, AS NOW PRACTICED, IS DEAD OR OBSOLETE...

Dead if we keep doing it with our current dependency on mined finite-supply mineral fertilizers and obsolete if we hope to maintain even the current population... NO MATTER WHETHER IT’S DONE ORGANICALLY OR WITHOUT GMOs. Too little is now being done to respond to this. Our response options are to make some modifications to soil agricultural technologies, to develop new forms of food and fiber production and use more efficient ways of consumption that could support even higher human populations, or by default, to return to low-intensity soil agriculture + hunting and gathering that could support only a small fraction of our current population at much lower technological levels.

Why? All life on the planet (with a few very rare exceptions...organisms living on heat near underwater volcanic vents instead of using photosynthesis) depends on a very thin layer at the surface of earth’s topsoils and the photic zone of the earth’s surface waters to provide life-supporting minerals like K, P, Mg, Fe, etc. This layer, call it the life-support mineral nutrient layer (LSMNL), where photosynthesis occurs and where minerals are bioavailable (in ionic form dissolved in water)and physically accessible by photosynthesizers is where the food web begins. The soil agriculture that provides us with our endosomatic energy (food kilocalories) and our own life-support mineral nutrient needs is carried out in the LSMNL.

Agronomics as it’s done today...the selling of plant products without the return of mineral nutrients in human biowastes back to the growing soils, inevitably takes minerals out of the LSMNL much faster than they are replenished by natural processes...weathering of rocks (mechanical or biochemical) and volcanic ash deposition. Deposition of sediments in riverine flood zones can also act to replenish flood plain areas’ mineral nutrient supplies but only a small portion of the earth’s total agriculture occurs on such flood plains.

The overwhelming majority of food production today is only possible because farmers supplement soils too poor in naturally supplied minerals by applying mined (finite in supply) mineral nutrients at a high-enough rate to replenish losses due to non-return of mineral nutrients from our biowastes as well as losses to erosion and leaching which are often exacerbated by modern agricultural techniques. Modern farmers and even the simple peasant subsistence farmer are practicing nothing but another form of depletion-based technology, as is fossil fuel consumption for our exosomatic energy. Soil agriculture as we now do it consists in depleting the minerals of the LSMNL without return of the human biowastes that contain the minerals taken from the soils in our agricultural and forestry products. That’s a dead-end path, sooner or later.

Contrast the case of an ecosystem that’s running naturally. A natural forest or prairie ecosystem has virtually every sq cm of the soil covered with something that’s either growing or decomposing. No plant products are being removed. All the animals are depositing their biowastes fairly evenly over the soils. There are various species of plants with a wide range of root system depths and there are healthy micro flora and fauna in the soils capturing minerals that would leach down to lower not-root-accessible layers and also carrying out weathering processes on rocks and grains that make minerals from them bioavailable.

The monoculture of a crop growing field has mostly bare soils between plants, and also bare between growing seasons, exposed to erosional agents of wind and water. Its plants (our staple foods) have with only short depth root systems...very thin effective LSMNL. It has humans taking away mineral nutrients in the foods or fibers they harvest and never being returned to the growing fields from which they are taken.

Forestry has also become highly dependent on additions of mined mineral nutrients and is at this time our primary source of important products like wood and paper...things we need to replace with synthetic hydrocarbons. The orchard or plantation cultivation of trees is also a source of foods like palm oil and palm sugar and various fruits. The dependence of all types of tree cultivation on mined mineral nutrients has made it every bit as unsustainable as the soil agriculture that provides the bulk of our dietary needs.

(Note: Because they have deeper root systems trees have a deeper effective LSMNL but in the case of foods from trees, the yield of kcal per H-yr as well is much lower than our typical grain and legume staple crops.)


Natural forests and prairies are sustainable ecosystems.
Soil agricultural fields, “managed” forests, orchards, and plantations are not.

Sadly, and perhaps in only a few generations more, tragically, the problem of LSMNL soil mineral depletion has been getting little attention. Much more attention has been given to organic farming (stopping the use of synthetic chemical pesticides and herbicides and using natural N sources) and the fight to stop GMO technology...important matters but really secondary in comparison to LSMNL depletion.

Many people simply do not understand the situation and are unaware that virtually no agriculture or silviculture now being done is being done sustainably. Here we have the most basic and essential life support input, food, under threat of a supply collapse that could begin in just a few more generations and it’s barely registering in the public consciousness. Yes, compared to the time we have left to make an exosomatic renewable energy transition, we do still have a little bit more time left on the clock to deal with this, but it’s also a potentially far deeper and more complex problem requiring much more time to handle.

The first red warning light, and it only takes one to declare an emergency, on the LSMNL instrument panel is for our supply of the mineral P, phosphorus. Keep in mind that there are numerous life-essential minerals which means that the supply of any one of them could severely limit our food supply, but P is arguably the most essential as it is the only mineral element found in the structure of DNA. The P supply warning light is now on and, although there is no firm consensus, the range of time-left-to-exhaustion-of-economically-recoverable P-rich rock reserves is from ~70 up to 200 years at current rates of consumption. Remember, P is not a replacable commodity like fossil fuels that can be replaced by renewable energy sources, but is a non-substitutable life essential commodity., and so 70-200 years is not really much time when dealing with a supply problem for something like this.

(Note: In recent years, the P depletion problem has received a little bit of attention starting with a group led by Dana Cordell in Australia and called the “Global Phosphorus Research Initiative”. See phosphorusfutures.net. )
We should be moving now with urgency equal to that we place on our exosomatic energy supply problems to be developing and implementing the next paradigm of food production, beyond soil agriculture, something I call EternaCulture (EC)...closed mineral nutrient loop hydroponics (with very limited soil based growing of selected crops that have very low mineral content). Along with transitioning to a semi-vegan diet, this technology, if implemented well by placing most of it in tropical zones could enable us to keep our current population fed (even a much larger one) on a fraction of current agricultural land and water use. It could allow vast areas of natural prairies and forest ecosystems to re-develop on lands that would be no longer needed for meeting human needs. It would put an end to the appearance of oceanic dead zones that form due to fertilizer run-off into rivers. It would also be much more amenable to zeroing-out the use of pest- and herbicides, and it simultaneously provides for sanitation and fertilization services. As an added bonus, it would give the Southern (industrially less-developed,tropical climate zone nations) a sustainable and substantial revenue source for trading with the North.

As with the transition to renewable exosomatic energy, a transition to renewable food and fiber technology like EC will require decades of time and trillions of dollars in start-up capital, but its potential payoff is to enable a truly sustainable economy that can even continue to grow so that all the world’s people can reach a decent and healthy modern standard of living. If we could achieve that, the demographic transition phenomenon could stabilize our populations and we could continue pursuing the human dream of ad astra. Failing to make the transition to truly sustainable food production technology like EC will virtually guarantee that we will be going back to a pre-agricultural-revolution economy. Without sustainable food, no economy is sustainable, and food supply tech is the primary determinant of all other aspects of any economy.

Man’s future is going to depend more on endo-energy (food) technology than on exo-energy technology.


Some references for this article and for additional research:

http://www.californiaearthminerals.com/media/mineral-nutrient-depletion-in-us-farm-and-range-soils.pdf

https://www.webnat.com/articles/MineralDepletionCauses.asp

http://wildancestors.blogspot.co.id/2011/08/farmers-of-forty-centuries.html

http://wildancestors.blogspot.co.id/2012/04/dirt-erosion-of-civilizations.html

https://www.phosphorusplatform.eu/links-and-resources/p-facts/p-fact-1

http://phosphorusfutures.net/

https://www.nasa.gov/content/goddard/nasa-satellite-reveals-how-much-saharan-dust-feeds-amazon-s-plants

http://onlinelibrary.wiley.com/doi/10.2307/1939481/epdf?r3_referer=wol&tracking_action=preview_click&show_checkout=1&purchase_referrer=onlinelibrary.wiley.com&purchase_site_license=LICENSE_DENIED

http://ipcm.wisc.edu/blog/2011/01/average-soil-test-phosphorus-and-potassium-levels-decline-in-wisconsin/

http://www.forestryfocus.ie/growing-forests-3/establishing-forests/fertilisation/

http://www.chestnuthilltreefarm.com/store/pg/36-Chestnut-Orcharding.aspx


About this post’s author, Greg Horrall:


An American raised in the farmlands of Indiana and living for the past 11 years in a small subsistence farming village in Yogyakarta, Indonesia, a graduate of Purdue University where he majored in Mathematics and minored in Physics and Aerospace Engineering followed by some graduate studies in Nuclear Fusion, Atmospheric Science, Photogrammetry, and Remote Sensing, Greg followed a career path in aerial imagery and topographical mapping and then became a spirulina culturist. He is now a struggling entrepreneur focused on ideas that follow the principles of what he calls Sustetatek, sustainable and efficient technologies for mankind’s flight into the future, and is currently working on a number of small projects like closed mineral nutrient loop food growing, an emoped, and a PVC-steel composite microhouse.

New Rare Earth Resources: A Non-Solution For A Non-Problem

Above: the report on the "Financial Post" of April 13, 2018. The study that the report describes is not just a bad paper, but something highlighting the shortcomings of our whole society in understanding and managing mineral depletion.

Any report on mineral availability that starts with "a semi-infinite deposit" should be taken with great caution - it reminds of when Julian Simon said that we have oil for "six billion years". About this report on rare earths, I'd say that calling it "clueless" is way too kind. But there is nothing to do: the term "rare" in the concept of "rare earth minerals" rattles so much inside people's minds that they imagine both a non-existing crisis and non-existing solutions.

So, what do we have here? A grand claim about rare earth resources that comes from a paper recently published in Nature. Let's go see it.

The term "tremendous" in the title of a scientific paper should ring more than a few bells in one's mind, but let's go to the meat of the paper, what did the authors found, exactly? Basically, that the concentration of rare earths and yttrium (that they call REY) in the mud of some areas at the bottom of the Pacific Ocean is larger than the average concentration in the earth's crust.

So far, so good. Then the authors go on to calculate the total amounts of rare earths that could be found in the large areas examined and conclude that these can be considered as "semi-infinite" resources. (the term is straight from the paper, it is not an invention of the journalist of the "Financial Post.").

At this point, you would ask at what cost these "semi-infinite" resources could be recovered, but this question is wholly ignored in the paper. The only instance where the term "cost" appears is when they say:

Because the amount of the resource is enormous, improving the ore grade will greatly enhance the economic value of the mud even if the recovery yield is somewhat lower than that we observed. A decrease in mud weight and volume will directly lead to reductions in smelting costs.

You wonder what Nature uses reviewers for, right? But, apart from meaningless paragraphs like this one, the problem is fundamental: extraction is not a question of amounts, it is a question of cost and the cost is directly related to grade. This basic point is never discussed in this paper, except for defining the underwater deposits as "extremely high grade." (and note that they use the term 18 times in the paper!)

"Extremely high grade," you say? Let's see. From the maps of figure 2 in the paper, it turns out that for most of the area explored the concentration is well below 2,000 ppm, that is less than 0.2%. In the text, the authors say "REY-rich mud having a maximum of almost 8,000 ppm (0.8%) of total REY content (ΣREY) was confirmed." But this is a maximum, not an average. Elsewhere in the paper, they speak of larger concentrations, but they seem to refer to special areas.

So, let's assume, optimistically, that 0.2% is the average concentration of rare earth minerals in this oceanic mud. Is this an "extremely high grade"? Well, high ore grade, in this case, may be all in the eye of the beholder. Let's compare with what we have on land. There is a recent review by Paulick and Machacek of the situation of rare earth extraction. It is a long and complex story, but the gist of it is that it is difficult to extract rare earths for a total concentration of oxides below 1%. Many mines operate on ore grades higher than 1%, some even up to 6%-8%. Paulick and Machacek state that "Overall, it could be assumed that deposits in the 2–4 wt% grade range may be in a position to add to global REE production at competitive operation costs."

There follows that the "extremely high grade" ores found by the Japanese researchers at the bottom of the ocean are well below what we need in order to be extractable at costs compatible with the present market conditions. 

And that doesn't take into account that these ores are at the bottom of the ocean, which is a (probably "tremendous") additional cost. The authors recognize the problem but don't quantify it, limiting themselves to state that, "if a hydrocyclone can be operated in-situ on the deep-sea floor, it would be possible to reduce lifting costs," Yeah, sure, and as Lewis Carroll said, "sometimes I've believed as many as six impossible things before breakfast."  Finally, there is no mention of the impact on the marine ecosystem of lifting untold billion tons of materials from the bottom of the Pacific Ocean. An impact that might truly deserve the adjective "tremendous." 

You see how bad this study is, but the problem is not so much the hype ("semi-infinite amounts," "extremely high grade," "tremendous potential," etc.) - after all, hyping one's minor discoveries to turn them into major breakthrough has become a cottage industry in science. The problem is worse. 

The problem is that these claims go straight to the media and are not challenged or, if they are, the challenge is not visible to the public. For the layman, the impression may well be that there are "semi-infinite" rare earth resources, which is not the case. But it is not even the case that we are "running out" of anything. Depletion is not about running out, depletion is about increasing extraction costs and if the extraction of something costs more than what you can afford to pay, then you may as well say that you "ran out" of it. But it is a different story and we aren't there yet with rare earths: we have time to adapt by using less and recycling.

Still, it seems to be impossible to pass this message to a society whose behavior can be best described as "knee-jerk" reactions - that is, showing only two states of understanding of the situation: complacency or panic (quote by James Schlesinger). It is not the only case in which society as a whole completely misunderstands what the real problems are (just think of climate). 

And, as usual, we march into the future blindfolded and along a narrow path with cliffs on both sides

Image h/t Max De Carlo. To know more, you may wish to read my book Extracted: How the Quest for Mineral Wealth Is Plundering the Planet

The Romans and Us. Why State Violence is on the Rise

The Spanish police injured hundreds of people, including women and the elderly, during the referendum for the independence of Catalunya, in 2017 (image source). It was not the worst that states can do - and have have been doing - to their citizens, but it is an indication that state violence is on the rise. Perhaps we can find reasons for this trend if we look back at history, all the way to ancient Rome. The Romans were extremely cruel and violent, perhaps an effect of their reliance on slaves. In our case, we have replaced human slaves with fossil slaves (fossil fuels) but, as they are abandoning us, we risk to return to the violence of ancient times.

The more you study ancient Roman history, the more you realize how similar to us the Romans were. The economy, money, commerce, travel, bureaucracy, laws - so many things in our world find a parallel in the Roman world, even though often in a much less sophisticated form. So, if you were to use a time machine to be transported to ancient Rome, you would find yourself in a familiar world in almost all respects. Except for one thing: you would be startled by the violence you would encounter. Real, harsh, brutal violence; blood and death right in front of you, in the streets, in the arenas, in theaters. It was not the random kind of violence we call "crime," it was violence codified, sanctioned, and enacted by the state.

When we think of violence in Roman times, we normally think of gladiator games. Those were surely bloody and violent, but just part of the story of how the Roman state managed violence. The Roman courts meted capital punishment with an ease which, for us, is bewildering. Poor people, slaves, and non-Roman citizens were especially likely to be declared "noxii" (plural of noxius) and condemned to death.

In those times, there was no such thing as a "humane" way of killing the noxii. On the contrary, their suffering was supposed to be an example - the more they suffered, the better. They were tortured, beaten, flogged, crucified, chocked, dismembered, burned, and more. It seems that they could even be killed also for theater plays: when the plot involved the death of a character, the actor playing the role could be replaced with a noxius who would be killed for real for the pleasure of the audience. (Tertullian reports this, although it is not clear how common it was).

As another example, the Roman law said that when a slave killed a master, all the slaves of that household were to be executed, even those not involved in the murder. Tacitus, (Ann. 14.42.2) reports that the law was put into practice when the slaves of a rich patrician - hundreds, at least - were executed after that their master had been killed by one of them over, apparently, a love rivalry. That was justified because it was to be seen as an example.

How is it that a supposedly advanced civilization as the Roman one could behave in this way? One word: slavery.

That needs to be explained. First of all, all societies are based on some kind of social control. If humans were ants, cooperation would be coded in their genes. But, in humans, personal interest may go against the common good. To avoid that, there is a need for negative or positive enforcement: what we commonly call the carrot or the stick.

Positive enforcement may be food, sex, shelter, and other forms of gratification. Negative reinforcements can be the denial of all that, but also physical punishment: flogging, beating, torturing, etc.

In our society, we tend to believe that positive reinforcements are better than negative ones. For instance, we agree that our accountants, lawyers, teachers, doctors, and the like don't do their job because they are flogged or beaten if they don't. They do their best because they look for money, the primary form of positive enticement in our world.

Our society is possibly the most monetarized in history in the sense that we tend to believe that money can push people to do more or less everything. You probably know the joke about how economists hunt elephants: they don't, but they believe that elephants will hunt themselves if they are paid enough.

But how about the ancient Romans? In many cases, they used money just like we do. For instance, the Roman soldiers fought because they were paid: the very word "soldier" comes from a late Roman coin. Probably, the Romans knew perfectly well that negative reinforcements - beating, flogging, etc. - were not the best way to entice people to do their best. But they had a big problem with their slaves.

Slaves were the backbone of the Roman society, but how could they be motivated to work? By paying them money? Hardly. The majority of slaves were engaged in menial tasks, sometimes they were expendable manpower for mines and other dangerous tasks. Giving money to them would have had no sense: how could they spend it? The Roman economy couldn't produce the variety of toys and trinkets that we use to mark people's social status - a game we know as "keeping up with the Joneses."

It is true that some slaves formed an upper crust of professionals - they occupied the social space that's today occupied by the middle class. These relatively well to do slaves could own money, but that didn't change the fact that they were slaves and, in most cases, they were expected to remain so for life. Freeing slaves was maybe a positive stimulus, but it was rare and often just a way for a master to get rid of an old and useless slave.

So, negative enforcements - the stick - were used to control the slaves. Harsh punishments were lavishly applied not only to slaves, but the underclass of the libertii (freed slaves), the poor, and the foreigners. The Romans were so cruel because they had to constantly remind to the underclass what was their place and that they were always just one step away from being sent ad bestias, condemned to be eaten by wild beasts in the circus.

Everything has a logic and it seems that also being cruel has a logic - although not a pleasant one. And now we can apply this logic to our society. We don't have human slaves, but we have fossil slaves in the form of fossil fuels. We deal with fossil fuels in ways similar to those the Romans used toward their slaves (as noted also by Mouhot). Just like the Romans used their human slaves to build their civilization, we used the power of fossil fuels to build ours. One of the consequences is that we didn't need (so far) the kind of wanton cruelty that the Romans used toward their slaves. Our fossil slaves never complained about being burned inside boilers and engines.

But it is also true that fossil fuels are becoming gradually more expensive as we use them, because of the depletion of the best resources. Then, we badly need to reduce their use in order to avoid the worst effects of global warming. Our fossil slaves are leaving us; it is unavoidable.

The consequences are already visible: increasing inequality, extreme poverty, societal stress, and more. We haven't returned to the kind of formal separation among classes that defines some people as "slaves" in the Roman sense of the term, but we are seeing the rise of "debt slaves." In principle, debt is something that is supposed to be repaid by hard work. But, in many cases, it is becoming apparent that no matter how hard and for how long a person will work, they'll never be able to repay their debt. So, how can debt slaves be motivated?

The answer is the same that the ancient Romans had found: using negative enforcement methods, that is punishments, even harsh ones, meted by the state in its various branches: the police, the judiciary, the army, etc. And it seems to be exactly what we are seeing.

It is difficult to find reliable statistics on the increasing trend of state violence. Possibly, the most evident set of data we have is for the incarcerations in the US, showing an increase of a factor of five of the number of inmates from 1980 to 2014. Other forms of state-sanctioned violence can be judged only in qualitative terms, but it seems clear that we are in a historical phase in which states are more and more torturing, beating, shooting, and harassing unarmed citizens. The beating of Spanish citizens by the state police in Catalunya in 2017 is just an example.

So, here we are: seeing a spiral of violence that threatens to engulf all of us. To avoid that, I think we can learn a lot from the experience of the ancient Romans. Their source of energy was human slaves and that was the reason leading them to be so horribly cruel and violent. We have been lucky enough that we didn't need human slaves (so far) and so we could create a reasonably peaceful society - at least a society that was far less cruel than that of the ancient Romans. But if we have to revert to human slaves, we'll return to a cruel and bloody world, as it has been the rule for most of human history.

If we want to avoid this sad destiny, the only hope we have is to replace the fossil slaves with renewable, solid-state slaves who won't complain about staying in the sun to provide energy for us. A solar-powered society doesn't need human slaves and it can be reasonably peaceful. We can build a society based on solar energy, but we have to do it fast -- before the dark fossil slaves leave us forever.



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A good book on violence in Roman times is "Spectacles of Death"; by Donald G. Kyle (1998) a paper on economic inequality during the Roman Empire is the one by Scheidel, W., & Friesen, S. (2010). "The Size of the Economy and the Distribution of Income in the Roman Empire", Journal of Roman Studies, 99 DOI: 10.3815/007543509789745223

The Seneca Cliff of the Gold Industry.

This article is reposted from Steve St. Angelo's website with the kind permission of the author. It illustrates a typical theme of the "Cassandra's Legacy" blog, the fact that all human enterprises are dynamic; they evolve, change, and adapt to the challenges generated by the environment. 

In particular, the mining industry follows a typical dynamic cycle of exploitation generated by the gradually declining profits that come from mining less and less concentrated ores. It is true for crude oil and it is true for gold as well. The latter is perhaps the mineral mined today at the lowest possible concentrations. For gold, concentration (or ore grade, if you prefer) is the crucial parameter that determines the cost of production. As a consequence, the gold mining industry is especially fragile and vulnerable to depletion coupled to market oscillation. The current situation is explained by Steve Rocco in detail in this fascinating and informative post. 

THE FRAGILE GOLD INDUSTRY: Gigantic Equipment, Massive Capital Expenditures & Rising Costs

POSTED BY SRSROCCO IN MINING, NEWS, PRECIOUS METALS ON OCTOBER 18, 2017 — 

The gold industry has been built on the leveraging of debt and energy.  The days of using human and animal labor to produce the precious yellow metal are long gone.  While some gold is still mined the old fashion way, the overwhelming majority is produced by using colossal-sized mining equipment, massive amounts of capital, energy, and materials.  Thus, the global gold supply comes via a very complex industry with a lot of moving parts.  When one of these critical parts are in short supply or removed, then the entire gold supply system disintegrates.

An example of one of the newest complex gold mines in the world is the Pueblo Viejo Mine in the Dominican Republic, owned by Barrick (60%) and Goldcorp (40%), which cost a staggering $3.7 billion to build.  The Pueblo Viejo Mine started production in 2013 and is now running a full capacity.  Gold production at the Pueblo Viejo Mine is over one million ounces per year.  According to Barrick, it’s cost of sales at Pueblo Viejo was $564 an ounce in 2016.  However, cost of sales does not include “all costs.”  We must also factor General and Administrative, Exploration-Evaluation, Mine Closure and Income Tax expenses.

However, these additional expenses do not include the initial $3.7 billion cost to build the mine.  According to data, the Pueblo Viejo Mine has approximately 15.5 million oz (Moz) of proven and probable gold reserves.  Even though additional gold discoveries at the mine will be added in the future, if we assume a 15-year initial payback period, the annualized capital cost would be an extra $250 per oz of gold produced.

Thus, the $564 cost of sales plus $250 capital cost now equals $814 an ounce.  But, this does not include the additional expenses which would push the actual total cost from the Pueblo Viejo Mine over $900 an ounce.  This is just my simple calculation which shouldn’t be compared to the industry’s more complex accounting of Net Present Value.  Even though the Pueblo Viejo Mine is Barrick’s lowest cost gold mine in the company, Barrick’s total cost to produce gold last year was $1,125, based on the $1,251 spot price.  Again, that is my simple “Net Income Break-Even Analysis.”

Regardless, the Pueblo Viejo Mine is a very advanced complex mine that processed 7.5 million tons of ore to produce the 1.1 Moz of gold last year.  According to Barrick’s 2016 Sustainability Report, the Pueblo Viejo Mine consumed the following in 2016:

Pueblo Viejo Mine Materials & Energy Consumed:

1. 4.9 billion gallons of water
2. 3,100 metric tons cyanide
3. 338,000 metric tons lime
4. 18.7 million GigaJoules of Energy (3.1 million barrels of oil equivalent)

There are many other materials not included in that list above, but the ability to produce gold at the Pueblo Viejo Mine is only possible from a very complex supply chain.  The majority of materials and energy consumed by the Pueblo Viejo Mine has to be transported to the Dominican Republic Island in the Carribean.

For example, Barrick’s mining equipment fleet at the Pueblo Viejo Mine includes following (info from OSIsoft Report):

1. (34) CAT 789 Haul Trucks
2. (2) Hitachi 3600 Shovels
3. (3) CAT 994F Front Loaders
4. (30) Support equipment

The estimated maintenance budget for just the haul truck fleet is $18 million.  And when one of the 34 trucks goes out of service, it cost one hell of a lot of money.  The truck downtime cost is $700 per hour.  The six tires the CAT 789 Haul truck uses cost approximately $30-40,000 a piece and last a little more than a year.  The CAT 789 Haul truck gets about 0.3 miles per gallon.

(CAT 797F transported by Mercedes Semi-tractor)

Now, the featured picture (above) that I used for this article is not the CAT 789; it is the CAT 797.  The CAT 797 weighs twice as much as the CAT 789, used at the Pueblo Viejo Mine.  However, I just wanted to give an idea of just how big these haul trucks can get.

Furthermore, the mining, excavating and hauling of ore out of the Pueblo Viejo Mine is controlled by high-tech computerized systems.  The hauling of the ore by the large truck fleet is monitored by state of the art technology that designs the most efficient method to remove the ore out of the mine, so very little time is wasted.  Again, time is money.

We must remember, the more technology that is used in a system, the more complex and fragile it becomes.  Of course, technology is great at making large operations run more efficiently and faster, but the downside is that if one or more critical parts are removed, the complex mining system breaks down.  What would happen to gold production at the Pueblo Viejo Mine if cyanide becomes in short supply?  Without cyanide, the processing of gold ore grinds to a halt.

While I have provided one example of the enormous cost and massive amounts of capital needed to produce gold and one mine, let’s take a look at what is going on at the top 8 gold mining companies in the world.

Top 8 Gold Mining Companies Costs & CAPEX Spending Surge

It is quite amazing how much more it costs to produce an ounce of gold today than it did at the beginning of the century.  The huge rise in the total cost to produce gold is why the price is nearly five times higher.  Unfortunately, many precious metals analysts suggest that the increase in the gold price is due to either market sentiment or increased demand.  I have stated in several articles that the tremendous increase in the gold price was due to the rise in the price of oil:

However, there are additional factors that also impact the cost to produce gold.  For example, the gold mining industry now has to move a great deal more ore to produce the same amount of gold it did in 2000.  The next chart shows the falling yield in the top gold mining industry from 2005 to 2013:

In just eight years, the top five gold miners experienced a near 30% decline in average gold yield from 1.68 g/t (grams per ton) to 1.2 g/t.  If we went back five more years to 2000, I would imagine it would be closer to a 40% decline in average yield.  Thus, it now takes the processing of 40% more ore to produce the same amount of gold today.  Which means, it now takes a hell of a lot more energy and materials to produce gold today than it did 16 years ago.

This next chart puts into perspective the increased cost to produce gold today versus in 2000:

This graph shows the increase “Cost of Goods Sold” for producing gold at the top 8 gold mining companies in the world.  Even though many of the companies have seen a decline in the Cost of Goods Sold since the peak in 2013, the overall figure is still much higher than it was in 2000.  Some of the companies included in the chart above have seen their Cost of Goods Sold increase significantly because they increased their gold production substantially.  However, Barrick did not have that excuse.

Barrick produced 5.9 Moz of gold with a $553 million cost compared to $5.4 billion in 2016 on 5.5 Moz of gold production.  Here we can see that Barrick’s Cost of Goods Sold increased ten times while production is about the same.

According to the data at YCharts.com and these companies’ annual reports, the total Cost of Gold Sold in 2000, was $4.9 billion ($4,953 million) versus $23.6 billion ($23,588 million) in 2016:

Now, what is amazing about the figures in the chart above is that the Cost of Goods Sold figure has more than quadrupled while total gold production in the group only increased by 2 Moz.  The top 8 gold miners Cost Of Goods Sold increased from $206 per oz in 2000 to $907 last year.   The huge increase in cost to produce gold is the very reason the price surged from $279 in 2000 to $1251 in 2016.  Let’s look at the comparison:

Cost of Goods Sold vs. Gold Price:

2000 vs. 2016 Cost of Goods Sold = 4.4 times increase

2000 vs. 2016 Gold Price = 4.5 times increase

So, if we removed all SUPPLY & DEMAND forces from the equation, it is quite surprising that the gold price is up by the same amount as the cost to produce gold.  However, we need to also look at the rise in capital expenditures.  During the same period, the top 8 gold miners total capital expenditures increased from $1.7 billion ($1,723 million) in 2000 to $6.1 billion ($6,088 million) in 2016:

Again, we can see that total capital expenditure (CAPEX) increased from $72 per ounce in 2000 to $234 an ounce in 2016, while overall production only increased by 2 Moz.  The group’s CAPEX spending only increased 3.2 times versus the 4.4 times in the Cost of Goods Sold, but it shows that it cost a heck of a lot more money to sustain or replace production.

If we understand that the present value of gold is tied to its cost of production, then we would realize it has a PRICE FLOOR.  Sure, the gold price could spike lower, but its average annual price has remained close to (or above) its cost of production for quite some time:

This chart represents my “Net Income Breakeven Analysis” for Barrick and Newmont, the two top largest gold companies in the world.  As I also mentioned above, Barrick’s cost to produce gold in 2016 was $1,125 when the spot price was $1,251.  Thus, the market has priced gold above its cost of production (in these two companies) since at least 2000.

Lastly, the gold mining industry needs a vast amount of materials, parts, energy as well as a very complex supply chain system to produce the precious yellow metal.  If one part of the supply chain breaks down, then it becomes extremely difficult or impossible to produce gold.  While there are many fragile aspects of the modern high-tech gold industry, I believe ENERGY is the most crucial.

Once the world starts to experience a decline in global oil production, the vast supply chain system will begin to break down.  This will impact the largest mines the most.  I will be writing more about this subject matter and also why a declining global oil supply will push the price of gold up much higher.

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