Introduction
Energy return on energy invested, or EROI, is a tool of net energy analysis, a methodology that attempts to compare the amount of energy delivered to society by a technology to the total energy required to find, extract, process, deliver, and otherwise render that energy to a usable form.
Net energy analysis was developed in response to the emergence of energy as an important economic, technological, and geo-political tool following the energy price increases in the mid-1970s and early-1980s. Interest in the field has been rekindled in response to yet another round of energy price increases and growing concern about energy’s role in climate change and the debate surrounding the remaining stocks of conventional fossil fuels. With many different sources being dubbed “the fuel of the future” it is important to determine which of these should receive the greatest share of society’s resources and thus be proliferated.
Energy is defined as the physical ability to do work: The exertion or effort directed to produce or accomplish something. Work itself is measured in heat units, e.g., British thermal units (Btus), Watts, or calories. EROI is the ratio of the work that can be done by a certain energy source to the amount of work required to convert that energy source into a usable form. However, there is not a universally-accepted formula for calculating EROI, so all EROI figures are approximations. Despite the definitional ambiguities it is, if nothing more, conceptually useful because it alters the way in which we view the so called “fuels of the future.”
In this paper, we will explore: The concept of EROI as well as some of the underlying economic principles; the difficulties with reducing it into a simple algorithm; and how it can be used to make more objective decisions about resource allocation in the context of proliferating non-conventional fuel sources.
EROI: A Conceptual Overview
No living organism, whether man, beast, plant, or economy can survive if, on the net, it expends more energy than it consumes. In order to sustain itself, this must be a one-to-one relationship: One calorie consumed for one burned, one dollar earned for one spent, etc. And to grow, this relationship must be even more lopsided. If a business wants to grow and bury its competition, its output must grow by a factor greater than its increased level of inputs. In microeconomics, this is known as increasing economies of scale. This seems to be logical enough, yet it often goes overlooked in the context of energy itself. We understand that if we want to lose weight we have to eat less and spend more time at the gym or that a lioness must be successful hunt at least one in five times in order to sustain her pride. Each of these is an example of an energy system. The purpose of energy systems is the fulfillment of demand for energy services. As a tool, EROI helps us gain a better understanding the energy involved in fulfilling this demand.
An energy system has two elements: An energy supply sector and an energy end-use. The energy supply sector consists of a sequence of processes for extracting, converting, and delivering the useful, i.e., heat, energy contained within primary energy sources to the end-users. In the example of the lioness: She is the supply sector, the primary energy is the flesh of her prey, and the end-users are the other members of her pride. The energy demands of her pride cannot be met until the prey is found, pursued, captured, and delivered to the pride. In order for this energy system to perpetuate itself, she must exert less energy performing the tasks necessary to meet the demands of end-users than she consumes herself. Or, the energy returned must be greater than the energy invested.
Calculating EROI
EROI is the ratio of the input of energy to the output of energy. It captures the fact that it requires energy to find, acquire, transport, store, and use energy. After all of these tasks and processes have been completed, how much actual energy is left?
One of the fundamental areas of ambiguity is a question of boundary:[1] How many elements should be included in the energy supply sector? Should the energy required to feed employees at an oilrig be included? How about the energy required to run the farming equipment that produces the food that feeds them? Or the energy required to build the vehicles that transport them to work? Or the energy required to mitigate the adverse environmental impacts associated with a particular supply chain sector?
As you can see, the energy inputs can be regressed almost infinitely. So in order to conduct any analysis at all, one must artificially draw a boundary for what is counted and what is not. This may be problematic because putting any sort of bounds on the system would produce inflated EROI estimates. On the other hand, trying to incorporate and properly weight every variable leads undoubtedly to “paralysis by analysis,” which may be as unbeneficial as inaccuracy.
Other pundits posit that a price-estimated EROI should be used. This school of thought is predicated on the notion that energy price serves as a good proxy for all of the energy involved in the production process. The idea is that the more energy involved, the higher the price. And naturally, over time, the market will steer the course of society from expensive, and energy-intensive fuel sources towards cheaper, more abundant fuels that can more easily be to use. Supporters of this methodology contend that the market implicitly agglomerates all of the data necessary to perform a “bounded” EROI analysis thereby making it a more attractive tool of net energy analysis. There are, however, weaknesses to this approach.
For instance, tax credits, subsidies, and other policy instruments that provide incentives to proliferate a certain energy source distort the prices by artificially augmenting the quantity demanded. A production subsidy, for example, makes a commodity such as corn-based ethanol cheaper for the consumer, while increasing the price paid to the supplier. So, because the fuel is cheaper, it must have a higher EROI than say gasoline. This is universally regarded to be false by “bounded” EROI proponents. Most estimates indicate that corn-based ethanol’s EROI is between 0.8 and 1.6:1, whereas gasoline’s is estimated to be between 11 and 18:1.[2] In addition to distorting prices, subsidies also distort the distribution of social welfare, a byproduct that even proponents of price-estimated EROI freely admit is difficult to measure. So, even if price-estimated EROI calculations are capable of capturing all of the energy inputs necessary, they cannot accurately measure the adverse economic impacts caused by policy instruments, which could make them just as misleading as the “bounded” estimates with which it competes.
Due to the importance of energy quality on EROI estimates, particularly in the frequent disparity between the quality of energy inputs and outputs, a third alternative is proposed by some.
The Divisia Index, which accounts for energy quality of both inputs and outputs is one such method. The Divisia corrects for the quality of the net energy of oil and gas extraction. As explained by the creators of the Divisia, “[t]he Divisia EROI is consistently much lower than the thermal equivalent EROI. The principal reason for this is the difference in the fuel mix, and hence fuel quality, between the numerator [output] and denominator [input] of the EROI. The outputs are crude, unprocessed forms of oil and natural gas. The inputs are electricity and refined fuels such as gasoline…The latter are higher quality than the former and have higher prices. Refined fuels and electricity are, therefore, weighted more heavily in the Divisia formuation.”[3] Still, this methodology is subject to the same question of boundaries as the traditional EROI approach.
Economies of Scale and the Industrial Revolution
Prior to the Industrial Revolution the principal fuel sources was wood and biomass. Initially, wood was plentiful, seemingly inexhaustible, widely distributed, easily harvested and therefore cheap. Also, is does not need to be refined into a more useful form. It was the fuel for cooking and for crafting iron tools. With their beasts of burden outfitted with iron ploughs, humans were able to till more land with less effort and reap larger harvests, ergo, realize increasing returns to scale. However, by the 17th century, timber stocks in Europe were falling and prices were climbing precipitously (see graph)[4] so out of necessity was born the need for a cheaper, more plentiful, and therefore more easily harvested fuel source. Enter coal.Not only was coal ubiquitously distributed, but it was found relatively close to the Earth’s surface, which made it easy to mine. Distribution and ease of extraction are important to EROI because they both equate to less time and work involved in the process. In other words, it takes less than the energy produced from a tonne of coal to mine and render a tonne of coal into a useful form.
Coal also has another property that makes it an attractive fuel source. In some forms, it burns at a higher temperature and a higher temperature equates to greater work potential. One ton of anthracite, the type of coal with the highest energy content, contains approximately 25 million Btus. Compare this to one ton of high energy hard wood, such as cedar, which contains roughly 20 million Btus. However, because most energy sources are not uniform in their quality, these sorts of comparisons do not always hold and therefore are not always useful; we must also consider the quality, ergo, the heat content of each type of fuel.
For instance, coal is ranked according to the degree of metamorphosis or “coalification” undergone by the carbon content of organic matter. For example, anthracite is hard, black, contains very little water, burns at a high temperature, and is a rather clean burning fuel. Compare this to low-grade coal such as sub-bituminous lignite, which is more brown in appearance, softer, dirtier, and has a relatively high water content, thus making it an inferior source of energy in terms of heat content compared to even many types of woods and other biomass. So to say that coal replaced wood entirely because it is a better source of energy would be inaccurate. Society makes the transition from one source of energy to another because as one fuel source becomes increasingly rare, it must exert more and more effort just to maintain the same level of energy production. This is the minimum necessary to maintain the status quo. And if we want to grow, to experience increasing returns to scale, we must exert much less energy, i.e., input less relative to output.
Shadow Costs and Substitutability
When society began to make the transition from wood and biomass to coal as its primary fuel source, fuel was still only used for a few simple applications: Home heating and cooking and a few industrial applications. Although we have known about the existence of coal since the Roman Empire, it did not really begin to use it as a source of energy until the start of the 17th century. This was primarily the case in Europe, which had decimated its forests but America’s timber stocks had yet to be fully tapped. The real, global transition from wood to coal did not really begin until the early 1800s and it wasn’t until a century later that coal had replaced wood as the world’s primary fuel source. Part of the reason why coal so easily replaced wood was because the two are close substitutes.
When a consumer is indifferent between two commodities, each of these commodities is said to provide her with the same level of utility. This is of course subject to an income constraint. The consumer will choose the basket (combination) of the two goods that maximizes her utility relative to her monetary constraints. This depends heavily on the individual. Plausibly, some consumers could have chosen to consumer equal amounts of coal and wood while others could have just as easily chosen to heat their homes will one or the other. After all, some ranks of coal and some grades of wood are capable of producing the same levels of heat. However, as the supply of wood fell and its price rose, slowly more and more people opted for coal to meet their cooking and heating needs. What begins at the micro-level snowballs overtime and turns into a macro-level shift. So, while coal and wood provide the same service, people did not begin to replace one with the other until the felt their wallets shrinking. In economics, this is known as shadow cost.
The shadow cost is the value of relaxing a certain constraint, e.g., a household’s monthly budget or a firm’s capital installations. For a household, more money means being able to buy more of some good. For a firm, this equates to replacing older machinery with newer, more efficient machinery. In the case of the latter, better machinery leads to higher productivity which in turn leads to higher revenues. The shadow cost is the change in revenue associated with a capital upgrade. And the higher the shadow cost, the more it behooves the firm to make the change. Why is this important in the context of EROI?
Today, the shadow cost felt by coal-based generation facilities is not high enough for them to switch to wind or solar-powered technology; too much energy is required to produce and install wind turbines relative to continuing to mine, ship, process, and install pollution abatement technologies at their plants. For instance, in the U.S. and China, two of the most coal-dependent economies, coal remains plentiful and easily extracted at home so mining and transportation costs are cheap relative to other fuels. France on the other hand, has coal but it is found much deeper in the Earth’s crust. When coal was being proliferated in the 19th century by neighboring Germany and the nearby U.K., France had to import expensive technologies. And when fusion technology was available, the switch from coal-based electricity production to nuclear was logical. Now, France is the world leader in nuclear power; approximately 75% of its electricity is generated by nuclear plants.[1] So until the EROI of other forms of fuel can compete with coal and the shadow cost of employing coal-based technologies become too high, coal will continue to be the most heavily-used fuel source on the planet. According to the Energy Information Administration, the statistical office of the United States Department of Energy, electricity demand is projected to grow at 1% per year through 2029. Over this same period, coal is projected to account for 47% of U.S. electricity generation, declining only 2 percentage points from its 2009 level.[2]
Sure, wind and solar energy are capable generating the electricity necessary to heat and power our homes. With time, they will replace coal; perhaps even more quickly than is currently foreseen. They are not, however, capable of replacing petroleum. None of the proposed gasoline replacements make much sense when one scrutinizes them under the EROI lens.
The Crude Oil Conundrum
Bioethanol, whether corn- or sugarcane-based, fuel cells, and electricity are three of the most heavily supported replacements for gasoline. As we saw earlier, corn subsidies in the U.S. have led to myriad economic problems including reduction consumer and producer surpluses, diverting social welfare towards the government, and a rising grain prices, which was not discussed.
In a nutshell, because subsidies raise the price received by suppliers above that paid by consumers, with the difference being paid for by the government, many farmers were drawn away from corn for food production towards corn for ethanol production. This led to a price increase in food costs. Corn is used to feed livestock, make flour, make syrups, etc. Moreover, the fertilizers used by many farmers are petroleum-based.
Rising food costs often equates to greater inflation.[3] And higher inflation means that purchasing power is weakened. Though inflation and unemployment are often inversely correlated,[4] people have to work more hours just to be able to afford the same basket of goods as before. This means machinery runs for longer, which requires more energy and can lead to more work-related accidents which strains hospitals and leads to, yup, you guessed it – additional energy use. Though there is a paucity of data to support this is, it is not farfetched to imagine that the increase in energy use far exceeds the energy created by the ethanol. In short, ethanol may indeed be an energy sink.[5]
Electric-powered cars have been around since the advent of the automobile in the late 19th century. Initially, approximately 30% of the vehicle fleet was powered by electricity.[6] However, these cars, much like today’s, could not travel as far as their gas-powered counterparts and recharging stations were few and far between. Soon, the stock of electric-powered cars petered out.
A simple search of Google suggests that there are between 600 and 800 million cars in use worldwide. Also, assume for a second that recharging your car’s battery is just as easily as filling its gas tank. Retrofitting all of these cars to run on electricity is out of the question. It doesn’t take a mathematician to see that the EROI here is miniscule. Suppose instead that the goal is to slowly supplant the existing fleet of gas-powered cars with electric-powered. This is more realistic, but will take some years.
The near term EROI might be higher than initially expected. The auto industry is a highly mechanized one and once batteries are affordable, they will be as easily installed as standard combustion engines. So the issue lies in the arithmetic of market for automobiles. The energy required developing the batteries aside, it may take a few generations to weed out every gas-powered car and replace it with one that runs on electricity. In 2009, total production of automobiles worldwide was slightly over 41 million. So even if the industry could produce just as many electric cars it would take between 14 and 20 years before everyone on Earth was driving an electric car. Even factoring in an average lifespan for cars of 10 years yields the same results. The next logical question is: Where is the additional electricity going to come from? As suggested by the Annual Energy Outlook report cited earlier, the energy portfolio for the U.S. is not likely to change drastically over the next 20 years, which brings us back to square one: How to determine the fuels of the future?
Crude oil will run out eventually. No one really knows for sure exactly when. If crude oil cannot be replaced as quickly as thought by even the most optimistic of people, we have no choice other than to continue to search for additional reserves no matter how obscure they may be. Deep oil wells in the Gulf of Mexico are seriously being considered and oil trapped in pre-salt formations off the coast of Brazil are thought by some to be untapped black-gold mines. Last year in a speech before the Association for the Study of Peak Oil & Gas – USA. Dr. Marcio R. Mello, president of HRT Petroleum and an expert in petroleum exploration and petroleum geochemistry, stated that over 500 billion barrels of oil could be found in deep in the bowels of the Earth off of the coast of Brazil.[7] This is equal to roughly the amount of oil produced over 2 decades.
Final Remarks
If this discourse has at all been useful, we know by now that a figure such as the one stated above, is misleading because it will require billions of dollars, thousands of man-hours, and countless Btus, or joules, or kilocalories of heat energy to convert the crude oil into usable energy. Though the science of EROI may be inexact it is at least a useful tool to determine the true energy requirements necessary for society to perpetuate itself. It is not simply enough to say that we should move forward and proliferate only those fuels that have high EROIs now. EROIs as we know are largely dependent upon the technology used to in the energy supply sector and more efficient technologies will lead to higher EROIs, regardless of the measure. Also, it is an important reminder that attractive energy alternatives of today, will be onerous dinosaurs in the future. With that said, a balance must be struck between building the most effective infrastructure possible today while not allowing their shadows to loom over investment decisions in the future. Furthermore, I acknowledge the absence of any discussion on revamping the energy infrastructure which will be necessary in many places, particularly those where the current capital installations are burdened by high shadow costs. But the argument is the same: No matter the energy mix, the ease and energy efficiency with which it can be delivered to our homes, offices, and schools must be taken into account. [1] Nuclear Power in France in France. World Nuclear Association London. January 2010
[2]Figures are based on the 2009 Annual Energy Outlook’s “Reference Case” scenario.
[3] Doroodian, K. et al. “The Impact of Removing Corn Subsidies in Mexico: A General Equilibrium Assessment.” Atlantic Economic Journal June (1999): 150 – 169
[4] In economics, this is known as the Phillips Curve.
[5] See for example: Lancaster, Don. “Some Energy Fundamentals.” The Blatant Opportunist October (2002): p. 71.2
[6] Surowiecki, James. The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies, and Nations. New York: Doubleday, 2004.
[1] See for example: Kavanagh, Etta. “Looking at Biofuels and Bioenergy.” Science Magazine June (2006): 1743 – 1748.
[2] For a complete list of EROI estimates, please see the Appendix.
[3] Cleveland, Cutler J. (1988) Net Energy from the Extraction of Oil and Gas in the United States.” Paper for the Center for Energy and Environmental Studies and the Department of Geography, Boston University, p.12.
[4] Allen, Robert C. (2006) The British Industrial Revolution in Global Perspective: How Commerce Created The Industrial Revolution and Modern Economic Growth, Oxford University, p. 12.
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