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Page added on March 6, 2014
‘Doctor EROEI’ Was Wrong
‘For some years now,‘ Tim Morgan writes in Life After Growth, ‘global average EROEIs have been falling, as energy resources have become both smaller and more difficult (meaning energy-costly) to extract.‘
You may have heard of this concept called energy return on energy invested (EROEI). It looks at how much energy we expend in relation to how much energy we extract. Some, like Morgan, think this is very important.
Consequently, falling EROEIs have become the basis of a variety of dire forecasts…
In these scenarios, we spend more and more energy just getting energy, and we have less and less for other discretionary items. As Morgan writes, ‘If EROEI falls materially, our consumerist way of life is over.‘
I’m writing to you today to slay this flawed EROEI concept.
I have to say I used to be taken in by this argument. I wrote a C&C issue a couple of years back with the headline ‘Crack This Code: EROEI – Why It Matters Now and What to Do About It.‘ I included a list of approximate EROEI ratios for various energy sources:
- 1970s oil and gas discoveries: 30-to-1
- Current conventional oil and gas discoveries: 20-to-1
- Oil sands: 5-to-1
- Nuclear: 4-to-1
- Photovoltaic: 4-to-1
- Biofuel: 2-to-1.
I noted that such ratios were falling and concluded that a lower mix of EROEI sources means higher prices for many commodities, because it will take more energy to produce them.
It means nothing of the kind.
I would like to right my old error and convince you why EROEI is fatally flawed, so you don’t fall for it. I’ll use Morgan as the foil, because he is an articulate and strong proponent of the idea in his new book.
Morgan’s crucial assumption appears on page five: ‘The economy is not primarily a matter of money at all. Rather, our economic system is fundamentally a function of surplus energy.‘
This is the key to the whole EROEI argument. Morgan repeats it often. And it is completely wrong.
You can’t take money out of the equation! Money is what it’s all about. It is the essence of the economic life. It’s at the centre of decision making. As economist Hyman Minsky said, ‘Money isn’t everything. It is the only thing.‘
Be sceptical of anything that seeks to analyse our economy by taking money out. Households and firms make decisions based on money. They certainly don’t use EROEI, nor should they.
When a firm decides to drill a well or not, it does so on the basis of estimated costs and profits. It makes a decision based on some expected return — as measured in money. They are not the same. High-EROEI projects can be losers. Low-EROEI projects can be winners — as measured in profits and return on investment in money terms.
According to Morgan’s logic, you wouldn’t bother generating electricity…
Here is Robin Mills, currently with Manaar Energy (and once a petroleum manager for the Emirates national oil company in Dubai):
‘Generating electricity, usually at a thermal conversion efficiency of less than 50% plus transmission losses, has an EROEI of much less than 1, but is still rational and economic because electricity is such a useful form of energy.‘
Put another way, the money costs of the inputs are less than the money prices of the outputs. It works because…it’s profitable! People value electricity more than they value the inputs. Looked at through an EROEI lens, though, it doesn’t make sense.
You can build any scary resource scenario you want if you exclude money prices. If, say, falling ore grades were predictive of prices, then we would see continually rising prices for copper and other resources. Clearly, this isn’t the case. But this does not prevent people (usually geologists) from taking these moneyless concepts to make economic forecasts of higher prices.
A general rule of thumb: If it doesn’t take into account money prices, then it isn’t about the real-world economy as it exists today.
That’s my biggest objection to EROEI. But I’m not making a comprehensive case against EROEI here. That would take too long. I won’t get into how EROEI is calculated: there is no agreement and when you think about it, maybe it’s impossible to know with any accuracy worth relying on.
In the end, I think Morgan doesn’t really get modern money. He repeats an old myth about its origins. He doesn’t seem to know why fiat currency has value. (He says money is a ‘claim on real goods and services,‘ which only begs the question: Why do people accept dollars in exchange for real goods?) He doesn’t seem to understand the primacy of making a monetary profit in a market economy.
Contrary to Morgan, you can’t take money out and hope to understand the modern economy. You have to study money. And in markets, you have to make a money surplus (a profit) — or you are out of the game before long. I can’t say the same is true for EROEI, which is perhaps the best I can say against it.
You can ignore EROEI, but you can’t ignore money.
Chris Mayer,
Contributing Editor, Money Morning
30 Comments on "‘Doctor EROEI’ Was Wrong"
dissident on Thu, 6th Mar 2014 1:59 pm
Drivel. If EROEI was irrelevant then oil corporations would not be facing massive increases in exploration and development expenses to the point that they are being constrained from bringing new supplies on the market.
EROEI is simple physics. But some economist would have no clue about physics. They think that elements can be manufactured if there is demand.
eugene on Thu, 6th Mar 2014 2:04 pm
Could only be written by an economist. Sorry, old man, you are full of it.
rollin on Thu, 6th Mar 2014 2:23 pm
Deja vu all over again. This article was put up just a short time ago.
‘Generating electricity, usually at a thermal conversion efficiency of less than 50% plus transmission losses, has an EROEI of much less than 1, but is still rational and economic because electricity is such a useful form of energy.‘
I will let the reader judge the tremendous fallacy of the above statement. Too glaringly obvious.
“If, say, falling ore grades were predictive of prices, then we would see continually rising prices for copper and other resources. Clearly, this isn’t the case.”
Falling ore grades mean more energy to mine and new cheaper mining techniques have to be developed. Another net energy loss, not sure how that connects to money but copper prices rose by 5 times in the last dozen years.
Money and energy do not equate. A cantaloupe costs more than a gallon of gasoline but the cantaloupe contains far less energy. The value of the cantaloupe is that it is life sustaining (and tastes good). The value of the gasoline is that it may allow one to obtain the cantaloupe.
An ipod does not contain much energy or mass but costs far more than a gallon of gas. Same with your clothing.
peter on Thu, 6th Mar 2014 2:29 pm
Well those eroie sums for electricity generation dont seem to run true. Scientific American has coal fired power station running at an eroie of 18:1 with the lowest being nuclear at 5:1. Simply put, if a electricity generator ran at less than an eroie of 1:1, then they wouldnt have any power to supply to the grid.
John D on Thu, 6th Mar 2014 3:23 pm
“High-EROEI projects can be losers. Low-EROEI projects can be winners —”
As long as both energy and investment have monetary values isn’t this somewhat of an oxymoron? Isn’t a high energy return on investment by definition an winner, and Low energy return on investment a loser?
rockman on Thu, 6th Mar 2014 4:30 pm
The problem with his argument as well as some who disagree with him is the assumption of how much energy oil/NG extraction requires. For the moment set aside the embedded energy in the drilling process and just look at direct energy input. Which, almost explusively, is diesel fuel. I sign the purchase orders all the time and know to the gallon how much fuel I’ve used to drill every well. And it typically represents less than 10% of the total well cost…sometime even half of that.
So yes: I can uses 500k gallons of diesel to drill a well that produces 200k bbls of oil. Assume that oil cracks 25% to create 50k bbls of diesel…that’s 2.1 million gallons of diesel. Now throw away the rest of the products away. So I use 500k gallons of diesel to produce 2.1 million gallons. So an EROEI of 4.2.
So what? I can show you two scenarios: A) the total well cost was $5 million so I made 3X my money back (200k bo X 75%..the royalty X $100/bbl = $15 million) and B) the total well cost is $20 million and I lost $5 million.
So two wells with the same EROEI of 4.2 and I make 3X my money on one and lose my ass on the other. This is not fictional…this is real life in the oil patch. I’ve seen many wells recover more energy than used to drill them but did not create an acceptable rate of return.
shortonoil on Thu, 6th Mar 2014 5:18 pm
This is the type of article that makes the hair on the back of an engineer’s neck stand up. It is so littered with dogma, and absurdities it borders on the supernatural; completely ignoring all that we have learned over the last few centuries about the physical behavior of matter, and energy. But like most arguments that support the notion that we exist in a world of infinite resources, unperturbed by nature’s laws, and where reality is manifested by the number of 0s and 1s generated by a central bank’s computer, it contains a tiny grain of truth.
An accurate determination of ERoEI is notoriously difficult to come by. The ratio of energy returned on energy invested appears simple enough at face value, but when it comes down to acually calculating it the problem of infinite complexity can soon come into play. The first term energy returned is usually not a problem. The energy in a unit of petroleum, for example, can be determined to great precision though laboratory analysis, or computation from the combustion equations. Deriving the second term, energy invested, if approached directly can lead one into a sum of an infinite number of values. To explain:
How do you calculate the energy invested in drilling an oil well? Of course the energy to turn the drill is obvious. The energy that went into building the rig is also fairly direct, but how about the gas that went into the pick up truck of the rough neck who drove out to the drilling site. The energy that went into building the road that the rough neck drove on to get to the drilling site. The energy that went into building the truck that the rough neck used to get to the drilling site. The energy that went into the chicken that laid the egg that the rough neck ate before he went to work? Energy invested, if not contained within pre-defined thermodynamic boundaries, soon develops into an infinite number of inputs that can only be guessed at without error margins.
The author says, “High-EROEI projects can be losers. Low-EROEI projects can be winners — as measured in profits and return on investment in money terms.” The author completely ignores the possibility that the ERoEI’s of the projects weren’t calculated correctly to begin with. They have reduced their faith in money as the ultimate metric to a religion; no confirmation is necessary? In actuality if the proper function is used money and energy can be set to equivalent values. This should not be surprising unless one believes in multiple realities. Believing in multiple realities is in the realm of philosophy or religion, it does not belong in an energy discussion.
http://www.thehillsgroup.org/
Nony on Thu, 6th Mar 2014 5:58 pm
The whole EROI thing is silly doomer website stuff. If I were a CFO at an E&P and were part of a decision meeting on a project and they had even calculated and presented the EROI, my head would explode.
$$$, NPV, timing, options, synergies, risks, political factors, who’s doing the project, the technical issues, etc. etc. FINE! But EROI? Who the eff would even calculate that?
Arthur75 on Thu, 6th Mar 2014 6:03 pm
The reality of today’s world summarized :
Oil situation :
http://iiscn.files.wordpress.com/2013/05/jlliquidsworld.jpg
Leading to :
http://iiscn.files.wordpress.com/2013/07/bp-oil-price-2013.jpg
In other words current crisis is primarily a monstruous oil shock, and only the beginning.
Reminder :
Contrary to the legend on the above graph (barrel price), the first oil shock was much more the direct consequence of US 1970 oil production peak :
http://upload.wikimedia.org/wikipedia/commons/c/c5/US_Oil_Production_and_Imports_1920_to_2005.png
Associated to the rebalance of barrels revenues between majors and countries, and dropping of B Woods in 71 and associated $ devaluation.
The “embargo” an epiphenomenon, very limited, lasted 3 months, but pratical to hide US peak and “put the blame” on the Arabs.
Geopolitical summary :
http://upload.wikimedia.org/wikipedia/commons/thumb/3/35/Seal_of_United_States_Central_Command.png/768px-Seal_of_United_States_Central_Command.png
Mike999 on Thu, 6th Mar 2014 6:04 pm
– Then There’s Bribery in the Fracking States, is also a cost. Typically to the Republican party, but, they’re not shy about attempting to “lobby” Democrats, and don’t forget the legislature and Judges.
– Solar: Solar will soon double in energy output per panel, so it’s ration will switch to 8-1, instead of 4-1.
Also, wind has ever increasing ratios. Why are these so popular? No legislative bribery needed, as these do not have a HUGE SOCIAL Cost: Water Pollution in the fracking stages requires Bribery, Solar and Wind do not.
Arthur75 on Thu, 6th Mar 2014 6:04 pm
If anything about Tim Morgan, the key point is that he doesn’t credit Charles Hall for much if not most of his “work”.
rollin on Thu, 6th Mar 2014 6:28 pm
The fact is we use or waste all the energy of the fossil fuels we produce.
Somewhere I saw a full analysis of surface transport (highway-road) that showed that less than 20 percent of the energy made it to the tank of the vehicle. All the mining, drilling, machinery, support, highway maintenance and rebuild, transport took up most of the energy.
Maybe we need to examine the total energy needed to run the systems we use, versus the individual energies of vehicles or mining.
ghung on Thu, 6th Mar 2014 7:02 pm
@Mike999 – “…Solar will soon double in energy output per panel, so it’s ration will switch to 8-1, instead of 4-1.”
Our oldest panels will have been in continuous use since October 1994; almost 20 years, and are still pumping out their full rated watts. Point being, we don’t really know what their EROEI will be. We currently have 46 PV panels doing various jobs on our place, of various ages, and haven’t had a single failure or measurable reduction in performance. 100% reliability so far, and zero waste streams since manufacturing, delivery and installation. How many other energy ‘sources’ can set that standard? And I didn’t have to bribe anyone.
shortonoil on Thu, 6th Mar 2014 7:20 pm
“FINE! But EROI? Who the eff would even calculate that?”
Who would calculate that? Well, engineers for one. That’s why they know what happening to the world’s petroleum reserve, and you don’t!
Nony on Thu, 6th Mar 2014 7:35 pm
If you were making a presentation for a drilling decision and had a slide on EROI, I would recommend that you cut it. I have never worked in this industry, but I highly doubt that investment decisions even look at EROI. I don’t working people even calculate it! It’s just peak oil website stuff…
Beery on Thu, 6th Mar 2014 7:42 pm
Money is certainly not the issue, but he might have a point if he substituted energy versatility for money. After all, if we absolutely must get a car from A to B, we will happily sell tons of non-petroleum-based energy for gasoline to fill the tank, because the gasoline is going to get the job done more efficiently than any other fuel. In this sense – and only in this sense – the proponents of EROEI are wrong. But in the end, it is all about energy.
rockman on Thu, 6th Mar 2014 8:05 pm
Nony – Actually if I had to guess about 99% of the folks in the oil patch couldn’t tell you what the acronym EROEI stands for. Not that they couldn’t appreciate the concept once you explained it. In almost 4 decades in the oil patch I had never seen that combination of letters until I started hanging out at TOD.
Davey on Thu, 6th Mar 2014 8:15 pm
Nony, a good investment decision maker will look for an edge anywhere. Eroi is a valid useful analysis. Is it something you put in you presentation to investors, yes but only superficially if it will benefit your sales pitch!
Nony on Thu, 6th Mar 2014 9:09 pm
I think EROI will not give me good info to make decisions. If anything, it will give me confusing info that would hurt a decision. Consider, the energy content of heavy crude is more than light crude. But light is more valuable because more gasoline can be made out of it more easily. Or consider sourness. No difference in the energy content, so equal EROI, but a sourer play has less value. Or consider transport costs or leasing or regulatory costs. We could have exactly the same energy, but the differnces in these factors would drive the decision. I would seriously advise you to cut an EROI slide from a presentation with any investor. They’ll think your stupid if you leave it in.
Nony on Thu, 6th Mar 2014 9:14 pm
Davy:
Here’s an example of a real valuable insight to drive an investment decision. To your point, it’s just a single data point…but super valuable. But it sure as heck ain’t EROI!
https://www.youtube.com/watch?v=iWD9YD_C8IM (watch the story from 30:30 to 32:30)
action on Thu, 6th Mar 2014 9:45 pm
Automobiles, airplanes, and ships dont run on money – the energy makes it possible, not money. What a retarded argument, its so straight forward – energy is the fundamental that allows all things to happen, money is just a by-product. The Sun was around long before money last I checked.
action on Thu, 6th Mar 2014 9:47 pm
And I understand what he’s saying that money drives the decisions of our society, but doesn’t change the fact the energy makes it possible.
Bandits on Thu, 6th Mar 2014 9:51 pm
The “oil patch” ignores EROEI just as they ignore climate change. All deniers ignore them just as they ignore environmental destruction, economic decline and collapse as well as population overshoot.
Right now the oil patch survives due to the benefits of early astronomically high EROEI. But it is wearing down relentlessly as are all consequences of human expansion.
“The oil patch” will continue on this path for as long as possible, it’s human nature. After all EROEI is not taught in schools, neither is peak oil, overshoot or economic collapse. Of course those subjects never will be taught, we can’t take hope away from our children, so the march to almost certain wipe out is assured.
GregT on Thu, 6th Mar 2014 9:58 pm
” I highly doubt that investment decisions even look at EROI.”
No they look at profit, or ROI. Unfortunately most can not see past the bottom line, and they have no understanding as to what money actually is, or where it comes from. Once the EROEI of energy production drops low enough, they’ll be left scratching their heads with their mouths hanging wide open, trying to figure out why all of their mountains of paper have all of a sudden become worthless.
Nony on Thu, 6th Mar 2014 10:01 pm
Your children will be fine! Don’t be so negative. Sheesh. I knew that every new generation thought they invented sex. I didn’t know that every old one thought the world would end after them.
There are lots of young people with fire in the belly. They won’t be negative. They won’t give up even if they fall down.
http://www.runnerspace.com/video.php?video_id=64548
action on Thu, 6th Mar 2014 11:24 pm
Yes Greg, and its stupid this has to be pointed out, that currency is just paper! And mostly now just electronic blips ones and zeros. Currency is nothing more than people’s trust and faith, fine for a society that didn’t depend on non renewable energy, but in this society energy is the platform, the Noah’s Ark of this form of civilization. All currency will be toilet paper eventually. If there was unlimited energy there would be no financial crisis that couldn’t be recovered from. We’d just keep building until theearthwas destroyed, or we’d live on space ships like the movies. Money may dictate how we choose to use our energy, but it can neverc replenish it.
Keith on Fri, 7th Mar 2014 6:01 am
I question Nony’s presence in these discussion?
meld on Fri, 7th Mar 2014 10:18 am
Don’t feed the trolls Keith. The more you ignore a troll the louder and more ridiculous it becomes until it destroys itself.
Davy, Hermann, MO on Fri, 7th Mar 2014 12:29 pm
Kieth, Nony, gives us PD’s (prepper/doomer)“be happy advice”. I try to tell him I am happy with the added piece of mind of acceptance. When one reads the writing on the wall and changes one’s attitudes and lifestyle amazing things occur. I have repeated over and over what is coming will be as little as a correction and as most as a severe contraction and or collapse. The time frame is as little as anytime with the financial system and as long as 10 years with the energy dynamics considered. The economic situation can play out for many years because of the new centrally planned economy we are in. The energy dynamics can ebb and flow based upon supply and demand related to the financial ups and downs. Nony thinks we have capitalism but in reality it is the herd following the feeder. The feeder is the central bank injecting liquidity for the top echelons in the economy so the herd feeds and prospers. The unintended consequences are the lower echelons are being cannibalized by inflation, unemployment, and fixed income destruction. This can last but it all depends on the confidence at the top. When the big boys run for the hills watch out. There will likely not be a bottom up revolt. The Powers have the structures in place to silence opposition
Ming on Fri, 7th Mar 2014 8:47 pm
The author of this text does not understand what money is, nor what energy is, and certainly does not understand what is the meaning of a declining EROEI on similar forms of energy harvesting…
This text is a useless piece of crap.