Energy Products: Return on Investment is Already Too Low

My major point when I gave my talk at the Fifth Biophysical Economics Conference at the University of Vermont was that our economy’s overall energy return on investment is already too low to maintain the economic system we are accustomed to. That is why the US economy, and the economies of other developed nations, are showing signs of heading toward financial collapse. Both a PDF of my presentation and a podcast of the talk are available on Our Finite World, on a new page called Presentations/Podcasts.

My analysis is with respect to the feasibility of keeping our current economic system operating. It seems to me that the problems we are experiencing today–governments with inadequate funding, low economic growth, a financial system that cannot operate with “normal” interest rates, and stagnant to falling wages–are precisely the kinds of effects we might expect, if energy sources are providing an inadequate energy return for today’s economy.

Commenters frequently remark that such-and-such an energy source has an Energy Return on Energy Invested (EROI) ratio of greater than 5:1, so must be a helpful addition to our current energy supply. My finding that the overall energy return is already too low seems to run counter to this belief. In this post, I will try to explain why this difference occurs. Part of the difference is that I am looking at what our current economy requires, not some theoretical low-level economy. Also, I don’t think that it is really feasible to create a new economic system, based on lower EROI resources, because today’s renewables are fossil-fuel based, and initially tend to add to fossil fuel use.

Adequate Return for All Elements Required for Energy Investment

In order to extract oil or create biofuels, or to make any other type of energy investment, at least four distinct elements described in Figure 1: (1) adequate payback on energy invested,  (2) sufficient wages for humans, (3) sufficient credit availability and (4) sufficient funds for government services. If any of these is lacking, the whole system has a tendency to seize up.

Figure 1. One sheet from Biophysical Economics Conference Presentation

Figure 1. One sheet from Biophysical Economics Conference Presentation

EROI analyses tend to look primarily at the first item on the list, comparing “energy available to society” as the result of a given process to “energy required for extraction” (all in units of energy). While this comparison can be helpful for some purposes, it seems to me that we should also be looking at whether the dollars collected at the end-product level are sufficient to provide an adequate financial return to meet the financial needs of all four areas simultaneously.

My list of the four distinct elements necessary to enable energy extraction and to keep the economy functioning is really an abbreviated list. Clearly one needs other items, such as profits for businesses. In a sense, the whole world economy is an energy delivery system. This is why it is important to understand what the system needs to function properly.

What Happens as Oil Prices Rise

When oil prices rise, wages for humans seem to fall, or at least stagnate (Figure 2, below). The comparison shown uses US per capita wages, so takes into account changes in the proportion of people with jobs as well as the level of wages.

Figure 2. High oil prices are associated with depressed wages. Oil price through 2011 from BP’s 2012 Statistical Review of World Energy, updated to 2012 using EIA data and CPI-Urban from BLS. Average wages calculated by dividing Private Industry wages from US BEA Table 2.1 by US population, and bringing to 2012 cost level using CPI-Urban.

Figure 2. High oil prices are associated with depressed wages. Oil price through 2011 from BP’s 2012 Statistical Review of World Energy, updated to 2012 using EIA data and CPI-Urban from BLS. Average wages calculated by dividing Private Industry wages from US BEA Table 2.1 by US population, and bringing to 2012 cost level using CPI-Urban.

In fact, if we analyze Figure 2, we see that virtually all of the rise in US wages came in periods when oil prices were below $30 per barrel, in inflation-adjusted terms. The reason why the drop in wages happens at higher per-barrel levels is related to the drop in corporate profits that can be expected if oil prices rise, and businesses fail to respond. Let me explain this further with Figure 3, below.

Figure 3. Illustration by author of ways oil price rise could squeeze wages. Amounts illustrative, not based on averages.

Figure 3. Illustration by author of ways oil price rise could squeeze wages. Amounts illustrative, not based on averages.

Figure 3 is a bit complicated. What happens initially when oil prices rise, is illustrated in the black box at the left. What happens is that the business’ profits fall, because oil is used as one of the inputs used in manufacturing and transportation. If the cost of oil rises and the sales price of the product remains unchanged, the company’s profits are likely to fall. Additionally, there may be some reduction in demand for the product, because the discretionary income of consumers is reduced because of rising oil prices. Clearly, the business will want to fix its business model, so that it can again make an adequate profit.

There are three ways that a business can bring its profits back to a satisfactory level, illustrated in the last three columns of Figure 3. They are

  • Automation. Human energy is the most expensive type of energy a business can employ, because wages to paid to humans to do a given process (such as putting a label on a jar) are far higher than the cost of an electricity-based process to perform the same procedure. Thus, if a firm can substitute electrical or oil energy for human energy, its cost of production will be lower, and profits can be improved. Of course, workers will be laid off in the process, reducing total wages paid.
  • Outsourcing to a Country with Lower Costs. If part of the production cost can be moved to a country where wage costs are lower, this will reduce the cost of manufacturing the product, and allow the business to offset (partially or fully) the impact of rising oil prices. Of course, this will again lead to less US employment of workers.
  • Make a Smaller Batch. If neither of the above options work, another possibility is to cut back production across the board. Even if oil prices rise, there are still some consumers who can afford the higher prices. If a business can cut back in the size of its operations (for example, close unprofitable branches or fly fewer airplanes), it can cut back on outgo of many types: rent, energy products used, and wages. With reduced output, the company may be able to make an adequate profit by selling only to those who can afford the higher price.

In all three instances, an attempt to fix corporate profits leads to a squeeze on human wages–the highest cost source of energy services that there is. This seems to be Nature’s  attempt way of rebalancing the system, toward lower-cost energy sources.

If we look at the other elements shown in Figure 1, we see that they have been under pressure recently as well. The availability of  credit to fund new energy investment is enabled by profits that are sufficiently high that they can withstand interest charges incurred in the payback of debt. Debt use is also enabled by growth, since if profits will be higher in the future, it makes sense to delay funding until the future. In recent years, central governments have seen a need to put interest rates at artificially low levels, in order to encourage borrowing. To me, this is a sign that the credit portion of the system is also under pressure.

Government’s ability to fund its own needs has been under severe stress as well. Part of the problem comes from the inability of workers to pay adequate taxes, because their wages are lower. Part of the problem comes from a need for governments to pay out more in benefits, such as disability income, unemployment, and food stamps. The part that gets most stressed is the debt portion of government funding. This really represents the intersection of two different areas mentioned in Figure 1: (3) Adequacy of credit availability and (4) Funding for government services.

The constellation of energy problems we are now experiencing seems to me to be precisely what might be expected, if energy return is now, on average, already too low.

The Role of Energy Extraction in this Squeeze

When any energy producer decides to produce energy of a given type (say oil or uranium), the energy producer will look for the resource that can be extracted at lowest cost to the producer.

Figure 4. Resource triangle, with dotted line indicating uncertain financial cut-off.

Figure 4. Resource triangle, with dotted line indicating uncertain financial cut-off.

Initially, production starts where costs are most affordable–not much energy is required for extraction; governments involved do not require too high taxes; and the cost of human labor is not too high. The producer may need debt financing, and this must also be available, at an affordable cost.

For example, easy-to-extract oil located in the US that could be extracted very simply in the early days of extraction (say before 1900), was very inexpensive to extract, and would be near the top of the triangle.  Tight oil from the Bakken and bitumen from Canada would be examples of higher cost types of oil, located lower in the triangle.

As the least expensive energy is extracted, later producers wishing to extract energy must often settle for higher cost extraction. In some cases, technology advancements can help bring costs back down again. In others, such as recent oil extraction, the higher costs are firmly in place. Higher sales prices available in the market place enable production “lower in the triangle.”  The catch is that these higher oil prices lead to stresses in other systems: human employment, government funding, and ability for credit markets to work normally.

What Is Happening on an Overall Basis

Man has used external energy for a very long time, to raise his standard of living. Man started over 1,000,000 years ago with the burning of biomass, to keep himself warm, to cook food, and for use in hunting.  Gradually, man added other sources of energy. All of these sources of energy allowed man to accomplish more in a given day. As a result of these greater accomplishments, man’s standard of living rose–he could have clothes, food which had been cooked, sharper tools, and heat when it was cold.

Over time, man added additional sources of energy, eventually including coal and oil. These additional sources of energy allowed man to leverage his own limited ability to do work, using his own energy.  Goods created using external energy tended to be less expensive than those made with only human energy, allowing prices to drop, and wages to go farther. Food became more available and cheaper, allowing population to rise. Money was also available for public health, allowing more babies to live to maturity.

What happened in the early 2000s was a sharp “bend” in the system.  Instead of goods becoming increasingly inexpensive, they started becoming relatively more expensive relative to the earnings of the common man. For example, the price of metals, used in many kinds of goods started becoming more expensive.

Figure 5. Commodity Metals Price Index from the International Monetary Fund, adjusted by CPI-Urban to 2012 price levels. Commodity Metals include Copper, Aluminum, Iron Ore, Tin, Nickel, Zinc, Lead, and Uranium.

Figure 5. Commodity Metals Price Index from the International Monetary Fund, adjusted by the US CPI-Urban to 2012 price levels. Commodity Metals include Copper, Aluminum, Iron Ore, Tin, Nickel, Zinc, Lead, and Uranium.

There seem to be two reasons for this: (1) In the early 2000s, oil prices started rising (Figure 2, above), and these higher prices started exerting an upward force on the price of goods. At the same time, (2) globalization took off, providing downward pressure on wages. The result was that suddenly, workers found it harder to keep a job, and even when they were working, wages were stagnant.

It seems to me that prior to the early 2000s, part of what buoyed up the system was the large difference between:

A. The cost of extracting a barrel of oil

B. The value of that barrel of oil to society as a whole, in terms of additional human productivity, and hence additional goods and services that barrel of oil could provide.

As oil prices rose, this difference started disappearing, and its benefit to the world economy started going away.  The government became increasingly stressed, trying to provide for the many people without jobs while tax revenue lagged.  Slower economic growth made the debt system increasingly fragile. The economy was gradually transformed from one which provided perpetual growth, to one where citizens were becoming poorer and poorer. This pushed the economy in the direction of collapse. Research documented in the book Secular Cycles by Turchin and Nefedov shows that in past collapses, the inability of governments to collect sufficient taxes from populations that were becoming increasingly poor (due to more population relative to resources) was a primary contributing factor in these collapses. The problems that the US and other developed countries are having in collecting enough taxes to balance their budgets, without continuing to add debt, are documentation that this issue is again a problem today. Greece and Spain are having particular problems in this regard.

A More Complete List of Inputs that Need Adequate Returns

My original list was

  1. Energy counted in EROI calculation–mostly fossil fuels, sometimes biomass used as a fuel
  2. Human labor
  3. Credit system
  4. Cost of government

To this we probably need to add:

  1. Profits for corporations involved in these processes
  2. Rent for land used in the process – this cost would be highest in biofuel operations.
  3. Costs to prevent pollution, and mitigate its effects – not charged currently, except as mandated by law
  4. Compensation for mineral depletion and degradation of soil. Degradation of soil would likely be an issue for biofuels.
  5. Energy not counted in EROI calculations. This is mostly “free energy” such as solar, wind, and wave energy, but can include energy which is of limited quantity, such as biomass energy.

Given the diversity of items in this list, it is not clear that simply keeping EROI above some specified target such as 5:1 is likely to provide enough “margin” to cover the financial return needed to properly fund all of these elements. Also, because the need for government services tends to increase over time as the system gets more stressed, if there is an EROI threshold, it needs to increase over time.

It might also be noted that the amounts paid for government services are surprisingly high for fossil fuels. Barry Rodgers gave some figures regarding “government take” (including lease fees as well as other taxes and fees) in the May 2013 Oil and Gas Journal. According to his figures, the average government take associated with an $80 barrel of US tight oil is $33.29 per barrel. This compares to capital expenditures of $22.60 a barrel, and operating expenditures of $7.50 a barrel. If we are to leave fossil fuels, we would need to get along without the government services funded by these fees, or we would need to find a different source of government funding.

Source of the EROI 5:1 Threshold

To my knowledge, no one has directly proven that a 5:1 threshold is sufficient for an energy source to be helpful to an economy. The study that is often referred to is the 2009 paper, What is the Minimum EROI that a Sustainable Society Must Have? (Free for download), by Charles A. S. Hall, Steven Balogh, and David Murphy. This paper analyzes how much energy needs to provided by oil and coal, if the energy provided by those fuels is to be sufficient to pay not just for the energy used in its own extraction, but also for the energy required for pipeline and truck or train transportation to its destination of use. The conclusion of that paper was that in order to include these energy transportation costs for oil or coal, an EROI of at least 3:1 was needed.

Clearly this figure is not high enough to cover all costs of using the fuels, including the energy costs to build devices that actually use the fuels, such as private passenger cars, electrical power plants and transmission lines, and devices to use electricity, such as refrigerators. The ratio required would probably need to be higher for harder-to-transport fuels, such as natural gas and ethanol. The ratio would also need to include the energy cost of schools, if there are to be engineers to design all of these devices, and factory workers who can read basic instructions. If the cost of government in general were added, the cost would be higher yet. One could theoretically add other systems as well, such as the cost of maintaining the financial system.

The way I understood the 5:1 ratio was that it was more or less a lower bound, below which even looking at an energy product did not make sense. Given the diversity of what is needed to support the current economy, the small increment between 3 and 5 is probably not enough–the minimum ratio probably needs to be much higher. The ratio also seems to need to change for different fuels, with many quite a bit higher.

The Add-On Problem for Fossil Fuel Based Renewables

With renewables made using fossil fuels, such as hydroelectric, wind turbines, solar PV, and ethanol, the only way anyone can calculate EROI factors is as add-ons to our current fossil fuel system. These renewables depend on the fossil fuel system for their initial manufacture, for their maintenance, and for the upkeep of all the systems that allow the economy to function. There is no way that these fuels can power the whole system, based on what we know today, within the next hundred years. Thus, any EROI factor is misleading if viewed as the possibility what might happen if these fuels were to attempt to operate on a stand-alone basis. The system simply wouldn’t work–it would collapse.

A related issue is the front-ended nature of the fossil fuels used in creating most of today’s renewables. People today think of “financing” any new investment, with easy payments over a period of years. The catch (as Tom Murphy pointed out in his BPE talk) is that Nature Doesn’t Do Financing. Nature demands up-front payment in terms of any fossil fuels used. Thus, if we build a huge new hydroelectric dam, such as the Three Gorges Dam in China, the fossil fuels required to make the concrete and to move huge amounts of soil come at the beginning of the project. This is also true if we make a huge number of solar panels. The saving we get are all only theoretical, and will take place only if we are actually able reduce the use of  other fossil fuel energy sources in the future, because of the energy from the PV panels or other new renewable.

In nearly all cases, adding renewables requires increasing fossil fuel use for this reason. We could, in theory, reduce fossil fuel use elsewhere, to try to cover the greater fossil fuel use to add renewables, but this would mean cutting industries and jobs currently using the fuel, something that many find objectionable. Several readers have suggested that we could greatly ramp-up solar PV. Yes, we could, but we would have to greatly ramp up fossil fuel usage (mostly coal in China, if current manufacturing approaches are used) to create these panels. Any future savings would be theoretical, depending on how long we keep the new system operating, and how much fossil fuel energy consumption is actually reduced as a result of the new panels.


At this point, the foregoing analysis suggests that products created using today’s oil and other energy products are not producing an adequate financial return to cover wages, interest expense, and necessary taxes. If EROI plays a major role in determining financial returns, EROI on average is already too low for many developed economies.

It is convenient to think that an economy can keep adding lower and lower EROI resources, but at some point, a “stop” signal starts appearing. I would argue that the issues we are seeing in many sectors of the economy are clear indicators that such a threshold is already being reached. An economy in which the wages of the common worker are buying less and less is an economy in trouble. I talk in another post (Energy and the Economy–Basic Principles and Feedback Loops) about the fact that economic growth seems to be the result of one set of feedbacks. As the price of oil rises and related changes take place, these feedbacks change from economic growth to economic contraction. It is these feedbacks that we are already having problems with.

One can argue that EROI has nothing to do with these issues. But if this is the case, what is the point it analyzing it in the first place? We clearly need to understand when an economy is giving us “stop” signals with respect to increasingly low quality energy inputs. If EROI is not helpful in this regard, perhaps we need to be looking at other indicators.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.
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242 Responses to Energy Products: Return on Investment is Already Too Low

  1. timl2k11 says:

    Very interesting. I was reading an article on Bloomberg that talked about how the biggest players in US shale, by their own metrics, have not yet been able to turn a profit. It would be interesting to see a graph that shows not just total US crude output (which appears to be rising), but net energy. It would seem that oil shale is not even worth extracting from the ground.

    • Danilo says:

      I agree, According to Joseph Tainter, Sustainability is a function of solving problems. It takes resources to solve problems. We need more and more resources to be sustainable.
      So Gail is factually demonstrating what J. Tainter is explaining

      • Yes, it takes resources to solve problems. Tainter talks about the problems leading to increased complexity. As a practical matter, it is the government that is called on to solve problems. Also, this increased complexity has a cost–more programs, more employees, and so forth. So it is the government that gets to be the one that cannot pay its bills, when there are not enough resources.

    • Interesting! Do you have a link to the Bloomberg article?

      • timl2k11 says:
        Under “Recycle Ratio” section;
        “Producers use a calculation called the recycle ratio as a measure of profitability, dividing profit per barrel of production by the cost of discovery and extraction. So a $40 profit divided by $20 in costs yields a recycle ratio of 2:1, or 2. A higher number represents more profitability.
        QEP’s recycle ratio was 0.69 in 2012 and Chesapeake posted 0.97, data compiled by Bloomberg show.”
        (Less than 1 means no profit, Just like EREI)
        Even the best performing companies only had RR’s of around 2.7. Even Exxon scored an RR of only 4.5.

        • Thanks for the link and discussion. I suppose Exxon bought assets cheaply long ago. It is one that has been buying back its company stock–apparently can’t find investments up to its standards today.

        • K N says:

          Please read the definition of the recycle ratio once more. It clearly states that you divide the profits made from a given barrel by the costs. This means that if any profit is made at all, then the numerator of this fraction will be positive. This ratio suggests that profits are not made when this ratio is either less than or equal to 0.

          A recycle ratio of 1 does not suggest it didn’t make profit. This would say that they made $1 of profit for $1 of costs, so there was initially $2 of incoming revenue.

  2. timl2k11 says:

    I’ve noticed lately someone is obsessed with voting your articles(which usually have had a 5 star rating) down (you can do multiple votes from different computers). I can see someone just rated it one star but didn’t bother to leave a comment.

    • Some of my articles seem to get more readership from a higher proportion of people who come from a standard economics background, because my posts are shown on a lot of non-peak oil sites. (A lot of people read my posts on other sites, and never come over to Our Finite World. I have no idea what total readership is.) I suspect it is these folks who give my posts low ratings. They don’t fit with their perception of how the world should be.

  3. Tony says:

    My own feeling, on EROEI, is that the minimum ratio needed for an economy/society as it currently is, is roughly what it is now. I’ve seen estimates over recent years, that put the overall EROEI at between 12 and 20. So I would think that the overall EROEI needs to be at about that level. The only way society, as currently constituted, could run on a lower EROEI would be through energy efficiency but there are limits there and efficiencies take time to be implemented and work through. A finger in that air would be that our current living arrangements cannot be maintained with less than 10:1, though a different kind of society could be.

    • Danilo says:

      According to Jørgen Randers, we will try to grow, but after 40 years, our society will collapse and go back to more simplicity by entropic and thermodynamic process.

      • The model Jørgen Randers and others use in the current Limits to Growth model is seriously flawed, in my view. It leaves out major financial aspects, and it does not recognize that it will likely be lack of demand/debt defaults/breakdown of the financial system/government collapse that will bring an end to our society. In many respects, having a bad model is worse than having no model at all. Back when the analysis was first done, these aspects were not as important, because the model was dealing with a distant event. Now they make all the difference in the world.

    • My impression is fairly closely related to yours. I think that as more energy availability comes on line, economies tend to “soak it up”. This occurred, up through about 2000, with the low energy prices. I am not sure we really understand the average world EROI. The EROI’s we are measuring are mostly in the West, while the distribution of oil and coal extraction is more in the East. Published EROIs tend to be based on locations where it is convenient to measure them, not distributed based on world supply. Based on oil tax rates around the world, EROIs are much higher outside the developed world.

      Also, the mix of world fuels is now changing increasingly toward coal, which has a higher EROI. This mix of fuels used varies greatly by country. The EROI of the fuels the US uses is probably quite a bit lower than the EROI for the mix of fuels used by say, China or India, because of their emphasis on coal. With respect to oil, probably world EROI matters, since it is internationally traded; with respect to other fuels, local EROI is probably more important.

      An economy is somewhat like a rapidly expanding group of cancer cells. It expects a steady increase in the amount of net energy supplied to it. Once this starts shrinking, or even not growing as rapidly, this becomes a problem. We seem to be getting to that point.

    • Robert Firth says:

      For what it’s worth, I also feel that our current civilisation could not be maintained with an EROEI less than about 12, even with all feasible conservation in place. For the US as it is now, 20 seems more likely.

      But that is because we use energy in hideously inefficient ways, for example by burning gasoline in an engine with 15% efficiency to move a tonne of metal back and forth to carry 10 kilos of shopping. I once worked out what it would cost (in energy) to deliver the shopping by employees on human-powered cargo tricycles instead of having everyone drive to the supermarket. About a factor of 20 cheaper.

      We could run a high civilkisation on 5% of our present energy consumption; the problem is we would first have to recreate the built environment from the ground up, and the energy to do that simply isn’t there. Which does indeed leave us facing collapse.

  4. Scott says:

    Thank you Gail for another excellent article. It surely looks like energy will become more expensive from here on after perhaps we brief deflation but that will just slow down the production which is the financial end of the problem. Now a days we have to expend a great amount of energy to get oil and gas. Hello Deep water and the arctic as our last oil frontier. These operations are extremely expensive and I wonder where the price will be in five years?

    • I am not convinced that energy will necessarily become more expensive. This is much more of a “peak oil,” geological type view. The cost of extraction may go up, but the amount people can afford to pay won’t go up. The problem becomes lack of jobs and companies and governments failing for financial reasons. What the result looks like, is not at all intuitive. A better description may be that oil (and energy prices in general) prices are likely to be volatile. Or perhaps that people’s incomes will be falling, so oil and food become a bigger percentage of total spending. Harder to afford, yes, so you are right from that point of view.

      • xabier says:


        This was pretty much the Argentinian experience: there was always stuff available to buy, but because of devaluation, and suddenly falling incomes/ mass unemployment, people just couldn’t buy as much as before, leading to another round of business collapses and an ever-smaller range of goods for sale, with some more frivolous categories eventually more or less disappearing in general stores and the quality of goods also declining for the masses.

  5. ” Both a PDF of my presentation and a podcast of the talk are available on Our Finite World, on a new page called Presentations/Podcasts.”-Gail

    What a GREAT idea Gail! Brilliant! 😀

    Speaking of Podcasts, the one we did with Gail is in the Can and ready to go as soon as she reviews them. It is broken into 2 parts.

    We also are scheduling up one with George Mobus of Question Everything in the near future. Check the Diner Podcast Page for the latest in Audio Doom. 🙂


  6. Great post,

    there is a very important question asked between the lines that you never phrase.
    Is there any possibility that capitalism will survive the end of growth, can sustainability exist in a capitalist system at all? In Short, are capitalism and sustainability mutually exclusive?

    Ths system that is about to collapse is capitalism, it will be gone for good.
    When stalinism (called socialim by most) and growth capitalism will both have collapsed, we will need a new plan!

    If we do not have that plan, fascism will be the default fall back when desaster strikes and barbarism returns. This discussion is blocked even more than talk about peak oil or global warming.

    We will not be able to keep the system from collapsing, but we all need to work together to prevent fascism. this might not be an adequate comment t this post, but people reading this blog need to be mentally prepared that after the collapse of growth capitalism, this fight will be the most important.

    • My impression is that capitalism, especially in terms of big companies, won’t survive. It will be too hard to make investments, and get an adequate return on them. Individual families may try smaller scale investments, with the hope that they will at least provide for their families.

      I really don’t know what might happen. My impression is that the tendency will be for countries to fragment down to sizes that can be ruled by local “strong men” or kings. I am not convinced that individual property ownership will survive. An approach that actually seemed to work fairly well in the past was to have farmers assigned to individual plots, with a common area for grazing. This common area could be moved around, to help soil fertility. But of course, those in charge need to keep the number of animals and people down, so that the whole system doesn’t break down.

    • PatrickCN says:

      I don’t think that you will get a satisfying answer to your question, as I think that a prediction with reasonable accuracy is dependent on too many variables.

      E.g. Some people expect that our civilization will experience a sudden economic collapse with widespread breakdown of nation states, along with an abrupt implosion of population numbers. Others assume a long-winded decline over several decades or centuries.

      Obviously, a long-winded decline would be more much more conducive to the re-emergence fascist structures (there is an argument to be made that we are already experiencing fascist governments in the Western countries as the surveillance leaks indicate). If, on the other hand, there would be an extraordinary quick collapse to occur, we might see very different structures afterwards.

      The political systems we might see, be it tyranny, monarchy, or democracy, along with the economic systems of communism and capitalism, are very likely to be dependent on the relative amount of energy sources per capita available, along with their respective EROI.

      The less energy available at that moment, the less hierarchical layers we will likely see. If you then take cultural, historical, geological and other contextual factors for a particular population within a particular region into account, then you might feel more confident in predicting if and when a fully blown fascistic nation state might resurface.

    • There are developments now in the european countries that suffer under the yoke of austerity. In Greece the extreme right is instrumentalized by the powers that be to help quell the uprisings of the rising left.

      Greece own fascist history is not long in the past. Fascism was overcome in 1974. This instrumentalisation of the right can be seen all over. The Gladio Operation by western intelligence was supporting fascist and full fledged nazi network till well into the eighties. In fear of a socialist government in italy, nazi “stay behind” organisations have been organised and armed by the cia.

      As capitalism fails, the very rich have the tendeny to turn to the far right. I am german, and our history shows us that Hitler would not have been able to claim power if not suported by the capitalists. This is the main reason why we have to be concerned about fascism. from afar, the tea party movement in the USA has many similarities to early fascist developments in the history of europe.

      As I see it, the more the public has been sensitized to the dangers of facism, the less likely a fascist takeover will be. It may be possible for strong civil nations to survive the collapse of capitalism and adapt in a democratic way. Northern Europe countries, germany and others might have a good chance to do so.

      Self organized anarchist communities are on the rise everywhere the state power fails (i.e. greece). In Mexico, where the state has failed and lost control in wide parts, we have the rising rule of criminal cartels in some places but also anarchist zapatistas elsewhere.

      In the USA, as crazy as that may seem, the new anarchist organizations (occupy) seem to fall on fertile ground. The USA seems to be very adaptable to anarachy and self organisation, as the mistrust in Government is more widespread than in i.e. Europe.

      There is also a very large influence of the IT revolution that has no equal in history so we may only guess how it will influence the transition. The uprisings world wide have in common, that they are non hirarchical and helped or initiated by social comunication platforms. Politics, always a matter of structures and hirarchy, is taken over by something new. the possibility of the “internet democracy” may be something to look out for.

      • Thanks for your ideas. People who feel like they are losing what they have, or have already fallen to the ground, are fertile ground for movements of all sorts. I am afraid I have not followed political movements all that much, but the more extreme movements often seem like they have the possibility of hope to fix the problems of the day–and of course the problems of the day have been explained badly. The assumption is that the problems are from bad leadership, not energy resources that are rising in cost, leading to joblessness and lack of economic growth.

        The Internet, cell phones, and the Social Media all have the potential to speed these groups along.

      • xabier says:


        A comment I’d make on that is that the extreme ‘democratic anti-capitalist’ Left in Spain, which I know well, is very hierarchical: you do what the Party bosses tell you to do, and never step out of line. With the hard Left, ‘equality’ is all baloney.

        Totalitarianism is what we should fear, whether ‘Left’ or ‘Right.’

        The most revealing thing Hitler ever said was that he admired Stalin , who had ‘got it right’! (Dear old Hitler, such an amateur at killing compared to Stalin…….)

        The developments in Greece are certainly very alarming. Golden Dawn seem to have significant financial backing from somewhere.

  7. davekimble2 says:

    If you know the Energy Returned over the productive lifespan of a plant, and the Energy Invested Up Front (infrastructure), Middle (fuel and maintenance, and At End (decommisioning), you can lay out the energy budget of the plant over its timeframe. From that you can calculate the cumulative energy profit to date – it starts off negative, of course, as does the financial budget, whatever the technology.

    For a completely front-ended technology, like solar PV, the cumulative energy profit only turns positive after twice the Energy Packback Time. If over that period you build more of those plants, to scale up its share of the energy mix, you can find yourself in a situation where the industry as a whole never makes a cumulative energy profit until decades after the build-out is complete. Meanwhile the industry is being subsidised by fossil fuels that haven’t been paid back yet.

    It follows that there must be a point where you can say with certainty ‘there are not enough fossil fuels left to complete a transition to an all renewable energy world.’

    • I know that Charlie Hall has made some calculations of such a ramp up with solar or something similar. His model seemed to say that as long as the ramp-up continued, we would always be in a negative position.

      It is hard to make comparisons with respect to fossil fuels. Oil supply is limited on an annual basis, so that to the extent solar PV or some other renewable uses oil supply, it is likely to leave less for other things. This could be a problem. Natural gas and coal can be ramped up, but we don’t know how much, how quickly. (One question: If we do ramp coal and natural gas production up for increasing the use of solar PV, will we ever bring production back down again? Or will we just use the larger coal mines as an energy source to heat homes better, or to manufacture something else?)

      I wonder if there are other limits as well. The particular rare earth minerals that are used? Or the level of pollution produced by making all of the solar PV? I expect that we would reach these before the coal limits.

      • davekimble2 says:

        In a 100% front-ended technology, the percentage of energy returned per year per unit of energy invested is ((ER/EI)*(100/Lifetime))%, and represents the maximum rate that the technology can grow per year using only its own output.

        If ERoEI is 5, and Lifetime is 25 years, the maximum breeding rate is 20% – that’s if ALL the energy output is used to make more infrastructure, that is, not sold into the energy market. Any rate of growth faster than that needs an energy subsidy from something else.

        This will double in the infrastructure in 3.5 years. BP(2012) has the share of electricity generation coming from solar, wind and biomass as 1.6%, so by 2050 it could reach 79%, assuming world electricity consumption is flat.

        Meanwhile the oil is going to become unavailable, and if we have to design, build and run electric bulldozers and trucks – well, it’s never going to happen.

        • Jörg Dürre says:

          Click to access photovoltaics-report.pdf

          Here you have the real current numbers from Germany – I am a little more optimistic than you.

          • Thanks!

            The issue I still see is the fact that these panels must still be integrated into the grid. This ads a layer of long distance transmission costs that Germany still has to pay. Also, homes and especially businesses value having power 24/7. The cost of maintaining the grid system, and all of the fossil fuel electrical power plants, and any hydro backup must still be paid. Giving German homeowners and businesses a big break on their electrical rates does not necessarily provide enough money to pay for all of the rest of the system.

            Because of these issues, the cost of electricity produced by the solar panels needs to be considered alongside the cost of the system needed to produce constant power.

            Suppose the cost of the system to produce constant power is 100%, and solar panels reach “grid parity” in cost, as it is usually counted. Then, we can expect that solar PV panels will produce electricity equal to 25% of grid electricity for 25% of the total system costs of 100%. The “catch” is that if one attempts to integrate the output of these panels into the original system, the cost of the original system doesn’t shrink by 25%. If shrinkage did happen, we would have (Revised base system =75%) + (Solar Panels =25%) = (Revised full system cost = 100%).

            Instead, what we have is more like — (I don’t know the real numbers)
            (Revised base system = 95%) + (Solar Paneels= 25%) = (Revised Full system cost = 120%)

            The study you linked to looks at the value of what the panels is producing on its own (which was only 3% of system electricity in 2011). The catch is that it doesn’t reduce the cost of providing 24/7 service by anything like 3%. It may even increase it. What a person really needs to do is look at is what happens to full system costs. Germany is only now finding out about the extra transmission lines needed. It is also finding out that if it subsidizes electricity rates for solar and wind, it probably needs to subsidize natural gas rates as well, to get enough natural gas balancing for the system. These additional items become part of the cost as well.

        • Yes, this is exactly the problem.

          • John Rainbird says:

            Thanks Gail, there will always be up front costs to make a transition, so the question becomes how will these costs change over time if we were to seriously shift to a new energy system. Even if there were sufficient fossil fuel reserves to make a transition to where there was a net energy profit, we’d blow the availabe carbon budget trying to get there. By all accounts it appears we’ve our left a run too late. I agree the finacial system will be the weak link through its multiple internal flaws combined with increasing costs of complexity and the focus on addressing symptoms over cause.

          • Jörg Dürre says:

            What PV already does is lowering the market price by the merit order effect. I put the German link as it has grafics.
            With the nex link you can follow the production curve of fossile, wind and solar power as you can see, photovoltaics almost perfectly shaved todays peak power during day time, formerly the most expensive times for electricity.

            There are some issues for long distance transmission. Mostly they are due to all the lignite and hard coal power we are trying to export to the rest of Europe. Official political wording of course is that we export the renewables. No congestion of conventional fuels power possible – they were there first 😉
            At the moment it is realistic to produce PV power for about 6-7 Eurocents. SME regularly would pay at least 12 – 18 cents for electricity.

            Energy payback time of 1,5 years for CdTe is fair enough?!

            We are avoiding the variable cost for fossile stuff like hard coal which is imported from all around the world to Germany.
            What we need is a flexible network of fast reacting (smaller) power plants integrated to a bottom up grid management system. By constructing this kind of integration we save a lot of hot standby power as is is used today for grid safety reasons.
            And yes we are subsidizing but only the big companies as the shares in the cost for the renewables are mostly put on the shoulders of the private customers.
            It is an investment for the future though. The amortisation for photovoltaics is calculated on 20 years and after that we will have power for almost nothing. Batteries will become dirt cheap soon so I would not put my money in big transmission lines.

            Btw I operate small vegetable oil based CHP which only makes some sense as renewable peak power reserve.

            • Renewable power has serious seasonality (Summer/winter/spring /fall) issues, as does demand. So usually you need transmission wires, not batteries, to fix the situation. Batteries only do short time-shifts.

              Getting a network of fast-reacting smaller power plants is difficult, especially if natural gas is used, and is expensive. This is where subsidies are likely to be needed. The rates, with the merit order effect, are not great enough to pay for peaking natural gas plants by themselves.

  8. Edward Kerr says:

    As usual, great analysis. Assuming that the worst possible outcome of climate change (human extinction) does not occur then we seem to be headed for, at best, a pre-industrial life style. As we attempt, certainly in vain, to keep this system going we will only be squandering the resources that might have prevented collapse or at least mitigated it.

    For any hope at all, the more efficient “alternative” energies need to be fostered while those with a dismal return (corn ethanol most notably) need to be abandoned. Solar panels, charming as they are, pale in comparison to “Concentrated Solar Molten Salt” technology on an EROI basis. On the energy front I think that our biggest problems are vested interests drag and a severe lack of imagination. But if we continue (and we surely will) propping up this failed system, simply to maintain BAU, then we won’t have a snowballs chance of developing a sustainable future for our species. The sun provides all of our energy (even fossil fuels) and we simply need to develop efficient way to harness that unmetered bounty.

    I try to be hopeful but it’s difficult.

    Warm Regards,

    • Whatever wins on an EROI basis, wins on a “cheap” basis. Governments can tax it significantly, and it can still make a profit. It will be so cheap, that people will voluntarily decide to change from a different method of creating electricity. I don’t think Concentrated Solar Power with Molten Salt storage is yet at that point.

      The sun provides nearly all our energy. I don’t believe it provides nuclear, though. Harnessing the energy provided by the sun is a major technical challenge, though.

    • “Pre – Industrial” lifestyle is not where we are heading, this is nonsense.
      I am pessimistic about our future, but we will not be bombed back into the middle ages.

      There are lots of hopefull developments. Technology that is innovative and sustainable can help us build a new kind of society. The best example is the progress of sustainable organic farming even against the “logic” of the markets.

      Organic farming can today compete with harvests of industrial farming. This is due to “high tech” used on a sustainable basis. Germany, where I come from, could produce enough organic food to feed its population easily, provided we would cut down meat production by 70%..

      In the USA, take a look at the tools and lifestyle of the amish people. The tools they are using for farming, carpentry, etc. are very sophisticated and work without burning a drop of oil.

      We are producing lots of electricity without fossil fuels allready and will do so in the future. So for Machines and technololgy, sustainable ways to use high tech can emerge.

      I want to describe an example utopian development:
      Consider a sort of amish “high-tech” community as a template (and no, do not include the amish religion in that template).

      As the lack of fossil fuels prohibits costly transportation with diesel trucks, production of essential high tech goods (machines, tools, computers) will be done in workshops in small communities in a decentralized fashion.

      We will find ways to produce the things we need with the ressources we can grow or easily produce. Wood, organic fibers, aluminium or ceramics will be the building materials of the future.

      With help from computer aided design, CNC Tools, 3D Printing and roboting we will be able to build and repair the things we need right where we use them.

      As patents make sense only in a capitalist and globalized world with large manufacturers, patents will not survive the collapse. A free, world wide, open source directory of digitalized blue prints will be available where everbody can add new designs and use them for manufacturing.

      Our wastefull, short sighted society today does not value inherent energy stored in the things we use, this is our premium source of energy squandering.

      Thus Longevity of the things we produce will be mandatory in our future. Our machines and tools (even computers) will be designed and produced to last for much longer and to be easily repaired, not years, but decades and centuries.

      As in the times of our grandparents we will pass on many of the things we possess to our children and grandchildren. Just as the furniture manually made by a carpenter can survive a thousand years and more, so will the tools and machines we will produce in the future.

      Over time, our descendants can accumulate more inherent energy stored in the things we use, than we do today and be better off than even we are today, without wasting the ressources of our planet.

      • As I see it, organic high tech is as unsustainable as any other kind of farming. It is easy to kid ourselves.

        • Don Stewart says:

          Regarding ‘high tech organic’. I guess it depends on how one defines ‘high tech’.

          For example, in the 1980s some Dutch researchers discovered that when plants are attacked, they emit volatile compounds which attract beneficials to eat the insects preying on the plant. The discovery didn’t attract much attention at the time.

          Since then we have had an explosion in our understanding of what a dense signaling network exists in the natural world, and particularly in the human body. It is now routine for smart doctors to say ‘the food you eat talks to your genes’ and the result is either health because helpful genes are expressed or disease because unhelpful genes are expressed. (Clueless doctors still don’t get it.) So we are now more comfortable with the idea of studying signaling networks and how they can be managed to benefit humans.

          For example, some hybrid plants have had the ability to emit the volatile compounds bred right out of them. And a plant which is a native to China may not be able to attract any beneficials in Iowa because it isn’t adapted to the particular ecosystem.

          Some farmers in Kenya have used the knowledge of volatiles to triple their corn yields. They found that legumes in a certain genus emitted the same volatile as the corn. So they interplanted the legume (which also harbors nitrogen fixing bacteria) with the corn. They also planted a ‘trap crop’ around the field consisting of grass which is very attractive to stem-borers.

          Is this high-tech? It is certainly applied science at its best. But it isn’t what Monsanto wants us to think of when we hear the words ‘high-tech’.

          Don Stewart
          PS for the home gardener, my suggestion is to use heirloom plants with interplanted plants which attract beneficials. No long straight rows of monocrop.

          • Yes, thanks for the comment.

            Hight Tech might have been the wrong phrase for what I wanted to express.

            Maybe this story about a farmer in India will explain what I was talking abiut better.

            Modern methods in sustainable farming are the result of science. They need not to be implemented with machinery.

            Rather it is about figuring out how best to interact with nature in a way that is benefitial for the farmer and nature.
            I am convinced that the knowledge for feeing people without industrial farming would be there. we still need to face overpopulation and many will suffer from hunger. But if people will starve in the future, short sightet leadership and greed will be to blame.

            • I think what is important too, is long term impacts. SRI (planting fewer seedlings farther apart and doing a lot of weeding) is viewed as a revolution, if it increases erosion, it could be a problem in a few years. (I don’t know that it does, but that is one thought.

              When I visited a farm near Mumbai, they were definitely dependent of fossil fuel fertilizer. I went with a group of people who were researching more sustainable ways. They asked about using human waste to fertilize crops, and we were told that culturally that was not acceptable. They would use animal manure if it was available, but not enough was available.

          • xabier says:


            Very interesting.

            In effect, our advanced technologies simply enable us to make apparently sophisticated and expensive, but in reality very crude and often counter-productive, interventions in natural systems, whether our bodies or wider nature.

            There’s a big push here in the UK to get people to accept take-over by the Monsanto Empire. It will produce more food, we are told, and we have ‘a moral duty to feed the world.’ This despite the fact that the UK only produces 40% of its food needs. Money drives out reason.

      • Edwin Pell says:

        A new chip manufacturing plant cost 6 billion dollars and uses machines, materials and tools from around the planet. Including 50 million dollar lithography machines from the Dutch.

  9. dashui says:

    FYI, my father likes to wildcat in west Texas . Over the last 5 years the costs to drill an oil well have ballooned from 6 million dollars to 10 million, so he is getting out of the business. Also big hedge funds have moved in taking the place of smaller investors. In the small oil company he was investing in a hedge fund put down 250 million dollars for new wells.

    • Wildcatting is pretty scary if a well could come up dry, and you have 10 million invested. In fact, even if it produces, it needs to produce a lot, or prices have to be quite high, to make money, I would expect. And the payback may be over a long period.

  10. donsailorman says:

    Businesses do not make decisions based on EROI; they use dollars as their unit of measure, $Return on $Invested. Government cost/benefit analysis is also in terms of dollar amounts.

    You rightly emphasize the importance of profits to firms in the energy industry. Currently oil companies are making excellent profits (both accounting profit and economic profit) from their investments. Natural gas production is barely profitable (at best) at today’s low prices, and coal production is adequately profitable to keep up current production levels.

    I think it is much more realistic to make calculations strictly in terms of dollars–which is what companies actually do–rather than try to calculate EROI. In any case, EROI or EROEI are slippery concepts–much harder to measure or to estimate than measures such as payback period or net present value as criteria for making capital investments.

    • MrColdWaterOfRealityMan says:

      I hear this argument a lot. Yes, money is what drives human behavior, but this does not change the laws of physics or any other laws of economics. What we’re really drilling for is positive net energy at an affordable price. Net energy from hydrocarbons is getting scarcer, and therefore the price for it is increasing. Yes, short term profit will occur for oil companies. It changes nothing. At some point, you still fall below the level needed to sustain an interdependent web of “just-in-time” supply chains that are still hopelessly dependent on cheap transportation energy. When that happens, unpredictable and distinctly non-linear breaks occur (e.g. What happens when drilling pipe is too expensive to make and move from Houston to the Antarctic?).

      You are correct about the measurement of EROEI, however. Do you only count immediate dynamic inputs? How about the steel that went into derricks? How about the roads that go to the derricks? How about the maintenance of those roads? It all takes energy, but some of that has been spent, and exists in a stable low form requiring little additional input. The measurement is somewhat arbitrary.

    • I didn’t quite go as far as saying that, but I tried to made it clear in my description of Figure 4 that what oil companies are looking at is finances, which are only slightly related to EROI.

      Academics works separately from the “real world”. Having lots of metrics generates a need for lots of academic papers. Quite a bit of the EROI papers come back to $$ in the end.

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