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Energy Economics - Crash Course Chapter 19

THE reason why growth will be more scarce in the future
Friday, October 24, 2014, 6:45 PM

Chapter 19 of the Crash Course is now publicly available and ready for watching below.

The central point to this latest video is this: as we’ve shown in previous chapters of the Crash Course, our global economy depends on continual growth to function. And not just any kind of growth; but exponential growth.

But in order to grow, it must receive an ever-increasing input supply of affordable energy and resources from the natural world. What I’m about to show you is a preponderance of data that indicates those inputs will just not be there in the volumes needed to supply the growth that the world economy is counting on.

In short, on top of all the debt and other economic messes we’ve made for ourselves, constraints from the natural world will increasingly place limits on economic growth in a way we haven’t had to deal with over the past century. 

This is why I’m so confident in the claim that the next 20 years will be completely unlike the past 20.

So understanding the dynamics at play here is key to forecasting what the future will be like. Since energy is the master resource, that’s where we’re going to start.

For the best viewing experience, watch the above video in hi-definition (HD) and in expanded screen mode

Coming next Friday: Chapter 20: Peak Cheap Oil

For those who simply don't want to wait until the end of the year to view the entire new series, you can indulge your binge-watching craving by enrolling to PeakProsperity.com. The entire full new series, all 27 chapters of it, is available -- now-- to our enrolled users.

The full suite of chapters in this new Crash Course series can be found at www.peakprosperity.com/crashcourse

And for those who have yet to view it, be sure to watch the 'Accelerated' Crash Course -- the under-1-hour condensation of the new 4.5-hour series. It's a great vehicle for introducing new eyes to this material.

Transcript: 

Now we connect the second E - energy - to the first - the economy and embark on the precise line of thinking that led me to completely change my lifestyle and I call it energy economics.

And the central point to this chapter is this: as we’ve shown in previous chapters of the Crash Course, our global economy depends on continual growth to function. And not just any kind of growth; but exponential growth.

But in order to grow, it must receive an ever-increasing input supply of affordable energy and resources from the natural world. What I’m about to show you is a preponderance of data that indicates those inputs will just not be there in the volumes needed to supply the growth that the world economy is counting on.

In short, on top of all the debt and other economic messes we’ve made for ourselves, constraints from the natural world will increasingly place limits on economic growth in a way we haven’t had to deal with over the past century. 

This is why I’m so confident in the claim that the next 20 years will be completely unlike the past 20.

So understanding the dynamics at play here is key to forecasting what the future will be like. Since energy is the master resource, that’s where we’re going to start.

Before 1870, the world got nearly 100% of its energy from biomass - trees and peat and things like that, and the world's population stood at just 1.3 billion at that time.

But then coal use exploded onto the scene, and then 50 years after that oil began to occupy a significant portion of the energy mix.   Since the first use of fossil fuel energy, a stored form of chemical energy which means it's the same as food in the larder, the global population has expanded more than 5 times, total energy use by 18 times, and the world’s economy by more than 80-fold.

Now take a look at this chart of global energy use by source, or type, of energy.  Its shape should be familiar to you by now.  It is non linear... everything we think we know about the economy, our ease of life, and the way the world works was formed during a period when the most massive liberation of stored chemical energy (in the form of fossil fuels of course) occurred.

The world's main energy source was all biofuels up to 1860 and then coal began to sneak in, in 1870, but did not make up half the energy mix until 1910 a full 50 years later.

Even though it was first drilled in 1869, oil did not become a full third of the energy mix until 1960 - more than 90 years later.

And natural gas first starts to sneak into the picture in 1910 but has not yet achieved parity with coal and oil yet, although it's getting close.

The point here is that energy transitions, from one energy source to the next take many decades and for a good reason - each form of energy has a huge amount of embedded capital tied up in it.  Even though steam ships were more cost effective, it took decades before the final sailing ships rotted away into disuse.

Ditto for the transition from coal to oil for transportation.

Likewise, we should expect that any transition to solar energy will take many decades, a minimum of four, but perhaps as many as six or even ten.  The question here is, do we have that much time?

The connection I am drawing here is both simple and immensely important - both human population and the global economy expanded to their current size primarily because of fossil fuel energy. 

With sufficient surplus energy humans can construct remarkably complex creations in short order as these pictures of oil-rich Dubai taken only 17 years apart can attest.

Now we can state the next key concept of the crash course, social complexity relies on surplus energy.  By extension so does economic complexity.  Societies that unwillingly lose either their social or economic complexity, or both, are notoriously unpleasant places to live. Given this, shouldn’t we pay close attention to how much surplus energy we’ve got and what we're using it for?

To illustrate this important concept let's take a quick tour through the idea of energy budgeting.  It is the same as household budgeting but we're budgeting energy instead of dollars.  It works like this.

At any given time, there is a defined amount of energy that is available to use as we wish.  Let’s put everything into this square – solar, wind, hydro, nuclear, coal, petroleum, natural gas, perhaps a tiny spot of algae and anything else I’ve happened to miss

That’s our total pool of energy to use any way we wish.  But if we want to have more energy next year, we obviously have to invest some of our current energy stores into producing tomorrow’s energy.  We must also invest some of today’s energy in building and maintaining the capital structure that allow us to collect and distribute the energy we use to maintain our complex society.  Roads, pipelines bridges, electrical pylons, and buildings would go into this category. 

What’s left over can be used for consumption.  Part of this goes into basic living needs such as water, food, & shelter leaving the rest for discretionary things like trips to the Galapagos, purchasing hoola-hoops or tiny racing sailboats.

To simplify this even more, we can divide energy up into two big buckets; energy that must be reinvested to keep everything going and energy that we can more or less choose what to do with.

This is exactly analogous to your earnings.  Suppose your household earns $50,000 per year and your total taxes are 30%.  This leaves you  $35,000 to buy food, pay for your shelter, purchase gasoline for your car and maybe do a few other things besides. 

If this suddenly flipped around and you found yourself with only $15,000 of take home pay your situation would change drastically. 

Perhaps you could only afford food and shelter while the car and new electronics and vacations become mere distant memories.  Your life would be forcibly simplified in terms of the number of things you could afford to buy or do.  It would be unpleasant.

So I want you to begin to think of the amount of energy that we have to reinvest in order to get more energy as the same thing as the tax on your salary.

And here’s why.

Forget all about how much money energy costs because it is actually irrelevant, especially when money is printed out of thin air.  Instead we are going to focus on how much energy it takes to get energy because as I am going to show you that is what really matters.   Fortunately, the concept is easy and it’s called Net Energy.

For this chapter, we’re going to measure net energy by dividing the amount of energy we get by the amount of energy we had to use in order to get that energy.  Energy Out over Energy In. 

Energy in is the tax while energy out is our take home pay.  Imagine that if the total energy it took to get an oil well drilled was one barrel of oil and 100 barrels was found. 

We’d say that our net energy return was 100:1.  In this example, the tax we paid was 1 out of 100, or 1%.   Another phrase for this that you will frequently encounter is Energy Returned on Energy Invested which goes by the acronym E.R.O.E.I. 

We’re just going to stick with Energy out divided by Energy in for this section as it’s easier to visualize and is essentially the same thing.

Now let’s make this visual by graphically comparing the relationship between energy out and energy in.  The red part is the amount of energy we put in and the green part  is how much we got out, or the Net Energy, and we’re displaying them such that they always sum to 100%.  

In the first scenario the energy out divided by energy in yields a value of 50, meaning that 1 unit of energy was used to find and produce 50 units of energy. 

In other words, 2% was used to find and produce energy leaving us a net 98% to use however we see fit.  We could also call this part the Surplus Energy available to society.

Even at a Net Energy ratio of 15, the surplus energy available to society remains quite high.

This surplus energy, of course, is what supports all of our economic growth, technological progress and our wonderfully rich and complicated society.

Now I want to draw your attention to what happens over here on this part of the chart between the readings of 10 and 5.  The Net energy available to society begins to drops off in a manner that should be familiar to you after seeing the section on exponential charts.  Only this hockey stick points down

Below a reading of “5” and the chart heads down in earnest hitting zero when it gets to a reading of “1”. When it takes one unit of energy to get a unit of energy, there is zero surplus and there’s really no point in going through the trouble of getting it. Below a reading of five and we are on the energy cliff.

To find out why this is an enormously important chart, let’s look at our experience with Net Energy with respect to oil.  

In 1930, for every barrel of oil used to find oil, it is estimated that 100 were produced giving us a reading of 100 to 1, which would be way off this chart to the left. 

By 1970 fields were a lot smaller and oil often deeper or otherwise trickier to extract and the net energy gain was now down to a value of 25 to 1.  Still a very good return with lots of green beneath it.  By the 1990s, this trend continued with oil finds returning somewhere between 18 and 10 to 1. 

And today?  It is estimated that recent oil finds are returning somewhere between 10 to 1 and 3 to1 net energy.  Why is the net yield dropping? 

Because in the past, a relatively small amount of energy was required to create the metal for a small rig and the finds were massive, plentiful and relatively shallow. 

Today much more energy is required to find energy.    Exploration ships and rigs are massive – if we put our humble 1930’s rig to scale it looks like this.

And today more wells are being drilled to greater depths to find and produce smaller and smaller fields all of which weigh upon our net energy. And not only is harvesting oil from these more challenging deposits more costly; it’s also introduces a much higher degree of risk. When, failure occurs, as the Deepwater Horizon proved to us, the economic and ecological costs can skyrocket.

And what about the allegedly massive amounts of oil contained within the so-called tar sands and oil shales?  The ones often described as equivalent to “several Saudi Arabias?”  

We’ll talk about these in greater depth in coming chapters, but for now, we’ll simply note the net energy values for these are especially poor and in no way comparable to the 100 to 1 returns found in Saudia Arabia.   Further, the water and environmental costs associated with them are disturbingly high.

While the evidence on net energy returns of nuclear power is conflicting, it's safe to say that the old fashioned boiling water reactors of the type that failed spectacularly at Fukushima in 2011 is a LOT less than what newer designs might offer.

Once full-cycle clean up and decommissioning costs are factored in all we can say is that the jury is still out on nuclear at this point.

And what about renewable energy sources?   Methanol, which can be made from biomass, sports a net energy of about 3, while biodiesel offers a net energy return of somewhere around 2. 

Corn-based ethanol, if we’re generous, might produce a net energy return of just slightly over one, but could also be negative according to some sources.  If we add in all the other new sources for usable liquid fuels that we just talked about, we see that they are all somewhere “on the face of the cliff”.

Unless we very rapidly find ways of boosting the net energy of these options we’ll simply find far less surplus energy for our basic needs and discretionary wants.

Solar and wind are both capable of producing pretty high net returns but these are producing electricity, not liquid fuels for which we already have an extensive investment in a distribution and use.

Oh, and by the way, where’s the so-called hydrogen economy on here? Right here(!). Because there are no Hydrogen reservoirs anywhere on earth, every single bit of it has to be created from some other source of energy at a loss.

In other words hydrogen is an energy sink. In creating and then using hydrogen, we lose energy and that’s not pessimism, that’s the law.  The Second Law of Thermodynamics to be exact.  Because hydrogen is a carrier of energy, not a source, it is more accurately described like this.  A battery.

Now, to make an absurd argument because nobody would be this foolish, suppose Congress made the decision to, saaaaay, try and run our society on Corn-Based ethanol?  What could we expect there? 

Well, if we adjust our graph to reflect that decision we see a whole lot of red and very little green.  The tax is very high, while our take-home pay  is very low. 

By way of commentary, I find it somewhat telling that out of all the possible alternative energy sources, this is the one that congress chose to advance with billions and billions in subsidies.

I mean, short of directly launching barrels of oil into outer space it’s hard to imagine a more foolish idea… 

An important point here is that even if the government completely subsidized ethanol to the point that it only cost you a penny a gallon to buy, we would soon find ourselves living in a shrunken, ruined economy. 

And the reasons why have already been covered.  With less surplus energy less societal complexity is possible.  Under an ethanol regime we’d find many cherished job positions would vanish.   

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3 Comments

Wildlife Tracker's picture
Wildlife Tracker
Status: Gold Member (Offline)
Joined: Jan 14 2012
Posts: 403
Chris

I love the energy cliff chart. I would love to see a chart predicting the amount of time we have of each EROEI period. We have a lot more resources that provide an EROEI of 4 than we do an EROEI of 10. It appears to be an exponential function based on past decline rates where we have more years of EROEI 4 resources than EROEI 10 resources.

it would be nice to have a predictive model combining population rates and EROEI decline rates to get a nice estimate of how much time we have before the apocalypse happens. Or whatever works.

The reason I say this is because the energy cliff chart is very misleading despite being an awesome visual. Humans are inclined to interpret the x axis as time when in fact the time scale is probably much greater than what the cliff represents...

If you wanted to pass on that data because I can't find where you found it, I would love to play with it...

 

billybob's picture
billybob
Status: Member (Offline)
Joined: Oct 25 2014
Posts: 1
lenr

hey Chris,have you ever looked at LENR also known as cold fusion?  it's a very controversial topic,but a few reputable scientists have been working on it and are quite certain that the phenomenon is real,although not very well understood.

Empirical Spiritual's picture
Empirical Spiritual
Status: Member (Offline)
Joined: Sep 1 2012
Posts: 20
EROEI

Great presentation on the concept. The analysis focuses on the unit of a barrel. How much can efficiency of use of the units offset the impact of declining EROEI?

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