energy economics
and fossil fuels—
how long do we have?

a briefing document

On housing and making living systems ecological

Tectonics: tectonic plates - floating on the surface of a cauldron

Index

site map

introduction

This briefing document is designed to remedy much confused thinking that is abroad on the matter of energy arithmetic.

It is designed to provide a better grasp of the basic ‘economics’, both real-world and in monetary terms.

jevons’ ‘paradox’

There is a problem of conservation, known as Jevons’ paradox:

Jevons, in The Coal Question (1865) [2], drew attention to the Watt steam engine. It was invented because the older Newcomen engine was so inefficient.

But making steam power more efficient made the use of steam power spread more widely, and therefore coal consumption increased.

Jevons’ Paradox is that conservation can encourage and increase consumption. Conservation does not necessarily, and of itself, reduce consumption.

See here for a more detailed and interesting short item on the related ‘rebound effect’. This is advised reading.

economic efficiency is not energy efficiency

economic efficiency

Consider a machine that is sold for $100, which lasts only a year, and then a solidly made version of the machine, that costs $300 and which lasts for 10 years.

As far as the company is concerned, the two machines will do the same job, for as long as they last; and maybe for the time the company wants that job done. However, by paying out only $100, $200 is saved for using the next year.

During that year of the $100 machine’s life, the other $200 dollars may be invested (assuming the company has that money spare). With the great onrush of technology, next year’s version of the machine may be better, or a new and more efficient process may have been developed.

If, to pay for the more expensive machine, the extra $200 was borrowed, then the company may well have to pay 10%+ per annum interest on their borrowings. The company may hope to be better off next year, so the immediately cheaper item may be purchased. And next year, it is likely that the same considerations may apply. Therefore, a company may decide to buy the ‘cheaper’ version each year. This may well not be energy-efficient.

The above example is, in fact, taken from real-world company decisions, but a family household also often buys inefficient, ‘cheap’ lamps with short lives and high consumption, in a very similar calculation.

Similarly, second-hand cars sell despite constant repair bills and higher consumption. They are also often sold to people paying very large interest on loans.

In the recent decades, consumed energy per dollar of GDP in the USA has fallen by around half, even as total consumed energy has increased by more than 2.6 times.[3] The decline in energy required per dollar of GDP is a major reason underlying the rising US standard of living.

Economic efficiency is also badly distorted by market interferences, caused through government subsidies to industry and to end users.

extraction costs

Depletion effects are not reflected in market prices. Oil, a depleting resource, is generally very easy to extract. As a consequence, the costs of extraction will not relate to the depletion effects. Market price is related more to extraction costs, profit and what the market will bear, including the taxes taken by the government.

Similar destruction of resources, such as fisheries and forests that have now vanished, has occurred many times in history. But never have so many people been so critically dependent on a non-replaceable resource. Even temporary shut-downs in electricity supply can leave homes in darkness and cold, the local supermarket tills will not work, fridges start to defrost and the food to spoil. Without oil, food cannot be transported to market, farm machinery ceases to operate, fertilisers cannot be manufactured, likewise pesticides to protect the crops. Hospital operating rooms would close, ambulances would cease to run, there would be no school bus any more, let alone that gas-eating SUV. A very possible outcome for running out of oil is deaths by the billion.

Fossil fuel extraction, and its accompanying depletion, is a tragedy of the commons [4] situation, without even the likelihood of any later recovery. The only way to control such situations is by rationing—in this case, serious rationing while alternative energy sources are developed. [5] Sane rationing would also establish a free market in apportioned rations, thus allowing transfers of wealth to those who forgo use.

“From an economic perspective, when the world runs completely out of oil is [...] not directly relevant: what matters is when production begins to taper off. Beyond that point, prices will rise unless demand declines commensurately. Using several different techniques to estimate the current reserves of conventional oil and the amount still left to be discovered, we conclude that the decline will begin before 2010.”

energy return on energy invested, or EROEI

When an energy source that has an EROEI ratio of 4:1 is replaced with another, alternative, energy source which has an EROEI ratio of 2:1, twice as much gross energy has to be produced in order to reap the same net quantity of resulting usable energy.

This can be worse than it looks. Consider that I inherited one barrel of oil, and the EROEI was 4:1. I could use my one barrel and end up with four barrels. Now consider that the EROEI was 2:1, and I still wanted four barrels. Well, I can use my one barrel to extract two barrels, then I have to use those two barrels to extract the four barrels that I want. Thus with an EROEI of 2:1, it has cost me three barrels to gain four; whereas with an EROEI of 4:1, it only cost me one barrel.

This means that when a society moves to using energy sources that have lower EROEIs, the actual amount of energy available to use (for manufacturing, transport, heating etc.) inevitably will diminish.

advertising disclaimer

An EROEI of 1 means that for every unit of energy you put in, you take 1 unit of usable energy out.

An EROEI of greater than 1 means you take more energy out than you put in.

For each barrel of oil you extract from the Middle East, you take around 30 times that usable energy back. Or put another way, it costs you approximately the energy of 1 barrel of energy to extract 31 barrels, refine it, move it around the world and pump it into the tank of a vehicle.

The EROEI would be lower if the inefficiencies in moving the car were incorporated.

With an EROEI of less than 1, you take less energy out that you put in. Attempting to run a profitable project on a negative EROEI requires the same trick as building a perpetual motion machine—it is not possible!!

Here follow some approximate EROEIs [6] for different energy sources:

diminishing returns

In any human activity, there tends to be what is often referred to as the Law of Diminishing Returns. This means that for any activity, the first part of the process produces the greatest profits or advantages. For example, when a successful oil well is sunk, the oil gushes up under considerable pressure. As the oil reservoir depletes, so more energy has to be applied to extracting what remains. And this energy amount increases as the depletion grows.

It is normal, in human behaviour, to go go for the easier and cheaper returns first. Hence, the easily extracted oil in the Middle East will tend to be at a premium relative to the deep-sea returns from the North Sea, or the heavier oils in Venezuela.

In general, the oil and gas will be extracted before the coal and tar sands. [7] When it comes to any particular resource, such as coal, the easier fields will be exploited first.

tar sand returns

The returns on extracting oil from tar sands is approximately 3 barrels of oil for every 2 consumed. This is an EROEI of about 1.5. There are also extreme environmental costs in water pollution and land destruction. And that is only taking current production into account, where the easiest resources are the first mined. This suggests that the Alberta tar sands can fuel the world for less than 5 years, even if you are prepared to pay the vast environmental costs.

Tar sands and shale oil.

expanding demand and its consequences

Throughout this series of documents, I am referring to depletion rates in terms of current usage. Unfortunately, the situation is far worse than this.

All the following three factors result in faster depletion. (I am not considering pollution elements at this point.)

• expanding population
• expanding usage
• exhaustion of a particular form of fossil energy, for instance oil

“Worldwide emissions of carbon dioxide [...] are expected to increase by 3.5 billion tonnes [...] annually by the year 2020. At the same time, global demand for energy will rise by 40 percent as the world population increases and economies grow, said Randy Broiles, global planning manager for Exxon's oil and gas production unit.” [8]

2020 is 16 years away. Oil at current extraction rates is expected to last approximately 40 years. Because of increasing demands, any projected oil supply will run down considerably faster than estimates based on current extraction rates. This is a compounding effect. The quote above works out to a 2% increase in energy consumption each and every year. With such an increase (very possibly underestimated), the 40 years immediately shrinks to 30 years.

It gets worse. As the reserves of oil fall, so the pressures on available replacement fossil fuels grow in tandem. Thus, coal, which is currently estimated at 200 years at current extraction rates, but only supplies approximately 28.4% [9] of fossil fuel power, will come under increasing pressure, so radically driving down that 200-year reserve estimate.

It gets still worse. Remember that the EROEI for coal is, in general, lower than that for oil. Therefore, more coal is required to produce a given amount of energy, let alone if the coal were used to produce a synthesised vehicle fuel substitute.

peak oil

Peak oil is that year in which the most oil ever is produced at a level never again to be repeated. Naturally this year cannot be predicted in advance, but only noted (with a high degree of probability) some years after the occurence of peak production.

This definition can also be applied to individual countries, areas or particular oil fields. For example, peak oil (also known as the Hubbert peak) in the USA was 1970. The widespread view is that world peak oil is rapidly approaching. If you wish to study further, the Hubbert Peak website gives a good start.

Peak oil is a very difficult and slippery concept because rising oil prices, in fact, bring oil production (and consumption) back into balance with the markets. Further oil markets are considerably cartelised and manipulated.

This article is shallow and does not give even reasonable attention to nuclear and conservation elements.

From various sources - 2005 consumption was over 30 billion barrels a year

The critical factor to understand in the graph above is that
in each year, we are now consuming more oil than is being discovered.

The slack in world markets is rapidly shrinking. For further information, read how vulnerable are saudi oil supplies?

advertising disclaimer

pollution

Naturally, the problems mentioned above will result in large increases in the atmospheric filth produced by fossil fuels, this being aggravated by any move towards coal.

For more data, start at Fossil fuel disasters.

interesting plot of energy efficiency waste

Note the huge losses on electricity power generation and transport.

While the above diagram is calibrated in quads, another version in exojoules, is also available from this page at llnl.gov.

See also Solar revolution: the economic transformation of the global energy industry.

end notes

1. Which way - Jevons’, Jevons’s or Jevons?
   According to English grammar, to indicate the possessive, belonging to, ’s put at the end of the word/label for the object/person possessing the item. This is fine for Mary’s cat, but for a name (or object) ending in s, things can be different. Here, the general rule is also add ’s, so Charles’s poodle, pronounced Charles-es poodle.
   
   If Jevons’ name was Jevon (without an s), it would be Jevon’s paradox. Thus amusingly, perhaps by rights we should say Jevons-es paradox, spelt Jevons’s!
   
   But even abelard naturally names the paradox belonging to Jevons as Jevons’ paradox, so in cases like this, occuring more often with older words, just an apostrophe ’ is added (Jesus’ mother is another example).
   
   There are also some that think that no apostrophe is needed for Jevons paradox, that the paradox is named after Jevons.
   
   
2. Jevons, William Stanley, 1835-1882, also known as one of the originators of the ‘marginal utility theory of value’,

“that as the quantity of any commodity, for instance plain food, which a man has to consume, increases, so the utility or benefit derived from the last portion used decreases in degree.” 1862

The ‘logical piano’, a machine designed by Jevons and made by a watchmaker, had 21 keys for Aristotelian logical operations. Similar ideas eventually passed into computer design.

3. “U.S. energy in terms of consumption of Btu's over the 1948 – 1999 period has grown at an annual compounded rate of 2.6% while energy consumption per dollar of real GDP (inflation adjusted) has shown a -1.3% rate. The result has been that energy per dollar of GDP has fallen almost by half even as total energy use has increased by more than 2.6 times. The decline in energy required per dollar of GDP is the reason underlying the rising U.S. standard of living.”
   Original source: “Big User - Or Just Efficient”, Issues & Insights, Investors Business Daily, 21 June 2001.
   
   
4. For basic details of the “tragedy of the commons”.
   
   
5. See Replacements for fossil fuels—what can be done about it?
   
   
6. EROEIs vary greatly according to assumptions. For instance, oil sands would probably come out much worse if site preparation and restoration (if even possible) and externalised pollution by end users were factored in. Similar remarks probably relate to other figures but this gives an idea.
   
   
7. As you will be aware, other factors such as government subsidy, early availability (for instance, coal), and other factors may modify this process, but the general tendency will remain.
   
   
8. Quotation from PlanetArk. Note that this article concludes with a highly irresponsible, and inaccurate, remark:

   “ "The oil resource base is huge - it's huge - and we expect it to satisfy world demand growth well beyond 2020," he said. ”

   For details of actual known oil resources, see World oil resources (at the end of 2001).

9. Figure derived using the percentages for world fossil fuel consumption taken from World primary energy consumption (at the end of 2001) using the figures:
   coal/(oil + coal + natural gas) %
   
   Thus, you will be more than lucky if, once the oil was depleted, the coal even lasted 50 years. And that does not account for the 2% compounding effect.
   
   

email email_abelard [at] abelard.org

© abelard, 2003, 29 november

all rights reserved

the address for this document is https://www.abelard.org/briefings/energy-economics.php

1890 words
prints as 7 A4 pages (on my printer and set-up)