The implications of EROEI & peak oil

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switters's picture
switters
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The implications of EROEI & peak oil

I highly recommend the following article, which was recently posted to The Oil Drum, to anyone who wishes to increase their understanding of the importance of EROEI to future energy supply.

Implications of Energy Return on Investment, Peak Oil and the Concept of “Best First”

The enormous expansion of the human population and the economies of
the United States and many other nations in the past 100 years have
been accompanied by, and allowed by, a commensurate expansion in the
use of fossil (old) fuels, meaning coal, oil and natural gas. To many
energy analysts that expansion of cheap fuel energy has been the
principal enabler of economic expansion, far more important than
business acumen, economic policy or ideology although they too may be
important (e.g. Soddy 1926, Cottrell 1955, Georgescu Roegan 1971, Odum
1972, Kummel 1982, Kummel 1989, Jorgenson 1984 and 1988, Hall et al.
1986 (and others), Dung 1992, Ayres 1996).

While we are used to thinking about the economy in monetary terms,
those of us trained in the natural sciences consider it equally valid
to think about the economy and economics from the perspective of the
energy required to make it run. When one spends a dollar, we do not
think just about the dollar bill leaving our wallet and passing to some
one else’s. Rather, we think that to enable that transaction, that is
to generate the good or service being purchased, an average of about
8,000 kilojoules of energy (equal to roughly the amount of oil that
would fill a coffee cup) must be extracted from the Earth and turned
into roughly a half kilogram of carbon dioxide (U.S. Statistical
Review, various years).

History has shown that removing the energy supply from the economy
will cause it to contract immensely or even stop. Cuba found this out
in 1991 when the Soviet Union, facing its own oil production and
political problems at that time, cut off Cuba’s subsidized oil supply.
Both Cuba’s energy use and its GDP declined immediately by about one
third, all groceries disappeared from market shelves within a week and
the average Cuban lost 20 pounds (Quinn 2006). Cuba subsequently
learned to live, in some ways well, on about half the oil as
previously, but the impacts were enormous. While the United States has
become more efficient in using energy in recent decades, most of this
is due to using higher quality fuels, exporting heavy industry and
switching the way we define economic activity (e.g. Kaufmann 2004).
Many other countries, including efficiency leader Japan, are becoming
substantially less efficient (Hall and Ko, 2007, LeClerc and Hall 2007,
Smil, personal communication).

So if energy is required for economic growth and maintenance, then
the important question is how much oil and gas (i.e. energy) is left in
the world? The answer is a lot, although probably not a lot relative to
our increasing needs, and maybe not a lot that we can afford to exploit
with a large financial and, especially, energy profit. Therefore a more
precise question might be, “How much oil is left that will yield a
large energy profit?" Energy return on investment is a way to answer
the latter.

Energy Return On Investment (EROI or EROEI) is simply the energy
that one obtains from an activity compared to the energy it took to
generate that energy. The procedures are generally straightforward;
simply divide the Energy Gained (Out) by the Energy Used (In),
resulting in a unitless ratio. The running average EROI for the finding
and production of US domestic oil has dropped from greater than 100
kilojoule returned per kilojoule invested in the 1930s to about 30 to 1
in the 1970s to between 11 and 18 to 1 today. This is a consequence of
decreasing energy returns as oil reservoirs are depleted and as energy
costs increase as exploration and development are shifted deeper and
offshore (Cleveland et al. 1984, Hall et al. 1986, Cleveland 2004).
Even that ratio reflects mostly pumping out oil fields that are half a
century or more old since we are finding few significant new fields. In
other words we can say that new oil is becoming increasingly more
costly, in terms of dollars and energy, to find and extract. The
increasing energy cost of a marginal barrel of oil or gas is one of the
factors behind their increasing dollar cost, although if one corrects
for general inflation the price of oil has increased only a moderate
amount.

The same pattern of declining energy return on energy investment
appears to be true for global petroleum production. Getting information
on global oil production is very difficult, but a study currently
submitted for publication indicates that the global EROI for petroleum
production has been declining over the past 8 years and is currently
about 18:1 (Gagnon and Hall, submitted). In fact, if the rate of
decline continues linearly for several decades then it would take the
energy in a barrel of oil to get a new barrel of oil. While we do not
know whether that extrapolation is accurate, essentially all EROI
studies of our principal fossil fuels do indicate that their EROI is
declining over time, and that EROI declines especially rapidly with
increased exploitation rates (e.g. drilling).

This decline appears to be reflected in economic news also. In
November of 2004, The New York Times reported that for the previous
three years oil exploration companies worldwide had spent more money in
exploration than they had recovered in the dollar value of reserves
found. Therefore it is possible that the energy “break-even” point has
been approached or even reached for finding new oil. Whether we have
reached this point or not the concept of EROI declining toward 1:1
makes irrelevant the reports of several oil analysts who believe that
we may have substantially more oil left in the world, because it does
not make sense to extract oil, at least for a fuel, when it requires
more energy for the extraction than is found in the oil extracted.

Declining EROI rates for US and World oil exploration and production
indicate that our [society’s] ability to weather the coming peak oil
storm will depend in large part on how we manage our investments now.
From the perspective of energy, there are three general types of
investments that we make in society. The first is investments into
getting energy itself; the second is investments for maintenance of,
and replacing, existing infrastructure; and the third is discretionary
expansion. In other words, before we can think about expanding the
economy we must first make the investments into getting the energy
necessary to operate the existing economy, and into maintaining the
infrastructure that we have, at least unless we wish to accept the
entropy-driven degradation of what we already have. Declining EROI
means that the required investments into the second and especially the
first category are likely to increasingly limit what is available for
the third. In other words, the amount of energy and dollars spent
supplying the energy for economic maintenance will likely increase,
while the remainder left for discretionary purposes will likely
decrease.

Declining EROI is mainly a consequence of the “best first”
principle. This is, quite simply, the characteristic of humans to use
the highest quality resources first, be they timber, fish, soil, copper
ore or, of relevance here, fossil fuels. This is because economic
incentives are to exploit the highest quality, least cost (both in
terms of energy and dollars) resources first, as was noted 200 years
ago by economist David Ricardo (1891). For instance, the peak in
finding oil was in the 1930s for the United States and in the 1960s for
the world, and both have declined enormously since then. An even
greater decline has taken place in the efficiency with which we find
oil; that is the amount of energy that we find relative to the energy
we invest in seeking and exploiting it. The pattern of exploiting and
depleting the best resources first is occurring for natural gas as
well. US natural gas originally came from large fields in Louisiana,
Texas and Oklahoma. Its production has moved increasingly to smaller
fields distributed throughout Appalachia and, increasingly, the
Rockies. The largest fields that traditionally supplied the country
with natural gas peaked in 1973, and then as “unconventional” fields
were developed a second, somewhat smaller peak occurred in 2007.

In summary, there are three related forces that may reshape
societies and economies around the world: peak global oil production,
declining EROI of global oil exploration and production, and the “Best
First Principle”. They imply that we no longer have the ability to
substantially increase oil production without substantially increasing
the amount of oil used to get that oil, and finally, that any new
discoveries will invariably cost increasing amounts of money and energy
to produce. The interplay of these three forces will most likely limit
the amount of money designated for discretionary spending, while
increasing the amount of money and energy needed just to sustain
economic function.

Ayres, R.U. (1996). Limits to the growth paradigm. Ecological Economics, 19, 117-134.

Cleveland, C. J. (2005). Net energy from the extraction of oil and
gas in the United States. Energy: The International Journal, 30(5),
769-782.

Cleveland C. J., Costanza, R., Hall, C.A.S. & Kaufmann, R.K.
(1984). Energy and the US economy: A biophysical perspective. Science,
225, 890 897.

Cottrell, F. (1955). Energy and society. (Dutton, NY: reprinted by Greenwood Press)

Dung, T.H. (1992). Consumption, production and technological
progress: A unified entropic approach. Ecological Economics, XX, 195
210.

Gagnon, Nate and C.A.S. Hall. A preliminary study of energy return
on energy invested for global oil and gas production. (In Review).

Georgescu Roegen, N. (1971). The Entropy Law and the economic process. (Cambridge, MA: Harvard University Press)

Hall, C.A.S. & Ko, J.Y. (2006). The myth of efficiency through
market economics: A biophysical analysis of tropical economies,
especially with respect to energy, forests and water. (In G. LeClerc
& C. A. S. Hall (Eds.) Making world development work: Scientific
alternatives to neoclassical economic theory (pp. _________)
Albuquerque: University of New Mexico Press)

Hall, C.A.S., Cleveland, C. J. & Kaufmann R. K. (1986). Energy
and resource quality: The ecology of the economic process. (New York:
Wiley Interscience. Reprinted 1992. Boulder: University Press of
Colorado.)

Jorgenson D.W. (1984). The role of energy in productivity growth. The American Economic Review 74(2), 26 30.

______. (1988). Productivity and economic growth in Japan and the United States. The American Economic Review 78: 217 222.

Kaufmann, R. (2004). The mechanisms for autonomous energy efficiency
increases: A cointegration analysis of the US Energy/GDP Ratio. The
Energy Journal 25, 63-86.

Kümmel R. (1982). The impact of energy on industrial growth. Energy The International Journal 7, 189 203.

______. (1989). Energy as a factor of production and entropy as a
pollution indicator in macroeconomic modeling. Ecological Economics 1,
161 180.

LeClerc, G. & Hall, C. A. S. (2007). Making world development
work: Scientific alternatives to neoclassical economic theory.
(Albuquerque: University of New Mexico Press)

Odum, H.T. (1972). Environment, power and society. (New York: Wiley-Interscience)

Quinn, M. (2006). The power of community: How Cuba survived peak
oil. Text and film. Published on 25 Feb 2006 by Permaculture Activist.
Archived on 25 Feb 2006. Can be reached at [email protected]

Ricardo, David. (1891). The principles of political economy and
taxation. London: G. Bell and Sons). (Reprint of 3rd edition,
originally pub 1821).

Soddy, F. (1926). Wealth, virtual wealth and debt. (New York: E.P. Dutton and Co.)

 

wdstk46's picture
wdstk46
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Re: The implications of EROEI & peak oil

A very good article covering an aspect of oil production that tends to be overlooked by many commentators.  Thanks for sharing it.

Jim 

eb_riesling's picture
eb_riesling
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Re: The implications of EROEI & peak oil

Thanks for sharing that Chris.  Our fearless leader also introcuded that topic in his course.  Interesting to see that others are starting to reinforce that concept. 

 

I will really start to worry that "the time" is close when we get an article like this in the mainstream media.

 

I have said it before and I'll say it again;  Buy some oil (the commodity) as it is ridiculously cheap right now.

 

E

 

Damnthematrix's picture
Damnthematrix
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Posts: 3998
Re: The implications of EROEI & peak oil

removed by me.

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
Re: The implications of EROEI & peak oil

I wouldn't invest in oil per se, rather in what oil can do for you, like tools, nails, screws, quality lumber, roofing iron, seeds, soil minerals.....

We must all start thinking outside the Matrix...

Mike 

Fogle's picture
Fogle
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Posts: 35
Re: The implications of EROEI & peak oil

While having nothing to add to this subject, I see
this forum-thing is really taking off. It is growing by the week and
becoming a good source of information by itself. Like the old
stone-soup analogy.

Thanks Chris, for sharing.

I also get the feeling a lot of us are becoming
"little" chris-martensons. I for one am starting to get
trough to a lot of friends, family and colleagues lately. Being a
little point of awareness. Being a starting point of positive action.
Maybe we can really make the difference. I am hopeful. We are part of
a good thing here at CM.com.

In Europe (Holland) the average joe is beginning to
become aware of our situation. This makes them wanting to listen our
message. How different from a year ago... 

Come to think of it, the effect of the work Chris Martenson has done, and is doing, is a clasic exponential function. And we are a the foothills of the up-leg. These are truely amazing times.

switters's picture
switters
Status: Platinum Member (Offline)
Joined: Jul 19 2008
Posts: 744
Re: The implications of EROEI & peak oil

I think this article should be required reading for anyone who is just beginning to learn about oil/resource depletion and its consequences.

EROEI is often completely missing from the analysis of those who claim that alternative energies or nonconventional fossil fuels will solve our energy problem.

I agree that we will have reached a new milestone when an article like this appears in the mainstream media.

 

mainecooncat's picture
mainecooncat
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Posts: 488
Re: The implications of EROEI & peak oil
eb_riesling wrote:

Buy some oil (the commodity) as it is ridiculously cheap right now.

Hi eb,

This has been talked about before on the site, I think between myself and Chris K, but clearly the price of oil has become decoupled from its inherent value and demand -- even with the decreased demand of the last several months at least in a year-over-year sense.

I think this is one of the achilles' heels of our current brand of market economics -- that the inherent value of things is not taken into account. We instead allow what essentially irrational humans are willing to pay for something to "signal" a said commodities value, which itself is most often based upon media reports or other equally dubious data. So we get oil -- could be argued the most valuable commodity or "thing" in the history of civilization -- being dirt cheap and electronic gadgetry being exorbitantly priced (video game systems, flat screens, ostentatious phones, etc.), all of which are more or less superfluous.

Fossil fuels superfluous, I don't think so.

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
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Posts: 3998
Re: The implications of EROEI & peak oil

This decoupling, in my opinion is a very very bad sign of how bad the economy has become...  so bad that no one even has the confidence we will continue buying fuel in sufficient quantities to keep the industry viable.

Mike 

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hobbes
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Posts: 4
Re: The implications of EROEI & peak oil

What is the current ERoEI? As per the crash course it is 3:1 (chapter 17b) , but this article says it is between 11:1 and 18:1.

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