Energy Products: Return on Investment is Already Too Low

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

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

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

Adequate Return for All Elements Required for Energy Investment

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

Figure 1. One sheet from Biophysical Economics Conference Presentation

Figure 1. One sheet from Biophysical Economics Conference Presentation

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

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

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