Gold mining consumes a massive amount of energy. So does Bitcoin mining, for that matter. But rather than being a drawback, I see the high energy consumption of these alternative currencies as an overlooked benefit.
After all, a currency that can't be arbitrarily created at the whim of 12 corrupt central bankers sitting in an oak-paneled conference room somewhere in the bowels of Washington D.C. is a bonus in my book. If we had been using either a gold-backed currency or Bitcoin when the 2008 financial crisis struck, it would have been impossible for the Federal Reserve to unilaterally bail out Goldman Sachs, Citigroup and all the other too big to fail banks against the will of the American people.
The fact that real energy and resources have to be expended to acquire new supplies of either gold or Bitcoin is one of the very compelling features that both of these currencies share in common. In fact, I would argue that is a vital attribute for any successful currency - it must represent a store of energy.
If we compare gold versus Bitcoin from a store of energy perspective, does one have a higher energy density than the other? And if so, by how much?
Let's examine the energy density of gold first.
Because it is impossible to get good information on aggregate energy usage in the gold mining industry, I'm going to use a single major gold producer, Goldcorp, as a proxy for industry-wide energy consumption. Goldcorp, a Canadian-based miner, is one of the world's largest gold producers, with a 2017 production total of 2.57 million troy ounces.
According to its February 2018 corporate presentation, Goldcorp attributes 14% of its production costs to either fuel (generally diesel or fuel oil) or power (mostly electricity). But Goldcorp also has other energy intensive costs that fall outside of this narrow definition of energy.
For example, tires (2%), explosives (3%), site costs (5%), maintenance parts (9%) and consumables (15%) are all energy sinks.
The massive tires used on mining vehicles are composed almost entirely of oil derivatives. A tire for the massive Caterpillar 797B dump truck weighs 11,860 pounds (5,380 kilos) and contains almost 2,000 pounds (907 kilos) of steel, which is itself a very energy intensive metal to mine and refine. It is estimated that each one of these mammoth tires consumes 100 barrels of oil to fabricate.
Explosives are another energy cost in disguise. Although it is generally accounted for as a material on a mining company's ledger, explosives are actually highly concentrated chemical energy.
Two of the most commonly used explosives in mining today are ANFO and TNT. ANFO is composed of 94% ammonium nitrate and 6% fuel oil (another hidden energy expenditure). Ammonium nitrate, in turn, is created by reacting gaseous ammonia with nitric acid. However, ammonia is not found free in nature and must instead be synthesized via the Haber process.
The Haber process is extremely energy intensive because it requires high pressures (between 150 and 250 atmospheres) and temperatures (750 to 930 °F or 400 to 500 °C) in order to work. In fact, it is estimated that ammonia synthesis via the Haber process devours more than 1% of total global energy output.
TNT, or trinitrotoluene, is hardly less energy intensive. The base chemical used to create TNT is toluene, a light hydrocarbon fractionate. Although it occurs naturally in crude oil in limited quantities, most toluene is a byproduct of gasoline production via either hydrocarbon cracking or catalytic reforming.
Gold mining site costs are another secret energy cost center. While these can vary widely from mine to mine, they include exploration drilling, mine ventilation, waste water disposal, waste rock removal and site reclamation. These activities consume large quantities of energy, only a portion of which are accounted for in raw electricity and fuel costs.
All of the equipment and replacement parts used to keep a gold mine running smoothly also cost a great deal in energy terms. Parts and machinery must be fabricated in a factory and then transported to the mine site, which is often geographically remote. Even common raw materials used in gold mining, like lime and sodium-cyanide, require tremendous amounts of energy to synthesize or extract.
And, of course, we can't ignore the fuel costs attributable to commuting mine workers and contractors, which only show up as an indirect, payroll cost.
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Overall, it wouldn't be an exaggeration to guess that anywhere from 1/4 to 1/3 of the cost of gold extraction is directly attributable to energy, either in the form of electricity or fossil fuels.
According to an estimate by industry consultant CPM Group in its 2018 Gold Yearbook, the All-In-Sustaining-Cost (AISC) to mine an ounce of gold averaged $949 across the entire gold mining industry in Q3 of 2017.
This means that there is between $237 and $316 worth of energy embedded in every ounce of gold pulled from the ground. With WTI crude currently trading at $51 a barrel and using the midpoint of the above energy consumption estimate, there is the equivalent of just over 5.4 barrels of oil used in the extraction of each ounce of gold. That is equivalent to 31.6 gigajoules (GJs) of energy per ounce!
We can calculate gold's electrical energy equivalence at around 8,800 KHW per troy ounce. This represents about 10 months' worth of electrical usage for the average American household.
So gold represents an excellent store of energy, being incredibly energy dense. But how does the energy consumption of crypto-currencies compare? Is Bitcoin far behind?
For Bitcoin's energy usage estimates, I'm going to rely heavily on the work of Alex de Vries, who is widely regarded as the world's leading authority on Bitcoin energy consumption, as well as being a prominent blockchain expert.
According to Mr. Vries latest estimates, Bitcoin's blockchain calculations consume about 67 terawatt-hours (TWH) annually, which is about the same amount of electricity that the South American country of Chile uses in a year. As of 2018, the average time between each successfully mined Bitcoin block is about 9 and 1/3 minutes. And each of these new blocks rewards miners with 12.5 new Bitcoins.
So we can extrapolate that somewhere around 704,000 new Bitcoins are created every year via mining.
This means that each freshly mined Bitcoin represents just over 95,000 KWH of electrical energy. This is equivalent to about 110 months of electrical usage for the average American household.
Although not directly comparable because Bitcoin is mined using electricity and not oil, each unit of the premier crypto-currency is equivalent to over 58 barrels of oil. This represents 342 GJ of energy per Bitcoin.
But what about the energy density of gold versus Bitcoin on a dollar for dollar basis?
With Bitcoin currently trading at $3,500, each dollar's worth of Bitcoin stores about 27.1 KWH of energy. With gold going for around $1,240 a troy ounce, every dollar of the precious metal symbolizes around 7.1 KWH.
An energy assessment of gold versus Bitcoin from an oil perspective gives us similar values. Each dollar of Bitcoin equals 0.0167 barrels of oil, while every dollar of gold is 0.0033 barrels of oil.
So Bitcoin has a clear advantage in energy density versus gold, with a ratio of 3.8 to 1 in Bitcoin's favor.
Of course, it is wise to keep in mind that this energy density ratio is somewhat arbitrary. It will fluctuate markedly with changes in the relative market value of gold versus Bitcoin. In fact, as the price of Bitcoin has dropped over the past several months, the preeminent crypto-currency has become more "energy rich" on a per dollar basis relative to gold.
Another factor to keep in mind is that both Bitcoin and gold are only energy storage vehicles in a very abstract way. It is not possible to pull electricity or oil back out of either of these alternative currencies once it has been consumed in their production.
Instead, both gold and Bitcoin provide their users with very different sets of energy-derived benefits. Gold is a physical commodity that possesses excellent corrosion resistance, malleability and ductility, as well as superb electrical and thermal conductivity. Some people bizarrely conclude that this means the yellow metal has no intrinsic value. I strongly disagree, as I argued in a recent article I wrote on the intrinsic value of gold and gemstones.
On the other hand, Bitcoin provides its users with a fully digital currency secured by an incorruptible, publicly-verifiable blockchain.
Personally, I feel that gold has the edge here, although you might reasonably reach a different conclusion. Bitcoin's blockchain technology is certainly innovative and definitely has value, but this value is completely self-referential.
For example, do we really need to know how much someone's Starbucks latte cost 5 years ago? As it is currently structured, Bitcoin will retain this (and other equally superfluous) transactional data in perpetuity.
I believe that earth's scarce energy resources could be better utilized. For instance, the electrical energy consumed in crypto-currency calculations could instead be used to tackle computationally-intensive math problems that would broadly benefit humanity. For those who are interested, this is a topic I addressed in greater detail in an article titled "Blockchain 3.0 and the Problem with Bitcoin".
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