Overly Simple Energy-Economy Models Give Misleading Answers

Does it make a difference if our models of energy and the economy are overly simple? I would argue that it depends on what we plan to use the models for. If all we want to do is determine approximately how many years in the future energy supplies will turn down, then a simple model is perfectly sufficient. But if we want to determine how we might change the current economy to make it hold up better against the forces it is facing, we need a more complex model that explains the economy’s real problems as we reach limits. We need a model that tells the correct shape of the curve, as well as the approximate timing. I suggest reading my recent post regarding complexity and its effects as background for this post.

The common lay interpretation of simple models is that running out of energy supplies can be expected to be our overwhelming problem in the future. A more complete model suggests that our problems as we approach limits are likely to be quite different: growing wealth disparity, inability to maintain complex infrastructure, and growing debt problems. Energy supplies that look easy to extract will not, in fact, be available because prices will not rise high enough. These problems can be expected to change the shape of the curve of future energy consumption to one with a fairly fast decline, such as the Seneca Cliff.

Figure 5. Seneca Cliff by Ugo Bardi

Figure 1. Seneca Cliff by Ugo Bardi. This curve is based on writings in the 1st century C.E. by Lucius Anneaus Seneca, “It would be of some consolation for the feebleness of our selves and our works if all things should perish as slowly as they come into being; but as it is, increases are of sluggish growth, but the way to ruin is rapid.”

It is not intuitive, but complexity-related issues create a situation in which economies need to grow, or they will collapse. See my post, The Physics of Energy and the Economy. The popular idea that we extract 50% of a resource before peak, and 50% after peak will be found not to be true–much of the second 50% will stay in the ground.

Some readers may be interested in a new article that I assisted in writing, relating to the role that price plays in the quantity of oil extracted. The article is called, “An oil production forecast for China considering economic limits.”  This article has been published by the academic journal Energy, and is available as a free download for 50 days.

A Simple Model Works If All We Are Trying to Do Is Make a Rough Estimate of the Date of the Downturn

Are we like the team that Dennis Meadows headed up in the early 1970s, simply trying to make a ballpark estimate of when natural resource limits are going to become a severe problem? (This analysis is the basis of the 1972 book, Limits to Growth.) Or are we like M. King Hubbert, back in 1956, trying to warn citizens about energy problems in the fairly distant future? In the case of Hubbert and Meadows, all that was needed was a fairly simple model, telling roughly when the problem might hit, but not necessarily in what way.

I have criticized Hubbert’s model for being deficient in some major respects: leaving out complexity, leaving out entropy, and assuming a nearly unlimited supply of an alternate fuel. Perhaps these issues were not important, however, if all he was trying to do was warn people of a distant future issue.

Slide 29 from my complexity presentation at the Biophysical Economics Conference. Hubbert's model omitted complexity, entropy.

Figure 2. Slide 29 from my complexity presentation at the 2016 Biophysical Economics Conference. Hubbert’s model omitted complexity, entropy.

The model underlying the 1972 book, Limits to Growth, was also quite simple. Ugo Bardi has used this image by Magne Myrtveit to represent how the 1972 Limits to Growth model worked. It does not include a financial system or debt.

Figure 2. Image by Magne Myrtveit to summarize the main elements of the world model for Limits to Growth.

Figure 3. Image by Magne Myrtveit to summarize the main elements of the world model for Limits to Growth.

As such, this model does not reflect the major elements of complexity, which I summarized as follows in a recent post:

Figure 3. Slide 7 from my recent complexity presentation. Basic Elements of Complexity

Figure 4. Slide 7 from my recent complexity presentation. Basic Elements of Complexity

Thus, the model does not forecast the problems that can be expected to occur with increasingly hierarchical behavior, including the problems that people who are at the bottom of the hierarchy can be expected to have getting enough resources for basic functions of life. These issues are important, because people at the bottom of the hierarchy are very numerous. They need to be fed, clothed, housed, and have transportation to work. All of these things take natural resources, including energy products. If the benefit of available natural resources doesn’t make it all of the way down to the bottom of the hierarchy, death rates spike. This is one of the forces that can be expected to change the shape of the curve.

Slide 17. People at the bottom of a hierarchy are most vulnerable.

Figure 5. Slide 17 from my complexity presentation. People at the bottom of a hierarchy are most vulnerable.

Dennis Meadows does not claim that the model that his group put together will show anything useful about the “shape” of the collapse. In fact, in an article about a year ago, I cut off part of the well-known Limits to Growth forecast to eliminate the part that is likely not particularly helpful–it just shows what their simple model indicates.

Figure 4. Limits to Growth forecast, truncated shortly after production turns down, since modeled amounts are unreliable after that date.

Figure 6. Limits to Growth forecast, truncated shortly after production turns down, since modeled amounts are unreliable after that date.

Anthropologist Joseph Tainter’s View of Collapse

If we read what anthropologist Joseph Tainter says in his book, the Collapse of Complex Societies, we find that he doesn’t consider “running out” to be the cause of collapse. Instead, he sees growing complexity to be what leads an economy to collapse. These are two of the points Tainter makes regarding complexity:

  • Increased complexity carries with it increased energy costs per capita. In other words, increased complexity is itself a user of energy, and thus tends to drain away energy availability from other uses. Thus, in my opinion, complexity will make the system fail more quickly than the Hubbert model would suggest–the complexity part of the system will use part of the energy that the Hubbert model assumes will be available to fund the slow down slope of the economy.
  • Increased investment in complexity tends to reach declining marginal returns. For example, the first expressway added to a highway system adds more value than the 1000th one. Eventually, if countries are trying to create economic growth where little exists, governments may use debt to fund the building of expressways with practically no expected users, simply to add job opportunities.

Ugo Bardi quotes Joseph Tainter as saying,

“In ancient societies that I studied, for example the Roman Empire, the great problem that these economies faced was that they eventually would incur very high costs just to maintain the status quo. They would need to invest very high amounts to solve problems that didn’t yield a net positive return; instead these investments simply allowed the economies to maintain the level that they were at. This increasing cost of maintaining the status quo decreased the net benefit of being a complex society.” 

View of Collapse Based on a Modeling Approach 

In the book Secular Cycles, Peter Turchin and Surgey Nefedov approach the problem of what causes civilizations to collapse using a modeling approach. According to their analysis, the kinds of things that caused civilizations to collapse very much corresponded to the symptoms of increasing complexity:

  • Problems tended to develop when the population in an area outgrew its resource base–either the population rose too high, or the resources become degraded, or both. The leaders would adopt a plan, which we might consider adding “complexity,” to solve the problems. Such a plan might include raising taxes to be able to afford a bigger army, and using that army to invade another territory. Or it might involve a plan to build irrigation, so that the current land becomes more productive. A modern approach might be to increase tourism, so that the wealth obtained from tourists can be traded for needed resources such as food.
  • According to Turchin and Nefedov, one problem that arises with the adoption of the new plan is increased wealth disparity. More leaders are needed for the new complex solutions. At the same time, it becomes more difficult for those at the bottom of the hierarchy (such as new workers) to obtain adequate wages. Part of the problem is the underlying problem of too many people for the resources. Thus, for example, there is little need for new farmers, because there are already as many farmers as the land can accommodate. Another part of the problem is that an increasing share of the output of the economy is taken by people in the upper levels of the hierarchy, leaving little for low-ranking workers.
  • Food and other commodity prices may temporarily spike, but there is a limit to what workers can pay. Workers can only afford more, if they take on more debt.
  • Debt levels tend to rise, both because of the failing ability of workers to pay for their basic needs, and because governments need funding for their major projects.
  • Systems tend to collapse because governments cannot tax the workers sufficiently to meet their expanded needs. Also, low-ranking workers become susceptible to epidemics because they cannot obtain adequate nutrition with low wages and high taxes.

How Do We Fix an Overly Simple Model? 

The image shown in Figure 3 in some sense shows only one “layer” of our problem. There is also a financial layer to the system, which includes both debt levels and price levels. There are also some refinements needed to the system regarding who gets the benefit of energy products: Is it the elite of the system, or is it the non-elite workers? If the economy is not growing very quickly, one major problem is that the workers at the bottom of the hierarchy tend to get squeezed out.

Figure 7. Authors' depiction of changes to workers share of output of economy, as costs keep rising for other portions of the economy keep rising.

Figure 7. Author’s depiction of changes to non-elite workers’ share of the output of economy, as costs for other portions of the economy keep rising. The relative sizes of the various elements may not be correct; the purpose of this chart is to show a general idea, not actual amounts.

Briefly, we have several dynamics at work, pushing the economy toward collapse, rather than the resources simply “running out”:

  1. Debt tends to rise much faster than GDP, especially as increasing quantities of capital goods are added. Added debt tends to reach diminishing returns. As a result, it becomes increasingly difficult to repay debt with interest, creating a major problem for the financial system.
  2. The cost of resource extraction tends to rise because of diminishing returns. Wages, especially of non-elite workers, do not rise nearly as quickly. These workers cannot afford to buy nearly as many homes, cars, motorcycles, and other consumer goods. Without this demand for consumer goods made with natural resources, prices of many commodities are likely to fall below the cost of production. Or prices may rise, and then fall back, causing serious debt default problems for commodity producers.
  3. Because of growing complexity of the system, the “overhead” of the system (including educational costs, medical costs, the wages of managers, the cost of government programs, and the cost of resource extraction) tends to increase, leaving less for wages for the many non-elite workers of the world. With lower wages, the non-elite workers can afford less. This dynamic tends to push the system toward collapse as well.

The following is a list of variables that might be added to the overly simple model.

  • Debt. As capital goods are added to work around resource shortages, debt levels will tend to rise quickly, because workers need to be paid before the benefit of capital goods can be obtained. Debt levels also rise for other reasons, such as government spending without corresponding tax revenue, and funding of purchases deemed to have lasting value, such as college educations and investments in research and development.
  • Interest rates are the major approach that politicians have at their disposal to try to influence debt levels. In general, the lower the interest rate, the cheaper it is to buy cars, homes, and factories on credit. Thus, the amount of debt can be expected to rise as politicians lower interest rates.
  • Wages of non-elite workers. Non-elite workers play a dual role: (a) they are the primary creators of the goods and services of the system, and (b) they are the primary buyers of the goods that are made using commodities, such as food, clothing, homes, and transportation services. Thus, their wages tend to determine whether the economy can grow. In general, we would expect wages of workers to rise, if their wages are being supplemented by more and more fossil fuel energy in the form of bigger and better machinery to help the workers produce more goods and services. If the wages of non-elite workers fall too low, we would expect the economy to slow, and commodity prices to fall. To some extent, rising debt (through manipulation of interest rates, or through government spending in excess of tax revenue) can be used to supplement the wages of non-elite workers to allow the economy to continue to grow, even if wages are stagnating.
  • The affordable price level for commodities in the aggregate depends primarily on the wage level of non-elite workers and debt levels. A particular commodity may increase in price, but in the aggregate, the total “package” of costs represented by commodity prices must remain affordable, considering wage and debt levels of workers. If wage levels of non-elite workers are rising, the overall affordable price level of commodities will tend to rise. But if wage levels of non-elite workers are falling, or if debt levels are falling, affordable price levels are likely to fall.
  • The required price level for commodity production in the aggregate to continue to grow at the previous rate. This required price level will depend on many considerations, including: (a) the rising cost of extraction, considering the impacts of depletion, (b) wage levels, (c) tax requirements, and (d) other needs, including payment of interest and dividends, and required funding for new development. Clearly, if the affordable price level falls below the required price level for very long, we can eventually expect total commodity production to start falling, and the economy to contract.
  • The energy needs of the “overhead” of the system. Increasing complexity tends to make the overhead of the system grow much faster than the system as a whole. Energy products of various kinds are needed to support this growing overhead, leaving less for other purposes, such as to increasingly leverage the labor of human workers. Some examples of growing overhead of the system include energy needed (a) to maintain the electric grid, internet, roads, and pipeline systems; (b) to fight growing pollution problems; (c) to support education, healthcare, and financial systems needed to maintain an increasingly complex society; (d) to meet government promises for pensions and unemployment insurance; and (e) to cover the rising energy cost of extracting energy products, water, and metals.
  • Available energy supply based on momentum and previous price levels. A few examples explain this issue. If a large oil project was started ten years ago, it likely will be completed, whether or not the oil is needed now. Oil exporters will continue to pump oil, as long as the price available in the marketplace is above their cost of production, because their governments need at least some tax revenue to keep their economies from collapsing. Wind turbines and solar panels that have been built will continue to produce electricity at irregular intervals, whether or not the electric grid actually needs this electricity. Renewable energy mandates will continue to add more wind turbines and solar panels to the electric grid, whether or not this electricity is needed.
  • Energy that can actually be added to the system, based on what workers can afford, considering wages and debt levels [demand based energy]. Because matching of supply and demand takes place on a short-term basis (minute by minute for electricity), in theory we need a matrix of quantities of commodities of various types that can be purchased at various price levels for short time-periods, given actual wage and debt levels. For example, if more electricity is dumped on the electric grid than is needed, how much impact will a drop in prices have on the quantity of electricity that consumers are willing to buy? The intersections of supply and demand “curves” will determine both the price and quantity of energy added to the system.

The output of the model would be three different estimates of whether we are reaching collapse:

  1. An analysis of whether repayment of debt with interest is reaching limits.
  2. An analysis of whether affordable commodity prices are falling below the level needed for commodity consumption to grow, likely leading to falling future commodity production.
  3. An analysis of whether net energy per capita is falling. This would reflect a calculation of the following amount over time: Net energy per capita calculationIf net energy per capita is falling, the ability to leverage human labor is falling as well. Thus productivity of human workers is likely to stop growing, or perhaps decline. The total amount of goods and services produced is likely to plateau or fall, leading to stagnating or declining economic growth.

The important thing about the added pieces to this model is that they emphasize the one-way nature of the system. The economy needs to grow, or it collapses. The price of energy products cannot rise much at all, because wages of workers don’t rise correspondingly. This means that any energy substitute must be very cheap. The system needs to keep adding debt, especially when capital goods are added. The benefit of this debt reaches diminishing returns. The combination of these diminishing returns with respect to investments made with debt, and the interest that needs to be paid on debt, means that it is very difficult for energy products based on capital goods to “save” the system.

Complexity Adds Unforeseen Problems

One issue that people working solely in the energy sector may not notice is that our current system for setting market-based electricity prices is not working very well, with the addition of feed-in tariffs and other subsidy programs. There is evidence that subsidizing renewable electricity tends to lead to falling wholesale electricity prices. In a sense, if we subsidize electricity prices for one type of electricity producer, we find it also necessary to subsidize electricity prices for other types of electricity producers. (Also in California.)

Figure 8. Residential Electricity Prices in Europe, together with Germany spot wholesale price, from http://pfbach.dk/firma_pfb/references/pfb_towards_50_pct_wind_in_denmark_2016_03_30.pdf

Figure 8. Residential Electricity Prices in Europe, together with Germany spot wholesale price, from http://pfbach.dk/firma_pfb/references/pfb_towards_50_pct_wind_in_denmark_2016_03_30.pdf

Inadequate prices for electricity producers and a need for ever-rising subsidies for electricity production could, by themselves, cause the system to fail. In a sense, this pricing problem is a complexity-related outcome that economists have overlooked. Their models are also too simple!


It is easy to rely on too-simple models. Perhaps the biggest issue that is missed is that energy prices can’t rise endlessly. Because of this, a large share of natural resources, including oil and other energy products, will be left in the ground. Furthermore, because prices do not rise very high, energy products that are expensive to produce can’t be expected to work, either, no matter how they are disguised. Substitutes that cannot be inexpensively integrated into the electric grid are not likely to work either.

I talked about low-ranking workers being a vulnerable part of the system. It is clear from Joseph Tainter’s comments that another vulnerable part of our current system is the various “connectors” that allow us to have our modern economy. These include the electric grid, roads and bridges, the pipeline systems, the water and sewer systems, the internet, the financial system, and the international trade system. Even government organizations such as the Eurozone might be considered vulnerable connecting systems. The energy cost of maintaining these systems can be expected to continue to rise. Rising costs for these systems are part of what makes it difficult to maintain our current economic system.

The focus on “running out” has led to a focus on finding ways to extend our energy supply with small quantities of high-priced alternatives. This approach doesn’t really get us very far. What we need to keep the economy from collapsing is a growing supply of cheap-to-produce energy and other natural resources. Ideally, these new resources should require little debt, and not cause pollution problems. These requirements are exceedingly difficult to meet in a finite world.


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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1,528 Responses to Overly Simple Energy-Economy Models Give Misleading Answers

  1. Yoshua says:

    U.K.’s Biggest Coal Station Now Runs Mainly on Chips of Wood

    • Artleads says:

      Chips of wood strike me as easier to procure and more economical (energy-wise)?

      • Ert says:

        Drax Powerstation?

        Where they burn wood from trees (not waste) imported from the US via ship and then transported from the ship to the power station via trucks? (http://www.telegraph.co.uk/news/earth/energy/coal/11412440/Are-wood-chips-really-worse-than-burning-coal.html)

        Sure thing it is definitely better for the a) environment, b) better economically!

        a) The planet will get rid of humans even faster!
        b) Burn-baby-burn! The economy grows on additional consumption!

        • Artleads says:

          Didn’t know zip about the industry. Was thinking in terms of wood chips on the ground in my yard–including mostly dried cuttings from bushes and trees–and that one might gather (conservatively!) in the forest. Not remotely thinking in industrial scale. Why I always think that others think the way I do is pretty hard to figure. 🙂

    • Brought across the ocean in ships operated using oil.

      • Fast Eddy says:

        Good thing that we have unlimited wood chips!

      • Tim Groves says:

        Potentially they could be brought across the ocean on sailing ships, making the process even greener. /sarc

      • Harry Gibbs says:

        It seems almost comically profligate and ill thought through:

        “I drove with environmentalists at dawn to a gorgeous swamp forest in North Carolina. The birdsong was entrancing, and a scarce prothonatory warbler – known as the swamp canary – danced before our TV lens.

        “The wood fuel industry has not advertised that it also takes trees from natural forests like this to boil kettles in Britain – but that’s what happens. Most of the swamp forests in south-east US are in the hands of small private landowners and they face few restrictions on what they do with their assets.”


  2. Thank you again Gail for another new topic of interest….the mainstream business media seems a bit confused

    This chart shows that oil is going to $75: Technical analyst

    “Craig Johnson, senior technical market strategist at Piper Jaffray, sees crude prices going as high as $75 per barrel in about a year based on a long-term chart of oil. Johnson’s chart shows an inverse head and shoulders has formed, a pattern that is generally thought to predict an uptrend. This, coupled with crude breaking above a diagonal neckline, makes Johnson bullish on oil”

    on the other hand…

    “But not everyone sees good times ahead for oil. A note from Morgan Stanley analysts before the Tuesday morning open stated that crude could drop down to about $35, a level that oil last hit in April.

    While Erin Gibbs, equity chief investment officer at S&P Global, isn’t as bearish on oil, she does believe the energy sector in general may not be headed anywhere even in the long term.

    “Overall, I think the sector is very much a hold,” she said. “We’re seeing really high valuations [and] the energy sector is trading at about 53 times forward earnings.”

    hmmm….a bunch of model confusion

    • Ert says:

      Then we will see how the ETP-Modell in regard to pricing conforms…. currently the picture looks that way: http://assets.wallstreet-online.de/_media/1591/board/20160725062938-oily.png

      Oil still under the upper bound of the ETP (in $ terms) and trending downwards if viewed for the last 20 months.

      • ETP doesn’t look like a very good fit to me.

        • UnhingedBecauseLucid says:

          Could you clarify why … It seems to indicate an inexorable decline just as you are predicting; in a sense, both methods seems to be looking at it the right way, in the right angle, just through a different lens…

          • Quite frankly, the stuff does not make a lot of sense to me. Let’s start with the economic activity powered by a barrel of oil. http://www.thehillsgroup.org/depletion2_022.htm This is supposedly down to $87.35 in 2014. The link refers back to Graph 25. Graph 25 is a comparison between (World GDP in Year t) and (Cumulative oil production between 1960 and Year t). I have no idea why B. W. Hill would want to look at such a comparison.

            What I look at instead is (World GDP in Year t) and (Total Energy consumption in Year t). That is how I get this chart, which I have shown in various forms, various times.

            Comparison of total world energy consumption and World GDP

            The energy shown is in barrels of oil equivalent, since it includes several kinds of energy. Using this equation, I find that GDP per barrel of oil equivalent is about $757 per barrel of oil equivalent in 2014, in $ 2010. The GDP per barrel of oil equivalent is rising a little every year.

            If we want to figure out GDP relative to oil only, rather than total energy, we need to we need to “gross up” this amount for the fact that our denominator is smaller–oil, instead of total energy. Oil amounted to about 32.3% of total world energy consumption in 2014, so dividing $757 by .322, 23 get $2,350 of GDP for each barrel of oil consumed in 2014. To make it comparable to what the Hills Group is projecting, we need to adjust for inflation between 2010 and 2014. Let’s say that is 2% per year between 2010 and 2014. The expected GDP per barrel of oil is then $2,545 in 2014 dollars in 2014. Somehow, this is rather different from $87.35, and the curve is going the “wrong direction”–GDP is getting higher per barrel of oil over time. (This is what all of our efficiency efforts are about.)

            BW Hill has developed his own EROI calculation which is fairly different from that of others–it leads to much higher energy consumption per barrel of oil extracted than others are finding. If we look at Wikipedia, we find this chart for EROI for various fuels:
            EROI chart from Wikipedia

            The EROI of world oil seems to be about 35, implying at about 2.8% of oil energy is spent on energy of some type or another. The category called “oil production” is presumably USA production, since that is what the labor is at the top of the page. This amount seems to be an EROI of about 22:1, implying energy consumption of 4.5% compared to the oil produced.

            I might note that in looking at energy used in extraction of oil, BS Hill looks at only US data, even though presumably he is trying to figure out world average amounts. With respect to oil wells drilled, he says: “More than half of the oil wells ever drilled have been drilled in the United States. Because the EIA has maintained records on the depth of most of the oil wells drilled there, it is a good proxy for average world well depth. It is assumed that the life span of the average well is 20 years. Past 20 years most wells are either shut-in, or their production has fallen to a small percentage of its original amount. A twenty year moving average is used to determine average well depth at time, year = #. The temperature of the reservoir is calculated from the earth temperature gradient of 1°F per 70 feet of depth.”

            I wouldn’t use US data to estimate energy costs for Saudi Arabia, for example. We have about the highest costs in the world.

            Regular EROI calculations would stop at oil extraction, before refining. BW Hill doesn’t give much information about its other energy costs he uses, only this comment:

            “One example is the EIA’s estimate for petroleum refining energy costs, which they give as 16,300 BTU/$ of finished product. If calculated at $3.00 per gallon for 2012, this produces 48,900 BTU/gal. With 48,000 fields around the world under production, the industry is very competitive. It therefore follows that average extraction costs are close to sale price. Employing the BTU/$ method, the 2012 production energy costs at the well head can be estimated at 14,735 BTU/gal. Distribution costs of raw material, and finished product are estimated at $42/barrel, giving 6,365 BTU/gal. The extraction, processing and distribution energy costs for 2012, when summed, equal 70,000 BTU/gal; which is what the ETP model predicts.”

            I have no idea where these numbers are coming from, or whether they are being interpreted correctly. The US refines a lot of heavy oil (imported Canadian and Mexican oil). US refineries would not be at all representative of world refineries, so I wouldn’t use them to represent world energy costs.

            This is a chart I found from a 2004 paper showing energy consumption for various energy products, assuming an overall refinery efficiency of 93.1%. https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0ahUKEwiy3YGnvZfOAhVG5iYKHZ_3Bx8QFggnMAE&url=https%3A%2F%2Fgreet.es.anl.gov%2Ffiles%2F1c49xpjg&usg=AFQjCNFNj86V3TM0Vokj1k74YGvzsebbnw&sig2=fom8cnu6WJd5BtrD3K8Eiw

            Energy refining efficiencies of various products

            This is a refinery energy use document I found on the EIA website, that is on a different basis: http://energy.gov/sites/prod/files/2013/11/f4/energy_use_and_loss_and_emissions_petroleum.pdf

            • Ert says:

              Hi Gail,

              one thing only regarding GDP and Energy: Hill looks only at oil, not at total energy… and Gas + coal with their high ERoEI hold up the average very high. Also oil has only started to drop of or being near the “energy cliff”.

              I understand the hill prediction/model in that regard that we enter now into a critical phase for oil – and for the world, because the further droppings of the net-energy contribution of oil for the world-enconmy (GDP) begin to matter around now.

            • His numbers are very different from everyone else’s.

            • Don Stewart says:

              Hill has been asked to submit his model to Charles Hall’s professional journal. You can comment negatively on it there, if you want to.

              As regards the use of nominal rather than deflated numbers, Hill has explained that on numerous occasions. Again, you can complain if you want to.

              I am not a thermodynamics expert. But it looks to me like many of your quarrels are small potatoes in the larger scheme of things. For example, the equations require a difference in temperatures, but those are only available for the US, so that is what he uses. I doubt that it makes much difference in the outcome.

              The EROEI from the perspective of the end user is very close to what Hall is currently estimating, as I understand it.

              However, it should always be kept in mind that Hill’s model is a thermodynamic model, not a bottoms up EROEI study. Hill calculates EROEI from the model output, not vice versa.

              As always, you should not believe me. You should ask Hill directly, or wait until he submits for publication.

              Don Stewart

            • David Quinn says:

              Real productive economic activity has become less important over the last 40 years,

              How would your Energy consumption to GDP look if you stripped out the financial sectors contribution?

            • Futilitist says:

              Hello Gail,

              I have enjoyed reading your work for many years, but you are incorrect in your assessment of BWHill’s Etp model. It is quite apparent from your comment above that you simply do not understand physics and the thermodynamic model you are so intent on criticizing. Here is the most elegant, simple explanation I could find, by BW himself:

              “The ETP model is the solution of a thermodynamic equation that gives the amount of energy on average it takes to produce oil, and its products. By subtracting that value from its energy content (exergy), the remainder is what is left over for the economy to use. When the remainder is no longer sufficent to pay for the oil, the price of oil must go down.”

              The thermodynamic equation BWHill is talking about is The Entropy Rate Balance Equation for Control Volumes, which is a second law statement. It measures the heat and mass being removed from a control volume to derive the total energy used in the process. In the case of the Etp model, the heat removed is determined from the average well depth, the mass removed is the oil (and water cut), and the process is the Petroleum Production Process. The Etp function is a measure of the rising entropy in the Petroleum Production Process. All processes in the universe experience rising entropy.

              As to some specifics, you said:

              “I might note that in looking at energy used in extraction of oil, BS Hill looks at only US data, even though presumably he is trying to figure out world average amounts. With respect to oil wells drilled, he says: “More than half of the oil wells ever drilled have been drilled in the United States. Because the EIA has maintained records on the depth of most of the oil wells drilled there, it is a good proxy for average world well depth. It is assumed that the life span of the average well is 20 years. Past 20 years most wells are either shut-in, or their production has fallen to a small percentage of its original amount. A twenty year moving average is used to determine average well depth at time, year = #. The temperature of the reservoir is calculated from the earth temperature gradient of 1°F per 70 feet of depth.””

              1. You refer to BWHill as BS Hill.
              2. You claim the Etp model uses only US data. This is false and misleading. The Etp model uses world oil production data. But there is no specific data for average world well depth, which is needed as one of the inputs to the thermodynamic equation. To solve this, in this one case only, BWHill uses US well depth as a proxy. It is false and misleading to claim that the entire study considers only US data.
              3. The quote you refer to from the Etp book is not “With respect to oil wells drilled”, as you claim. It is obviously with respect to determining the average world well depth, as I just explained. This is confusing and misleading.

              As far as the correlation of World GDP/Cumulative Oil Production vs. your approach of focusing on World GDP/Total Energy Consumption, it really makes no difference at all. Both correlations are true. This is because energy is a zero sum game and the world economy runs on Total Immediately Available Energy at every given moment. When the energy available from oil begins to decline too rapidly, so does Total Immediately Available Energy. As Total Immediately Available Energy declines, so does the economy. As the economy declines, so does investment in alternatives. So it goes.

              It all comes down to thermodynamics, Gail.


            • I think what BW Hill needs to do is model the energy investment required for the marginal oil barrels that are now being added, rather than required world average energy investment, or even US average energy investment. I would agree that the amount of energy investment is getting to be problematic for the marginal barrels, but I don’t think that this analysis will show that. This is basically the issue that the economy cannot afford the high energy cost of extracting, refining, and shipping the marginal barrels of oil that we are now extracting. If BW Hill wants to estimate required world average energy investment, he seems to be a long way from figuring this out. He has not looked at enough detail to figure out anything close to what he claims to be looking for.

              There are a lot of details that need to estimated correctly, whatever his model is. There is a big range of refinery costs, and a lot of confusion on how to count them. One of the issues is that very heavy oil is generally “cracked.” When this is done, natural gas is added, and the hydrogen in the natural gas allows a larger number of shorter-chain molecules in the refined products. Thus, more of the heavy crude can be sold a gasoline or diesel, rather than as asphalt. If oil prices are low, the amount of this cracking falls–doing this cracking is not economic. The US has unusually low-prices for natural gas. For this reason, the US has become a “magnet” for cracking of heavy crude oil from elsewhere, raising US energy costs of refining crude oil, far above the world average energy cost level for refining oil.

              The market normally takes energy costs of refining crude oil into account in setting prices of different types of crude oils; this is why bitumen generally sells at a big discount to liquid oil, such as from the Bakken.

              Of course, before the crude oil gets to the refinery, there will also be different energy costs. Bakken oil will have very long well lengths (but depths significantly shorter, because the wells are L shaped). Bitumen mined in Canada may not have wells at all, or may use one of several varying extraction methods. Saudi Arabia will use a much smaller number of very big wells, probably less deep than in the US. High energy transportation costs, as when oil from the Bakken is sent by train, can be an issue as well. The rule of thumb I remember was that train transportation from the Bakken added $10 per barrel to the cost of production. Now, I understand train transportation is much less used; pipelines, which provide transportation at a much lower energy cost, are more available.

              I come from a world where “we didn’t have this, so we used that” is simply unacceptable as an explanation for why an approach is used. The write-up has a lot of general sloppiness to it. If someone else wants to endorse it, fine. But I would rather be left out of the discussion.

            • hkeithhenson says:

              Gail, I used to work as a computer consultant in an oil refinery, one that belonged to ARCO at the time, in the southwest corner of the Houston area. https://en.wikipedia.org/wiki/Houston_Refining.

              While I was there, I got a tour of the fluid cracker unit, around 12 stories tall. https://en.wikipedia.org/wiki/Cracking_%28chemistry%29#Fluid_Catalytic_cracking The process pours heavy oil fractions, about the consistency of Vaseline, heated to 700 deg on a flow of 1300 deg expensive sand (zeolites). The breakdown products are stripped from the sand with steam and the carbon which has been deposited on the sand is burned off in the regenerator. This process uses no hydrogen, but the feed stock is usually hydrotreated beforehand to get out the sulfur.

              Hydrocracking does use hydrogen. https://en.wikipedia.org/wiki/Cracking_%28chemistry%29#Hydrocracking The articles make the point that fluid cracking makes more gasoline and hydrocracking more diesel so fluid cracking is more used in the US and hydrocracking in the EU and Asia.

              The thermodynamics and economics is complicated. Natural gas isn’t the only source for hydrogen, it can be made from any hydrocarbon, carbon sources or electric power, though the last is expensive unless you have really cheap power.

            • Thanks. I know that in practice, the US has grown to be a major center for using natural gas in the process. With the low cost of natural gas here, it is cheap. When “cracking” is done, the volume of the finished product is higher. The United States gets “credit” for this “refinery gain,” which seems to me to come indirectly because of the natural gas usage in the process (among other things). The outcome of this process is more product that can be burned (diesel and gasoline), rather than asphalt, used as a cheap product for paving roads and making roofing. Thus, more energy is dissipated when cracking is used, in many different ways–more natural gas is used in the process, more heat is used in the process, and the end product can be burned, rather than driven upon or used for roofing material.

              If a person doesn’t know what he is doing, he will add the high energy cost related to catalytic cracking to the high front-end energy costs of oil which is extracted from the Bakken. This is of course nonsense. Oil from shale formations is very light. It doesn’t need cracking.

            • smite says:

              Not sure if it’s complete nonsense? Isn’t the lighter oils in many cases used/mixed in for improving the (refinability) properties of heavier oil? If so, then I’m quite sure Bakken oil eventually will end up in a cracker.

            • I suppose anything is possible. Bakken oil would normally be sent to a refinery without cracking capability. One reason that there was a big interest in export capability is because with the decline in North Sea oil, there is space available in Europe in the relatively simple refineries that used to refine the North Sea oil, before it declined in quantity.

              We used to have more simple refineries in the US. Some of them have closed, because they could not operate profitably. Given the differential between light and heavy oil prices, at that time, companies refining heavy oil, using crackers, were able to make gasoline and diesel quite a bit more cheaply than those who bought light oil, and refined it using a simple refining process. There is nothing intuitive about whether a high refining cost can be competitive.

            • smite says:

              Wouldn’t a large enough price differential between light, heavy and sour oil explain why there are refineries with capabilities to deal with lower quality liquids?

            • Right. In fact, at least in some periods, the differentials have been on the “too large” side, making refining navy and sour oil very profitable, compared to refining light oil.

            • smite says:

              It is probably a lot of haggling, mixing and mashing between the qualities among the producers and refiners. I read somewhere that a lot of the Saudi lighter oil end up at other OPEC countries for ‘improving’ their product.

    • World demand is collapsing–that is the problem.

      • Fast Eddy says:

        In 2007 Goldman projected oil at $300.

        It amazes me that people take these predictions seriously…. Taleb hit the nail on the head when he said – you’ve 10,000+ fund managers making predictions … the odds are that some of them are going to guess right …. and they are called geniuses…

        I am holding a playing card in my hand. Must be thousands of people reading this … guess which one it is?

        The person who is right will be designated as genius of the month of FW.

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