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Energy return on investment and economic stimulus spending

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 http://robertreich.blogspot.com, and for an entry on his normal calling for more stimulus spending, visit http://robertreich.blogspot.com/2009/11/great-disconnect-between-stocks-and.html). 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.

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High Debt and Energy Return on Energy Invested Don’t Mix

The June 13th edition of The Economist has a cover story about the heavy debt burden being placed upon the younger generation of the US citizens due to government spending on bailout packages. There are some staggering numbers (e.g. $483,000 for every household is owed to pay for unfunded obligations for elderly pensions and health care) and we’re almost assured to reach a debt of at least 100% of GDP in 1-2 years. This debt is worrisome not only because of the typical concerns about paying back money that is owed, but because the energy situation is different now than when the US had gross debt of 120% of its gross domestic product just after World War II. Future energy resources are poised to have less energy return on energy invested than past energy resources – that means less of a driver for economic growth.

The situation in the late 1940’s was that much of the US spending that caused the debt to increase was into factories, technology development, and worker training. Then these investments in infrastructure and skill transferred to the private sector after much of it came from the private sector because of the war – think Singer typewriter factories making M1 Garand carbine rifles. Then, after much of Europe and Japan was destroyed by acting as the battlefield, the US was the remaining industrialized country with no infrastructure damaged at home. Therefore, the world bought American products … and the US nor the world had yet not peaked in conventional oil production.

Thus, there are two important concepts (at least) that are fundamentally different for our future than our past:

(1) In dealing with the current economic recession and increasing debt load, the US is no longer the only industrial game in town, and

(2) Energy resources are generally more scarce and those remaining have less energy return on energy invested (EROI), or “bang for the buck”.

I will not dwell on item (1) as it is obvious today that China is the world’s manufacturer. They emit as much CO2 now as the US, although Americans still consume more (i.e. is responsible for more) CO2 embodied in purchased products and services than the Chinese. China is a net exporter of CO2 and the US is a net importer.

It is item (2) above that is the more long term concern and a fundamental driver in how world society will change. The US used its oil production capacity to fuel the Allied victory in World War II as the Germans had succumbed to turning coal into liquid diesel, and the Japanese were forced to pursue Southeast Asian islands in search of oil. The US strategy was still affected by not having oil and diesel available at any quantity desired, but to a much lesser extent than that of the opposition.

During the 1950’s the available oil in the US enabled the boom of the automobile age and rebel attitudes embodied by James Dean. With the US oil production peak in 1970 and the Arab oil embargos of 1973-74, Phase I of the “limits to growth” movement began. People could now conceptualize that there were limits to finite resources such as oil, but that is only part of the story. The energy return on energy invested – the amount of energy obtained, say in barrels of oil, after using one unit (e.g. barrel of oil) to obtain the new energy resource – for fossil resources is on an inevitable decrease and the EROI of renewable resources is not as high as the best (and past) EROI for oil, natural gas, and coal. In fact, some research (http://www.esf.edu/EFB/hall/images/Slide1.jpg) suggests that the renewable resource/technologies with the highest EROI are wood and hydropower – the oldest form of primary energy and the oldest form of powering automated processes (water wheels). You could also say that investing in modern hydropower dams played a large part in bringing the US out of the Great Depression.

We are now in Phase II of “limits to growth” movement with greenhouse gas emissions looming as an even larger environmental limit. The original energy resource limit concerns are also back at the center of discussion. The “easy oil”, or that with high EROI, has been found and extracted. Shale gas finds and extraction methods (i.e. fracing) have enabled new natural gas resources to become economic reserves accessible at any time, but at a higher cost than in the past, and likely with higher EROI than past natural gas fields (an ongoing study is attempting to quantify EROI for shale gas).

One set of solutions that is envisioned to solve our energy, environmental, and economic dilemma is the use of renewable energy technologies. Modern renewable technologies such as wind turbines, solar photovoltaic panels, and concentrating solar panels produce power when the input resource (wind and sun) are available. Since these resources are intermittent, research and technology focus upon how to either create steady electrical output or output on demand. This essentially means generating excess electricity at some time, storing that energy, and releasing it when desired. This extra investment in storage systems requires energy and again lowers the EROI for the entire system of electricity generation devices.

Because economic growth and energy availability are highly correlated, lower EROI also implies lower monetary return on investment. This in turn means that large investments in modern renewable energy infrastructure will not return the same amount of energy or money in the future as the same quantity of investment in hydropower in the 1930’s and oil in the 1950’s and 1960’s. So economic models that do not account for the energy return on clean/green/renewable technologies as well as returns on nuclear and fossil systems will likely overestimate the economic growth of the future. Some think that we have significantly decoupled our economic system from our energy system, but this is a short-sided view of the use and influence of historically high EROI fossil fuels on human civilization. Look at the figure below and ask yourself two questions:

(1) how this increase in primary energy consumption and GDP could have existed without fossil fuels?

(2) Can energy consumption and GDP continue their upward trends into the future, or even maintain current levels, without fossil fuels?

EnergyGDP_Historical.jpg
EnergyGDP_Historical.jpg

When looking on this 3000 year time scale, it is appropriate to ask these questions. One can visualize the day when fossil fuels will no longer be economic to extract. This is why more research into EROI and how it affects economic growth is needed. The understanding of how energy conservation (e.g. less energy consumption overall) programs affect economics and business structures needs to be better understood. This means going beyond energy efficiency (“energy/unit output”) which businesses are technically incentivized to do now already. It’s time to find out how people (at least those in the middle class who pay taxes yet don’t have too much disposable income) value their time and habits vs. investing in concepts such as the smart grid, electricity storage systems, biofuels, and oil shale.

Why do Americans who consume on average 350 GJ/person/yr (1 GJ = 1 billion joules of energy), compared to an average of 80 GJ/person/yr for the world, think that any sacrifice in energy consumption is not tolerable when other countries consume 1/3-1/2 the energy and have just as fulfilling, if not more fulfilling, lives? There are a few good reasons such as the US is a relatively large country that requires a good deal of energy to move from city to city. But designing cities and transportation systems to use less energy should be a priority instead of not even an afterthought. Transportation across a large country is just one example of a strategic challenge, but until we stop paying photographers to chase around Angelina Jolie and Britney Spears, then I’ll know we still aren’t serious as a society about tackling the energy challenges of our future. I believe we can have equal if not better livelihoods in the US by consuming less energy in the future. It’s not hard to convince Western Europeans of this, but they still have a large number of paparazzi …

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