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Energy the nexus of everything: November 2009 Archives

There is much discussion today in the US regarding how much the government should spend, and go further into debt, to help get the economy growing and increase employment such that we can later pay back this debt when economic growth is good (i.e. positive) again. For those who do not believe in the general capitalism arrangement that assumes economic growth (as we define it today) can and must continue indefinitely, the logic of spending more so we can pay it back later can seem like putting off the inevitable final economic bust.

Persons such as Robert Reich, former Labor Secretary under the President Bill Clinton, are calling for more stimulus spending (see, and for an entry on his normal calling for more stimulus spending, visit Reich correctly says that the latest increase in US GDP growth, of a reported 3.6% in the 3rd quarter of this year, is mostly related to a shift in capital assets at the expense of labor. This is supported by research by Robert Ayres and Benjamin Warr indicating that investments in providing "useful work" and capital are responsible for roughly 50% of US economic growth whereas additional labor investments are only responsible for some amount of less than a few percent. Useful work is roughly equivalent to primary energy consumption divided by efficiency of conversion into mechanical motion – but think of essentially as how energy impacts our economy. In 1900 their research shows that investments in labor were the most influential factor (55%) in US economic growth with useful work responsible for nearly 40%.

What all of this means is that over the last 100 years our industrialized economy has replaced physical labor (working in factories and farms) with machinery run on fossil fuels. Therefore as long as cheap energy is available to operate this machinery and make more of it, human labor is simply not necessary. We pay people to think of ways to not need as may people to make a product, and then we act surprised when we succeed. We now pay people to think, not use their muscles, and we translate this to a need for better education. We also translate this to other areas of life, such as health care, where investments in capital (knowledge and machinery) have enabled incredible tools and techniques to cure disease and injuries.

What all of these advancements depend upon is excess energy such that people CAN be paid to spend time and think of new inventions. This excess energy is a function of the resource (renewable or fossil) and our ability to exploit it. This ability can be measured as energy return on investment (EROI). If US oil had an approximate EROI of 100 in the first decade of the century and today has an EROI of 10–20, then each barrel of oil in 1900 had approximately six times more capability of growing the economy than today. This estimate is calculated as follows:

˜ ((EROI-1)*"useful work" productivity factor in 1900) / ((EROI-1)*"useful work" productivity factor in 2000)
˜ ((100-1)*40%) / ((15-1)*50%)
˜ 40/7 = 5.6

So when we look to the past and assume we can invest in various economic stimulus packages with the thought that we have always had the ability to repay the debt in the future, I believe understanding this tie energy (EROI, useful work) and economic growth is important. So we can say:

1. The US has a large national debt load (the highest ever) and now the annual budget deficit is reaching the highest levels ever reached. Thus, we seem not to be paying back the debt over time, except interestingly the US did that during the time Robert Reich was serving in the 1990s under the Clinton administration; and

2. The total system-wide conversion of energy resources into useful work is becoming less productive over time yet more influential on the economy.

The conclusion is that we are increasing our debt load at the same time we are having less ability to pay it back. This basic conundrum will define this current century.

A recent article titled "Government impose 'carbon capture levy' to fund coal-fired power plants", discusses the UK government imposing a tax on electricity to potentially fund carbon capture and storage (CCS) development on up to four coal plants over the course of 10–15 years. A quote from the article sums up the discussion:

"The Department for Energy and Climate Change said yesterday that uncertainty over the commercial viability of CCS meant that public support might have to continue beyond 2030."

Of course CCS is not commercially viable. The only way to make it commercially viable is to internalize the cost of CO2 emissions to such a degree that the cost of investing in the infrastructure for capturing the CO2 justifies the investment. The price of CO2 is not there yet for the UK, and is nonexistent within the United States. So the commerical viability question is not even applicable except for potentially using captured CO2 to extract more oil out of mature reservoirs. Still, given that there are natural sources of CO2 that only require major investments in pipelines while avoiding interacting with the electricity indudstry, a sufficient CO2 price may not exist for a couple of decades that induces investment in CO2 capture on coal plants.

But the real "commercial viability" conundrum rests on the fact that a large portion of society believes that we (well, the industrialized world) should place a value on reducing CO2 emissions. Capturing CO2 from coal plants will lower their net electricity output by 20–35%. In terms of the normal venacular of economics, this is going to something less efficient. In this case, the efficiency is less electricity output per unit of fuel input. This is a fundamentally different concept than has occured since the dawn of the industrial revolution.

Sure, we have imposed certain types of pollution mitigation technologies on power plants before (e.g. SO2 and NOx scrubbing, mercury capture), but these have for the most part not prevented coal plants, and the power plant industry in general, to increase their efficiency over time by increasing the pressure and temperature of operation. But everyone knows that the thermodynamics of the power plant with CO2 capture will be less efficient. This goes directly against the purpose of investments and technological advancement since the founding of modern civiliazations.

People have historically invested in ways to extract more productivity and wealth from the Earth per unit of effort (human effort) until some ecological feedback prevents that from being a desireable option any longer. These feedbacks to date have mostly been associated with direct air-, soil- and water-quality problems. And the past mitigation methods have been of a small order of cost such that the human population has continued to grow since the Industrial Revolution. But this feedback fo global warming appears to cost several orders of magnitude more to deal with. The question is: "Is coal power so valuable to us that we will continue to use it even at lower efficiency?" In other words: "Are other viable technologies so inferior that coal power must continue to exist by providing less direct services than it has since we first put it in a steam cycle connected to a dynamo?"

So far, the answer seems "yes" to these two questions. Widespread use of CCS will mean that we value environmental/ecosystem services more than energy services on a larger scale than any time before in history of human civilization.

The discussion continues in the US about economic recovery (it was somehow reported this past week at 3.5% for the last quarter). People keep asking typical and often meaningless questions. "Is this growth sustainable?" "But employment is still rising, when will unemployment go down?" To many in the research community that study society from a "whole systems" mentality, the answers to these questions are obvious in the long run even if few short term solutions exist to alleviate any real or perceived economic pain or loss of lifestyle. Oh, and the answers to the two questions are "no", and "when we (the US) accept lower lifestyles".

This weekend, Timothy Geithner, the US Treasury Secretary appeared on the popular Sunday talk show Meet the Press. Geithner was asked when employment (unemployment is US is measured at 9.8%) would start to rise, and when the budget deficit and national debt would stop growing. His answer was the mainstream view. This view is essentially that the economic stimulus funds are providing the base investments for growth in the future, and they will "take a while." Another way of looking at this statement is, that because private businesses spent years, if not the past couple of decades, making the wrong types of investments and/or expecting the wrongly high returns, the government is now making the right kind of investments that will make those same high returns. Oh, and create jobs.

Unfortunately, the research on energy and economics is showing us that the trends are not indicating that these future expectations will come to fruition. I present two areas of research to think about together.

(1) Work on economic production functions by Robert Ayres of INSEAD indicates that investments in increased labor no longer produce economic gains for the US. Work by Ayres and his colleagues (often Ben Warr) on how energy, or rather "energy services" (which they term more precisely "exergy services" or "useful work") relate to economic growth shows that investments in energy services and capital are practically the only drivers of economic growth at this stage of development in the US. If we consider, as many economic production functions do, that the "factors of production" are of three main categories, (i) capital, (ii) labor, and (iii) energy (or energy services), then Ayres' work shows that every dollar invested in capital or energy is each responsible for half of economic growth, and investments in labor are responsible for well less than 5% of economic growth.

See: an interview and/or journal paper from Ayres and Warr Interview: Journal paper: Ayres, RU, Sustainability economics: Where do we stand? Ecological Economics 2008 67(2) 281–310.

(2) Research on the trends in energy return on energy invested (EROI) for fossil fuels undergoing the inevitable decline. This does not necessarily have anything to do with whether or not there are large fossil resources, but can have something to do with describing fossil reserves (those that are economically recoverable). What this declining EROI means is that even though we have continually produced and consumed more energy (worldwide) and have large coal and natural gas resources, they will still not provide for the economic growth of the past.

One example of conceptualizing pionts (1) and (2) above is natural gas. The natural gas (NG) inudstry is now on a public relations campaign to explain the resource base increased by technologies to extract natural gas from shale rocks. So yes, we now have a greatly (2–3X) expanded resource base of NG, but at what EROI? These resources cannot be economically produced at the $2/MMBtu of the year 2000, and need closer to $6/MMBtu for a price. Thus, the EROI of unconventional NG could be 3X less than conventional NG. So the conculsion is, we may have 100 years of domestic NG in the US based upon current consumption, and these resources are valueable, just not as valuable as past resources.

What all this means is that economic growth, as defined since the industrial revolution, cannot happen as fast as the past. The conversion of energy resources, including both renewables (dependent upon current solar income) and fossils (benefitting from hundreds of millions of years of solar income) for productive uses simply requires more energy and resources than in the past. Thus, there is less excess available for other economic sectors, and most economists, businesses, and governments have not accepted this position. There is little incentive for them to do so, except for energy companies themselves since their livelihood is dependent upon making proper judgments of how EROI relates to their monetary return.

Furthermore, investments in energy technologies, capital, and resources that increase labor in the energy sector relative to past investments, inherently go against the trends of the last 100 years. This is not a result of bad public policy, bad tax incentives, overtaxation or even bad business practices. This is a result of increasing complexity of our society such that investments just no longer provide the larger marginal return as they used to, and perhaps they are no longer providing a marginal return at all anymore (think bank bailouts, two wars: Afghanistan and Iraq, health care reform).

We think more energy equals more capabilities, but that equation is incorrect. EROI is a necessary and important factor to understand. When EROI is high, there is a large margin for error and a high degree of discretion when making investment decisions. As EROI decreases, there is less margin for error, and each error can become more influential for a system that has been built upon higher EROI and still expects it. The pay of investment bankers and automaker executives together with health care technologies are results enabled by high EROI that enabled their existence to begin with. They are only causes of budget deficits and debt when we refuse to adjust. This point of adjustment, or lack thereof, is where we reside today.