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Page added on November 5, 2013
EROEI: The global economy sinks under its debts as the real cost of energy rises
ALTHOUGH the economy is improving, this is turning out to be “a recovery, but not as we know it”. Britain may be getting better off, but people keep getting poorer, as the costs of essentials continue to grow much more rapidly than incomes. Yet far from being a uniquely British problem, this is a worldwide phenomenon.
When you consider the “richer economy, poorer people” conundrum, it might occur to you that there are in fact two parallel economies, not one. This is precisely the point made in my new book Life After Growth.
On the one hand, we have the “real” economy of energy, resources, labour, goods and services. On the other, there is the “financial” economy of money and debt. Money, of course, has no intrinsic worth, so any value that money possesses derives from its role as a claim on the output of the real economy. Together, money and debt constitute a quantity of “claims” on the real economy of today and tomorrow. That’s fine if – and only if – we do not create claims that exceed the value capabilities of the real economy.
Ultimately, the real economy is an energy equation. The economy began when the discovery of agriculture freed up a small proportion of the population for non-subsistence tasks. It took a huge step forward when the invention of the heat-engine enabled us to use fossil fuels to apply vast leverage to the very limited capabilities of human labour. Energy is vital, not just for warmth, cooking and transport, but for every other economic essential as well. Modern agriculture is hugely energy-dependent. Without abundant energy, we could not possibly extract one tonne of copper from 500 tonnes of rock. Hydrocarbons provide plastics as well as a gamut of chemical products. And so on.
But accessing energy comes at a price, and that price is the energy that is consumed in the access process. Picture, for instance, a gas well, an oil platform, a pipeline or a refinery, and you will appreciate the scale of the materials (such as steel) and the work (both mechanical and human) that the energy-delivering infrastructure embodies. What really matters to the economy is net energy – the relationship between the energy that we access and the energy consumed in the process.
In earlier times, this relationship was hugely positive. Using rudimentary wellhead equipment to access billions of barrels of energy in the sands of Arabia delivered at least 100 units of energy for each unit invested in the infrastructure. Today, those abundant, low-cost energy supplies are being replaced by resources which are ever more energy-costly to produce.
The critical measure here is EROEI (the Energy Return On Energy Invested). The days of 100:1 energy returns are long gone. The ratio for new oil projects has declined from 30:1 to barely 10:1 since the 1970s. For global energy overall, the EROEI has declined from about 37:1 in 1990 to less than 14:1 now.
The flip-side of EROEI is the real cost of energy. The cost ratio at an EROEI of 37:1 in 1990 was 2.6 per cent, but this has risen to 6.8 per cent today. The global EROEI may fall to 10:1 by 2020, increasing the energy cost “levy” on the economy to 9 per cent.
In blithe ignorance of this increasing levy, we have continued to grow the claims value of the financial system on the assumption of perpetual growth. These “excess claims” show up as unsustainable debt, undeliverable welfare commitments, and unrealisable expectations for returns on investment. My calculations suggest that the system now owes $90 trillion (£55 trillion) more than it can deliver.
For individuals, this is being manifested in the escalating real costs of fuel, power, food, water and physical infrastructure. Globally, it is visible in “energy sprawl”, as the energy-delivering infrastructure expands (both in scale and in cost) in response to the weakening in efficiency resulting from a deteriorating EROEI. As well as crimping disposable incomes and destroying returns on investment, this process is curbing our ability to invest in other things.
The essential point is that the economy is not a monetary system governed by the theoretical “laws” of economics, but an energy dynamic determined by the all-too-real laws of thermodynamics. Once we understand this, the squeeze on household prosperity becomes far less of a mystery.
Tim Morgan was global head of research at Tullett Prebon from 2009 to 2013, and is author of Life After Growth (Harriman House), published on 18 November.
21 Comments on "EROEI: The global economy sinks under its debts as the real cost of energy rises"
westexas on Tue, 5th Nov 2013 2:22 pm
Methinks this chart would be relevant:
GNE/CNI Vs. Total Global Public Debt for 2002 to 2012:
http://i1095.photobucket.com/albums/i475/westexas/Slide2_zps01758231.jpg
GNE = Global Net Exports of oil (EIA)
CNI = Chindia’s Net Imports of oil
For more info, search for: Export Capacity Index
bobinget on Tue, 5th Nov 2013 3:27 pm
What we need are solutions.
“All politics is local”
Going after cheaper oil with the most powerful armed forces the world has ever known, isn’t working.
Even domestic oil and gas exploration and production is meeting resistance. (Often well outside gas and oil production areas) When the inevitable happens and oil or gas contaminates air, land or sea, the political Right considers this the price of doing business. If a solar start-up goes sour, the same folks scream bloody murder. Clearly, we are losing perspective, growing more distant from reality.
“He knows the price of everything and the value of nothing”.
Obviously, change will only happen with another
http://en.wikipedia.org/wiki/Krakatoa event times one hundred.
Next time, the ‘enemy’ as the great philosopher POGO once said, “is us”.
As powerful greenhouse gasses accumulate: http://www.usatoday.com/story/news/nation/2013/10/08/alaska-sinks–climate-change-thaws-permafrost/2794255/
WHEN Siberian gas pipelines, Alaskan oil PL’s built on permafrost collapse, perhaps then, instead of blaming Obama or Greenpeace we, collectively, begin to ‘get it’.
Like rugged Alaskans our entire planet needs to begin making preparations. Start by building stronger, flexible stairs.
SteveK on Tue, 5th Nov 2013 3:32 pm
From Charles Hall: If EROEI of “oil was 1.1:1 then one could pump the oil out of the ground and look at it … and that’s it. It would be an energy loss to do anything else with it. Ifit were 1.2:1 you could refine it into diesel fuel, and at 1.3:1 you could distribute it to where you want to use it. Ifyou actually want to run a truck with it, you must have an EROI ratio ofat least 3:1 (at the wellhead) to build and maintain the truck, as well as the necessary roads and bridges (including depreciation). If additionally you wanted to put something in the truck and deliver it, that would require an EROI of, say, 5:1.3
Now say you wanted to include depreciation on the oil field worker, the refinery worker, the truck driver, and the farmer; you would need an EROI of7:1 or 8:1. Iftheir children were to be educated you would need perhaps 9:1 or 10:1, to have health care 12:1, to have arts in their lives maybe 14:1, and so on.
J-Gav on Tue, 5th Nov 2013 4:33 pm
“Excess claims” is right on the money.
West Tex – your chart is relevant, thanks.
SteveK – Thanks for reminding folks about Hall’s EROI ratios lined up beside what sort of society they can actually get you. I’ve always found those fascinating, though I have no way or proving or disproving them.
GregT on Tue, 5th Nov 2013 5:44 pm
“The essential point is that the economy is not a monetary system governed by the theoretical “laws” of economics, but an energy dynamic determined by the all-too-real laws of thermodynamics.”
It amazes me how people absolutely cannot understand this statement. Everything on this planet, is bound to the physical ‘laws of nature’, not to pseudo-sciences, such as human ‘technology’, or human economics. Both are dependant on cheap, excess energy.
Anyone that has been paying attention, is able to see the correlation between EROEI and average individual net worth. Both have been in a steady state of decline for the past 30 years or so, and will continue to decline, exponentially.
Arthur on Tue, 5th Nov 2013 6:29 pm
to have arts in their lives maybe 14:1, and so on.
There was more art in cities like Vienna, Venice, Prague and Paris before the rise of the fossil fuel age than there is today.
Charles Hall reminds me of pre-Socratic philosophers, who attempted to explain the universe from one principle, like Thales with water and Anaximenes with air.
And now we have Charles Hall and his EROEI, explaining everything.
GregT on Tue, 5th Nov 2013 7:01 pm
Before the fossil fuel age, the excess energy used to create ‘the arts’ came from the labour of the commoners. They were not the ones with ‘art in their lives’. It was the ruling classes that enjoyed the fruits of other people’s labor.
In today’s societies, many of us live much better lives, than the kings and queens of old. That is about to change.
ghung on Tue, 5th Nov 2013 7:20 pm
What was the EROEI of sailing ships and firewood?
Arthur on Tue, 5th Nov 2013 8:08 pm
‘the arts’ came from the labour of the commoners. They were not the ones with ‘art in their lives’.
Here the compact town of Vlissingen + surrounding meadows (Flushing Meadows 1.0 so to speak) in (Old)-Zealand in 1669:
http://deepresource.files.wordpress.com/2012/04/vlissingen-1669.jpg
This was a city by and for the commoners. That old city was aesthetically much more pleasing than the Vlissingen of today. In fact: one piece of art, without substantial fossil fuel, sorry about that, mr Hall. Although the name Holland is derived from Holzland, meaning woodland, there hardly were any forests in Holland, even as early as in 1669 and certainly not in Zealand. There was some peat for heating, but that was about it.
Too much fossil fuel makes people fat and turns them into apathetic couch potatoes. The Renaissance probably was the period of highlight of art ever, all without fossil fuel and thus any meaningful EROEI. I take the good-humoured mr Hall with a grain of salt with his EROEI-14=art equation.
DC on Tue, 5th Nov 2013 8:08 pm
Yes, indeed, there was art in the past Arthur. Roman art was far superior to that found even in places. During the age of colonial expansion, which is what I am sure you are taking about when you refer to Prague and Paris, the wealth to commision that art was wrung out of colonies and the local peasantry.
Think all those bucolic colonnaded mansions you can still see in the amerikan south that have been turned into tourst attractions were produced by good ol christian work ethic?
Nope….slavery made them possible.
Like Greg says, they worked the land by hand so a tiny elite could commision great works of art.
Going back even further, Rome didn’t have energy slaves to produce all its great art, but had the next best thing-actual slaves. In fact many artisans in the ancient were slaves.
As net energy available to each of us declines. Art will simplify too again, along with society itself.
Sorry Arthur. High(er) cultural expression is only possible with lots of net energy floating around to invest it in. Energy slaves, or actual slaves to produce your art. Take your pick.
IanC on Tue, 5th Nov 2013 10:01 pm
I’m with DC on this one. Small amounts of gasoline/oil have as much potential energy in them as numerous peasants and slaves working many hours in a day (don’t have the exact ratios in front of me, but they are available). Currently, wealth depends on one’s access to the new slave: cheap, abundant surplus oil, right. It’s always been an issue of who controls the ability to exploit others to do the extra work.
Norm on Tue, 5th Nov 2013 10:07 pm
Ya GregT winz and Arthur loses. Cause the guys with shovels, hand saws anx paint brushes, did not get to sit in the audience, andlisten to Handel’s Royal Water Music. The building was not big enough for all the laborers, so the laborers went home to dirt floors. That’s how it went before fossil fuel. With enough fossil fuel, yes you can get some rednecks into the symphony. Otherwise probably not. There is however a tech change, they can listen to it recorded instead. So GregT wins cause its long since known that science, literature, academia, exploration, art and music are due to efficiencies, machines, and cheap energy. Otherwise all your cellists sill be out in a field with a weeding hoe.
Arthur on Wed, 6th Nov 2013 1:13 am
I am afraid that the question whether high art existed before 1800 is morphing into a ‘no commoner left behind’ discussion.
Stephen on Wed, 6th Nov 2013 6:44 am
There were many famous painters that existed before the oil age. The Egyptian Pyramids also existed prior to the oil age.
Arthur on Wed, 6th Nov 2013 8:11 am
The first opera house in the world:
http://smg.photobucket.com/user/Liz-ONBC/media/Babylon%20Nights/Opera/mal01.jpg.html
Teatro San Cassiano, Venice, 1637
All it takes are craftsmen and horses and carriages.
Don’t tell Charly or Norm.lol
Now Mozart and Vivaldi are replaced by Eminem and Modda fokka Ice-T. The more fossil fuel, the higher the art. Priceless!
Such is the glory of the unstoppable EROEI!
HARM on Wed, 6th Nov 2013 8:21 am
“No commoner left behind”
Good grief, what a glib and ignorant comment. You think illiterate Medieval serfs were going to the public museums (that did not exist) then, do you? You’ve completely missed the point: without high EROEI energy “slaves”, modern society doesn’t work -at least not for the bottom 99% of us. Below a certain point, most of become actual slaves, or at the very least subsistence farmers.
HARM on Wed, 6th Nov 2013 8:22 am
“No commoner left behind”
Good grief, what a glib and ignorant comment. You think illiterate Medieval serfs were going to the public museums (that did not exist) then, don’t you? You’ve completely missed the point: without high EROEI energy “slaves”, modern society doesn’t work -at least not for the bottom 99% of us. Below a certain point, most of become actual slaves, or at the very least subsistence farmers.
DC on Wed, 6th Nov 2013 9:02 am
Arthur, pre-industrial civilizations had there own metric of what we are referring to as ‘EROEI’ you know. China had it, Rome had it, Egypt had-they all did. Of course, they didn’t measure it, or try to ‘model’ as we are prone to here-but it existed just the same. It was based on solar power, animal, wind, and human power, and no doubt other less tangible factors. Slavery, serfdom, whatever form it was, was a major,but not the only, contributor to pre-ind nations ‘ERORI’ surplus. Out of that-came art. Public and Private(mostly private of course).
But dont worry Art, ahhh…art isnt going to disappear after the oil does-it will just become simpler, more primitive. Exactly what happened when Rome fell. Western art took a serious nose-dive in both quantity AND quality. Took a long time for the public investments in art to reach the scale they had during Roman times. People in the future will be just like the people today. They will ‘buy’ whatever art and culture their post-oil arrangements will afford them. But I doubt they will building opera houses and cathedrals, or baseball stadiums for that matter. At least not on the scale we are used to.
Arthur on Wed, 6th Nov 2013 11:14 am
without high EROEI energy “slaves”, modern society doesn’t work -at least not for the bottom 99% of us.
I know that, but that was not the starting point of the discussion, which was the relationship between the level of art a society can produce and the amount of external energy available to that society. Where do tourists go if they want to see real art? Greece, Rome, ancient European cities, cathedrals like the Notre Dame, the Loire Castles, Taj Mahal, Borobudur, pyramids, etc., in short all accomplishments from before the fossil fuel age. They do NOT go to see modern high rise buildings. They want to escape from that sorry spectacle, because that’s where their cubicles are located.
To sum it up: the fossil fuel age was (and is) very good for the 99% masses and their cultural artifacts (Hollywood, television, sports stadiums, junk food, cars and mass transport), but if you want high art, you need an aristocracy, religion and stiff hierarchies to extract resources from the base and convert them into the art mentioned. EROEI really has nothing to do with it. It is a spiritual thing, not material.
BillT on Wed, 6th Nov 2013 2:20 pm
Yep. you are correct Arthur, it took aristocracy and the power of the church to wring the blood out of the peasants to make your wonderful art. If you could ask them if they wanted that art or preferred freedom to live as they liked, I bet I know their answer. “Fuck the ‘art’, give me my life!” (or the historical equivalent.) And all of those works of art are fleeting. Soon no one but the local farmers will see them because travel for pleasure will end with oil. And, obviously you think aristocracy and religions dogma is a good thing. Both are the enemy of homo sapiens.
DC on Wed, 6th Nov 2013 5:58 pm
Indeed, the Eruopes tin-pot dark ages dictators didnt build there brooding, gothic oppressive cathedrals because they were good investments, actually quite the opposite. Xtians built those things in order to make sure no surpluses could be used to invest useful things-like public works.-sanitation, or public education and so on. The only surpluses the church was interested in investing in, were their poorly designed and ugly structures, intended to remind the peasantry who they served. Gawd and the aristocracy. There was very little ‘spiritual’ about it. But they sure took a lot of energy to build and maintain.
Things havent change that much really. Nowadays, amerikans invest there shrinking surpluses on unproductive crap as well. The US military and expanding cars only transportation. Throwing money at those is for many, an almost religious affair. Like your cathedrals there Arthur, they are designed to soak up societies surpluses to remind people who they serve, Gawd, and the corporate Aristocracy.
Sure, there is nothing very spiritual about a carrier battle group-or a 12 lane ‘free-way’. But like your ‘spiritual’ cathedrals, there real intention is to make sure no surpluses are left over to invest in things that would actually improve the human condition.
EROEI again…