The Oil Drum: Net Energy - Discussions about Energy and Our Future

REVIEW: A Preliminary Investigation of Energy Return on Energy Investment for Global Oil and Gas Production

David Murphy — Tue, 28 Jul 2009 09:20:23 -0400

This post reviews a paper by Nate Gagnon, Charles Hall and Lysle Brinker titled: “A Preliminary Investigation of Energy Return on Energy Investment for Global Oil and Gas Production,” published recently in the peer-reviewed journal Energies. The lead author was my colleague for two years at SUNY-ESF and the second author is currently my Ph.D. advisor and has published numerous guest posts here on The Oil Drum. See here for a list of previous posts relating to work by Dr. Charles Hall, and here to download a full-text PDF of this paper.

EROI of Global Oil and Gas Production

ABSTRACT: Economies are fueled by energy produced in excess of the amount required to drive the energy production process. Therefore any successful society’s energy resources must be both abundant and exploitable with a high ratio of energy return on energy invested (EROI). Unfortunately most of the data kept on costs of oil and gas operations are in monetary, not energy, terms. Fortunately we can convert monetary values into approximate energy values by deriving energy intensities for monetary transactions from those few nations that keep both sets of data. We provide a preliminary assessment of EROI for the world’s most important fuels, oil and gas, based on time series of global production and estimates of energy inputs derived from monetary expenditures for all publicly traded oil and gas companies and estimates of energy intensities of those expenditures. We estimate that EROI at the wellhead was roughly 26:1 in 1992, increased to 35:1 in 1999, and then decreased to 18:1 in 2006. These trends imply that global supplies of petroleum available to do economic work are considerably less than estimates of gross reserves and that EROI is declining over time and with increased annual drilling levels. Our global estimates of EROI have a pattern similar to, but somewhat higher than, the United States, which has better data on energy costs but a more depleted resource base.

As the title of this article indicates, the authors estimate the energy return on investment (EROI) for global oil and gas “production.” The first thing to note is that the calculation is actually for the EROI of global exploration, development, and production (commonly called E+P or “upstream”) – a much more comprehensive estimate than just production. They estimate that the EROI of global oil and gas E+P in 2006 was roughly 18:1 (above figure). To establish these estimates the authors rely on three datasets: a) the Energy and Information Administration (EIA), and b) the British equivalent of the EIA, and 3) John S. Herold, Inc., a privately managed database consisting of data on total "upstream" costs (i.e. all costs up to the point the oil comes out of the ground) of publicly traded energy firms around the world.

The crux of their analysis depends on the conversion of money numbers into energy numbers. Since global energy costs are not maintained in energy units, but in economic units only, they derived an energy intensity value for each dollar spent in the energy industry. These numbers, derived independently for the energy industries within the U.S. and England, were about the same: roughly 20 MJ per dollar for both countries in 2005. The energy intensity numbers were multiplied by the estimates of money spent to get rough estimates of energy cost of energy production.

In addition to estimating the current upstream EROI of global oil and gas, they extrapolated three trends from their time-series estimates of EROI and show global EROI declining to 1:1 between either 2022 or sometime in the very distant future, with the best estimate being about three decades away. To do this, the authors forecast linearly the historic trend of global EROI, which is, as the authors acknowledge, a forecasting methodology fraught with problems. Nonetheless, the forecasts provide a thought-provoking view of what may happen if society continues along a "business as usual" path.

Linear extrapolations of historic EROI trends

The authors also attempt to answer the question “What are the reasons for the decline in EROI estimates, especially since 1999?” They offer two solutions: 1) technology is seemingly being outpaced by depletion, and/or 2) increasing the annual drilling rate decreases the drilling efficiency. The drilling intensity decreased during the early and mid 1990s when EROI was actually increasing, but has increased since 1999. This has led to a sharp decrease in drilling efficiency (barrels found/produced per well drilled). Their best guess is that both options are operational, a contention with which I am inclined to agree. Improved technology is increasingly used in E+P activities, including, of course, drilling. So the fact that the EROI of E+P has declined over the past 10 years indicates that easier-to-access resources, i.e. high EROI resources, are increasingly rare (if found at all), because even with increasing technology and drilling efforts, we are witnessing declining EROI.

Lastly, the authors address the major assumptions they have made while performing their analysis. This is a crucial step in most large numerical analyses and, unfortunately, one that is often overlooked. The assumptions are:

1) “changes in monetary expenditures indicate changes in energy expenditures.”
2) “energy intensities are the same the world over.”
3) “We assume a constant energy intensity in the US after 2002, and constant energy intensity in the UK prior to 1998 because there are no data available for those time periods.”

The second assumption is the most problematic from a scientific perspective because upstream costs vary widely from deep offshore, to tar sands, to shallow offshore, to onshore drilling. The application of energy intensity numbers, which are derived directly from cost data, from one area of the world to the rest of the world is potentially flawed. But in reality, this is a reflection of one of the conclusions the authors derive from their work, i.e. WE NEED MORE/BETTER DATA. The fact of the matter is that although the authors had access to three extensive data sets, two public and one private, they were still able to access data for only 40% of the world’s oil production. Furthermore, many of the data sets that are unavailable to public scrutiny are the most important, i.e. that from Saudi Arabia, Russia, Iran, and every other Nationalized Oil Company.

Some interesting quotes from the manuscript:

This [Herold] data base accounted for about 40% of the oil produced in the world in 2006.

What is clear in the Herold data base is that the amount of oil and gas produced per dollar spent between 1999 and 2006 shows a decline. In 1999 the industry produced about one tenth of a barrel of oil equivalent (boe) per 2005 dollar spent globally in exploration, development and production. By 2006 that number had declined to approximately 50%.

It is important to note that the data we used in this analysis group oil and natural gas production together, since they are commonly produced from the same reservoirs. However, the effort required to pump oil out of the ground is generally much greater than that required to bring natural gas to the surface. We therefore expect that the true EROI of oil is somewhat lower than our results suggest, while that of conventional natural gas is higher.

The Net Hubbert Curve: What Does It Mean?

David Murphy — Mon, 22 Jun 2009 10:30:18 -0400

Cutler Cleveland of Boston University has reported that the EROI of oil and gas extraction in the U.S. has decreased from 100:1 in the 1930’s to 30:1 in the 1970’s to roughly 11:1 as of 2000 (Figure 1). But beyond the fact that society receives currently around 11 barrels of oil for every 1 barrel that it spends getting that oil, What does this mean?

Figure 1. Plot of three estimations of EROI for U.S. oil and gas.

Well, first, it means that, if the trend of declining EROI continues, society will be spending an increasingly larger chunk of their remaining energy to get more energy. This cycle is positively reinforcing:

Declining EROI means that the net energy contained in each unit of energy delivered to society is decreasing over time, requiring the extraction of increasingly greater quantities just to meet societal demand →
decreases the quantity of energy remaining in the ground for future society →
makes it more difficult to find and develop the remaining bit of energy.

With every barrel we pull out of the ground we propel ourselves further down this path, creating a more difficult situation for future generations. (note: I assume that the “Best First Principle” applies to this scenario, i.e. society is using the best resources (i.e. oil fields) first, then the second best, etc…)

More importantly, declining EROI also means that the amount of discretionary energy available to society is FAR less than that predicted by a Hubbert curve (Figure 2). The Hubbert curve represents the total gross quantity of energy available, and, as it is calculated, there are equal quantities of energy available on the left and right side of the peak. This, however, is only true in a gross sense. The net energy available (i.e. discretionary energy) is less. In other words, declining EROI means that there will be much less net energy extracted post-peak than pre-peak on the Hubbert curve.

Figure 2. Hubbert curve as published in 1971. See here for a more detailed discussion of M. King Hubbert and this graph.

To understand this in greater depth, I quantified this relationship by first creating a replicate of the Hubbert curve published in 1971 (Figure 2). I then applied the three point values of EROI over the past century (i.e. 1930 = 100:1, 1970 = 30:1, and 2000=11:1), and interpolated linearly the values between the points and into the future to a minimum EROI of 1.1:1. I have no a priori reason to believe that EROI has declined linearly or that it will decline to 1.1 and then level off, but it has certainly declined in the past and as long as it is declining the general results reported here are valid.

I then used the following equation to calculate the percent of net energy available from the gross energy produced:

Net Energy = Gross Energy * ((EROI – 1)/ EROI)

Figure 3 shows the results of this analysis. Unlike the original Hubbert curve that shows equal quantities of gross energy resources on the left and right side, the Net Hubbert Curve is skewed so that most resources are on the left. For example, according to the original Hubbert curve, 50% of the energy resource is remaining when production levels reach the peak, but this is quite different for the Net Hubbert curve. Due to declining EROI, by the time peak production is reached, 73% of the net energy available is already used.

Figure 3. Gross and Net Hubbert curves, adapted from Figure 2.

The implications of these results are vast, but in general, declining EROI is going to make it very difficult to meet the net energy needs of future society. Although this study may not be very precise, it does imply that if we have reached Peak Oil (and I think we have), that society has already spent quite a bit more than half of the net (or discretionary) oil energy that will ever be available.

A Net Energy Parable Revisited

Nate Hagens — Thu, 28 May 2009 10:03:25 -0400

(**Note: This was my first main post on TOD. It was an anecdotal attempt at showing how scaling of lower energy gain renewables might have deleterious wide boundary impacts on society. The core principles behind this story remain intact and relevant).

Besides water, energy is the most important substance for life on the planet. For most organisms energy is embodied in the food they eat, be it bugs, nuts or gazelles. The excess of energy consumed to energy expended (net energy) has been integral in the evolution of the structure and form of present day organisms.

Net energy is measured as how much energy is left over after the calories used to find, harvest, refine and utilize the original energy are accounted for. It is a term linked to physical principles and departs in many cases from our current market mechanism of valuing things by price. The alternative energy debate seems to have two firmly entrenched camps - those that acknowledge the importance of energy gain to our society and those who focus on gross energy, energy quality and dollars. This post explores what net energy is, why its important and how its principles may impact the future organization of our society. [break] For most living things, energy is calories. Over eons, natural selection has optimized the most efficient methods for energy capture, transformation, and consumption.( Lotka) Cheetahs that repeatedly expend more energy chasing a gazelle than they receive from eating it will not incrementally survive to produce offspring.

But humans, in a very brief evolutionary time span, have puzzled out how to unlock the hydrocarbon bonds in fossil fuels, freeing up vastly more energy that can be directly eaten. The vast majority of our per capita energy production is spent on non-nutritive exosomatic consumption. We have gradually, with rapidity at times, advanced modern human civilization to a global scale, with liquid fuel in jets, trucks, and automobiles providing the glue that links people and products together.

WHAT IS NET ENERGY?

To harness and consume energy requires some type of energy investment. This investment is what comprises the difference between gross energy and net energy. There is various nomenclature that describes this concept. Energy profit ratio, surplus energy, energy gain, EROI, and ERoEI all represent virtually the same relationship of how much energy we receive, relative to an energy input(dollars do not factor in). The most referenced metric in the Peak Oil literature is EROI or ERoEI (Energy Returned on Energy Invested), which, in its simplest sense is the ratio:

Energy Output / Energy Input

There is disagreement (sometimes dramatic) in the energy literature not only as to what should be included as energy inputs and outputs (a boundary issue) but how variables are included (how to evaluate co-products, how to include other limiting inputs to an energy technology, etc) These nuances will be covered in a subsequent post.

Net energy is typically given as per unit of energy invested. Thus:

EROI = Net Energy + 1.

(For those of you who've played craps - some tables pay off the hard-ways FOR one and others TO one. EROI and net energy have a similar relationship. EROI is how much energy output FOR an energy input and net energy is the energy output TO the energy input.)

Net energy also can refer to a sum as well as a ratio. For an ethanol process that has an EROI of 1.2:1 -the net energy is just .2, but we can also calculate how much net energy is created for society in a given year or a life-of-resource total. At EROI of 1.2, the 3.9 billion gallons that the US produced in 2005 required 3.29 billion gallons of BTU energy input, resulting in a `net energy' of 610 million gallons. (This post will use net energy and EROI interchangeably - if a sentence uses EROI, just subtract one to get net energy, if I use net energy, just add one to get EROI)

A GROSS vs NET ENERGY GRAPH

Briefly, the above graph shows a theoretical depletable resource which follows the 'best first' concept of resource extraction. The vertical axis is quantity and the horizontal is time. The gross energy resource "X", is the entire area under the curve. ("X" = "A"+"B"+"C"+"D"). Direct energy costs are "D". Indirect energy costs (like tractors and highways and medical insurance and such) are "C". Environmental externalities (in energy terms) are "B". "A" represents the total net energy of the resource after costs have been subtracted. At any given point in time the EROI can be calculated by taking a ratio of the total area divided by the costs (depending on the boundaries). As can be seen, net energy peaks and goes to zero way before the total gross energy is depleted. (This graphic is from an upcoming paper on EROI by a colleague (Kenneth Mulder) and myself.)

ENERGY QUALITY

Energy quality is also relevant. From an economic standpoint, the value of a heat equivalent of a fuel is set by its price, energy density, physical scarcity, cleanliness of the fuel, capacity to do useful work, flexibility, safety, conversion aspects, etc. (1)

(Source - Neal Elliot - ACEEE)

Electricity is currently the highest quality energy we have in our society, largely due to its ability to do work. Although crude oil is of lower energy `quality' than electricity, its use is ubiquitous in allowing other segments of society to transport goods, etc. and its `quality' as measured by price, has been increasing relative to electricity in recent years.

Cutler Cleveland et al. devised one method of `quality correcting' the net energy of oil and gas extraction using, The Divisia Index, which accounts for energy quality of both inputs and outputs(1 )Below is a graphic of the the thermal and quality corrected EROI of US oil and gas extraction.

"The Divisia EROI is consistently much lower than the thermal equivalent EROI. The principal reason for this is the difference in the fuel mix, and hence fuel quality, between the numerator and denominator of the EROI. The outputs are the crude, unprocessed forms of oil and natural gas. The inputs are electricity and refined fuels such as gasoline and other distillate fuels. The latter are higher quality than the former, and have higher prices. Refined fuels and electricity are, therefore, weighted more heavily in the Divisia formulation."(1)

In the 1930s, US oil was easy to discover. In many cases it was almost at the surface and had an EROI of discovery of 100:1.(2). It has since declined, depending how one measures it or who one talks to, in the range of 10-15:1. As it gets deeper, harder to find, more viscous, higher sulfur content, etc, the EROI will continue to decline. A typical refining efficiency is about 10:1, so the total refined EROI of our precious liquid fuel is still between 5-10:1. This may not seem so high (compared to 100!), but how many stocks have you owned that make 500-1000%? On each iteration? This is the type of energy subsidy world society has become accustomed to.(My paucity of references for this segment gives evidence to how little concern our leadership has for the issue of net energy. Charles Hall, (with data from John S Herold and Co.) and others are working on new updated oil and gas EROI numbers - but solid energy data is either proprietary or difficult to assimilate)

WHY IS NET ENERGY IMPORTANT?

We all intuitively know the difference between net and gross - we use the concept everyday. If you make $100,000 per year in salary and the government takes 38%, your net is $62,000. If the government took 99%, it really wouldnt matter whether you made $100,000 or $1,000,000, your take home would be very small. The same concept applies to energy, and in particular, whatever energy source is most central to society. Basically, net energy matters because net energy is what we use.

"Energy gain, or EROI, varies with the quality (transformity) of a resource deposit and with the efficiency of the technology used to locate, extract, process, distribute and exploit the resource. As the ease of obtaining or using a resource declines, more energy must be devoted to these activities, causing energy gain to decline. Where an energy budget is substantially constant, allocating more resources to energy production reduces the amount of energy available for other activities. The potential impacts of such a situation on a human system include less leisure time, a lower standard of living, higher taxes, and an increase in childhood mortality. In an animal population, allocating greater effort to energy production may mean less winter fat, increased embryo resorption, lower birth weights, or the like.Tainter(3)

It is fundamentally impossible to maintain a constant level of net energy while the aggregate energy profit ratio drops. Only after the energy profit ratio and the need for new fuel related level off can net energy supplies return to the desired level (4).(This book, Beyond Oil, is 20 years old, but is probably the best book on the concepts of net energy, agriculture and society)

We are currently living in the highest energy gain era of any organism in the history of earth. Although the total amount of BTUs consumed in 2005 was higher than any year in history, world energy per capita peaked in 1979.(5)(One could argue that the plateau in net energy per capita has been maintained by a large wealth transfer from poor to rich, from future to present, and from abstract 'energy' (debt) to real consumption).

There are a finite amount of stored fossil fuels on the planet. Some of the largest, highest quality resources have already been exploited. The remaining resources are in many cases more energetically difficult to harvest, or have negative side effects (e.g climate change and coal).

"Environmental degradation is greater when the resource is of low quality and distributed but heavily used. Thus, a switch to renewable energy sources might bring, ironically, environmental damage comparable in scale to, or greater than, that caused by the use of fossil fuels." (Joseph Tainter)(2)

We already see evidence of this in some of the scaling of biofuel production in Asia

A NET ENERGY PARABLE

Net energy of corn ethanol examples and debates have been presented ad nauseum from both proponents and detractors. The redundancy is trivializing the concept. Though the ethanol debate is critically important in deciding how to deploy of our remaining fossil energy, what follows is a more benign example:

A civilization of 1000 sasquatches lives on a small distant Planet P. They require only food (energy) and water to live but also enjoy a vibrant culture with artisans, builders, and craftspeople. Sasquatches are vegetarians (as everyone knows) but do raise animals for labor help, namely Hephalumps. These animals help them harvest large hempy plants from the mountain near where they live and process them into Saspacks (the finest, sturdiest, durable backpacks in the universe). Each week (which is 10 days long, based on Planet P's sun), the sasquatch colony works very hard for five days and then has leisure time during for the next 5 days. Once a year, a ship from Planet X lands and trades luxury food items (non-caloric but tasty), medicine, comic books, and basic materials in exchange for an agreed upon cargo of Saspacks.
This societies only source of energy(calories) is Waybread, which is a highly energy dense cake made with Spice, water, and the meat from the Mongo nut, which grows in an enormous grove 25 miles from the sasquatch community. Once a Ten-Day, a troupe of the strongest 300 sasquatches traverses 25 miles to the Mongo nut groves, fills up their packs with nuts, and returns home with their energy bounty. It is a one day grueling journey across the Black Plains and through the Black Swamp but they make a ritual of it, telling stories and laughing most of the way until they arrive late at night. They spend a second day climbing trees and picking Mongo nuts, laughing at the colorful monkeys that play in the Mongo trees as well as picking some flowers to bring home to their wives and girlfriends. On the third day they leave at the crack of dawn and are home by nightfall. These same 300 sasquatches then spend two more days, cracking, pounding and combining ingredients together with the nuts to make Waybread; enough for the entire community for the next Ten-Day. All these sasquatches do no other work or leisure on the days they are procuring energy for the tribe. In return, they receive exalted status as the tribes energy providers, and a five day rest.
Since Sasquatches are freakin' huge, each member of their society consumes 4 m-cals a day. They really only require 3 m-cals to survive, but the extra makes them fat and hearty and also contributes to general gastronomic pleasure (sasquatches do not like to feel peckish). Hephalumps are even bigger and the 100 strong herd each requires 8 mcals per day of Waybread to survive and function. Although Waybread is highly nutritious, it is also highly perishable, and must be consumed within one Ten-Day, after which time it gets wormy, and gross.
During the five-day ritual of energy harvesting and preparation, 600 other tribal members are busy harvesting fiber from the mountain, and weaving and stitching it into Saspacks. The remaining 100 bigfoots, mostly youngsters, clean and maintain the village, manage the water supply from the river, and comb the hillsides for Spice. At the end of the fifth day, a feeling of joy emerges in the community as the tribe can look forward to relaxing, dancing and sleeping for five straight days, with plenty of Waybread for everyone. This routine has been going on for as long as any sasquatch can remember. None of them could imagine anything otherwise.

We can determine the energy gain (or net energy) of this society based on the above information. First let's look at the energy output:

Each of the 1000 sasquatches eats 4 mcals per day and there are 10 days per week on their planet. This equates to 40,000 mcals energy consumption per Ten-Day. Each of their herd of 100 Hephalumps requires 8 mcals per day (8,000 mcals per Ten-Day) Therefore the Mongo nut energy source provides them with a flow of energy of 48,000 mcals per Ten-Day. This is their energy output, which is entirely consumed.

How much energy does this society spend in order to get the 48,000 mcals? Well, 300 sasquatches work/travel for three days to acquire the Mongo nuts and then spend two days refining it into edible quality. They have to eat for nourishment during this time otherwise they would not have the strength to do work. Their caloric input (from the prior week's waybread) is 300 sasquatches times 5 days times 4mcals equals 6000mcals.

The energy gain for this society is 48,000 mcals less 6,000 mcals equals 42,000 mcals per ten-day.

The EROI is 48,000mcals/6,000mcals =8:1. The net energy is EROI-1 or 7:1. (Remember, EROI is FOR one and net energy is TO one.) For every unit of energy spent in energy harvesting/refining, 8 are produced. Since they used one unit to produce 8, 7 are left over for other areas of society. (Of the 48,000 mcals of energy available to their society, 6,000 is used for energy production, 12,000 is used to make Saspacks, 2,000 used for cleaning and water procurement, 8,000 to feed the Hephalumps and 20,000 to sustain the tribe during their 5 days of hedonistic leisure.) Sidenote -even though there is a 8:1 EROI, 30% of the tribes members contribute to energy procurement.

One day, the 300 energy procurers arrive at the Mongo grove and find many of the colorful monkeys lying dead on the ground. They were so disturbed that they carried 2 of the carcasses home to show the shaman. They also discovered that the Mongo nuts were no longer as easily reachable from the ground and they had to go either deeper into the forest, or climb higher up the trees to fill their packs with the largest ones. This ended up taking a whole extra day.
After returning home a day late, the community was in a panic. They would have to spend a day out of their Five-Day to finish the procurement of food! And the sight of the dead, dark colored monkeys made many sasquatches cry. It was decided to call an emergency Council, to determine what might be done about the turn of events. Many wise and respected sasquatches voiced their opinions. They were saddened by the dead monkeys, but they were more concerned about the lack of easy to find Mongo nuts - the implications being the 300 energy workers might have to work MORE than 5 days per Ten-Day. One of the senior males suggested "We could save a little time by not stopping to pick and bring home flowers which aren't really needed for our energy supply". A matriarchal sasquatch immediately stood up and chastised "Zeke-Stinky-foot, you come home without flowers and you'll see how much they are needed, Husband-mine!". There was a vote and it was decided to continue to pick and bring home flowers.
During much arguing and debating, the shaman entered the pavilion and everyone quieted down. He exclaimed "Colorful Monkey-friends die from Black poisoning" A sharp intake of breath from the Council-members. "Our energy providers feet put Black Desert and Black Swamp on Mongo trees while they pick nuts. Colorful-monkey friends get on paws then in mouth then die." The Council went into an uproar - Black poisoning! Because of our energy procuring! How awful! Yet what can we do? - We need the Mongo nuts to survive and have energy to work and sing! And if we go around the Black Desert and Black Swamp it will take an extra day in both directions!!" The sasquatches were very upset, and spent most of their Five-Day arguing and trying to make a new plan, where none had ever been needed before. It was decided by the Council to have the 300 workers spend an extra day at the groves to fill up their packs. The Shamans comment about the Black Desert being carried to the trees, and killing monkeys was only talked about by a few, and drowned out by the sasquatch leaders who really wanted at least 4 days of leisure and 4mcals per day. It was also decided to send 100 of the 600 saspack workers on exploratory missions, something that hadn't been done in generations, to see what was beyond a 25 mile radius of their community.
These plans worked out reasonably well and gradually the sasquatch colony adjusted. After all, they still had the same amount of food and energy, even though they had to work slightly harder for it, and produce a few less Saspacks. At the end of each Ten-Day the sasquatches were not quite as well rested, but were happy in their resolve to work a little harder to get energy for the tribe. (The Hephalumps did not notice any of this, and continued to chew their 8,000 mcal of Waybread per week.)

The phenomenon of `best-first' apparently applies to Mongo nuts as well as oil. We can now calculate an updated net energy for the sasquatch society. The energy production was the same, at 48,000 mcal per Ten-Day. But the 300 sasquatch energy team now worked 6 days per week requiring 4mcal per day or 7,200 mcal. Also, 100 workers spent 2 days per week (on average) exploring and looking for other Mongo nut sites. From a societal perspective, this `energy exploration' expenditure of 100*4*2=800 mcals should be included (somewhere) in any net energy calculations even though it didn't directly result (yet) in energy production.

The updated EROI formula is:
Energy output = 48,000 mcal/Energy input =8,000 mcal = EROI of 6:1 (net energy of 5:1)

Now of the 48,000 mcal of production, 8,000 is used for energy procuring, 11,200 is used for industry (Saspacks), 2000 for village maintenance, 8,000 for Hephalump food and 18,800 for leisure. Everyone in the sasquatch civilization still consumed the same amount of energy as before, but societies mix of labor allocation and free time had shifted.

***Sidebar of interest: We also now have information to calculate a more advanced (thorough) form of EROI, one that includes co-products and externalities. Flowers have value to sasquatch society and as such get a `co-product' credit in the EROI calculation. (much like dry distiller grains in the ethanol calculation) Since they are an additional output, we can reduce the amount of energy allocated to getting the Mongo nuts, as some of the sasquatch caloric expenditure is now considered necessary for getting flowers. How we allocate this is a debated but relevant question. We could take the market price of the two products (sasquatch society has none) or allocate by mass( the flowers have 50% of the mass of the Mongo nuts) or by volume (they are very light - only 10% the weight of nuts).

Allocating by mass would increase the EROI quite a bit:

Energy output = 48,000 mcal Energy input =4,000 mcal (4,000 allocated to flowers) = EROI of 12:1 (Net energy of 11:1)

Allocating by weight would increase the EROI slightly:
Energy output = 48,000 mcal /Energy input = 7,200 mcal (800 allocated to flowers) =EROI of 6.66:1 (Net energy of 5.66:1)

Our market system (in my opinion) underestimates the long term value of energy to society and net energy calculations that give so much `energy credit' to things like Dry Distiller Grains, thus overestimate the true energy gain (or underestimate the energy loss).

Regarding externalities, it is difficult to put an energy cost on dead monkeys. However, the poisoning was clearly a direct result of the sasquatches energy harvesting techniques and to exclude it from an energy analysis would not be holistic. Modern EROI analysis is just starting to value externalities as costs (see Patzek and Pimental regarding soil mining and Life Cycle analysis of GHG emissions) Ecological economics attempts to value things that humans need and value but are considered `free' in the market system. Quite possibly, the limiting factor of large scale ethanol production, even cellulosic, is the degradation of soil and assumption of continued ease and availability of irrigation.

Since sasquatches are a peaceful and conscientious race, lets arbitrarily allocate a high energy cost to the biodiversity loss to their culture of 8,000 mcals. The EROI would then be:
Energy output = 40,000 mcal (8,000 were subtracted) / 8,000 mcal energy input
=EROI of 5:1 (net energy of 4:1)

Continuing with our story:

The sasquatches situation, largely beyond their control, deteriorated further. The Mongo nut supply, while still enormous, was becoming more thinly distributed. Also, the nuts, which once averaged 3 lbs were now mostly 1-2 lbs. It took the sasquatches much more time and effort to pick and organize them. It also took more time to process them into Waybread, as the shell to nut ratio had increased substantially. All in all, it took an additional 100 sasquatches (400 total) a total of 7 days to harvest and process the Waybread. They were not beginning to get restive.
One day, while the stressed sasquatch community was hard at work on what was normally their 7th day (2nd of leisure), a troupe of youngsters came running full out into the village "We are saved! We are saved! - We found a new Mongo nut grove with huge nuts and plenty of them!! We'll soon be able to go back to our old routine of dancing and reading comic books! For a Five-Day! These nuts are huge!"
A Council was hastily convened where the youths were eagerly bombarded with questions: "How big was the grove? Were there colorful monkeys? Would you like some water? Have you met my daughter Fern-Blossom?" An old silver-back sasquatch, one of the tribal leaders, stood up and quietly asked "Sons, how far is this grove?" One of the scouts replied "Sir, its 120 miles on the other side of the mountain, but an easy walk, with no Black Swamp or Desert". The leader nodded: "That is 5 days in each direction. If we send our energy workers that far, there will not be enough time for them to process the Waybread upon their return." He paused, "However, our Mongo nuts close to the village are getting smaller. I think we should go harvest this new, bigger energy source you have discovered. We will have to take more of our Saspack workers and our village cleaners too. But you are right, you have saved us."
When everything was sorted out, the sasquatches had to organize 2 energy procurement teams of 375 sasquatches each. One team brought water from the village and met the other team halfway and then returned with the large Mongo nuts to process them. These teams traded off in their duties but worked 8 days total out of every Ten-Day. This left 200 sasquatches to work on the saspacks, and it was decided, to be fair and because they were behind contract, that they also work an eight-day. There were only 50 of the tribe left to work on cleaning, and basic village maintenance. The community was amazed that so much! of their time was spent making Waybread, just to spend it on making more Waybread - very little singing and relaxation time anymore. After a few months, the tribal leader, at a somber Council meeting, announced that everyone would have to cut back, and strict rationing of daily consumption to 3 mcals per sasquatch would be enforced.
Because of the reduction in Saspack labor time, the Hephalumps weren't all needed and some started to roam the village. A large controversy erupted when one of the energy workers, strained from a long ten-day on the road, hit a hephalump on the head and killed it. He wanted to eat it but didn't know how.

The energy gain of this society continued to decrease. The energy output of 48,000 mcal (before the rationing), had an energy input of 750 sasquatches times 4 mcal times 8 days = 24,000 mcals.

The EROI was 48,000 / 24,000 =2:1 (Net energy of 1).
A large portion (50%) of this societies efforts were now allocated to energy procurement. Of the total 48,000 mcals procured, 24,000 was from energy procurement, 8,000 was for their livestock, only (200*8*4mcal) =4,800 mcal devoted to Saspack production, and 1,200 to maintain the village and procure water and 10,000 mcals for leisure and art.

A further problem, (for which I dont plan to attempt the math) was that WATER, not energy was now a limiting factor in the energy harvesting process. Water was much heavier to carry than Waybread so a cache had to be set up midway between the water source and the Mongo nut source. The Energy Return on Energy Invested stood steady at 2:1, but the Energy Return on WATER Invested, was declining dramatically.

After the tribal decision to ration consumption, the energy gain of society upticked. Since each sasquatch only consumed 3 mcals, (and many noticed new clarity of thinking and vitality after initial grumbling), the energy production requirements tapered off a bit:

The tribe still procured the same amount of Waybread (the extra was allocated to the following weeks Mongo picking team). The energy input was now only 750 *3mcal *8days = 18,000 Mcals. Because of their belt tightening (or efficiency) the societal EROI increased to 48,000/18,000 = 2.66 (net energy 1.66).Note: the EROI of energy procuring didnt change, but the societal energy gain, from a Tainter-like perspective, did increase.

At year end, the spaceship landed from Planet X. (There were 14 female sasquatches, and one male, waiting at the landing port, hoping to be rescued.) The alien trader strode down the ships conveyor and frowned when he saw the somewhat disheveled sasquatch community. There were Hephalumps everywhere (a delicacy on his planet), huts and sidewalks were in disrepair, and the tribe looked thin.
He was greeted by the tribal leader who sheepishly stated "Noble trader, our energy supplies have dwindled and we had to spend extra time harvesting a new energy source so only had time to make 3,200 Saspacks, not the 6,000 per our agreement."
The alien snorted, "Silly sasquatches - your world, though small, is FULL of energy - what you call the Black Swamp is also known as crude oil and what you call Black Desert is called coal-both of these substances have way way more energy than your precious Mongo nuts. Since you are good customers, I will give you your materials and ½ the medicine but withhold the tasty treats and comic books until you can make more Saspacks. If you like, I will bring machinery to your planet and help you to harness your Black Swamp, in return for great riches" The community was saddened and confused. How could the Black Desert be strong energy? It was poison. They held an immediate Council and concluded that they could do without the comic books, materials and candy. The local shaman could find his own medicine, and they would continue harvesting Mongo nuts, but would further divide the labor among the tribe and produce Saspacks no more. They also didn't need the Hephalumps anymore and would lead them to the Mongo groves and leave them free next Ten-Day. They waved goodbye to the galactic trader for the last time.

The sasquatches were transitioning from a high to a low gain energy system. By removing the Hephalumps and the Saspack industry, which brought them niceties that they didn't really need, they now only had to procure 30,000 mcals per ten-day. The energy input was still 750 *3mcal*8days = 18,000 Mcals.

The final EROI in our example is 30,000 / 18,000 = 1.66:1 (Net energy of .66). While lower, the community now had reorganized in such a way that 18,000 mcal went to energy procurement and 12,000 were left for leisure and dancing and singing (40% of all energy).

CONCLUSIONS

Sasquatch civilization underwent a decline in net energy. The results were less industry and less free time, as a larger effort had to be made to procure essential food. Eventually, they partially offset this loss in energy gain, by jettisoning certain aspects of their culture that were energy intensive yet did not really provide the satisfaction that it cost. The situation of the Sasquatches is not that different from our own. Our assets are human ingenuity, 1.2 trillion barrels of oil, 179.8 trillion cubic meters of natural gas, and 909,064 million tones of coal (of various qualities)(source BP), and the various renewable flows generated from the planet. Our liabilities are a large population, the seemingly unquenchable human desire for more, a growing realization that we have in fact tapped the 'best-first' energy reserves, and ecosystems that are nearing the limits of their resilience to human extraction and waste absorption.

Our civilization is organized around high energy gain infrastructure - low gain sources, possibly even as low as 5:1 may not have the energy density required to power our liquid fuel intensive society. As can be seen by the below graphic, shopping centers and skyscrapers are part of a high energy infrastructure. Renewable flows, at least thus far do not match up in energy gain. Large scale wind has a higher EROI than oil, but cannot (as of yet), power our planes, trains and automobiles.

(Graphic from Cutler Clevelands EROI powerpoint.)

The corn ethanol and even the cellulosic ethanol debates typically miss a larger point. Much mental effort is spent debating whether the energy balance is slightly positive or slightly negative while society runs on an energy gain significantly higher than any liquid fuel alternative. When we hit $150 oil, there won’t be too many parents buying their kids a new GI Joe with the Kung Fu grip toy. At the same time, energy companies will need more and more employees to man wildcats and oil rigs and install solar panels. Though we might not be thinking in these terms at the time, the lack of energy gain (or lower net energy) will be manifesting itself in resources taken away from marginal areas of society (toy companies, hot tubs, hemorrhoid cream, Snausages, poker chips, etc) into energy producing and distributing sectors.

THE BOTTOM LINE:

1) Net energy is more important from a relative basis than absolute. A 3:1 EROI doesn't tell us much unless we know how that compares to what an organism/society has been built on/used to. A 2:1 EROI would have made stone age villagers incredibly rich. A 5:1 EROI may not be enough to power our society. (e.g. as fossil fuels get more expensive they will collapse the economy and no real recovery will ever happen as the high energy gain outputs are already gone)

2) Energy reserves are not as important as energy flow rates. We could have a billion mongo nut trees, but all that matters is the maximum flow that society is able to harvest in real time. (This obviously applies to oil as well)

3) Energy quality depends on the context. High BTU substances, like oil or coal, are clearly very useful to our society, but may not be to others. (the sasquatch colony valued and used Waybread, not oil)

4) Liebigs law of the minimum applies to an energy portfolio. Wind has a high EROI, but our system infrastructure relies on liquid fuels. The net energy of the weakest link matters more than the overall net energy of society. (Adding high EROI wind capacity while net energy of oil dwindles does not solve the problem, unless the energy mix changes from liquid fuels to electricity)

5) Using different boundaries in net energy analysis will lead to different conclusions. A society running at 5:1 EROI would be happy to develop a scalable technology with an 8:1 EROI, however, after environmental externalities are included, it might only be a 3:1 technology. (Coal-to-liquids and climate change comes to mind) The difficulties lie in making meaningful comparisons and valuing important life functions not priced in the market system.

6) Rather than pursuing the highest and most promising energy technologies, it might be prudent to pursue ones that are certain, and meet the net energy decline half-way by reducing energy footprints. As we decline in aggregate societal energy surplus, a great deal of remaining energy is going to be wasted, ostensibly going after 'more oil and gas', which will likely be unprofitable both monetarily and from energy perspective.

7) Since evolution has favored organisms that have the highest energy output energy input ratios, it will be a cognitive challenge for us (as organisms) to willingly reduce the numerator.

8) Consumption, in the sasquatch example, continued very high until late in the game, and was subsidized from borrowing from other aspects of society. Lack of energy gain was a phantom concept until the situation was much deteriorated. Similarly, in our current fiat based civilization, we might 'replace' the lower energy gain by printing money or relaxing financial requirements, but these measures will not be based on anything biophysical and make the eventual crash much steeper. In the end, it's not about how much energy we have but how much societies can afford via real inputs.

Our collective task will be to improve our net (total cost) energy from renewables while changing the infrastructure of society to best match what our long term sustainable energy gain can be.

-thelastsasquatch (a.k.a. nate hagens)

(1) Net Energy from the Extraction of Oil and Gas in the United States. Cutler Cleveland, Boston University

(2)Hydrocarbons and the Evolution of Human Culture, Hall et al. Nature Novermber 20, 2003

(3)Resource Transitions and Energy Gain, Tainter et al. Conservation Ecology 2003

(4) Beyond Oil: The Threat to Food and Fuel in the Coming Decades, Gever et al, 1986 Ballinger Publishing

(5) The Olduvai Theory: Energy, Population and Civilization, Richard C Duncan, The Social Contract Winter 2005-2006

Using Thermodynamics to (Re)Examine Environmental Kuznets Curves

David Murphy — Mon, 11 May 2009 10:01:00 -0400

The Environmental Kuznets Curve (henceforth EKC) was developed from a paper written by Simon Kuznets in 1955 titled Economic Growth and Income Inequality. His theory explained that the relationship between economic growth and income inequality forms an inverted U-shape graph with income inequality on the y-axis and economic growth (e.g. GDP/capita) on the x-axis. EKCs extend Kuznets’ original theory by stating that pollution increases as economies grow from agrarian to industrial, but as the population becomes wealthier a turning point is passed after which the amount of pollution decreases as income grows, forming an inverted U-shape (Figure 1). As such, EKC theory has been cited as a justification to prioritize economic development over environmental stewardship (Beckerman, 1992), and just last week the science reporter for the New York Times, John Tierney, wrote an article claiming exactly the same thing: “The richer everyone gets, the greener the planet will be in the long run.”

However, after 20 years of research and over 100 peer-reviewed papers, academia has yet to come to a consensus over the exact mechanism driving EKCs. Much of the disagreement over EKCs stem from shaky empirical support. To be sure, numerous studies used empirical tests and found the existence of EKCs, but many of these same studies disagree in two important ways: 1) estimates of the turning point of the inverted U-shape for pollutants vary widely and 2) the EKC relationship describes the trends for some pollutants only, not all. I propose that the lack of consensus surrounding EKCs stem from the fact that EKC theory, as it has been studied, ignores the laws of thermodynamics.

Review of the First Law of Thermodynamics

The first law of thermodynamics states that energy cannot be created nor destroyed. When coal is burned, for example, all of its energy is transformed to some other form, such as electricity, sulfur dioxide or nitrogen oxide to name just three. There are a myriad of other examples. The important point is that energy is conserved in every transformation. A basic understanding of the first law is important because it means that transforming pollution from one form to another is not the same as eliminating pollution. That is, extracting pollutants from flue gases transforms the pollutant, but does not eliminate it. To illustrate this point empirically, I have reexamined two of the most commonly cited examples supporting EKCs: deforestation and sulfur dioxide.

Deforestation

Cropper and Griffiths (1994) tested for an EKC relationship between income and deforestation in 64 developing countries around the globe and found that the incomes of many of the African and Latin American countries were still below the turning point; meaning that those countries were not yet rich enough to stop deforestation. However, in a similar study Panayotou (1995) analyzed deforestation in 41 tropical nations and found that the turning point for deforestation was around $1,300 per capita (2003 dollars), which is much lower than the turning point estimates for many air pollutants. Panayotou explains that deforestation should have a lower turning point than most industrial air pollutants as most tropical deforestation occurs to clear land for farming, which occurs before industrialization in the “normal” evolution of an economy. The list of papers examining EKC and deforestation seems ever expanding, and for a detailed discussion see Yandle et al., (2004).

Global per capita GDP, however, is roughly 4 times the turning point level cited by Panayotou (1995), and has been since 1990, yet the forest area around the globe has declined over that entire time period (Figure 2). According to the findings of Panayotou (1995), forest area around the globe should be increasing, as the global income is greater than the turning point in the EKC. Thus simple attempts to validate the findings of Panayotou fail, moreover, they are contradictory.

Sulfur-Dioxide

Burning coal releases the embodied chemical energy within the coal and in doing so creates electricity and numerous pollutants. After the Clean Air Act was enacted, coal burning power plants (among others) installed scrubbers so that these pollutants could be removed from the flue gases, and hence decrease air pollution. As a result, many EKC studies found strong correlations between high income and low sulfur dioxide emissions (Grossman and Kruegar, 1991; Selden and Song, 1994; Cole et al., 2001).

Each of these studies excluded, however, the fact that these high-income areas had decreased sulfur emissions at the expense of increased ground pollutants in the form of Coal Combustion Waste (CCW). CCW is the amalgamated end product of many flue gas pollutants, including sulfur dioxide. In this example, the CCWs are shipped back to the coalmine or stacked outside the coal power plant. Data on CCW is hard to find, but the little that I could find indicates that more landfills and surface impoundments, i.e. the facilities that store CCW, are coming on-line as U.S. income grows (Figures 3). In other words, increasing income is correlated negatively with sulfur dioxide emissions, but correlated positively with the production of CCW. So in accordance with the first law of thermodynamics, scrubbing sulfur pollutants out of a flue gas doesn’t eliminate the pollutant, rather it simply transforms the pollutant.

Conclusion

Yandle et al. (2004) state “By the mid-1990’s, investigations of the EKC relationships had generated enough consistent findings to give assurance for many pollutants, richer is definitely cleaner.” Yet EKCs do not have wide empirical support, and since simple attempts to validate the empirical support for EKCs fail, I question the utility of EKCs as a unifying paradigm for environmental and economic policy. As I have shown in the examples of deforestation and sulfur dioxide, simply changing or extrapolating the system boundaries to incorporate thermodynamics calls into question the EKC relationship. To be sure, it is true that sulfur dioxide emissions have decreased within the U.S. as income has increased, which seems to support the EKC theory, but is it then justified to say, in light of figure 3 and the First Law, that we don’t have a sulfur pollution problem? Wealth may allow societies to deal with pollution in a more efficient manner or transform pollution into a less harmful form, but the idea that all nations can become wealthy by consuming the world's resources yet be pollution-free is antithetical to the laws of thermodynamics.

The quote by Yandle et al. (2004) is deeply troubling on a conceptual level also. It not only encourages policy makers to place priority on economic development over environmental stewardship, it implies that a growing economy by default will resolve environmental issues and hence direct environmental action is unnecessary. This idea may be supported by faithful EKC believers, but as York, Clark and Foster have eloquently and thoroughly discussed, it is farcical to most natural scientists. To ensure that economic and environmental policies work together to promote a healthy economy and planet, policy makers should use scientific concepts that enjoy wide empirical support, such as the Laws of Thermodynamics, as a unifying theme governing pollution patterns and draft policies based on these laws, rather than EKCs.

Beckerman, W. 1992. Economic Growth and the Environment: Whose Growth? Whose Environment? World Development 20: 481 – 496.

Cole, M.A., Rayner, A.J., and J.M. Bates. 2001. The Environmental Kuznets Curve: An empirical Analysis. Environment and Development Economics 2(4): 401 – 416.

Cropper, Maureen, and Charles Griffiths. 1994. The Interaction of Population Growth and Environmental Quality. American Economic Review Papers and Proceedings 84(2): 250-254.

Grossman, Gene M., and Alan B. Krueger. 1991. Environmental Impact of a North American Free Trade Agreement. NBER Working paper 3914.

Kuznets, Simon. 1955. Economic Growth and Income Inequality. American Economic Review 45(1): 1 – 28.

Panayotou, Theodore. 1995. Environmental Degratdation at Different Stages of Economic Development. In Beyond Rio: The Environmental Crisis of Sustainable Livelihoods in the Third World, ed. I. Ahmed and J. A Doeleman. London: Macmillan, 13 – 36.

Seldon, Thomas M., and Daqing Song. 1994. Environmental Quality and Development: Is there a Kuznets Curve for Air Pollution Emissions? Journal of Environmental Economics and Management 27: 147 – 162.

Yandle, B., Bhattarai, M., and Maya Vijayaraghavan. 2004. Environmental Kuznets Curves: A Review of Findings, Methods, and Policy Implications. PERC 2(1).

Further Evidence of the Influence of Energy on the U.S. Economy

David Murphy — Thu, 16 Apr 2009 11:11:37 -0400

Gail, Jeff Rubin , and now James Hamilton (warning- pdf) of the University of California – San Diego have produced literature correlating either this financial collapse or recessions more generally with peak oil and oil prices. The take-away message of their work is that oil prices played a fundamental role in causing the current recession and many previous recessions. In this post I, along with Steve Balogh, a fellow researcher here at the EROI Institute at SUNY-ESF, will add to this discourse.

In his recent report, James Hamilton states that:

With hindsight, it is hard to deny that the price rose too high in July 2008, and that this miscalculation was influenced in part by the flow of investment dollars into commodity futures contracts. It is worth emphasizing, however, that the two key ingredients needed to make such a story coherent— a low price elasticity of demand, and the failure of physical production to increase— are the same key elements of a fundamentals-based explanation of the same phenomenon. I therefore conclude that these two factors, rather than speculation per se, should be construed as the primary cause of the oil shock of 2007-08.

Hamilton continues:

At a minimum it is clear that something other than housing deteriorated to turn slow growth into a recession. That something, in my mind, includes the collapse in automobile purchases, slowdown in overall consumption spending, and deteriorating consumer sentiment, in which the oil shock was indisputably a contributing factor…Eventually, the declines in income and house prices set mortgage delinquency rates beyond a threshold at which the overall solvency of the financial system itself came to be questioned…had there been no oil shock, we would have described the U.S. economy in 2007:Q4-2008:Q3 as growing slowly, but not in a recession.

Hamilton acknowledges early on in his report that the proportion of income spent on energy is an important determinant of consumer spending patterns. The theory is fairly simple: if energy expenditures rise faster than income, then the share of income for other things besides purchasing energy must decline, such as spending on mortgage payments for a second home in Las Vegas. In other words, rapid, large increases in energy prices may curtail consumption enough to trigger larger financial problems – like the bursting of a housing bubble – that when aggregated across an economy may cause or contribute significantly to a recession.

Figure 1 shows petroleum expenditures by consumers as a share of total GDP. Monthly data for 2008 was annualized so that each value represents what the petroleum expenditures as a share of GDP would have been had the expenditures remained the same until the end of 2008 (i.e. the value in March of 2008 represents what the annual expenditures would have been if the level of expenditures in March remained constant for all of 2008). We did this because the increase and subsequent decline in prices and consumer spending occurred within one year, so that using annual averages actually “annualizes-out” the volatility of the data.

Figure 1 shows that slow economic growth and even recessions tend to occur when petroleum expenditures reach about 5 or 6% of GDP.

This relation seems to be consistent for the major recessions but not for the minor recessions that occurred in 1990 – 1991 and 2001. However, a clearer picture is painted by looking at the year on year change in GDP and the year on year change in percent of GDP spent on petroleum expenditures (Figure 2). In this graph it is clear that rapid increases in the price of oil leads to rapid increases in the percent of GDP spent on petroleum which is followed by a slowing of economic growth, i.e. a recession.

Although neither correlation nor causation between expenditures and recessions are tested explicitly in these figures, the implication is certainly present. Every major and minor recession in the past 38 years was proceeded by a rapid increase in prices and expenditures on petroleum. This does not mean that recessions are caused, or caused solely by increasing oil prices or expenditures on petroleum, rather that it is a common pre-condition for recessions.

Often there are exogenous and/or endogenous factors that seem to exacerbate the economic climate during times of high petroleum prices and expenditures, which taken together, can cause a recession. The major recessions of the 70’s and early 80’s were driven clearly by exogenous supply perturbations, while the recession of the early 2000’s (dot-com bubble) and the current recession (housing bubble) were driven by endogenous financial problems. Nonetheless, the common factor to all of these recessions was a rapid and large increase in expenditures on petroleum.

The next phase of this research will test statistically for correlation and causation within this data set. We welcome any comments/critiques/alternative theories.

EROI Update: Preliminary Results using Toe-to-Heel Air Injection

David Murphy — Wed, 18 Mar 2009 09:27:38 -0400

In August 2007, a post titled Extracting Heavy Oil: Using Toe to Heel Air Injection (THAI) introduced readers of The Oil Drum to a technology for producing an upgraded extra-heavy oil from Alberta Tar Sands without the environmentally messy and energy-intensive surface mining procedures that currently dominate extraction. The post provided a first-look at producing and partially upgrading Alberta bitumen in situ. In this post we make preliminary estimates of the Energy Return on Investment (EROI) of the THAI process.

The Alberta Tar Sands continued to garner interest through the first half of 2008 because of declining conventional oil production in Canada, the apparent success of the Steam Assisted Gravity Drainage (SAGD) process and the increasing price of crude oil. Today they are still of interest as the countries of North America (and around the world) desire cheap, abundant crude oil from politically stable regions (See Unconventional Oil: Tar Sands and Shale Oil - EROI on the Web, Part 3 of 6). However the subsequent financial collapse during the second half of 2008 has caused many tar sand projects to be deferred. In fact, Canada's oil-sands industry has hit the skids, spreading a deepening gloom over Alberta's economy, and to some degree, across the country. Some expansion projects that were under way in the Fort McMurray region have been put on the shelf, as oil companies slash their budgets to reflect the new economic environment in which they operate – that is – a world of lower oil demand and, at least compared to the summer of 2008, low oil prices.

The environmental benefits that the THAI process appears to offer include lower water and natural gas requirements, and a smaller surface footprint when compared to similar extraction technologies used in the Tar Sands, e.g. SAGD. However, in August of 2007 when the first post on The Oil Drum was written, there had been only about one year of pilot operating experience, and the news from the Whitesands Project cited problems with sand contamination in the extracted bitumen.

Can the Alberta Tar Sands Help this Situation?

In December 2008, with over two years of pilot operating experience from the Whitesands Project, the operator Petrobank filed an application with the Alberta Energy Conservation Resources Board (ECRB) and Alberta Environmental for the construction and operation of a 10,000 barrels per day (bpd) THAI commercial facility, called the “May River Project Phase l” (see here and type in permit application number 1600065 – warning: large files). This is of particular importance from an EROI perspective because the documentation accompanying the permit provides the opportunity for an energy performance review of a proposed commercial THAI facility based on actual operating data from the Whitesands Project. Our attempts to acquire more detailed information directly from Petrobank were denied.

In this post a retired oil refinery engineer and TOD member “daveinmarinca” and EROI Guy review the project facilities design and energy performance with the goal of establishing a preliminary EROI for the THAI process in Alberta. Daveinmarinca is an arms-length investor in Petrobank Energy and Resources Ltd., the company that patented THAI™, and otherwise has no ties with the company. We intend for this post to be an objective and academic analysis.

A Brief Review of- and Updates to- the THAI process

We review here the THAI process; for a more detailed review please visit the original post by Gail. The THAI process utilizes well pairs consisting of a vertical air injection well and a 700 meter horizontal collection well (Figure 1 at the top of this post). First, the vertical air injection well is preheated with steam. Next, compressed air is injected and oxidation (i.e. combustion) is initiated to create the “mobile oil zone”. In effect some of the bitumen is burned to give heat and mobility to adjacent bitumen. As the hot bitumen drifts downward and down slope it transfers heat to other bitumen, causing that to be fluid too. As oxidation and oil production proceeds, a broader combustion zone is established until the well reaches its production capacity. Each well-pair at the Whitesands Project had a thermal-hydraulic limit of 555 bpd per well.

Table 1 (below) lists the physical properties of the virgin bitumen and the THAI oil analysis at the well-head. According to Petrobank, the thermal cracking in the reservoir, which is an inherent feature of the THAI process, reduces the viscosity, sulphur content and asphaltenes while increasing the API gravity and lighter hydrocarbon elements. This results in a lighter, higher quality product that is easier to refine than the in situ bitumen and requires less diluent for shipping.

Preliminary Estimates of the Energy Return on Investment for the production of bitumen using THAI

The permit application includes an energy balance from which we can make coarse estimates of a range of EROI values that we might expect from the THAI process (Note: 1. All the permit performance numbers and the EROI analysis are based on Whitesands THAI performance without CAPRI™ as provided in the project permit documents – CAPRI is not discussed in this post. 2. The diagram below was re-created from the files submitted by Petrobrank in order to increase clarity. For the original diagram please see the permit application linked above).

The “energy balance” as calculated by Petrobank is 90.6% implying we think that for every ten units of energy taken from the reservoir 1 unit is used up in the process. This is not an EROI calculation, rather it is an assessment of the efficiency of the Central Processing Facilities and Wellsites. In other words they calculate that 94,625 GJ/day flow into these facilities and they produce 85,774 GJ/day of products, for a conversion efficiency of 90.6%.

We calculate somewhat different numbers, and our preliminary EROI for the THAI process is between 3.3:1 and 56:1 (Table 2 - below), depending on the input energy allocated for naptha (diluent which is generated from outside the immediate system, usually during the fractional distillation of oil) and the amount of input energy allocated to the bitumen burned in situ. The estimate of 3.3 includes as an energy cost 100% of the energy content of the naptha and 100% of the energy content of the bitumen burned in situ. The estimate of 8.9 excludes the entire energy cost of naptha, assuming that it is recycled, and the estimate of 56 excludes both the cost of naptha and the cost of the energy burned in situ.

Table 2. Various preliminary estimations of the EROI for the THAI production process.

Asssumptions:

One major assumption in the EROI calculation is that the input energy allocated to the bitumen burned in situ (combustion zone) is only 10% of the original oil in place. This amount is as close of an estimate as we can make from the reports filed by Petrobank. If this 10% is correct, then the total amount of recoverable oil in the system under study is 76,111 GJ/day (68,500 / 0.9), which would mean that the energy burned in situ is 7,611 GJ/day (76,111 - 68,500).

Another potential issue involves the air injected into the combustion zone. After the first post on THAI we learned that in order to maintain combustion below ground the concentration of oxygen in the injected gas must be increased. We have read nothing on the permit application indicating that this is the case at Whitesands, so we assume implicitly that these costs either don’t exist or have been incorporated into the costs associated with the central processing facilities and well sites.

Discussion of EROI estimates

There are three complicating factors that become immediately obvious when calculating the EROI for the THAI process.

First, the energy content of the naptha is quite large, yet this GJ amount is not burned or used in any way aside from decreasing the viscosity of the bitumen so that it may be shipped via pipeline. Clearly there is an energy cost associated with both the physical mixing at the processing facility and subsequent separation at the refiner, but this, presumably, will be less than the energy content of the naptha itself. Consequently, if we assume that the cost of the physical mixing of bitumen and naptha is included in the costs of the process facility, and exclude the separation costs at the refiner since the boundary of this analysis is the central processing facility, then the appropriate EROI estimation for the THAI process is 8.9:1.

Second, and perhaps an issue that is more contentious, is the energy value assigned to the bitumen burned within the “combustion zone” of the THAI process. The THAI process according to Petrobank uses the heat energy released from the oxidation of a portion of the original bitumen in place to thermally crack the remaining bitumen, lowering the viscosity and, it seems, increasing the quality (API) of the bitumen that is extracted. Since this bitumen is already in the ground and cannot otherwise be used, and there is no additional financial or energy cost to attain it – it is essentially “free”.

There are three reasons, however, as to why the energy cost of the bitumen burned in situ should be included in the EROI calculation. A) There is an “opportunity cost” of the bitumen burned in situ. By burning this bitumen in the combustion zone the opportunity to develop it at a later time by some future technology is lost. B) The THAI process does not work without the heat energy provided by the exothermic combustion of bitumen. So even though this bitumen comes at no additional “cost” to the firm, it still acts as an energy input to developing the bitumen. C) There are various environmental costs that occur, such as the carbon dioxide produced during combustion. As a result, we include the energy of the bitumen burned in situ as part of the energy input to the THAI process in our base case. However, we have no unequivocal position on including or not this energy input.

Third, the bitumen shipped to the refinery is still far from “light, sweet” crude oil and needs significant refining if products other than asphalt are desired – i.e. gasoline. About 10% of the energy content of a barrel of “standard” oil is used in the refining process (Szklo and Schaeffer, 2007), and we would not be surprised if that number were higher, maybe much higher, for the bitumen produced at Whitesands. Furthermore, if the system boundaries in this analysis were extended to include the refinery and all costs until the end-user (i.e. the person at the gas station filling up their gas tank), the EROI would decrease substantially. For example, Hall, Balogh and Murphy (2009) calculated that the EROI for oil extraction in the U.S. decreased by about two-thirds of the original EROI once they included the downstream energy costs, including: refinery costs, non-fuel products, transportation costs, and use infrastructure. Therefore it is reasonable to say that the EROI for the THAI process might decrease by about two-thirds if gasoline is the desired product.

An additional cost we were not able to consider is the infrastructural cost for the air supply (e.g. vertical wells) or extraction systems (e.g. horizontal wells). We assume that all significant operating energies are covered in the above table.

We conclude, based on this preliminary analysis that the THAI process appears to represent a somewhat better process to recover “oil” from tar sands than other above ground methods, as previous estimates of the EROI from surface extraction of Tar Sands have been around 5:1. The highest estimate of the EROI of the production process using THAI is 56:1, while the lowest estimate is 3.3:1. This is clearly a large range, but it is up to the reader to decide which number is most appropriate. We believe that even though the oil burned in situ is “free” in the financial sense, it is a required energy input to the THAI process and, from this perspective, this energy should be included in the estimation of EROI from THAI – resulting in an EROI of 8.9:1, which is an improvement over other tar sand extraction processes, such as SAGD. We welcome additional data and contrarian or other comments.

Author’s Note: We would also like to mention that EROI analysis is just one of many important analytical tools or “lenses” through which we can view energy resources and technologies. As is the case with all quantitative and qualitative analyses, there are limitations to EROI analyses, and we at TOD: Net Energy are planning to discuss at length the limitations of EROI in the coming weeks.

Some Thoughts on the Obama Energy Agenda from the Perspective of Net Energy

David Murphy — Mon, 09 Feb 2009 10:16:19 -0400

The Obama-Biden comprehensive a New Energy for America Plan is designed to:

Help create five million new jobs by strategically investing $150 billion over the next ten years to catalyze private efforts to build a clean energy future.
Within 10 years save more oil than we currently import from the Middle East and Venezuela combined.
Put 1 million Plug-In Hybrid cars -- cars that can get up to 150 miles per gallon -- on the road by 2015, cars that we will work to make sure are built here in America.
Ensure 10 percent of our electricity comes from renewable sources by 2012, and 25 percent by 2025.
Implement an economy-wide cap-and-trade program to reduce greenhouse gas emissions 80 percent by 2050

The Obama energy agenda focuses on - and these are not mutually exclusive - efficiency, electrification, and the promotion of alternative energy resources. Its five main goals are set up in a way so that success in any one of the five individual areas will reinforce the other 4, helping the overall agenda achieve success. For example, creating 25% of the U.S. electricity production from renewable resources (goal #4) will aid in decreasing the U.S. greenhouse gas emissions by 80% (goal #5).

The energy agenda is a welcomed change showing a future outlook that is based, at least to some [small] extent, on the physical realities of the natural resource world. However, from the perspective of net energy, some potential problems do exist. My goal here is to discuss some possible shortcomings of the new administrations energy agenda from the perspective of net energy.

1) Help create five million new jobs by strategically investing $150 billion over the next ten years to catalyze private efforts to build a clean energy future

With a recession in full swing and the recent announcement of thousands of job losses at major companies within the United States, creating jobs has become mission number 1 of the new Obama administration. In the meantime, the collapse of the stock market has made raising capital the number one problem for the alternative energy sector. The primary goal of the Obama plan is to bolster the alternative energy sector of the economy by injecting $150 billion dollars of capital into alternative energy companies/programs, and in doing so create 5 million [permanent] jobs.

The situation, as seen from the perspective of net energy, is as follows: any alternative technology with a reasonably high EROI is usually profitable, and if something is profitable it will not have trouble sustaining growth long after the 150 billion dollars is spent. For example, the growth of wind farms (EROI ≈ 18:1) in the U.S. has outpaced every other country in the world for the past 4 years, and in 2008 the U.S. passed Germany with the World’s largest installed wind power capacity. With a little help to bolster new wind power companies in these tough economic times, I believe that the moderately high EROI of wind power could translate to sustained profits and this industry should grow into the distant future, and as a result create long-lasting jobs. The same probably could be said for solar, geothermal, and bioenergy (for burning – but not ethanol).

On the other hand, lets look at alternative energy technologies with very low EROI’s. Corn-based ethanol is argued to have an EROI between 1.2 and 1.6 to 1. These low EROI values mean that the corn-ethanol industry is operating at the margin of positive energy returns, and because of that fact, the industry as a whole is vulnerable to shocks. For example, Verasun, one of the largest ethanol companies in the U.S., filed recently for bankruptcy, Aventine Renewable Energy and Pacific Ethanol have both lost about 80% of their value, BioFuel Energy lost 46 million dollars on poor hedges on commodity prices, and the list goes on... The financial collapse and the reduction in the price of oil had a large negative impact for these companies, which is exactly the point: negative disruptions in financial markets or in the price of oil will have magnified impacts in this industry due to the fact that the energy surplus contained within the ethanol product is marginal at best. Ironically, the large increase in energy prices that encouraged alternatives probably had something to do with the financial collapse that made them no longer feasible economically.

2) Within 10 years save more oil than we currently import from the Middle East and Venezuela combined

Decreasing the amount of oil we import from unstable regions is always a good idea from a political standpoint, but that may not hold true from a net energy perspective. It is a good idea from the net energy perspective if the decrease in imports from Venezuela and the Middle East is met by a similar decrease in consumption within the United States. It is a bad idea if the decrease is compensated by an increase in imports from “friendly” countries, that have generally, at least when compared to the Middle East, poorer quality resources that emit much more CO₂.

For example, Canada is the largest foreign supplier of oil to the United States, and much of their future oil production resides in the tar sands of northern Alberta. The EROI of developing oil from the tar sands is between 2 to 5:1. Compare that with oil from the Middle East, which has an EROI of roughly 20:1.

This large difference in EROI impacts the difference between “gross” and “net” oil deliverables. Using an equation from Mulder and Hagens (2008), I can estimate the gross energy extracted to deliver one unit of net energy for any EROI value. The equation is:

Gross Extraction = EROI / (EROI – 1)

Using this metric, to deliver one net unit of oil from the Middle East would require the gross extraction of 1.05 barrels of oil equivalent (boe), while in Canada the same net delivery would require the gross extraction of 1.25 boe. In the end, Canada would need to extract roughly 20% more boe than the Middle East to deliver the same amount of net oil to the U.S. Currently the U.S. imports 790 million barrels per year from the Middle East (defined here as the “Persian Gulf”, including: Bahrain, Iran, Iraq, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates). The gross extraction cost of this fuel in the Middle East is 40 million boe, while in Canada it would be 198 million boe, a difference of 158 million boe. Low EROIs quickly add up to high extraction costs, and although the low EROIs do not currently impact price, they will certainly impact the net ultimate recoverable oil from any given basin. For example, the tar sands have roughly 170 billion barrels of proved reserves, and extracting that oil at an EROI of 5:1 will mean that 42.5 billion boe will be used just to extract and deliver the other 127.5.

3) Put 1 million Plug-In Hybrid cars -- cars that can get up to 150 miles per gallon -- on the road by 2015, cars that we will work to make sure are built here in America

Plug-in hybrid cars are an efficiency improvement for our transportation system as a whole, and matched with the production of electricity from renewable technologies, they represent a large step away from a fossil-fuel intensive transportation system.

Electricity has a higher quality than oil or gasoline in that it can be converted into mechanical work at higher efficiencies than can internal combustion engines, which are limited to Carnot efficiencies, and it can be transported long distances much easier than oil or gasoline. For these reasons the high-speed trains in Europe and Japan use electricity for power rather than fossil fuels directly. Hence electricity driven transport is an efficiency improvement over the internal combustion engine.

Most important, however, is that electricity can be produced from wind, solar, geothermal, and other renewable sources. Currently, however, much of the electricity in the U.S. is produced from fossil fuels, and without a switch to renewable sources of electricity, a move to electric vehicles will only shift the emission of greenhouse gases from the tailpipe to the smokestack.

From a net energy perspective, electric vehicles make sense as they increase efficiency, but the biggest variable in this equation is making the electricity grid technologically capable of effectively transmitting wind and solar power to car batteries without large transmission (entropic) losses. We need to undertake much more comprehensive EROI assessments if we are to understand these relations well.

4) Ensure 10 percent of our electricity comes from renewable sources by 2012, and 25 percent by 2025

The 2012 goal will not be difficult to meet, as 9% of the nameplate capacity of the electrical system in the U.S. is produced from renewable resources already (renewable defined as: hydroelectricity, wind, solar, and geothermal).

Continually increasing the amount of electricity that comes from renewable sources will indeed make meeting all the other goals much easier, and much like the conclusion from number 3, the important aspect from the net energy perspective is whether the U.S. can establish an electricity infrastructure that will allow for effective transmission of electricity from places of production to places of consumption, because places where the sun shines the most or the wind blows the hardest are usually places were people don’t live. Questions like the following become overwhelmingly important: what is the energy cost of upgrading transmission lines, and how will that affect the EROI of the renewable energy technologies that utilize those lines?

Spatial Map of U.S. Potential Wind Power

5) Implement an economy-wide cap-and-trade program to reduce greenhouse gas emissions 80 percent by 2050

A successful cap and trade program is needed to reduce greenhouse gas emissions. I am wary, however, that too much emphasis is being placed on the future of carbon capture “technology” while decreasing consumption is being overlooked.

Much attention has been given to carbon capture technologies, such as carbon capture and sequestration (CCS), without much regard for its impact on production efficiency or the extreme costs of building such facilities. CCS technology decreases the power output of a plant by about 30% (see Michael Webber). In other words, the U.S. would have to burn 30% more fuel just to maintain the same level of power output. I am also skeptical of storing pressurized carbon dioxide underground – see Law of Unintended Consequences. In the end, maybe trading carbon-dioxide emissions for lower efficiency is the best option, but it will come at a high net energy cost.

Carbon Capture and Sequestration (Science, 2007)

The Effect of Natural Gradients on the Net Energy Profits from Corn Ethanol

David Murphy — Tue, 13 Jan 2009 12:09:06 -0400

Scaling biofuels from the level of the laboratory or pilot-plants to commercial production is the Achilles’ Heel of almost all biofuels. One major problem is that biofuels use feedstocks that are invariably less energy dense than their fossil fuel counterparts. For example, there are approximately 45 MJ per kilogram contained in both the finished product of gasoline and crude oil, while ethanol has an energy density of about 26 MJ per kilogram and corn has only 16 MJ per kilogram. In general, this means that large amounts of corn must be grown and harvested to equal even a small portion of our gasoline consumption on an energy equivalent level, which will undoubtedly expand the land area that is impacted by the production process of corn-based ethanol.

Figure 1. Map of the optimal gradient space for the production of corn-based ethanol within the United States. Colors correspond to EROI numbers listed in the figure caption. The grey areas represent locations without a significant amount of corn-production.

There is a definite hierarchy of corn productivity by state. For example, in 2005, 173 bushels per acre (10859 kg/ha) were harvested in Iowa, while only 113 bushels per acre were harvested in Texas (7093 kg/ha). This is consistent with the general principal of gradient analysis in ecology, which states that individual plant species grow best near the middle of their gradient space; that is near the center of their range in environmental conditions such as temperature and soil moisture (Whittaker 1956, Hall et al. 1992). The climatic conditions in Iowa are clearly at the center of corn’s gradient space. What is understood less is that corn production is also less energy-intensive at or near the center of corn’s gradient space.

Ethanol producers are privy to this information, which is why most of the first corn-ethanol refineries were located in the “corn-belt”, defined here as the four states in the U.S. with the highest corn production: Iowa, Illinois, Minnesota, and Nebraska. The Renewable Fuel Standard that was signed into law as part of the Energy and Independence Security Act of 2007 mandated that 36 billion gallons of ethanol be produced by 2022, which led to the expansion of the ethanol industry and by 2008 over half of the new plants under construction or expansion were in areas located outside the corn-belt.

Using state-specific data for lime, fertilizer (N,P,K) and irrigation and county-specific data for yield (bushels per acre), I have calculated the EROI for corn-based ethanol for each county across the U.S. to see how the natural ecological gradients across the U.S. might impact the EROI of corn-based ethanol production. I used values taken from Farrell et al. (2006) for all other costs, which are not geographically variable in this analysis, including: herbicides, insecticides, seed, transport energy, gasoline, diesel, natural gas, LPG, electricity, farm labor, labor transportation, farm machinery, and inputs packaging.

My results show diminishing returns for EROI as distance from Iowa increases, meaning that the geographic expansion of corn production will produce lower yields at higher costs (Table 1, Figure 1). For example, ethanol production in Iowa and Texas yield enormously different energy balances. In Iowa, the production of a bushel of corn costs 43 MJ, while in Texas it costs 71 MJ (Table 1). Using those energy yields, the gross costs of producing 36 billion gallons of ethanol would be 576 x 10⁹ MJ in Iowa and 952 x 10⁹ MJ in Texas (0.4 liters ethanol/kg corn, 25.4 kg/bushel of corn). The difference in gross energy costs between Iowa and Texas is 376 x 10⁹ MJ, which is the energy equivalent of 8.4 billion liters, or 2.2 billion gallons, of gasoline. In reality, the proportion of corn used for corn-based ethanol production will come from both optimal and marginal land, but some marginal land will be required.

Table 1. Summary statistics of the costs and gains of corn-based ethanol production for states that produced at least 1% of the United States 2005 harvest, ranked by decreasing Refinery Gate EROI.

Note* Yield (MJ/Ha) was calculated using 16 MJ/Kg corn-energy conversion ratio. Values for non-spatial costs include: herbicides, insecticides, seed, transport energy, gasoline, diesel, natural gas, LPG, electricity, farm labor, labor transportation, farm machinery, and inputs packaging. We calculated Farm-Gate EROI by dividing yield (MJ/Ha) by the sum of spatial and non-spatial production costs. We calculated Refinery-Gate EROI using values of 15.24 (MJ/L) for refinery costs, 21.46 (MJ/L) as the energy content of a liter of ethanol produced, and 4.13 (MJ/L) as the co-product credit. No Co-products EROI was calculated the same as Refinery-Gate EROI excluding the co-product credit of 4.13 (MJ/L).

More important than the gross costs and gains of ethanol production are the net costs and gains. The gross amount of fuel produced must be adjusted by the EROI of that fuel to estimate the net energy profit that is added to the economy. For example, if the production of 2 MJ of ethanol requires 4MJ of fertilizer inputs, then the process ceases to provide a net energy profit to society, rather a loss of 2 MJ, even though the gross ethanol gain is 2 MJ. If we assume fertilizers are the only input and ethanol is the only output, the EROI of this process would be 0.5. The following equation can be used to calculate the net energy added to the economy using just the gross energy gains for society and the EROI of the fuel production process.

Net Energy Profit = Gross Energy Gains * (1 - (1 /EROI))

By substituting 2 MJ for the “Gross Energy Gains”, and 0.5 for the EROI, the Net Energy Profit calculates to -2, which means that the production of ethanol is a net energy loss, even though it has a gross energy gain of 2MJ, in this example. Using this method the net energy gains will always be lower than the gross energy gains, which complies with the Second Law of Thermodynamics, which implies that no energy conversion process can operate at 100% efficiency. The question then becomes: How much of the 36 billion gallons mandated by the RFS is an net energy profit? The answer depends, in part, on where the ethanol is produced. If the mandate was fulfilled only by ethanol produced in Iowa, which has a refinery-gate EROI of 1.32:1 (Table 1), the net energy profit provided by the ethanol is actually 9 billion gallons. On the other hand if the ethanol were produced in Texas, then the net energy profit is only 4.7 billion gallons.

Clearly, the net gains from this process are less appealing than the gross. The net gains are even lower if co-product credits are removed. Co-products are dry or wet distiller’s grains, which are a very contentious subject in the literature on corn-ethanol. This matter is significant because the energy credits allotted to the use of co-products as a by-product of the corn-based ethanol process account for 19% of the total energy gains of the corn-based ethanol process (co-products are allotted 4.13 MJ/L while ethanol is 21.46 MJ/L). More importantly, when this 19% is removed from the EROI calculation, the EROI of corn-based ethanol for marginal lands (e.g. Texas) is less than 1. Which is to say that the net energy profits from the production of 36 billion gallons of ethanol in Texas, for example, would be -1.08 billion gallons [36 billion gallons * (1- (1/0.97))]. In other words, without the energy contained in the co-products, the production of corn-based ethanol on marginal lands creates net energy losses rather than profits.

Whether or not co-products should be included in the calculation of the EROI is a topic for a different discussion, but the impact of excluding them is profound. The primary message to be gleaned from this post is that “scaling-up” corn-based ethanol or other similar biofuel projects usually have complications, such as lower corn yields on marginal lands, and these complications tend to increase the costs, not the gains, associated with converting feedstocks with low energy densities to final products with higher energy densities.

References:

Farrell AE, Plevin RJ, Turner BT, Jones AD, O’Hare M, Kammen DM. 2006. Ethanol Can Contribute to Energy and Environmental Goals. Science 311: 506-508

Hall CAS, Stanford JA, Hauer FR. 1992. The Distribution and Abundance of Organisms as a Consequence of Energy Balances Along Multiple Environmental Gradients. OIKOS 65: 377-390.

Whittaker RH. 1956. Vegetation of the Great Smoky Mountains. Ecological Monographs 26: 1-80.

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

David Murphy — Fri, 02 Jan 2009 11:23:27 -0400

The following is a post by both Dr. Charles Hall and EROI Guy. Most of the material comes from a recently published book chapter titled “Peak oil, EROI, investments and the economy in an uncertain future.” The book can be found here. Dr. Charles Hall is a professor of Systems Ecology at the College of Environmental Science and Forestry in Syracuse, New York, and has written about energy issues many times on The Oil Drum, found here.

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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 (1821). 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 second by drilling a vast amount of wells, a 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 megan@communitysolution.org

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.)

Welcome to The Oil Drum: EROI

David Murphy — Sun, 28 Dec 2008 18:17:56 -0400

We welcome all readers to the newest TOD sub-domain: "The Oil Drum: EROI" – or Energy Return on Investment. This sub-domain will be administered by Professor Charles Hall and his Ph.D. Student, David Murphy (EROI Guy) as well as by many of the other editors and contributors from TOD that write about net energy analysis and biophysical economic concepts.

We have at our school (SUNY – College of Environmental Science and Forestry) an “EROI Institute” (web site is operational, but still undergoing development) which is basically three offices, two relatively large, and a bunch of books and computers. There are roughly 8 graduate students at any one time and usually about half a dozen undergraduates hanging around. We all work on sweating out various analyses related to energy. We have only quite minimal funding and work on a shoestring although many students are supported by NSF fellowships, teaching assistantships or funding that we do have for tropical research. So with that introduction, let us turn our attention briefly to describing why we think EROI is important.

Net energy is sometimes called energy surplus, energy balance, or, as we prefer, energy return on investment (Hall 1972, Hall and Cleveland 1981, Cleveland et al. 1984, Cleveland and Kaufmann 1986). Its advocates, including us, believe that net energy analysis offers a very useful approach for looking at the advantages and disadvantages of a given fuel and offers the possibility of looking into the future in a way that markets seem unable to do. Its advocates also believe that in time real market prices must approximately reflect comprehensive EROIs, at least if corrections for quality are made and subsidies removed. Thus can we make market decisions based on biophysical, rather than market, economic analysis? At a minimum we believe that biophysical analysis can add a great deal of insight to traditional market analysis.

The current literature on net energy analysis, such as it is, tends to be mostly about whether a given project is or is not a net surplus, that is whether there is a gain or a loss in energy from, for example, making ethanol from corn (see June 23, 2006 issue of Science Magazine for a fairly thorough discussion of this issue). The general criteria used by much of the current debate is focused on the “energy break-even” issue, that is whether the energy returned as fuel is greater than the energy invested in growing or otherwise obtaining it. The general argument goes like this: if the energy returned is greater than the energy invested then the fuel or project “should be done”, and if not then it should not be done. Obviously this issue is clearest when one might be discussing whether the fuel requires more energy for its production than is delivered in the product, but we believe that EROI can be extended even further.

The applications of EROI are many-fold, and hopefully through TOD: EROI we will see how it is applied to many different aspects of the energy/economic world. So with that brief introduction to us and the importance of EROI, we ask that you please stay tuned for our next post, which deals with the interrelation of EROI, Peak Oil, and the concept of “best first”.

Cleveland, Cutler J., et al. "Energy and the U.S. Economy: A Biophysical Perspective." Science 225.4665 (1984): 890.

Hall, C. A. S., and C. J. Cleveland. "Petroleum Drilling and Production in the United States: Yield Per Effort and Net Energy Analysis." Science 211.4482 (1981): 576-9.

Hall, C. A. S., R. Kaufmann, and C. J. Cleveland. Energy and Resource Quality: The Ecology of the Economic Process. New York: John Wiley and Sons, Inc, 1986.

Hall, C. A. S. "Migration and Metabolism in a Temperature Stream Ecosystem." Ecology 53.4 (1972): 585-604.