Energy surplus: the economy blind spot?

North Sea oil rig

The special importance of energy has tended to be ignored or downplayed by conventional economists although it has recently become a political hot potato in the UK and elsewhere. What is also largely ignored is the importance of a large energy surplus to the health and strength of an economy that in turn impacts on our general standard of living.

Energy surplus is a simple concept – it’s the calculation of net energy output. In other words: the energy generated less the energy expended required in order to acquire it.  Energy inputs include the energy embodied in operating equipment and buildings and the energy consumed by them. If you are into metrics the calculation to compare different energy supply technologies is the ratio of energy output to the energy inputs. This is called the energy return on energy invested; EROI or EROEI.

Many countries have long enjoyed the large energy surplus provided by fossil fuels. This has enabled economies to diversify and become ever more sophisticated since the levels of energy surplus have been greatly in excess of that needed to satisfy basic human needs. In order to maintain such an economy, and therefore standard of living, then that large energy surplus needs to be maintained. This is achieved either by sources that produce a large energy surplus or considerable amounts of sources with a lower energy surplus.

There are signs however that the large energy surplus that has been enjoyed in the past may be on the decline. This is mostly driven by a decline in the EROI for oil and gas. Global production of oil and gas was 30:1 in the 1990s but in 2006 this had fallen to 18:1 (Gagnon, Hall, & Brinker, 2009). And with oil and gas still making up the majority of our global primary energy supply, 52.8% in 2011 – virtually unchanged since 1973 (IEA, 2013), this decline is important.

It’s fairly easy to understand that no life form can survive for long while energy inputs exceed the energy output. What appears to be harder to realise is that trends in energy surplus also have serious implications for the economy.

A decline in energy surplus occurs for the following reasons:

  • increased energy input expenditure for the same level of energy output
  • reducing energy output for the same level of energy input
  • or both of the above

So what is the explanation for the fall in EROI for global oil and gas? There are two main reasons: First of all an increasing proportion of conventional sources of oil and gas are passing their peak and are therefore not producing as much output as before. And secondly, there is an increasing proportion of unconventional oil and gas exploitation i.e. tar sands, deep-water oil fields, shale gas.  Unconventional oil and gas require greater capital expenditure (inputs) than conventional sources. Both these reasons can be summarised as an increasing toil for oil and gas. “Toil for Oil” was part of the title of in a Financial Times article (Lewis, 2013) reporting on the 2013 IEA World Energy Outlook report. The article specifically discusses the rapid increase recently in capital expenditure by the oil and gas industry.

And what of renewables? With the exception of hydro all renewable supply technologies have EROI figures that are lower than conventional fossil fuels. Technology improvements will of course go some way to narrowing the gap with oil and gas, especially as the proportion of unconventional sources continues to increase. But renewables are extremely site specific, are not as versatile, e.g. generating electricity only, and there is also the intermittency problem in the case of wind and solar. Addressing intermittency would reduce EROI since this would require greater energy inputs. It can also be expected that over time the marginal extra unit of wind and solar will have a lower EROI through the “best first” principle i.e. the best sites will be exploited first.

Note that those capital energy inputs are manufactured and supplied to the energy sector by the industrial economy. Increasing toil for energy of any kind to maintain a level of energy output means a crowding out of the ability of the economy to deliver other activities. It could ultimately lead to a contraction of the economy i.e. recession.

Ignoring the trends in energy surplus is therefore dangerous and can lead to failures in energy policy and planning. Innovations and technological improvements will go some way to try to halt or reverse this decline especially if a completely new abundant energy source is discovered. But will human creativity save the day or will energy resource limits bite and more importantly than this: When?

Claire Louise Carter is a PhD student at the Sussex Energy Group in SPRU at the University of Sussex.

References:

Gagnon, N., Hall, C. A. S., & Brinker, L. (2009). A Preliminary Investigation of Energy Return on Energy Investment for Global Oil and Gas Production. Energies, 2(3), 490–503. doi:10.3390/en20300490

IEA. (2013). Key World Energy Statistics 2013.

Lewis, M. (2013, November 25). Toil for oil means industry sums do not add up. Financial Times. Retrieved from http://www.ft.com/cms/s/0/5e923e3a-51d3-11e3-8c42-00144feabdc0.html?siteedition=uk#axzz2mJM8b39E

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