Peak Oil: The End of Economic Growth?
by Professor Charles A. Hall, of the State University of New York College of Environmental Science and Forestry, Syracuse.
Dr. Hall is a systems ecologist who began his career studying life in freshwater systems. He is best known for developing the concept of EROI, or energy return on investment, which examines how organisms, including humans, invest energy in obtaining additional energy to improve their biotic or social fitness. He has applied this approach to fish migrations, the carbon balance, tropical land use change and petroleum extraction, in both natural and human-dominated ecosystems. His lecture will deal with the probable implications of peak oil on the economic activity of OECD and developing countries. It will focus on the past, present and future energy cost of energy itself, and how that is likely to effect investments, economic growth and discretionary spending. He recently published a paper calling for a new economic paradigm, available for download here (pdf document).
An introduction to EROI by Charles Hall
EROI stands for energy return on investment, and refers most explicitly to the ratio of energy delivered to society from one unit invested in getting that particular energy. The units can be KJoules per KJoule or barrels per barrel etc, and there can be modifications, for example the quality of the energy input or output. It is a physical concept, but one that can have enormous economic implications, and one that must eventually be a large component -- or even determinant -- of many energy and economic assessments.
The idea and its implications for society has been around since the mid part of the past century in the writings of Fred Cottrell, Kenneth Boulding and Howard Odum but to my knowledge EROI was not derived explicitly until the 1980s in work by Cleveland, Kaufmann and myself. Although EROI (or its cousins net energy analysis and life cycle analysis) is a term that is rarely heard today we believe that this issue is likely to become a dominant one in the U.S. and the world in coming decades because of the apparent substantial and continuing decline for the most important fuels, and because alternatives (i.e. substitutes) tend to have a much lower ratio.
The situation can be seen clearly for the finding and production of domestic oil in the United States. The EROI has evolved from the situation in 1930 when we found roughly one hundred barrels of oil for every barrel (or its equivalent as natural gas) invested to roughly 25 barrels per barrel in the 1970s to from 11 to 18 barrels per barrel in the 1990s. The numbers reflect current production from existing fields, and the EROI for finding new oil is almost certainly much lower. The very large difference between the investment and the return--that is, the energy surplus--of the oil industry allowed Texas and the United States to generate enormous wealth over the twentieth century. Over time the quantity of U.S. oil produced increased dramatically until its peak in 1970, but the EROI declined more or less routinely for both extraction and especially for new discoveries.
We believe that if the EROI for our principal fuels continues to decline the implications will be enormous as more and more of our total energy output, and hence our total economic activity, is diverted to get the same quantity of fuels. The normal response by many to this issue is that substitutes will occur and that technological processes will continue to improve so that there should be little or no concern. In fact there is a continuing race between technological progress and depletion. If the declining EROI of, for example, U.S. oil is used as a yardstick it would appear that depletion is winning the race. While substitutes to replace U.S petroleum since its peak in 1970 have in fact occurred, the majority of this has been imported oil, now possibly facing its own peak, and U.S. natural gas, which is subject to the same peaking and depletion issues, perhaps soon. Our own research indicates that the EROI for global oil and gas is in the vicinity of 30 to 1 but declining fairly rapidly.
The use of EROI for potential policy assessments has created a large controversy between scientists and economists who want the market to make all decisions and even analyses. For example, some scientists have argued that net energy analysis has several advantages over standard economic analysis. First, net energy analysis assesses the change in the physical scarcity of energy resources, and therefore is immune to the effects of market imperfections that distort monetary data. Second, because goods and services are produced from the conversion of energy into useful work, net energy is a measure of the potential to do useful work in economic systems. Third, EROI can be used to rank alternative energy supply technologies according to their potential abilities to do useful work in the economy.
In clear contrast most neoclassical economists reject methods of economic analysis that are not based on human preferences, arguing that net energy analysis does not generate useful information beyond that produced in a thorough economic analysis. This is a perspective that I do not share, particularly because we believe that markets are poor predictors of what we perceive to be almost inevitable impacts of a coming serious decline in energy availability and in EROI for our most important fuels.
In any case neither system has yet adequately addressed the cost of environmental impact or contribution to depletion. Thus a critically important issue is what should the boundaries of the analyses be i.e. how far should we go in the costs of the energy to make (or use) a fuel? There are also important methodological problems that are nicely seen in the letters and responses found about EROI for biomass-derived alcohol that were in Science magazine June 23, 2006.
There are several groups working on determining the EROI of various alternatives to oil although it is apparent that there are no clear alternatives to oil with high EROI and a large resource base. Windmills have, apparently, a high EROI, but an enormous expansion would be required before it gives even 1 percent of US energy use.
Adapted from the July 17,2006 ASPO USA newsletter.