Energy's Impact on Real Wealth Creation
by: Paul Kando
It's nature's law that energy is conserved but entropy increases. Therefore a real economy is a collection of institutions and processes that turn matter and valuable low-entropy energy into useful objects in quest of an enjoyable life for all. But those objects, like the energy embedded in them, decline in usefulness, ultimately becoming valueless, high entropy waste. Economic value produced ultimately depends on the amount of energy available. A key economic indicator, more fundamental than the monetary price of energy, is the energy that remains available to the economy after all the energy in obtaining that energy have been expended. The economic use of a barrel of oil requires drilling wells, transporting and refining crude, shipping distillates, making the drilling rig, steel for pipelines, refinery equipment, tank trucks, gas stations, cars that burn the fuel, and so on. Only the energy left after all this is available to create real wealth and further our enjoyment of life. The Energy Return On Energy Invested (EROI) defines this net energy. (e.g. it takes 1 unit of energy to harvest 5 units of tar sand oil; EROI = 5:1)
The EROI of fuels varies. It may rise with technical efficiencies but tends to decline over time, primarily because industry exploits high EROI reserves first, in quest of the biggest bang for the buck. In 1978 petroleum energy obtained per foot of drilling reportedly declined from 50 barrels to 15. The EROI for the US oil industry as a whole dropped from roughly 24:1 in 1954 to 11:1 in 2007. Worldwide, despite efficiency improvements, the average EROI of petroleum fell from 100:1 in the 1920s to 19:1 today. Oil shale ranges from 4:1 to as low as 1.5:1. The estimated EROI of coal is an average of 67:1, of natural gas 10:1, of wind 18:1, of tidal 6:1, and of wave power 15:1. For hydroelectricity the EROI ranges between 11:1 and 267:1, for nuclear between 1:1 and 15:1, solar PV between 4:1 and 10:1, geothermal heat pumps between 2:1 and 5:1, ethanol between 1:1 and 10:1, biodiesel between 2:1 and 10:1.
EROI analysis reveals the irrationality of selecting energy systems on the basis of market price, which depends on current demand, subsidies, taxes and the rate of extraction from the global stock. Using price signals would require that the relative monetary prices of different kinds of energy reflect their relative social costs and benefits. They do not. An EROI standard would help in making energy choices. But where to set boundaries, i.e. what to include in EROI calculations - infrastructure? vehicles? recovery and processing of ores? - is subject to lively debate.
Policies should strive to maximize total sustainable well-being delivered by the economy, i.e. favor a sustainable energy system with the highest EROI. But is there a minimum EROI needed for economies and civilizations to succeed? One study suggests 3:1 as "a bare minimum", allowing only transportation energy and related systems, leaving little for the things we value most about civilization - art, medicine, education and so on. Even an average EROI of 5:1 is insufficient to support a significant military. A definitive answer to the question of minimum EROI for our own civilization may have to wait until history reveals we have fallen below it.
Can we convert to renewable energy rapidly enough to avoid such an experiential determination? Assuming a minimum EROI of 5:1, a figure approached by current petroleum technologies, it is encouraging to know that renewables can do much better. The EROI for solar PV is conservatively estimated at 10:1 and wind at 20:1, perhaps even 50:1. However, some analysts worry that as society is forced to make do with less oil, it may fall into an "energy trap" where it makes more sense on an energetic basis to continue to develop oil rather than renewables because the sunken energy costs of the existing infrastructure make the continued use of petroleum energetically inexpensive. You can't build a windmill using promised energy. Unlike monetary investments, which can be made on credit and amortized out of the income stream they produce, energy investment in new energy infrastructure must be made up-front, using part of today's energy budget. Since nature provides no energy financing, society can find itself in a situation where it is politically better off using oil.
Sometimes such problems appear unsolvable on the macro scale but can be solved at the level of individual behavior. Rational citizens may postpone some of their energy expenditures on other things, investing instead in insulating a house or installing solar panels, given realistic assumptions about tomorrow's energy cost. Such decisions could accumulate into the macro results that the energy trap makes politically difficult to achieve.
In any event, we must one day have an economy running on its current solar energy income rather than its dwindling fossil inheritance or face a climate disaster. The amount of energy that economy will have at its disposal depends on the choices we make today. Had classical economists accepted decades ago that their theories run counter to the laws of thermodynamics, we would now be much further along toward an economy and civilization based on a sustainable matter-and-energy flow. Adam Smith published his Wealth of Nations 75 years before those laws were set to paper. It's high time to rethink the idea of that invisible hand.