EROI, Insidious Feedbacks, and

the End of Economic Growth

David J. Murphy
SURE Conference
SUNY-ESF
November 4, 2010
1. Economic Production Correlates
with Energy Production
2. When oil consumption grows,
so does the U.S. economy
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US Oil consumption from 1970 - 2008
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 3. 50% of the variation in GDP is
explained simply by oil consumption
Is oil the chicken or the egg?

Karanfil 2009
 Is oil the chicken or the egg?

4. Adjusting energy for

quality differences
among fuel types
indicates causality
running from energy
consumption to GDP

Cleveland et al. (2000)

But its not just energy that grows
the economy

It is CHEAP energy
 5. Oil Prices are Lower During
Expansions
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Average Real Oil price from 1970 - 2008
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6. Every recession since 1970 has been
preceded by a spike in the price of oil
 7. Supply Curve
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Decrease of ~2 mbpd lowers price to $30 bbl

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8. Supply didn’t increase with Price
9. We are finding less oil
10. The oil we do find is in hard to
reach places (i.e. expensive)
 Summary of the Facts

  Inexpensive energy has been used to provide

steady economic growth in the recent past

  We are finding less oil, and the oil we do find is

expensive, creating a volatile price situation
 Peak-Era Growth Model

  This system of insidious feedbacks is aptly

described as a growth paradox: maintaining
business as usual economic growth will require
the production of new sources of oil, yet the only
sources of oil remaining require high oil prices,
thus hampering economic growth.
Peak-Era Growth Model

GDP

Time
What is so different between this
recession and past recessions?
  Peak Oil

  EROI
Are oil supplies constrained?
Are oil supplies constrained?

OPEC Spare Capacity estimates from McKinsey and Co.

 When was/will be the peak?
Does the date actually matter?

  The peak may have occurred in 2005 for

conventional crude and 2008 for liquids

  But it does not matter

  What does matter: Will the supply of oil be

constrained in the future?
 Energy Return on Investment
(EROI)
  EROI = Energy Out / Energy In

OIL Energy Out (MJ) 

Other
Cement Steel Energy In (MJ) 
Inputs
 Price and EROI
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Average price during
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Extraction D<>E"
Difficulty,
Time
 What does all this mean for
economic growth?

For the first time in the past 140

years we will try to grow the
economy on a declining oil supply
 What about alternatives?

“As resources become scarce and relative costs

change, substitutions will occur to ameliorate
effects of diminishing returns”

Barnett and Morse, Scarcity and Growth (1963)

“Resource scarcity has been successfully handled with the

help of technical progress that has widened the resource
base and/or by substitution. The 20th century has been
referred to as ‘the age of substitutibility.’ The 21st century
will be even more so.”
Radetzki (2010)
Substitution takes a long time
How does EROI impact society?
 Energy flow to society

Oil Economy

Biofuel
Economy
How does economic growth (or a
lack thereof) impact alternative
energy sectors?

  Financing alternative energy projects will

become increasingly difficult (ceteris paribus)
  Volatile fossil fuel prices – boom and bust cycles
  Large upfront investments require deep pockets

  Largest unknown – policy

  subsidizing renewables or taxing oil and gas sectors
Natural gas in particular is troubling for
renewable energy, as it is both
feedstock and competitor for various
alternatives
“VeraSun Energy Co.'s decision to delay the openings of two of
the largest U.S. ethanol plants reflects the immense pressure
ethanol producers are under as their margins are squeezed by
high corn and natural gas prices.”
http://www.marketwatch.com/story/ethanol-plant-closings-may-come-as-margins-vanish

“American Electric Power CEO Michael Morris took this sentiment

a step further, claiming that shale gas at $5.00 MMBtu (~3.5cents/
kWh) represents a challenge for the U.S. renewable energy
sector.”
http://www.greentechmedia.com/articles/read/will-natural-gas-hurt-renewables/
Demand: An Ace in the Hole!

  A systematic decrease in oil demand may have

unknown, and hopefully positive, impacts on the
economy

  The average European consumes half the

energy of the average American

  Half of our oil consumption ~ 9 mbpd

 Thank You Very Much!
  Contact information: djmurphy04@gmail.com, 315-412-4619

  References:

  1. Cleveland, Kaufmann and Stern. 2000. Aggregation and the role of energy in the economy.
Ecological Economics, 32:

  2. Hubbert. 1956 of Conference. Nuclear Energy and the Fossil Fuels. Spring Meeting of the
Southern District Division of Production, San Antonio, Texas.

  3. CERA. 2006. United States Production, Hubbert Vs. Actual. Cambridge Energy Research
Associates.

  4. Ericksen. 2009. Global Oil Production. The Oil Drum.

  5. Gagnon, Hall and Brinker. 2009. A Preliminary Investigation of the Energy Return on Energy
Invested for Global Oil and Gas Extraction. Energies, 2 490 – 503.

  6. Hall, Powers and Schoenberg. 2008. Peak Oil, EROI, Investments and the Economy in an
Uncertain Future. In Biofuels, Solar and Wind as Renewable Energy Systems: Benefits and Risks.
Pimentel Ed^. Springer Netherlands. Netherlands.

  7. Kahneman and Deaton. 2010. High income provoes evaluation of life but not emotional well-
being. Proceedings of the National Academcy of Sciences,

  8. Radetzki, M. 2010. Peak Oil and Other Threatening Peaks – Chimeras Without Substance. Energy
Policy, 38, pp. 6566 – 6569.