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environmentalresearchweb blog

New article on energy quality shows the influence of ‘net energy’ on economic growth

Recently I had a new article published in Environmental Research Letters, the journal associated with environmentalresearchweb. The title of the letter is “Energy intensity ratios as net energy measures of United States energy production and expenditures”. In this letter I explore the Energy Intensity Ratio (EIR) as a proxy measure for energy return on energy invested (EROI). In calculating the EIR by dividing the energy intensity of a fuel (Btu/$) by the energy intensity (total energy consumption/GDP) of the overall US economy, I can track the relative cost of energy over time. In this way, the price of energy is scaled to the energy efficiency of the economy. Essentially, high EIR values mean that energy is cheap and is not constraining the economy. Low EIR values mean that energy is expensive, and if the value becomes low enough, can constrain economic growth because too much economic activity is spent obtaining and purchasing energy instead of other activities.

A major benefit of this EIR approach is that it uses readily available data: energy prices, energy consumption totals, and gross domestic product (although GNP would also provide additional insight). Thus, this method connects economists (who believe in an efficient market that price includes all information) and those of the energy analysis community that work to calculate EROI from core energy and materials data. The analysis shows that EIR is an effective proxy measure for EROI as they follow the same trends over time.

Often people interpret the steady decline of the economy’s energy intensity as an indicator that the economy is becoming more decoupled from energy consumption. However, as my paper shows, this is a misleading view. What matters more is whether or not obtaining energy also takes less energy inputs over time. As seen in the figure, during the 1970s the EIRs for oil, natural gas, and coal all dropped for over a decade (due to the Arab Oil Embargos raising oil prices) that economic growth was negative for 38 out of 96 months (40% of the time) from November 1973 to November 1982 (also see www.nber.org/cycles/cyclesmain.html). It took a decade for the US to effectively break from the stagnant economy by investing in energy efficiency (vehicle fuel standards, appliance efficiency, etc), new energy resources and technologies (Western subbituminous coal, enhanced oil recovery), and largely removing oil from electricity generation.

A parallel scenario exists for the last ten years in that again the EIRs of coal, natural gas, and oil all dropped significantly to the levels not seen since the early 1980s. And also, at the end of this drop in energy quality was a prolonged economic recession (18 months from December 2007 to June 2009) from which the economy has not fully recovered. US unemployment has been above 9.5% for an unprecedented amount of time since the Great Depression.

Image: http://environmentalresearchweb.org/blog/assets_c/2010/11/EIRPlot_RecessionMatching-1828.html

The conclusion from this analysis is that three decades after the oil crises of the 1970s, today we are essentially at the same point we were with respect to EROI and EIR as in 1980. In other words, for all of our technological advances in the last three decades – including computers, information technology, horizontal drilling and unconventional oil and gas development, and energy efficient appliances – we are just treading water with respect to energy quality. The US economy broke free from the energy chains of the 1970s by using energy more efficiently, and that will be the key to new economic growth. Unfortunately, these efficiency investments can take another decade to pay off. Although not widely cited as the reason by most economists and “experts” on news shows, low EIR and EROI energy supplies are the major reason why economists do not see near term economic growth being as large as in the past.

About Carey King

Dr. Carey W King performs interdisciplinary research related to how energy systems interact within the economy and environment as well as how our policy and social systems can make decisions and tradeoffs among these often competing factors. The past performance of our energy systems is no guarantee of future returns, yet we must understand the development of past energy systems. Carey’s research goals center on rigorous interpretations of the past to determine the most probable future energy pathways. Carey is a Research Scientist and Assistant Director at the Energy Institute at The University of Texas at Austin, and appointed also at the the Center for International Energy and Environmental Policy within the Jackson School of Geosciences and Business, Government, and Society Department of the McCombs School of Business. Visit his website at: http://careyking.com and follow on Twitter @CareyWKing
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