A new theory of energy and the economy – Part 1 – Generating economic growth

How does the economy really work? In my view, there are many erroneous theories in published literature. I have been investigating this topic and have come to the conclusion that both energy and debt play an extremely important role in an economic system. Once energy supply and other aspects of the economy start hitting diminishing returns, there is a serious chance that a debt implosion will bring the whole system down.

In this post, I will look at the first piece of this story, relating to how the economy is tied to energy, and how the leveraging impact of cheap energy creates economic growth. In order for economic growth to occur, the wages of workers need to go farther and farther in buying goods and services. Low-priced energy products are far more effective in producing this situation than high-priced energy products. Substituting high-priced energy products for low-priced energy products can be expected to lead to lower economic growth.

Trying to tackle this topic is a daunting task. The subject crosses many fields of study, including anthropology, ecology, systems analysis, economics, and physics of a thermodynamically open system. It also involves reaching limits in a finite world. Most researchers have tackled the subject without understanding the many issues involved. I hope my analysis can shed some light on the subject.

I plan to add related posts later.

An Overview of a Networked Economy

The economy is a networked system of customers, businesses, and governments. It is tied together by a financial system and by many laws and customs that have grown up over the years. I represent the economic network as a child’s toy made of sticks that connect together, but that can, if disturbed in the wrong way, collapse.

Figure 1. Dome constructed using Leonardo Sticks

Figure 1. Dome constructed using Leonardo Sticks

The economy is a self-organized system. In other words, it grew up gradually over time, one piece at a time. New businesses were added and old ones disappeared. New customers were added and others left. The products sold gradually changed. Governments gradually added new laws and removed old ones. As changes were made, the system automatically re-optimized for the changes. For example, if one business raised its price on a product while others did not, some of the customers would move to the businesses selling the product at a lower price.

The economy is represented as hollow because, as products become obsolete, the economy gradually adapts to the replacement product and loses support for earlier products. An example is cars replacing horse and buggy in the United States. There are fewer horses today and many fewer buggy manufacturers. Cities generally don’t have places to leave horses while shopping. Instead, there are many gasoline stations and parking lots for cars.

Because of the way an economy adapts to a new technology, it becomes virtually impossible to “go backwards” to the old technology. Any change that is made must be small and incremental–adding a few horses at the edge of the city, for example. Trying to add very many horses would be disruptive. Horses would get in the way of cars and would leave messes on the city streets.

The Economy as a Complex Adaptive System and Dissipative Structure

Systems analysts would call a system such as the economy a complex adaptive system, because of its tendency to grow and evolve in a self-organizing manner. The fact that this system grows and self-organizes comes from the fact the economy operates in a thermodynamically open system–that is, the economy receives energy from outside sources, and because of this energy, can grow and become more complex. The name of such a system from a physics perspective is a dissipative structure. Human beings, and in fact all plants and animals, are dissipative structures. So are hurricanes, galaxies, and star formation regions. All of these dissipative systems start from small beginnings, grow, and eventually collapse and die. Often they are replaced by new similar structures that are better adapted to the changing environment.

The study of the kinds of systems that grow and self-organize is a new one. Ilya Prigogine was awarded the Nobel Prize in Chemistry in 1977 for his pioneering work on dissipative systems. One writer (in French) about the economy as a dissipative structure is François Roddier. His book, published in 2012, is called Thermodynamique de l’evolution.

Why Energy is Central to the Economy

If the economy is a dissipative system, it is clear that energy must be central to its operation. But suppose that we are coming from a step back, and trying to show that the economy is an energy-based system that grows as more external energy is added.

Let’s start even before humans came onto the scene. All plants and animals need energy of some kind so that the organism can grow, reproduce, move, and sense changes to the environment. For plants, this energy often comes from the sun and photosynthesis. For animals, it comes from food of various kinds.

All plants and animals are in competition with other species and with other members of their own species. The possible outcomes are

  1. Win and live, and have offspring who might live as well
  2. Lose out and die

Access to adequate food (a source of energy) is one key to winning this competition. Outside energy can be helpful as well. The use of tools is as approach that is used by some types of animals as well as by humans. Even if the approach is as simple as throwing a rock at a victim, the rock amplifies the effect of using the animal’s own energy. In many cases, energy is needed for making a tool. This can be human energy, as in chipping one rock with another rock, or it can be heat energy. By 70,000 years ago, humans had figured out that heat-treating rock made it easier to shape rocks into tools.

A bigger step forward for humans than learning to use tools–in fact, what seems to have set them apart from other animals–was learning to use fire. This began as early as 1 million years ago. Controlled use of fire had many benefits. With fire, food could be cooked, cutting the amount of time needed for chewing down drastically. Foods that could not be eaten previously could be cooked and eaten, and more nutrition could be obtained from the foods that were eaten. The teeth and guts of humans gradually got smaller, and brains got larger, as human bodies adapted to eating cooked food.

There were other benefits of being able to use fire. With time freed up from not needing to chew as long, there was more time available for making tools. Fire could be used to keep warm and thus expand the range where humans could live. Fire could also be used to gain an advantage over other animals, both in hunting them and in scaring them away.

Humans were incredibly successful in their competition with other species, killing off the top carnivore species in each continent as they settled it, using only simple tools and the burning of biomass. According to Paleontologist Niles Eldridge, the Sixth Mass Extinction began when humans were still hunter-gatherers, when humans first moved out of Africa 100,000 years ago. The adverse impact of humans on other species grew significantly greater, once humans became farmers and declared some plants to be “weeds,” and selected others for greater use.

In many ways, the energy-based economy humans have built up over the years is simply an approach to compensate for our own feeble abilities:

  • Need for warm temperature–clothing, houses, heat when cold, air conditioning if hot
  • Need for food–metal tools, irrigation, refrigeration, fertilizer, herbicides, pesticides
  • Knowledge/thinking ability of humans–books, schools, Internet
  • Mobility–airplanes, cars, trucks, ships, roads
  • Vulnerability to germs–medicine, sanitation

A key component in any of these types of adaptations is energy of some appropriate kind. This energy can come in various forms:

  • Embodied energy stored up in tools and other capital goods that can be reused later. Some of the energy in making these tools is human energy (including human thinking capacity), and some of this is energy from other sources, such as heat from burning wood or another fuel.
  • Human energy–Humans have many abilities they can use, including moving their arms and legs, thinking, speaking, hearing, seeing, and tasting. All of these are made possible by the energy that humans get from food.
  • Energy from animals – Dogs can help with hunting and herding; oxen can help with plowing; horses can be ridden for transportation
  • Energy from burning wood and other forms of biomass, including peat moss
  • Energy from burning fossil fuels (coal, natural gas, or oil)
  • Electricity produced in any number of ways–hydroelectric, nuclear, burning coal or natural gas, and from devices that convert wind, solar, or geothermal energy
  • Wind energy – Used in sail boats and in wind powered devices, such as windmills to pump water. Wind turbines (with significant embodied energy) also generate electricity.
  • Solar energy – Most energy from the sun is “free”. It keeps us warm, grows food, and evaporates water, without additional “help.” There are also devices such as solar PV panels and solar hot water heaters that capture energy from the sun. These should perhaps be classified as tools with significant embodied energy.

One key use of supplemental energy is to reduce the amount of human labor needed in farming, freeing-up people to work at other types of jobs. The chart below shows how the percentage of the population working in agriculture tends to drop as the amount of supplementary energy rises.

Figure 2. Percent of Workforce in Agriculture based on CIA World Factbook Data, compared to Energy Consumption Per Capita based on 2012 EIA Data.

Figure 2. Percent of Workforce in Agriculture based on CIA World Factbook Data, compared to Energy Consumption Per Capita based on 2012 EIA Data.

The energy per capita shown on Figure 2 is includes only energy sources that are bought and sold in markets, and thus that can easily be counted. These would include fossil fuel energy and electricity made from a variety of sources (fossil fuels, hydroelectric, nuclear, wind, solar PV). It does not include other sources of energy, such as

  • Embodied energy in previously made devices
  • Human energy
  • Animal energy
  • Locally gathered dung, wood, and other biomass.
  • Free solar energy, keeping people warm and growing crops

Besides reducing the proportion of the population needed to work in agriculture, the other things that “modern” sources of energy do are

  1. Allow many more people to live on earth, and
  2. Allow those people to have much more “stuff”–large, well-heated homes; cars; lighting where desired; indoor bathrooms; grocery stores filled with food; refrigeration;  telephones; television; and the Internet.

Figure 3 below shows that human population has risen remarkably since the use of modern fuels began in quantity about 200 years ago.

Figure 3. World population from US Census Bureau, overlaid with fossil fuel use (red) by Vaclav Smil from Energy Transitions: History, Requirements, Prospects.

Figure 3. World population from US Census Bureau, overlaid with fossil fuel use (red) by Vaclav Smil from Energy Transitions: History, Requirements, Prospects.

Besides more and better food, sanitation, and medicine, part of what allowed population to rise so greatly was a reduction in fighting, especially among nearby population groups. This reduction in violence also seems to be the result of greater energy supplies. In the animal kingdom, animals similar to humans such as chimpanzees have territorial instincts. These territorial instincts tend to keep down total population, because individual males tend to mark off large areas as territories and fight with others of their own species entering their territory.

Humans seem to have overcome much of their tendency toward territoriality. This has happened as the widespread availability of fuels increased the use of international trade and made it more advantageous for countries to cooperate with neighbors than to fight with them. Having an international monetary system was important as well.

How the System of Energy and the Economy “Works”

We trade many products, but in fact, the “value” of each of these products is very much energy related. Some that don’t seem to be energy-related, but really are energy-related, include the following:

  • Land, without buildings – The value of this land depends on (a) its location relative to other locations, (b) the amount of built infrastructure available, such as roads, fresh water, sewer, and grid electricity, and (c) the suitability of the land for growing crops. All of these characteristics are energy related. Land with good proximity to other locations takes less fuel, or less time and less human energy, to travel from one location to another. Infrastructure is capital goods, built up of embodied energy, which is already available. The suitability of the land for growing crops has to do with the type of soil, depth of the topsoil, the fertility of the soil, and the availability of fresh water, either from the sky of from irrigation.
  • Education – Education is not available to any significant extent unless workers can be freed up from farming by the use of modern energy products. Students, teachers, and those writing books all need to have their time freed up from working in agriculture, through advanced energy products that allow fewer workers to be needed in fields. Howard T. Odum in the Prosperous Way Down wrote about education reflecting a type of embodied energy.
  • Human Energy – Before the advent of modern energy sources, the value of human energy came largely from the mechanical energy provided by muscles. Mechanical energy today can be provided much more cheaply by fossil fuel energy and other cheap modern energy, bringing down the value of so-called “unskilled labor.” In today’s world, the primary value humans bring is their intellectual ability and their communication skills, both of which are enhanced by education. As discussed above, education represents a type of embodied energy.
  • Metals – Metals in quantity are only possible with today’s energy sources that power modern mining equipment and allow the huge quantities of heat needed for refining. Before the use of coal, deforestation was a huge problem for those using charcoal from wood to provide the heat needed for smelting. This was especially the case when economies tried to use wood for heating as well.

Two closely related concepts are

  • Technology – Technology is a way of bringing together physical substances (today, often metals), education, and human energy, in a way that allows the production in quantity of devices that enhance the ability of the economy to produce goods and services cheaply. As I will discuss later, “cheapness” is an important characteristic of anything that is traded in the economy. As technology makes the use of metals and other energy products cheaper, extraction of these energy-related items increases greatly.
  • Specialization – Specialization is used widely, even among insects such as bees and ants. It is often possible for a group of individuals to obtain better use of the energy at their disposal, if the various individuals in the group perform specialized tasks. This can be as simple as at the hunter-gatherer level, when men often specialized in hunting and women in childcare and plant gathering. It can occur at advanced levels as well, as advanced education (using energy) can produce specialists who can perform services that few others are able to provide.

Technology and specialization are ways of building complexity into the system. Joseph Tainter in the Collapse of Complex Societies notes that complexity is a way of solving problems. Societies, as they have more energy at their disposal, use the additional energy both to increase their populations and to move in the direction of greater complexity. In my Figure 1 (showing my representation of an economy), more nodes are added to the system as complexity is added. In a physics sense, this is the result of more energy being available to flow through the economy, perhaps through the usage of a new technology, such as irrigation, or through using another technique to increase food supply, such as cutting down trees in an area, providing more farmland.

As more energy flows through the system, increasingly specialized businesses are added. More consumers are added. Governments often play an increasingly large role, as the economy has more resources to support the government and still leave enough resources for individual citizens. An economy in its early stages is largely based on agriculture, with few energy inputs other than free solar energy, human labor, animal labor, and free energy from the sun. Extraction of useful minerals may also be done.

As modern energy products are added, the quantity of energy (particularly heat energy) available to the economy ramps up quickly, and manufacturing can be added.

Figure 4. Annual energy consumption per head (megajoules) in England and Wales 1561-70 to 1850-9 and in Italy 1861-70. Figure by Wrigley

Figure 4. Annual energy consumption per head (megajoules) in England and Wales 1561-70 to 1850-9 and in Italy 1861-70. Figure by Wrigley

As these energy products become depleted, an economy tends to shift manufacturing to cheaper locations elsewhere, and instead specialize in services, which can be provided with less use of energy. When these changes are made, an economy becomes “hollowed out” inside–it can no longer produce the basic goods and services it could at one time provide for itself.

Instead, the economy becomes dependent on other countries for manufacturing and resource extraction. Economists rejoice at an economy’s apparently lesser dependence on fossil fuels, but this is an illusion created by the fact that energy embodied in imported goods is never measured or considered. The country at the same time becomes more dependent on suppliers from around the world.

The way the economy is bound together is by a financial system. In some sense, the selling price of any product is the market value of the energy embodied in that product. There is also a cost (which is really an energy cost) of creating the product. If the selling cost is below the cost of creating the product, the market will gradually rebalance, in a way that matches goods and services that can be created at a break-even cost or greater, considering all costs, even indirect ones, such as taxes and the need for capital for reinvestment. All of these costs are energy-related, with some of this energy being human energy.

Both (a) the amount of goods and services an economy produces and (b) the number of people in an economy tends to grow over time. If (a), that is, the amount of goods and services produced, is growing faster than (b), the population, then, on average, individuals find their standard of living is increasing. If the reverse is the case, individuals find that their standard of living is decreasing.

This latter situation, one of a falling standard of living, is the situation that many people in “developed” countries find themselves in now. Because of the networked way the economy works, the primary way that this lack of goods and services is transmitted back to workers is through falling inflation-adjusted wages. Other mechanisms are used as well: fewer job openings, government deficits, and eventually debt defaults.

If the situation is reversed–that is, the economy is producing more goods and services per capita–the way this information is “telegraphed” back to the people in the economy is through a combination of increasing job availability, rising inflation adjusted-wages, availability of new inexpensive products on the market place, and government surpluses. In such a situation, debt is likely to become increasingly available because of the apparently good prospects of the economy. The availability of this debt then further leverages the growth of the economy.

External Energy Products as a Way of Leveraging Human Energy

Economists tell us that value comes from the chain of transactions that are put in place whenever one of us buys some kind of good or service. For example, if I buy an apple from a grocery store, I set up a chain of payments. The grocer pays his employees, who then buy groceries for themselves. They also purchase other consumer goods, pay income taxes, and perhaps buy oil for their vehicles. The employees pay the stores they buy from, and these payments set up new chains of transactions indirectly related to my initial purchase of an apple.

The initial purchase of an apple may help also the grocer make a payment on debt (repayment + interest) the store has, perhaps on a mortgage. The owner of the store may also put part of the money from the apple toward paying dividends on stock of the owners of the grocery story. Presumably, all of the recipients of these amounts use the amounts that initially came from the purchase of the apple to pay additional people in their spending chains as well.

How does the use of oil or coal or even the use of draft animals differ from simply creating the transaction chain outlined above? Let’s take an example that can be made with either manual labor plus some embodied energy in tools or with the use of fossil fuels: shoes.

If a cobbler makes the shoes, it will likely take him quite a long time–several hours. Somewhere along the line, a tanner will need to tan the hide in the shoe, and a farmer will need to raise the animal whose hide was used in this process. Before modern fuels were added, all of these steps were labor intensive. Buying a pair of shoes was quite expensive–say the equivalent of wages for a day or two. Boots might be the equivalent of a week’s wages.

The advantage of adding fuels such as coal and oil is that it allows shoes to be made more cheaply. The work today is performed in a factory where electricity-powered machines do much of the work that formerly was done by humans, and oil-powered vehicles transport the goods to the buyer. Coal is important in making the electricity-powered machines used in this process and may also be used in electricity generation. The use of coal and oil brings the cost of a pair of shoes down to a much lower price–say the equivalent of two or three hours’ wages. Thus, the major advantage of using modern fuels is that it allows a person’s wages to go farther. Not only can a person buy a pair of shoes, he or she has money left over for other goods.

The fact that the wage-earner can now buy additional goods with his income sets up additional payment chains–ones that would have not been available, if the person had spent a large share of his wages on shoes. This increase in “demand” (really affordability) is what allows the rest of the economy to expand, because the customer has more of his wages left to spend on other goods. This sets up the growth situation described above, where the total amount of goods and services in the economy expands faster than the population increases.

Thus, the big advantage of adding coal and oil to the economy was that it allowed goods to be made cheaply, relative to making goods with only human labor. In some sense, human labor is very expensive. If a person, using a machine operated with oil or with electricity made from coal can make the same type of goods more cheaply, he has leveraged his own capabilities with the capabilities of the fuel. We can call this technology, but without the fuel (to make the metal parts used in the machine, to operate the machinery, and to transport the product to the end user), it would not have been possible to make and transport the shoes so cheaply.

All areas of the economy benefit from this external energy based approach that essentially allows human labor to be delivered more efficiently. Wages rise, reflecting the apparent efficiency of the worker (really the worker + machine + fuel for the machine). Thus, if a worker has a job in the economy affected by this improvement, he may get a double benefit–higher wages and plus the benefit of the lower price of shoes. Governments will get higher tax revenue, both on wages (because of the new value chain and well as the higher wages from “efficiency”), and on taxes paid relating to the extraction of the oil, assuming the extraction is done locally. The additional government revenue can be used on roads. These roads provide a way for shoe manufacturers to deliver their goods to more distant markets, further enhancing the process.

What happens if the price of oil rises because the cost of extraction rises? Such a rise in the cost of extraction can be expected to eventually take place, because we extract the oil that is easiest and cheapest to extract first. When additional extraction is performed later, costs are higher for a variety of reasons: the wells need to be deeper, or in more difficult to access location, or require fracking, or are in countries that need high tax revenue to keep local populations pacified. The higher costs reflect that we are using are using more workers and more resources of all kinds, to produce a barrel of oil.

Some would look at these higher costs as a “good” impact, since these higher costs result in new payment chains, for example, related to fracking sand and other products that were not previously used. But the higher cost really represents a type of diminishing returns that have a very adverse impact on the economy.

The reason why the higher cost of oil has an adverse effect on the economy is that wages don’t go up to match this new set of oil production costs. If we look back at the previous example, it is somewhat like going part way back to making shoes by hand. Economists often remark that higher oil prices hurt oil importers. This is only half of the problem, though. Higher costs of oil production result in a situation where fewer goods and services are produced worldwide(relative to what would have otherwise been produced), because the concentrated use of resources by the oil sector to produce only a tiny amount more oil than was produced in the past. When this happens, fewer resources (including workers) are left for the rest of the world to produce other products. The growing use of resources by the oil sector is sort of like a growing cancer sapping the strength of a patient. Oil importing nations take a double “hit,” because they participate in the world drop in output of goods, and because as importers, they miss out on the benefits of extracting and selling oil.

Another way of seeing the impact of higher oil prices is to look at the situation from the point of view of consumers, businesses and governments. Consumers cut back on discretionary spending to accommodate the higher price of oil, as reflected in oil and food prices. This cutback triggers whole chains of cutbacks in other buying. Businesses find that a major cost of production (oil) is higher, but wages of buyers are not. They respond in whatever ways they can–trimming wages (since these are another cost of production), outsourcing production to a cheaper part of the world, or automating processes further, cutting more of the high human wages from the process. Governments find themselves saddled with more unemployment claims and lower tax revenue.

In fact, if we look at the data, we see precisely the expected effect. Wages tend to rise when oil prices are low, and lose the ability to rise when oil prices are high (Figure 5). The cut off price of oil where wages stop rising seems to be about $40 per barrel in the United States.

Figure 5. Average wages in 2012$ compared to Brent oil price, also in 2012$. Average wages are total wages based on BEA data adjusted by the CPI-Urban, divided total population. Thus, they reflect changes in the proportion of population employed as well as wage levels.

Figure 5. Average wages in 2012$ compared to Brent oil price, also in 2012$. Average wages are total wages based on BEA data adjusted by the CPI-Urban, divided total population. Thus, they reflect changes in the proportion of population employed as well as wage levels.

What if oil prices are artificially low, on a temporary basis? The catch is that not all costs of oil producing companies can be paid at such low prices. Perhaps the cost of operating oil fields still in existence will be fine, and the day-to-day expenses of extracting Middle Eastern oil can be covered. The parts of the chain that get squeezed first seem to be least essential on a day to day basis–taxes to governments, funds for new exploration, funds for debt repayments, and funds for dividends to policyholders.

Unfortunately, we cannot run the oil business on such a partial system. Businesses need to cover both their direct and indirect costs. Low oil prices create a system ready to crash, as oil production drops and the ability to leverage human labor with cheaper sources of energy decreases. Raising oil prices back to the full required level is likely to be a problem in the future, because oil companies require debt to finance new oil production. (This new production is required to offset declines in existing fields.) With low oil prices–or even with highly variable oil prices–the amount that can be borrowed drops and interest costs rise. This combination makes new investment impossible.

If the rising cost of energy products, due to diminishing returns, tends to eliminate economic growth, how do we work around the problem? In order to produce economic growth, it is necessary to produce goods in such a way that goods become cheaper and cheaper over time, relative to wages. Clearly this has not been happening recently.

The temptation businesses face in trying to produce this effect is to eliminate workers completely–just automate the process. This doesn’t work, because it is workers who need to be able to buy the products. Governments need to become huge, to manage transfer payments to all of the unemployed workers. And who will pay all of these taxes?

The popular answer to our diminishing returns problem is more efficiency, but efficiency rarely adds more than 1% to 2% to economic growth. We have been working hard on efficiency in recent years, but overall economic growth results have not been very good in the US, Europe, and Japan.

We know that dissipative systems operate by using more and more energy until they reach a point where diminishing returns finally pushes them into collapse. Thus, another solution might be to keep adding as much cheap energy as we can to the system. This approach doesn’t work very well either. Coal tends to be polluting, both from an air pollution point of view (in China) and from a carbon dioxide perspective. Nuclear has also been suggested, but it has different pollution issues and can be high-priced as well. Substituting a more expensive source of electricity production for an existing source of energy production works in the wrong direction–in the direction of higher cost of goods relative to wages, and thus more diminishing returns.

Getting along without economic growth doesn’t really work, either. This tends to bring down the debt system, which is an integral part of the whole system. But this is a topic for a different post.

A Note on Other Energy Measures

The reader will note that in my analysis, I am using the cost (in dollars or other currency unit) of energy production, including indirect costs that are hard to measure, such as needed government funding from taxes, the cost of interest and dividends, and the cost of new investment. The academic world uses other metrics that purport to measure energy requirements. These do not measure the same thing.

Caution is needed in using these metrics; studies using these metrics often seem to recommend using a source of energy that is expensive to produce and distribute when all costs are considered. My analysis indicates that high-cost energy products promote economic contraction regardless of what their EROEI or Life Cycle Assessment results would seem to suggest.

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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727 Responses to A new theory of energy and the economy – Part 1 – Generating economic growth

  1. Jan Steinman says:

    This is a particularly ambitious posting — thanks! It ties together a number of things that people don’t normally tie together.

    • Very well said! Normally people think energy is just a small part of the system. They don’t get that without energy, no culture, no education and so on. But energy is the system.

      I just discussed with a woman who said we should try better to understand the system, not just criticize it. I linked to this post, explaining that energy is a core matter to understand the system we live in. She was rather mad on me, and said this was a matter of the ideology of capitalism, not a matter of energy.

      • xabier says:

        One of the principal characteristics of life in the 20th century industrial economies was political activism, usually conceived as a way to Utopia. In that world-view, all is ideology, politics, struggle.

        Bring the fundamental importance of energy to the attention of such people and they are inclined to get angry, as you are thereby taking their Utopian future away from them and disabusing them of their belief that it is all about politics.

        Ideology all too often gets a man or woman to kill; but, Left or Right, it never made a mule budge, a calf fatten, the sun shine or a river flow…..

        • garand555 says:

          A lot of times, it is about politics. Politics and energy often intertwine, and politicians often get it wrong. Take using corn to produce ethanol for fuel, for instance. That is one of the dumbest things to do, unless you are a farmer who profits from it or a politician who gets reelected because of it.

        • InAlaska says:

          xabier,
          Haven’t “seen” you much around the blogosphere much lately. How ya been?

      • Jan Steinman says:

        “She was rather mad on me, and said this was a matter of the ideology of capitalism, not a matter of energy.”

        (A native English speaker would say “mad at me.”)

        If one sees life as a dissipative mechanism, I think that capitalism is arguably better at that than the alternatives. But ultimately, they’re two sides of the same coin, no?

        Under capitalism, man exploits man. Under communism, it’s just the opposite.

        — JK Galbraith

        • My wife from the Philippines still has the same problems with these short between words after 12 years here. I think they have a name, prepositions or something? I’m not sure.

    • Thanks! When it gets this long and complicated, I worry that many people will give up on the post–find something shorter and more entertaining to read.

  2. grobertson1 says:

    Gail, What if the answer, is In fact “less efficiency”.
    Certainly a too high price of oil is harmful,
    but a too low price perhaps equally or greater harm.

    Certainly a low price of oil means fewer rigs, fewer drillers,
    means a reduced need for housing, transportation, food preparation,
    certainly at a point, a point where production cost is equal or greater
    than price, low oil price means reduced employment.

    What if in many areas we have reached the peak of efficiency verse employment
    and more efficiency simply means less employment.

    Efficiency too has diminishing marginal returns.
    Certainly robotics are more efficient than humans in many areas
    but certainly they will result in far less employment of humans.

    If an abundance of energy increases population, as is proposed, then
    why does Japan have declining population, fewer children per couple,
    whilst many poor countries, have many more children per couple
    .
    At a point, Efficiency drives reduced population; not vice versa.
    If food is abundant you need less people to farm and harvest it.
    If medicine is abundant, you need fewer family, you are less concerned
    that an heir may pass.
    If energy is abundant you need less people to say collect firewood.
    You need fewer family.

    • “If an abundance of energy increases population, as is proposed, then
      why does Japan have declining population”

      Japan has an abundance of energy? I think they are massively dependent on imports.

      There are many things that contribute to bringing down fertility rates to around replacement levels. I would say that energy abundance equals more population is more of a general rule, certainly not an absolute one.

    • As I told someone else, the primary purpose of an economy is to serve human beings. It is really easy for all of the efficiency efforts to remove human jobs. The other thing they do is make goods like cars much more expensive, requiring workers to borrow more money in order to afford one.

      At this point, things are so badly messed up, I am doubtful things are fixable, regardless what we do.

      Japan is very short of energy. About all it can do is make nuclear electricity from imported fuel. It also has too many people in a small area. It is not sustainable as it is. People sense this, and are having small families. Also, with government pension programs, there appears to be no need to have children to support you. (In reality, the government plan is not really guaranteed.)

      People from poor countries know that many of their children are likely to die before adulthood. They generally can’t afford birth control. They know that every family has several children. So they do what others do. If they want to have a reasonable chance of having children to support them when they are old, they need to have several children.

      • Harry Gibbs says:

        It is fascinating the way in the Japanese seem to intuit the gravity of their net energy crisis and the ways in which the young especially are responding by retreating into fantasy, turning their backs on romance and family-making, and in many instances holing themselves up permanently in their rooms: http://www.bbc.co.uk/news/magazine-23182523

        • I have read about the situation with Japanese young people retreating into fantasy before. Even in the United States country, there are a lot of young people spending their free time playing video games and putting off marriage indefinitely.

        • MG says:

          It is the result of cognitive dissonance = the official image of the world presented by the institutions and the leading personalities (state, church, parents, pop stars etc.) does not correspond with the reality.

          • BC says:

            Gail and MG, critical points you make.

            Consider that the decline in US oil production per capita from the peak in 1970 correlates virtually 1:1 with the rate of deceleration of the rate of growth of world population (first derivative) since the change rate peak in the 1970s, which will achieve a first-order exponential decay by no later than the early 2020s.

            That is, the world reached peak capacity to increase the rate of change of growth of the primary energy source required for modern, high-tech, high-entropy civilization 40 years ago, and we no longer have the capacity to produce affordable supplies of the primary energy per capita that we can afford to burn and grow real GDP per capita and the population and its replacement.

            At the trend exponential decay rate since the 1970s, world population will peak in the next 5-7 years and decline inexorably no later than sometime in the 2030s.

            • MG says:

              Dear BC, interesting observations and predictions. We are really loosing energy and that makes the growth impossible… Add to that the fact that we have huge masses of the people who do not realize that we are loosing energy and, as a consequence, simply hit the concrete wall. The decline of the human population can not be reversed…

      • grobertson1 says:

        Gail I will give a quick and over simplified example with round figures.
        A friend of mine works for Coca Cola
        Initially they had 3 bottling plants
        in each bottling plant
        they had 2 bottling lines the bottling lines required 100 employees
        with advance in technology
        they installed 6 bottling lines the bottling lines required 50 employees
        with advance in technology
        they installed 12 bottling lines the bottling lines required 25 employees
        with advance in technology
        they now have 25 bottling lines the bottling lines require 2 employees

        Now they can close 2 of the bottling plants, they don’t need them
        or their employees.

        Simply put you had 100 employees in each of 3 bottling plants
        no one on government assistance
        now you have 1 bottling plant with 2 employees with 298 on government assistance.

        If you can make it faster and cheaper with low oil cost and technology
        if the cost of the bottling line + energy is far greater than employee salary
        and that hassle of employees (days off, vacation, overtime, health)

        As more and cheaper energy goes through the system LESS business
        and FEWER employees are needed. This is contrary to the premise that
        “As more energy flows through the system, increasingly specialized businesses are added.”

        Coke may have more consumers, Coke may have more sales
        and Coke may be produced for less, and Coke may make more money.
        BUT
        You now have a lot of people on Government assistance,
        very simply looking at just One plant – you had 100 people self supportive buying cars,
        having a home, shopping for necessities and luxury goods.
        NOW
        You have 2 people self supportive and 98 who can’t afford the new Car,
        the home or the luxury goods.

        Long story short, cheap energy means you need fewer people
        and technology means you need fewer people
        efficiency means you need fewer people

        NOW there is a time when GDP decreases because fewer people
        are needed, fewer get a salary, fewer buy the house or buy a smaller house
        or rent an apartment, fewer buy that luxury car.

        WE in the US are Now at the LOWEST labor participation rate since 1978.
        .
        .And in the last 3 years have hit the HIGHEST SNAP (food stamp)
        participation rate ever.
        .
        .And at the HIGHEST 17 Trillion in Debt level Ever. (with no end in sight).
        .
        In 2013 it was estimated by Forbes that PER TAX PAYER the debt
        including unfunded programs is 1.1 MILLION per tax payer.
        .
        Efficiency has produced little if nothing, perhaps comfort for the wealthy
        .
        Low Oil will only result in MORE layoffs, how many thousands are being laid
        off right now,

        Some estimate low oil will result in a minimum of 20,000 layoffs by June 2015
        I bet the estimate is very low, and includes only the Oil companies,

        Is anyone saying Cheap Oil will increase employment 20,000 by June 2015 ?
        I have not read it. And that is a break even.
        .
        .

        • “As more and cheaper energy goes through the system LESS business
          and FEWER employees are needed. This is contrary to the premise that
          “As more energy flows through the system, increasingly specialized businesses are added.””

          I think the problem here is impatience; you want the people to be employed in totally new fields that don’t even exist yet, instantly. This is no different than when we went from ~90% of people working on farms, to ~50%, which lead to the industrial revolution. Those new factories did not spring into existence instantly.

          I think this is a huge problem with a lot of things, such as the price and supply of oil, or interest on debt, or anything; people expect instantaneous results, when there is in fact an amount of latency for effects to ripple through the system.

        • I agree that laid off workers are a real problem, as are a lack of jobs. When I mentioned more specialized businesses, I didn’t mean that was the only impact. Some of the more specialized businesses are the laid-off workers trying to sell something they make at home, for example.

          A big issue I see, and that you are pointing out here, is that people need to be the main focus, not businesses and not government. Somehow, the purpose of businesses has to be just as much to make jobs for people, as it is to make goods and services for people. (Of course, making this change won’t really save the economy from collapse.) The theory at one point was that new jobs would appear, to replace the old ones. The problem now with the new jobs that appear is that they are part-time minimum wage jobs that no one can live on.

  3. bwhill says:

    Hi Gail,

    I would like to add that there is an important concept that escapes most people. Most people normally equate energy, and work. They are not the same thing, although they are measured with the same units, such as BTU. Energy is a property of matter, it can be neither created nor destroyed. Work is not a property. Work is created when energy is transferred. That process ALWAYS results in losses. One BTU of energy never results in one BTU of work. It takes work (goods and services) to produce petroleum, and its products, not energy.

    We have put up a page that explains this important concept for petroleum production:

    http://www.thehillsgroup.org/depletion2_019.htm

    On average it takes 4.9 BTU from the well head in the form of energy from petroleum to put one BTU of work back into it. This is the reason that a small increase in the cost to produce petroleum has a large impact on the economy it is supporting. What we call high cost oil is in actuality low energy oil for the economy. A one dollar increase in the cost to extract petroleum takes almost $5 out of the non energy goods producing sector of the economy. Since the work to produce petroleum has been increasing since the first barrel was extracted, and will continue to increase, without rapidly growing production to compensate, its negative impact on the economy will continue to intensify.

    Nice article, thanks.

    BW Hill
    http://www.thehillsgroup.org/

    • Don Stewart says:

      ‘On average it takes 4.9 BTU from the well head in the form of energy from petroleum to put one BTU of work back into it. ‘

      Dear Mr. Hill
      I am not sure I understand that statement. Can you elaborate?
      Thanks….Don Stewart

      • bwhill says:

        Don Stewart says:

        “I am not sure I understand that statement. Can you elaborate?
        Thanks….Don Stewart”

        A gallon of 37.5 API crude has an energy content (exergy) of 140,000 BTU (5.88 million per barrel). Because petroleum is used primarily as an energy source it must be able to supply enough energy to power its own extraction, otherwise it would be an energy sink, and not of much value. To use that energy it must be converted to work; goods and services (drilling rigs, pumps, etc.) That conversion takes place with an efficiency of about 20%; which is similar to an internal combustion engine.

        When wells get deeper, water cut increases, and permeability declines it requires more work to extract the oil. When the work to extract it increases by one BTU, it takes 4.9 BTU of energy from the petroleum stream (the original 140,000 BTU/gal) because of the efficiency of the conversion. The oil has less value to the economy on a 1:4.9 ratio. That is why many oils actually have very little value to the economy, such as shale. Shale wells are often very deep (up to 11,200 feet), and have very low permeability (close to zero).

        Factoring in the production of waste heat (that thermodynamics says is required to make the process go forward) brings the maximum energy that can be used to extract oil from the initial 140,000 BTU per gallon to about 20,000 BTU (840,000 per barrel). That is very close to what many high production cost oils are now requiring for extraction.

        Our site has many pages dedicated to explaining this phenomena, and many graphs. Oil production is primarily an energy production process, and is only indirectly related to the volumetric quantities that are produced. The value of a barrel of oil is the result of the energy it delivers to the economy. The relationship between energy, and volume changes with time, production costs, and the increasing difficulty of extracting it.

        http://www.thehillsgroup.org/

        • Don Stewart says:

          Dear Mr. Hill
          Thanks for your response.

          ‘Factoring in the production of waste heat (that thermodynamics says is required to make the process go forward) brings the maximum energy that can be used to extract oil from the initial 140,000 BTU per gallon to about 20,000 BTU (840,000 per barrel). That is very close to what many high production cost oils are now requiring for extraction.’

          Is the end product that you are calculating relative to directly useful? Is it gasoline at the pump, including the cost of processing the credit card? Does it include the cost of the car? …In other words, I am trying to figure out where the boundary is in your analysis.

          If it is petroleum products at the refinery gate, then there is generally another ‘trophic level’ before a human gets any benefit. For example, diesel fuel has to be used to drive a tractor or power a truck or shovel. If so, that would seem to make the whole enterprise very shaky.

          A similar set of choices of boundaries applies to food. On farm food production is pretty fuel efficient. But once the food leaves the farm, the real fun with fuels begins as the food is sliced and diced and delivered and refrigerated and cooked and the net result is 10 calories consumed by the system for every dietary calorie delivered.

          If your boundary is the refinery gate, and we try to add on to that the industrial food system, it seems that we are definitely in trouble.

          Am I thinking about this the right way?

          Thanks…Don Stewart

        • garand555 says:

          Let me see if I understand this in simplistic terms:

          To drill a well, you have to do work. That work is breaking up and moving dirt and rock. You are saying that, for every joule work done of moving dirt and rock out of the way, 3.9 joules are wasted, i.e. one joule of work done plus 3.9 joules of wasted energy equals 4.9 joules of energy expended for every joule’s worth of dirt and rock moved?

        • I agree that it is a good point that you don’t get to really use all of the oil, because of the oil used in the process. The statement gets to be less true, if it is possible to substitute less valuable products like natural gas, coal or even nuclear energy for providing the energy used in extraction.

          It sounds like you are doing something fairly different from the standard EROEI analysis however. Wikipedia says that the EROEI of Shale oil is 5, and shows a chart of Hall and Murphy that seems to be similar. This analysis would suggest that out of 6 barrels extracted, 1 goes to the process of extraction while 5 goes to the end user. Thus, 1/6 (or 17%) of the energy (not necessarily oil) goes to extraction. You are saying something fairly different–something equivalent to 100% of the energy is used for extraction. That is quite different. What exactly is the difference? Are you saying that Hall and Murphy our leaving out the energy conversion loss?

          For what it is worth, I calculated Saudi Arabia’s (oil and natural gas consumption) as a percentage of its (oil and natural gas production) based on BP data for 2013. The numbers suggested that Saudi Arabia is using about 36% of its own oil and natural gas to service its entire economy. It is not clear that there is much purpose for the economy, apart from oil extraction and keeping the rest of the population pacified. In the 1974-1977 period, about 6% of the oil and gas production was used internally.

          • bwhill says:

            Gail says:

            Wikipedia says that the EROEI of Shale oil is 5, and shows a chart of Hall and Murphy that seems to be similar. This analysis would suggest that out of 6 barrels extracted, 1 goes to the process of extraction while 5 goes to the end user.

            The Etp model produces Total Production Energy values. That includes extraction, processing, and distribution energy cost. The EIA has stated that refining energy cost is equal to 16,300 BTU/ dollar of finished product. That comes out very close to what we have determined. Using a wholesale weighted average price for finished products for 2010 gives about $3.00/gal, or 48,900 BTU/gal.

            Using Hall’s ERoEI of 5:1:
            Extraction……….28,000 BTU/gal
            Processing……..48,900
            Distribution……..6,500 (based on $40/barrel)

            Total………………83,400 BTU/gal

            Waste heat at 29% (minimum) = 40,600 BTU/gal

            Based on a 140,000 BTU/gal (API 37.5) leaves 16,000 BTU/gal of usable energy for the end consumer.

            LTO is lighter oil than conventional, so its energy content (exergy) is lower. This is shown in Graph# 20:

            http://www.thehillsgroup.org/depletion2_011.htm

            LTO is at best a very feeble energy source; at worst it is negative.

            http://www.thehillsgroup.org/

            • If you are using EROEI and ETP, are you not at risk of double counting some of the losses?

              Also, it seems counting refining loses in BTU per dollar would give highly variable results, based on gasoline prices? Why not refining cost in BTU per barrel?

            • I would agree that EROEI really needs to be adjusted for processing and distribution costs. It has always struck me strange that it was not so adjusted–especially when so many talk about “Net Energy” as the amount that is left afterward, without understanding what part of the costs that are omitted. EROEI is “wellhead” costs, so excludes nearly all processing costs and all distribution costs.

              It would seem like whether or not you need to gross up for waste heat would depend on how the amounts you are working with are calculated. I know when I saw an oil platform in operation, the energy used was electricity, but it was from the natural gas extracted as a co-product with oil. Presumably, the calculation would take the amount of natural gas fed into the operation, not the amount of electricity coming out of the operation. I also know that all of the hydroelectric, nuclear, and solar amounts provided by the EIA and BP in their reports are “grossed up” amounts–amounts of fossil fuel that would need to be burned, to produce the given amount of electricity. On the other hand, refineries use huge amounts of electricity from the grid. I don’t know how the EIA treats that — as a “grossed up” amount or just the energy seemingly provided. My first guess is that they would provide grossed up numbers, but I don’t know.

              One piece that you may not have thought about is the fact that a lot of the energy used in refineries is really natural gas used in the process of “cracking” the very long hydrocarbons of very heavy oil, such as bitumen from Canada. That natural gas isn’t really burned, as I understand it, so there would be no point to “grossing it up.” Such energy wouldn’t be involved in processing LTO. (That is why heavy oil trades at much lower prices than lighter oil–the cost of refining is much higher.) The US has an advantage over other countries on the cheap cost of natural gas, which is why we do so much refining of heavy oil in the United States. Of course, transportation energy of oil from shale formations is much higher, because they use rail transport so heavily.

              Apart from the issue of exactly what Extraction, Processing and Distribution costs are, and whether they need to be grossed up or not, my other gripes about EROEI amounts are

              1. They don’t include an allowance for government operations needed to support the endeavor. Clearly roads need to be repaired, and other government services need to be considered. In the Middle East, these costs are very high. Governments used to collect royalties “in kind”–just take some of the fuel off of the “top,” as payments

              2. They don’t consider an allowance for the return on investment needed to support this operation. Arguably, part of this return is a return on debt. Thanks to government intervention, this rate is very low. But there also needs to be a return on equity. And this return on equity needs to run for the entire period where equity investment is needed–from the time the land is leased, to the time extraction is completed. It would depend on the length of time funds are tied up–currently EROEI calculations don’t reflect this difference. If anyone expects EROEI to distinguish among different energy products, at a minimum EROEI calculations need to distinguish “quick-in; quick out” products from ones which require a long-term investment in capital. If the return is zero, investors will quit.

              I know the EROEI folks say something like “We need a minimum EROEI of at least 10” or some other number. But I think that information gets lost on a lot of readers. Also, that minimum is very different for different energy products, something else that gets missed.

            • Don Stewart says:

              Dear Gail
              Mr. Hill will correct me if I misinterpret their model.

              The EROEI people are fond of the ‘waterfall chart’ which shows that the net energy available descends with increasing speed as the ratio approaches 1 to 1. They then tack on the notion that we need at least 5 to 1 or 8 to 1 or 10 to 1 or something. However, the Hill’s Group model uses a fully loaded cost of production, due to the way the core equation was estimated. So Hill’s Group graphs will show an approach to zero in a much nearer time frame than most EROEI based charts.

              In fact, the way I read them, the Hill’s Group charts indicate that new oil supplies became uneconomic in 2012. The big expansion in tar sands and shale was a bubble which is not sustainable in the absence of extraordinary interventions.

              In short, ‘new oil’ is already in the rearview mirror. Which has implications for things like E&P and oil field services and financial investing by those desperately seeking non-zero returns. It also means that the market value of oil producers (including, perhaps, countries such as Saudi Arabia) should be the monetary value of the current assets as a rapidly depreciating quantity. In addition, there are non-linear effects because consumers incomes will be simultaneously falling…which leads to predictions of falling oil prices. I am not sure I can visualize all those non-linearities without getting into the equations and fooling around with them a la Limits to Growth.

              In short, what would a Limits to Growth model for an oil company look like? What parallel Limits to Consumption model would be applicable to consumers? Can we make a Limits to Financialization model?

              Don Stewart

      • bwhill says:

        Don Stewart asks

        Is the end product that you are calculating relative to directly useful? Is it gasoline at the pump, including the cost of processing the credit card?

        The Etp model gives the Total Production Energy. That is, the energy to extract, process, and distribute a unit (gallon, barrel) of oil. That would be the total energy required to deliver the finished product to the end consumer.

        To calculate this directly would be impossible, there would literally be an almost unlimited number of places for that energy to go. Like you said, “the energy to process the credit card”, or how about the gas that the rough neck put in his pickup to drive out to the drilling site. These all represent energy cost for that production cycle, and must be included.

        To project onto your next question, how do we test such a determination? We have used several methods to test the models output. I’ll refer to two of them here:

        Like we explain in The Study Overview at the site, the only data set that we can be almost 100% sure is correct is the historic price of petroleum. Energy is obviously an essential component of the economy, so it must have an intrinsic dollar value. Solving the Etp equation for the price of petroleum (WTI as reported by the EIA) produces this graph:

        http://www.thehillsgroup.org/depletion2_010.htm

        The black curve is the equation derived, and the dots are the actual prices reported. The curve was “not” derived by doing a best fit to the data. It was derived directly from the Etp function. In our report “Depletion: A determination for the world’s petroleum reserve” we describe how that was accomplished.

        The second method we use to test the model, and produce values is by using a BTU/$ approach. The EIA , and the World Bank report on total world energy production, and world GDP. Graph# 12 is a plot of their data:

        http://www.thehillsgroup.org/depletion2_008.htm

        What this graph gives is gross energy in dollar terms. It does not take into consideration the energy it takes to produce energy. This method has some limitations because it assumes that all energy sources must in $ terms be equivalent. On small value items this may not be true, but on large $ expenses it appears to hold fairly well. The reason is that to be a marketable commodity any energy source must be competitive with other energy sources. If not, the producer would be better off financially buying its energy for production from other sources. We see this in the purchase of natural gas to refine petroleum. The quantity of NG purchased by the refining industry goes up, and down with the price of NG.

        The BTU/$ approach has its limitations, but overall it works reasonably well. It correlates the price of petroleum to what the Etp model predicts quit closely. It is also useful to test claims that are often made by others. There was a recent quote that NG had an ERoEI of 70:1. A quick calculation using the BTU/$ approach shows that NG would have to be selling for about $0.20/MMcuft for such a claim to be accurate. A new Volt is about $38,000.00. From Graph# 12 for 2015 it takes 5,632 BTU to generate $1 in goods in services. The energy equivalent in oil is about 36 barrels. To replace 2 billion ICs with EVs is not likely to happen. It would take over 3 years of total world petroleum production to do it.

        Like the Etp model the BTU/$ method gives all energy needed to produce goods and services. This includes what we call “societal costs”: roads, military, judicial, regulation, and all the cost associated with producing goods and services. Societal costs can be very high. It even includes the shoe leather the rough neck scrapped off while drilling the last well they worked on! Calculating direct producer costs is another kettle of fish, and will have to wait for another day. This post is getting too long as it is.

        http://www.thehillsgroup.org/

        • Don Stewart says:

          Dear Mr. Hill
          Profuse thank yous for your generous donation of time in answering.

          One more question, if this isn’t overkill. You say:
          ‘by 2010 a dollar would only have bought 6,946 BTU’

          Could you use the curve to figure out how much oil has been promised for future delivery in terms of formal debt, and for the sum of formal debt and unfunded liabilities? Or, looked at from the other angle, how much oil will one get when the debt or promise is paid?

          It seems as if the answer to the first question must be somewhere around a thousand BTUs, and the second is a curve which declines to zero by 2030. Is this a valid way of using the model?

          Thanks…Don Stewart

          • bwhill says:

            Don Stewart says:

            Or, looked at from the other angle, how much oil will one get when the debt or promise is paid?

            This is an intuitively very good question, and goes to the heart of the problem of credit formation surrounding petroleum production. As a hypothetical example: lets say a producer in Oklahoma drilled a 4000 foot well in 1980 that produced X barrels per day. In 2012 the same producers drilled another 4000 foot well that produced X barrels per day. Now, it probably took as much energy in 2012 to drill a 4000 foot well as it did in 1980. In 1980 the producer was getting 31,227 BTU for a dollar, in 2012 they were getting 6,380 BTU for a dollar. In terms of energy the cost of the two wells was the same. In dollar terms it increased by 4.9 times.

            The driller of the well has to pay interest on that money, either to the financier, or through loss of opportunity cost if self financed. The driller is only getting X barrels per day. If interest rates do not decline, in 2012 they would have been paying 4.9 times as much per barrel for the use of that money than they did in 1980. A declining BTU/$ value almost assures that interest rates will decline, or the end consumer will soon find that they can not afford oil. Because oil is a foundational commodity (you can not run our present civilization without it) things start getting messed up in the financial system when interest rates hit zero.

            To answer your original question, “how much oil does one get when a future note comes due”? Is it equal to what the principal face value of the note would have bought at the time of issuance? The example above indicates that it would only be equal if the interest rates decline. Because of ZIRP, we are now in the situation were the buyer of oil is getting priced out of the market. This page at our site demonstrates what is happening:

            http://www.thehillsgroup.org/depletion2_022.htm

            The values from the page above were calculated from the energy dynamics of petroleum production (the Etp model) and the BTU/$ function. It should be possible to demonstrate this from an economic perspective (although we have not done that).

            http://www.thehillsgroup.org/

            • The amount of debt that is borrowed at the time oil is extracted is a lot more than the debt borrowed by the oil company. The vast majority is borrowed by consumers and businesses for other purposes. For example, a lot of people working on oil extraction in Norway went out and bought fancy houses and boats, using their income from oil extraction as the basis for their house and boat loans. And then the oil use used to build cars, people in the countries where the cars were purchased used debt to purchase them as well. The question becomes: how are all of those debt going to be paid back? Aren’t there going to be a lot of defaults because Norwegian engineers will never get their jobs back (and unemployment insurance not be enough to cover their loans)? The issues is not just the rate of interest–it is the ability to repay the principle as well.

              To “work,” the system needs to operate in a mode of economic growth. If one country is down, and everyone else is up, perhaps this can be tolerated. But economic contraction for very long tends to bring the system down.

        • bwhill says:

          Matthew Krajcik says:

          Also, it seems counting refining loses in BTU per dollar would give highly variable results, based on gasoline prices? Why not refining cost in BTU per barrel?

          Hi Matthew,

          The values are calculated from the Etp model, but we try to use high quality data sources to confirm the results any time it is possible. The EIA is one of the best available. One of the weak points of the model is that it gives “Total Production Energy”. One number without splitting that into extraction, processing, and distribution. We have to use a lot of numerical analysis to come up with the individual energy cost breakdown. The model itself is based on a fundamental thermodynamic equation, “The entropy rate balance equation for control volumes”. It has been tested extensively against several high quality data sets. So we trust it. The numerical analysis – not so much.

          For instance, in the example above, which uses the 16,300 BTU/ $ of finished product from the EIA, processing and distribution (48,900 + 6,500) equals 55,400 BTU/gal. The model’s output is 53,458 BTU/gal. A 3.5% margin of error.

          When using the hybrid method (the model and the BTU/$ method) there is always the danger of double counting. We have built up a large enough set of tested cases to use as a baseline. That gives data points to refer to after doing a calculation. It is a matter of doing a lot of checking to see if the result makes sense. The BTU/$ approach is using gross energy figures, but many calculations require the energy determination after waste heat has been subtracted. That is were you have to be really careful not to double count. One side of the equation is gross energy, and the other is net after the waste value has been subtracted. You do those several times to make sure it is right!

          Hope that answers your question?

          http://www.thehillsgroup.org/

    • I know that when you get mechanical/electrical energy by burning a fuel, you get heat energy as well. We have decided in this country to treat the heat energy as waste. In some countries (like Sweden and Russia) there is a real attempt at cogeneration. We have said “no” to this–it creates a natural monopoly. So in this country, the heat by-product is waste.

      In fact, the major type of energy that has been needed in most economies in the past is heat energy. Look at my Figure 4. Heat is what is used to break chemical bonds. It is used in smelting, baking, heating homes and businesses, and to run turbines to generate electricity. “Waste” heat from my ICE is what keeps my automobile warm in winter.

      Now, the current fad seems to be to work backward–generate electrical energy using wind or solar, when very often what we need is heat for someone’s apartment, or to heat a frying pan. Electricity is more convenient to transport, I suppose. But it seems like a waste to me. Instead of putting solar PV panels on the roof, the person would be better off using a solar reflecting oven, or even burning some wood.

      The market price brings all of these things together in my mind. I don’t find discussing these things very enlightening to readers who aren’t engineers. We rarely use oil to make electricity, so that isn’t an issue. We use oil where another less expensive fuel doesn’t work well, whether or not there is theoretical waste in the process.

      • Jan Steinman says:

        “Now, the current fad seems to be to work backward–generate electrical energy using wind or solar, when very often what we need is heat for someone’s apartment, or to heat a frying pan.”

        HT Odum would say that electricity is a form of energy with “high transformity,” meaning it contains a lot of embedded energy. You only get about 35% of the energy out of coal, and you lose another 10% in transmission losses, so watt for watt, electricity is “worth” about four times as much as coal.

        So yes, it does seem like a stupid waste to heat things with electricity. In the Pacific Northwest, we built big dams and had very cheap electricity, which caused us to be wasteful.

        And yet, it’s so convenient! I’m heating seed trays with electricity right now. How difficult it would be to heat seed trays by most other means! I want to take a stab at heating them with compost heat one of these days.

        • Don Stewart says:

          Jan
          It’s rather humbling to me to look at what the French market gardeners were able to accomplish, without electricity or plastic or refrigeration. You note the convenience. It would be hard for most of us to go back to doing things the old ways.

          Don Stewart

        • Electricity is convenient, but it is another one of the things at the “top of the mountain” of complexity that we have put together. Grid electricity is likely to be fairly early to become unavailable. It was late to be added, especially for farm families. Even today, many people in India and Africa do not have access to grid electricity.

          Oil is more portable. It is easier to use without a huge system being in place. I listen to my parents’ stories, and it becomes apparent that their parents had access to oil, but not electricity, for quite a while. When they did get electricity, it was powered by batteries, and hooked up to a few light bulbs. My mother talks about a gasoline powered clothes washer.

          There is a popular story being passed around, saying that we will have electricity in the future, but oil will be very expensive. I see this story as basically untrue. Electricity may be available, if you personally have figured out a way to assure the production and storage of electricity. Even then, it only works until something in the system “breaks” (such as the inverter, or back up batteries) and cannot be replaced. Oil is likely to be unavailable (just like grid electricity). So it is not a cheapness/expense issue.

        • garand555 says:

          There will always be waste heat when you burn things to do work. A lot of it. No matter what gizmos you hook up to capture that energy, some of it will be bled off to the world as heat. If you can generate some electricity, then use the waste heat to heat some homes, you are probably doing very well.

      • bwhill says:

        Gail said:

        I know that when you get mechanical/electrical energy by burning a fuel, you get heat energy as well. We have decided in this country to treat the heat energy as waste.

        Hi Gail,

        I think you are confusing heat that is wasted, with “waste heat”. And yes, we could certainly go a long way to eliminating our ongoing energy crisis by capturing the heat that we are now just dumping into the atmosphere. I’ve never done any calculations on that subject, but I would imagine that it is quads of BTU (10^15) per year.

        “Waste heat” is a term out of thermodynamics. It refers to the heat remaining in the combustion products after you have reduced their temperature to that of the environment (assumed to be 77 deg F). At that point there is no way of using it to produce “work”. The quantity of waste heat produced is a function of the combustion equations, and depends on the temperature that combustion takes place at. For example: 37.5 API crude must produce at least 29% waste heat for the combustion process to occur. Natural gasoline, or pentane (C5H12, API 93.5) another liquid hydrocarbon must lose 43% of its energy content during the combustion process.

        Thermodynamics is a very difficult subject because many of the concepts it uses have no representative mental picture associated with them. The classic example is entropy. There is no way to build a picture of entropy in your mind. I have been using it in engineering calculations for more decades than I want to admit, but I can’t honestly say that I can see a picture of it. You learn it by using it.

        Of course, this makes explaining our precarious situation to others very difficult. To understand it requires concepts that can only be alluded to, but they are very important, if not critical! So thanks for your insistent day after day pounding. If only 3% of the population come to terms with our predicament we may, yet, avoid one mighty bad train wreck.

        http://www.thehillsgroup.org/

        • TomTomson says:

          I absolutely love your hompeage and enjoy your posts here and on other forums/blogs. Thanks for the good work. Keep it up 😉 .
          One example we had in the first engineering classes on thermodynamiks to approach entropy was baking a cake. First you have the ingredients seperated then you put them together and into the oven. When the cake is ready try to get all your former ingredients back out of it in a seperated way. There you have some aspect of entropy.
          I know that this is pretty simplistic, but it helps to imagine entropy during the process for all those who had no contact with engineering/ physics and so forth. (Entropy As a measure of disorder)

          I also enjoy your work Gail. Your research is done very well. Especially connecting finance with our energy predicaments is something the most people can not do very well because they specialize to much on one or the other.

          (Maybe your understanding of climate change/science needs some refinement, but that does not matter very much, because our energy and finance predicament will very likely be the first in row to fell industrial civilisation. )

          “….we are marching towards extinction, with blinders on our eyes…” For all the punk fans out there.

  4. Cal Abel says:

    Gail,

    Wonderful post. A few years ago I was working on modeling oil production only as a function of price, but ran into a problem, the price and the volumetric flowrate of oil didn’t correlate well in my model. I tried normalizing to gold, GDP, CPI and non of those worked. After reading the work of Benjamin Ayers and Robert Warr, and doing some of my own work over at http://statisticaleconomics.org I developed a measure of marginal utility of a currency by determining the amount of energy that can be bought by the currency. I call this the Energy Price Index. I use the data from EIA’s Monthly Energy Review with a little modification as the delivered nuclear fuel costs are no longer reported. When I applied the marginal utility of the dollar to the WTI price as a proxy for global production the model worked rather well.

    Where this gets interesting is when you apply the EPI to the Social Security Administration’s Average Wage Index. When we look at the distribution of wages and specifically the mean and variance of the log of the wages, we see a picture where the complexity of our economy should be growing (variance greater than 1) but since 1999 the mean wage adjusted by the EPI is declining. Curious I plotted the money supply (M2) vs the EPI (marginal utility of money) What I saw was the same powerlaw form as of a polytropic process. What this means is that the QE that has been ongoing since the dotcom bubble has been actively cooling the economy (reducing the average utility of our income).

    My understanding of debt is different. I see it as an expectation of the future path of an endeavor, The interest rate and terms dictate what the debtor thinks is the value of their share of the future of that endeavor.

    I disagree with the idea of high capital cost of energy production being the correct metric. The better metric is the delivered cost of exergy to the economy. If we lower the cost of delivered exergy and increase the supply of available exergy then that is how we achieve growth. Don’t discount nuclear so quickly, much of the cost is tied up in dealing with a regulator that has unlimited regulatory warrant, predicated on the false hypothesis of Linear no threshold. But that is a different topic for another day.

    • Thanks for your thoughts on the subject. I would be interested in seeing a copy of your work on EPI and wages if it is available. An Internet link would be ideal. Otherwise, an e-mail to GailTverberg at comcast dot net would work.

      I think debt can have multiple conflicting definitions. The reason we encounter a problem is because the expectation of the future path of the endeavor is not correct in a finite world–it is invariably too optimistic. There is no real tie with the underlying resources, the cost of extracting these resources, and the ability of workers to pay for these high-cost resources, in their mix of goods they buy, which includes food and fuel.

      I have not studied the delivered cost of exergy. I think it is easy to forget that nuclear has its own challenges. Decommissioning cannot be done with electrical energy, as far as I can see. It needs oil products, given the machinery we have today. Also, high quality deposits of any mineral are limited in size. After that, we need to move on to smaller deposits in harder to access location, requiring more fuel products of the right type to access. Thus, the cost rises and our ability to actually keep the supply line working becomes increasingly difficult.

      There is also the theoretical alternative of getting a substantial part of the nuclear fuel back through reprocessing, but this involves building and maintaining plants, and the supply lines needed for this process, including the maintenance of roads. There is also the issue that many of our nuclear plants are already near the end of their working lifetimes. We will need oil to build new ones–we don’t have machinery using electricity that do this. We need many supply lines to be in place to build these new plants. One of these is the continued education of engineers who can build nuclear power plants. I don’t believe exergy measures this kind of energy. It is measured by Howard Odum’s transformities, however.

      We can think of technologies of increasing complexity as forming a mountain. In this mountain, nuclear energy is near the top. It is easy to say–this is very efficient–Let’s just use nuclear power (or LED light bulbs, or electric cars). What we forget is that we need the whole mountain of the rest of the economy, including the continued functioning of our banks and the continued functioning of oil supply, to actually make these products. They look like salvation, but they really aren’t.

    • bwhill says:

      Cal Abel says:

      Hi Cal,

      The problem with correlation between price, and quantity is that you are probably trying to use the production rate (barrel per year). If you use the accumulated production as reported by the EIA you will find an excellent correlation with an exponential function. That is, use the CDF and not the PDF (Hubberts curve) of the distribution.

      If you go to our site, and look at study graphs you’ll find a family of accumulated production curves by pulling up Graph# 4 (Cumulative Production Family vs Time) under Study Graphs. In the report we used them to calculate URR of C+C by a best fit method to the EIA data set. It come out to 2286 Gb.

      The curves are actually logistic curves, but an exponential curve fits very well to the price data set, and we show an example in Graph# 17:

      http://www.thehillsgroup.org/depletion2_010.htm

      We calculated this from the energy dynamics of the process. From an economic perspective the reason that the accumulated distribution works, and the production rate doesn’t is probably because the accumulated distribution accounts for capital formation in the process. However, we will leave that to someone like Gail to figure out.

      http://www.thehillsgroup.org/

  5. Pingback: Uma nova teoria de Energia e Economia, por Gail Tverberg | Haraquiri - mostrando as entranhas

  6. Pingback: A new theory of energy and the economy – Part 1 – Generating economic growth | Зеленое будущее

  7. You talk about shoes. Have you heard about the new “Shoe City” the Chinese are building in Ethiopia: http://www.doorsofperception.com/development-design/shoe-city-vs-sole-rebels-2/

    It’s a very strange world. 100 years ago shoes were made locally, now soon all shoes are made in Ethiopia! And when the economy collapses, nobody will know how to make shoes anymore. Not even the Ethiopians, as they just operate the machines for the Chinese.

    • Interesting point!

      I might mention that the need for shoes is much greater in cold parts of the world than in warm parts of the world. In warm parts of the world, it is often possible to go barefoot comfortably, unless a person is trying to, say, traverse hot sand or rocks. Even then, sandals will provide adequate protection. These can be made very simply.

      In cold parts of the world, protection from the cold is needed. This is very difficult to obtain. I know when we visited a place in Norway where living conditions of the period around 1100 were reproduced, one issue the guide mentioned was the virtual impossibility of keeping feet warm enough in the winter, when working outside. This seems to have been a source of foot problems. I suppose one response would be to stay inside as much as possible during winter. Any kind of enclosure would help keep body heat inside.

      • Yes, it’s going to become a lot different! Here is snowing a lot for the time, but I note people don’t even care to cover their cars or take of the snow. They just start the diesel heater one hour before they leave with the remote control from inside home, simply letting the snow and ice covering their cars melt away. So when they leave the house the temperature inside the car is already 25 warm degree.

        Some people live in a temperature bobble all winter, living in hot homes, always entering a hot car, doing their shopping in a shopping mall and so on. And soon they’ll not even have shoes. How can they survive?

        • You have identified the problem. It is hard to come up with an answer.

        • TomTomson says:

          They wont. It is that simple.
          Also humans will not and can not go back to living arrangements comparable to the 1600,1700 1800 or any other period. Too much people with too much skills which are not remotely close to being necessary for survival. ( myself included, as an engineer who works in software development and research).too much built infrastructure, too much waste, too little wild life left, too much nuclear power plants, too much faith in human ingenuity and or politics. And so forth.

          Think about everything you do during the every day life. How will you do one of these tasks without industrial civilisation? brushing your teeth in the morning, driving to work, cooking your food, buying some clothes, work at most workplaces itself, commenting on a blog 😉 and what have you…

          Some people managed to live a life which is less dependend on industrial civilisation. And some people are not embedded in the system at all. ( very few, mind you)But this lifestyle for 7 billion people affords some very tough shifts in perception of the human endaevour and the perception of our selves and our relation to nature and so on. And i can not imagine that this will happen on an instant. Also it may not be possible to feed so much people without indsutrial agriculture and with all the depleted soils and aquifers…

          In addition climate change, the accomponying 6th mass extinction and the polluted environment may cause the extinction of most of complex life forma on earth in this century or the next. (Humans included) the collapse of all financial institutions and all possible outcomes from rearranging society and economics to full blown thermonuclear war may or may not accelerate this. But i doubt that we are going to beat the laws of physics this time around…

          • “Also humans will not and can not go back to living arrangements comparable to the 1600,1700 1800 or any other period. ”

            Those who survive, must. It will probably not be anywhere near 7 billion, maybe closer to 100 million.

            “Think about everything you do during the every day life. How will you do one of these tasks without industrial civilisation?”

            You won’t. Those who survive will have very different lives compared to modern western lifestyles.

        • richard says:

          How can they survive? [barefoot in winter]
          We have, on average, 17 days of frost here. Long before our time, a local historian went without shoes for the winter to be able to afford the cost of paper to record the history of this town. So, while that may seem exceptional to us, physically, it cannot ne ruled out.

  8. @Matthew, maybe because the process was much slower back then? The rapid increase in methane release now is anyway a fact. Nobody knows all the variables, but why take the chance?

    For my part I hope start making biochar in some years. If you don’t want to take this chance, make biochar!

  9. It’ a consumption based economy, not a lot different from yeast in a vat of sugar. You grow until you run out of sugar, then you die off until there are only so many yeast cells as can consume sugar produced by other photosynthetic organisms daily.

    Once the stored energy is depleted down to the extent it cannot be drawn up with less energy than it takes to draw it up, then you survive only on what is available on a pay as you go basis. Very simple really.

    The only real question is how rapidly the demand destruction occurs, and whether that is more rapid than the resource depletion. The demand destruction comes first from the current population using less per capita energy, then after that comes from fewer humans consuming the energy.

    RE

    • step back says:

      RE:
      I think we are more like a beehive than a Petri dish full of yeast.
      In the Petri dish, each yeast cell fends for itself.
      In the beehive, the 99% work for the 1% (the Queen)
      and they all depend on a nearby field providing sufficient resources (nectar).

      I hope you do a podcast on your Doom Diner site about this topic.

      • It’s a good topic, but to do a good show with it I need a few people who can chat from this perspective.

        I’m planning a 3rd Anniversary Vidcast for mid-February. Maybe able to look at this topic then depending who shows up.

        RE

    • Maybe so. I think pollution plays a role too, both in the case of yeast, and in the case of human populations. We don’t always know what the pollution is. We hear about the lead drinking containers in ancient Rome causing lead poisoning. Someone examining our civilization a thousand year from now may talk about plastics poisoning our environment, or the use of herbicides and pesticides on food, or a whole list of other things (mercury, lead, prescription pills in drinking water, hormones in meat, materials in land fills, materials collected in filters from coal fired power plants, food coloring in grocery products, etc.)

      • step back says:

        Gail,
        I fully agree.
        We humans are way too certain that all the synthetic chemicals we expose ourselves to (Bis-PA?) are harmless. And yet we have a marked rise in cancers and autism.

        But all that aside, the human economy is not a homogenous Petri dish of yeast but more akin to parasitic sub-populations, one exploiting the next; each making “promises” (a.k.a. debt obligations) one to the next one the assumption that energy and other resources for fulfilling those promises will forever be there.

        In other words, ha ha; the Stone Age didn’t end because “we” ran out of stones and the digital age will not run out because we will always be able to make more bits.

        • “In other words, ha ha; the Stone Age didn’t end because “we” ran out of stones and the digital age will not run out because we will always be able to make more bits.”

          What? The Stone Age “ended” because people were able to make tools out of bronze. The Bronze Age “ended” not because people stopped making Bronze, but because they were then able to mass produce Iron goods in greater quantities at lower prices. Not at all related to resource depletion; in fact, all the the ages are the exact opposite of running out, but instead moving to the next level of exponential growth.

          • step back says:

            MK,
            Of course in your jest you are correct.
            We do not have to worry about “running out” because over the last 4000 years
            we have been filling her up.

            Her being the atmosphere and the thing we fill her up with is our waste products, primarily CO2. We will choke in our waste product long before we “run out”.

            Good point.

          • See my comment to Step Back.

        • What people miss is that the system will end because the debt system can’t be serviced; there are just too many demands on wages to keep up the price of fuels; consumers have too little funds left to repay debt with interest; investors discover that the projects available with today’s high cost of energy have a negative return, when all costs are included.

      • A good thing is that if there are survivors their societies must become more interwoven with the natural world, not producing as much pollution and waste:

        “While it is therefore wrong to set natural and engineered systems on opposite sides of a spectrum, there are nevertheless important differences. Nielsen and Müller (2009) argue that in natural systems, the cycles are local, decentralized and develop towards being increasingly closed with decreasing emissions and waste as a consequence. In engineered systems, however, the cycles are increasingly global, transport-intensive and have evolved to be open with increasing emissions and waste as a consequence.”

        http://www.paecon.net/PAEReview/issue68/RammeltCrisp68.pdf

        “When the needs of a system cannot be met from within itself, we pay the price in energy and pollution.” – Bill Mollison

        • Pollution and waste are the flip side of energy use. We are constantly using more materials from lower grade ores. There is huge energy cost associated with attempting to recycle.

          In some sense, concentrated ores of minerals of any kind, not just fossil fuels, are one-time gifts. We have been dissipating these one-time gifts; this dissipation is another face of our problem with diminishing returns.

          The idea that we can use less is an attractive one, but the way that complexity works, and the way our networked system works, it is very doubtful that we can. It looks like the financial system collapses instead, bringing down the whole economy.

          • James says:

            Further, the idea that “we can just use less” is always predicated on the basic supposition that we have plenty in the first place. Replace “plenty” with “not enough” and the idea of using less becomes much less palatable. Amazing that so many of us still can not see that.

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