A Tutorial on Net Energy and Its Relation to the Economy
This is the tutorial I presented in Syracuse NY at SUNY-ESF in April. You can download the slides here. The pdf file has much better resolution than you'll find here. What I will do here is provide some more commentary on the subject with each slide.
And now, a man who needs no introduction...
The purpose of this tutorial was to provide people who were relatively new to the concepts of Biophysical Economics (which is almost everyone!) what the role of net energy is in economic activity. What I present here will be nothing new to long time readers. So you can browse through it quickly. New readers who have not spent any time reading my prior posts about BPE and net energy might find some of this instructive.
This overview slide pretty much sums up what I planned to talk about.
Everyone at the conference was familiar with peak oil and energy return on energy investment (EROI). But the issues of what net energy means to the productive/consumptive economy are much less well understood. In general most people have an intuitive, if not formal understanding of what net energy means. But it is still the case that many people have not really linked up the flow of net energy with the work that gets done in the economy. Hence I choose to focus on Net Energy. The most important points regarding net energy versus gross energy (i.e. the number of barrels of oil per unit time produced) are that: a) net energy available declines at a faster rate than oil production declines; and b) the peak of net energy flow has already passed us by and we are in serious decline already — much before the peak and decline of gross energy.
It is somewhat surprising that many people do realize that net energy available to do useful (read economic) work is less than the gross energy available at the well head, yet they do not really spend much time thinking through how this net energy turns into useful work in economic activity. They have a vague notion of, say, manufacturing production driven by machines and those using up energy. But the nature of the connections and transformations is not as solid.
In this slide I tried to make the connection more solid in people's minds. Energy in specific forms (e.g. gasoline or electricity) are direct inputs to the machines that accomplish our economic work. Society and the markets may put a value on the end product of work, e.g. doing work to make a hamburger may be just as valued as doing work to make a screwdriver (the tool, not the drink). And they are priced accordingly. But the screwdriver will save energy resources in the future if it is used. Once the hamburger's calories are used up, that is the end of it. The only possible future economic value in a hamburger might be if it fed a person who used those calories to make a screwdriver!
We begin to capture the essence of EROI when we understand that obtaining the energy that goes into the economy requires that we use up some of the gross energy (either directly or from stocks of already converted energy) to obtain that energy. In this slide I am showing the feedback of diesel fuel (or the equivalent of some other form) being used to run the processes of extraction, refining, and distribution. As a result of using some of the fuel to get more fuel, the net amount being delivered to society is much less than the amount of energy (in the form of diesel) in the original stock of oil gotten out of the ground. Net energy is highly refined energy (more power capacity per unit of weight or volume), making it very much more valuable than the raw oil from which it comes. But it also is less in total energy available simply because some of it was used up producing the net product.
Net energy is not just net of production energy costs. We also have to take into account the energy used to create and maintain the capital equipment that is used to capture and convert the raw or gross energy into the final usable products. So we need to have some mechanism for accounting for all of this energy, properly amortized, and added to the operational energy costs. For example, we should consider the energy required to construct drilling rigs, pipelines, and refineries as part of the EROI computation. This is not an easy task since no accounting system actually counts Joules used per unit time. The closest we get is the cost accounting system that keeps track of allocated costs (e.g. labor, materials, capital equipment, and overhead — both direct and indirect costs) as a surrogate for energy. The logic is pretty simple. All of those items did, in fact, require energy inputs (from prior net flows used as investments) just as we think of capital invested in the same items that compose the cost structures in our economy. So dollar accounting can serve as a rough guide to energy accounting. But it is only a very rough guide since the causal linkage between money and energy has long ago been broken by financialization (creating ephemeral monetary wealth out of promises and bets!)
This graphic (by no means telling the whole story) shows the kind of complexity involved in accounting for all of the energy transformations and uses that go into delivering usable energy to the end user. Every single item in each of these elements in the stream needs to be accounted for in order to have a real understanding of what our energy actually costs us. Again, the logic is simple. Every time energy is used to construct or operate these elements that is energy that will not be available to do end user work, the economic work that produces results for the consumers in society. This model requires that we separate energy uses into two basic domains. The first is the energy used to capture, convert, and deliver the energy we use in our lives. The second is the latter, the energy we actually use to move our vehicles, heat and light our homes, cook our food, take hot showers, etc.
This slide sums that up and shows that the net energy to the economy, NEE, in the next time increment (t+1) is just the gross energy pumped at time t less the prior produced net energy that we use to invest in getting that NEE out. The dynamics are a bit more complicated than this simple formula suggests, but the basic idea is sound. Some day I will work on a more realistic dynamical equation.
This slide just restates the point. What is very important to understand, however, is that the red, energy capture, conversion, and delivery (CCD) subsystem is subject to two interrelated forces that change the whole dynamic over time. These will be shown in the next slide. But it has to do primarily with the depletion of the fixed reservoir of gross energy (e.g. fossil fuels). The total input into the economy is very much dependent on these two forces.
In this slide you may notice that the raw (gross) energy input to the CCD is smaller, representing the decline in resources over time. Next you can see the increased amount of energy being fed back into the CCD in order to attempt to compensate for the diminishing supply, but also as a result of the fact that such compensation involves doing harder work to get what can be gotten. The principle known as ‘Best First’ means that the easy to get at and pump oil (in this case) is taken first, leaving the harder to find and harder to pump/refine oil to the future. Then when the future arrives the energy cost of getting the stuff up and out goes up. It takes more energy to accomplish the same flow rate of the gross energy. This necessarily means a lower net energy to the economy flow rate since more had to be siphoned off to try to keep up gross flows. What I am showing here is the combined effects of post-peak gross energy and declining EROI (increasing marginal costs). Together these factors drive the supply of NEE downward at an accelerating pace.
Just to be clear about work itself. All economic work IS biophysical work. That is everything that we do to produce goods and services can be broken down into work as defined in physics. What makes it economic work is that it is effort applied to changing the world and the stuff in it into forms and processes that serve human wants and needs. Fundamentally, anything that supports human life is economic work. It does not matter what dollar price is put on the output. The value is intrinsic to the usability of the good or service in supporting life. Illicit drug products may command a high dollar price in the marketplace. But clearly, such drugs do little to support life or improve our conditions. So there is no real relationship between drug prices and economic value. What has happened is that the historical energy cheapness of high-powered energy forms, like oil, have boosted us beyond the point of serving mere physiological needs to such a degree that we have mostly lost the sense of purpose of true economic work. Some of us cannot think of anything else to do but to turn to the effects of drugs to compensate for our sense of worthlessness.
The simplest economic system is centered precisely on our ability to efficiently obtain food. If we succeed at this, not only do we maintain our biomass, but we have enough additional energy to provide our offspring with nourishment, thus increasing the total biomass devoted to the human genome.
The human situation is largely dependent on the production of tools (including clothing and shelter) and the mastery of fire (for cooking and heat). If a man learned to make a spear he became a more efficient hunter, able to chase down larger game and produce an essential surplus of food. This is humanity's econiche! The production of hunting, and later farming, tools and techniques is how we survive in the world. This is the absolute core of our economic life. It is also the origin of specialization which allowed the energy investment in creating tools to become more efficient. For most of humanity's history, the EROI of physical exertion was going up. When we learned to master mechanical work produced by water and later fire, our EROI went up still further, but one had to add in the energy content of the water and fire (and wind) in order to obtain a systemic EROI. In the historic world, the sources of energy were essentially boundless compared with the meager few humans and with their pre-industrial consumption rates.
But the high EROI for human biomass eventually led to an overabundance of human biomass! The evidence that suggests that human biomass far exceeds the normal ecological carrying capacity of the planet is very compelling. If we consider that the artificial carrying capacity produced by high EROI fossil fuels, coupled with machine power is what allowed us to go into this overshoot condition, and that after peak net energy that overshoot condition becomes operative, then the picture becomes rather dire. No species that found itself in an overshoot condition avoided population collapse.
This is a graphical representation of that core of economics — our metabolism. Take special note of the indications of the Second Law of Thermodynamics at work; the heat loss from our bodies and the entropy increase that attends the decay of our “technological” productions. Also, note that our own bodies are designed to have energy CCD subsystems that, themselves, take energy to operate. So our external social and technical organization simply reflects this universal pattern of systems.
I've included, in this figure, the “extra” use of energy to enhance life through esthetics. At first this probably came from humans taking a little more time to produce a spear or clay pot that was decorated in some fashion. There was excess energy to use, and it could be directed at making things not just practical, but pleasing to the eye and spirit. Over time, as more energy could be siphoned away from basic physiology and reproduction, more technology and esthetics could be supported. In the industrial age, when the flows of super high-powered energies coupled with machines have significantly amplified our basic energy economy systems, we have invested significantly more into esthetics, or at least what started out as esthetics. Today we build McMansions and drive SUVs that are designed to please, but also boast of super abundance. They allow us to practice conspicuous consumption by channeling energy into ersatz esthetics — glitter and bling — just for the sake of consumption. So extraordinarily abundant was our extrasomatic energy available from fossil fuels that we not only produced overshot human biomass, but channeled considerable energy into these non-life supporting artifacts and services.
Two of my pet peeves have to do with the general misapprehension of what efficiency means (and how that misapprehension contributes to digging us a deeper hole) and our general misapprehension of the value of increasing complexity as technology supposedly advances. It is the perception that technology generally increases the efficiency of work processes, but this is strictly a local perspective. It is true that increasing technological inputs to work processes can have a positive affect on productivity or the number of units of output per unit of human labor input. But productivity is not actually the same as efficiency per se. Moreover, the use of local productivity as a measure of efficiency misses entirely the fact that, at least in some cases (and I think this is increasingly the case), a marginal improvement in efficiency due to the technology utilized is lost in the global system when the energy inputs to produce that technology is taken into account. We are back to the EROI calculations wherein we should use the largest possible boundary to capture the true energy costs. As an example, I discovered years ago while working in the solar space heating business (1980s) that the rough amount of energy it took to build the solar collectors, pipes, pumps, etc. exceeded the usable energy gained to heat the work space! The solar systems were being dollar cost subsidized by the government (both federal and state) so the home/business owners were realizing what looked like a reasonable payback in terms of saved heating bills. So they were seeing a local optimization, so to speak. But what was really happening is that the governments were hiding the true costs of producing the systems. Even the leading solar collector manufacturers were selling collectors at a slim margin to a loss in order to increase their market shares. Everyone was absolutely convinced that with enough units being sold, economies of scale would kick in and bring the prices down to where the subsidies (and lost profits) could be forgone. Eventually the subsidies were removed simply because the systems were not proving out thermodynamically (i.e. they were delivering far less usable heat than everyone thought they would). And look what happened to that industry. I was fortunate enough to get out before the floor collapsed.
When work processes are first being developed even small improvements in technology can have large effects on efficiency AND productivity. As a result, our thinking goes that adding more technology (improvements) will further increase both. But increasing technological improvements follows a diminishing returns law just like any scaling problem. This relates to the second issue which Joseph Tainter (who gave the keynote address on Friday night) address with his thesis that increasing complexity reaches a point of diminishing returns. He casts this in a more general sense that when people are attempting to solve problems (societal as well as technical) they generally find solutions by increasing the complexity of the process. This applies to processes of governance as much as to processes of production. Growth and increasing complexity that comes with it eventually reaches a point where not only is the next unit of increase not paying for itself, but actually starts to decline in value. In other words, there is a peak of complexity (as well as size) after which adding more complexity, such as putting in more technology, actually produces a net loss to the global system. Since organizational entities like governments and businesses are largely self interested they will only see what looks like an improvement in local productivity and fail to note that the whole system in which they are embedded is worse off as a result.
Eventually, however, this pattern catches up with every entity precisely because they are embedded in the whole and long-term feedback loops will start to impact them each.
The ability to locally recognize a global deterioration can be easily masked in a system where the growth in availability of very high EROI energy sources is accelerating, as has been the case with fossil fuels over the last two hundred years. For example as local entities made wealth gains due to increasing use of machinery (most recently computing) they failed to see the deterioration of the environment that resulted. It has only been in the last fifty years that those effects became sufficiently obvious and interpreted for what they were by a few global-thinking individuals that we have started attempting to consider those “externalities” when accounting for total real costs. We really don't know how to do that effectively, but the thought is rising that we need to. Unfortunately, because of very long time lags in the feedback loops (e.g. the accumulation of CO2 in the atmosphere and oceans) our recognition comes too late to actually mitigate.
This slide attempts to show the model of a biophysical macroeconomics view accounting for natural resources, including nature's ability to absorb high entropy wastes, and explicit energy flows. Note that while money, used as a message conveyor to signal work processes to produce, flows between standard neoclassical economic entities there is no such flows out to the resources to pay for nature's services. Money, operating in a market system, is just a way to coordinate the overall activities in the production systems. It is information flow, at root. See the next slide.
A long time ago, when tokens were first being used to represent real wealth accumulation, money represented a claim on that wealth. But it also came to represent a claim on future new wealth in the sense that someone could use a current claim to purchase work to be done in the future. This worked simply because with high EROI systems (such as agriculture) the expectation that a greater gain in total wealth could be realized was basically sound. In other words, people could bet that the future would be marginally better than the present and take a risk by putting up some of their current claims on wealth to ‘invest’ in future production that would pay back the current claim plus some additional.
The basic pattern of accumulating (storable) wealth and using some of it to purchase productivity was possible in a world where expansion of the population and increasing access to natural resources was possible. It was also promoted by the fact that over the ages humans always managed to find ways to increase the total exosomatic energy flowing into their work processes. With the advent of fossil fuel-based work done by machines (with increasing technical efficiency) this pattern took off in spades.
Somewhere along the line (perhaps as early as in the 14th or 15th centuries, humans started losing the deeper meaning of money as representing a capacity to do work. Values became detached from real utility. Economic models, such as mercantilism and later capitalism, started treating the tokens of work as if they were the primary units of value. As energy continued to flow in increasing amounts and power, there was little regard paid to this understanding. At some point, the idea that money produces money (rather than money invested in work produces real wealth that would result in an increase in the number of tokens in circulation) took hold.
Now money is valued for itself. Monetary wealth, often only recorded on paper as a series of promises, has come to be the same as real wealth in the minds of most people. Fiat currencies work in a psychological space where money is perceived as wealth in and of itself. It is still true that having money allows one to buy real wealth (assets) and services, but this is only the case as long as everybody believes that money is worth something, even if they don't exactly know what. And it only works as long as one has a source of real income. Rents work only so long as the underlying assets are maintained (meaning doing real work to overcome entropy). Going to a job only works as long as the job exists and the products or services are in demand. Below I raise the issue of what happens to the value of money and the potential for income when energy flows diminish.
People being inventive with regard to how to develop “instruments” have now gone so far in this money is its own value game as to develop paper products (essentially still some kind of IOU) that act as real assets in their own right in the minds of their owners. That is, they are now seemingly creating money out of thin air by promising that there will be some solid asset (collateral in the future) that will provide the underlying value, but they don't even need to say what that will be! This is the world of finacialization gone wild. We turned a relatively simple method of investing in future real assets (including the origin of fractional reserve banking practices) into investing in some vague promise that gets paid off in created money. Today, financialized money transactions account for a significant fraction of the gross domestic product, as well as that measures growth, just because they do involve sales of pieces of paper valued at some nominal amount. The Wall Street and investment banker boyz are recognizing record profits from those sales, and duly awarding themselves giant bonuses for doing so. Yet it is all a fabrication. A dream. A belief in something that isn't real. All made possible because we have so long enjoyed the exponential rise (until recently) of energy flow capable of doing real work that made it seem like dreams could come true.
This is short detour to explain something very fundamental and almost always under appreciated by the majority of people. Most people, especially the politicos, believe that alternative, renewable energy sources such as solar (PV and thermal), wind, waves, geothermal, etc. are going to simply replace fossil fuels and the economy will keep chugging along. At least some of them have the slightly more realistic belief that this is only feasible if we cut out a lot of wastage and increase efficiencies (but look out for what I said above about efficiencies). Here I focus on the fallacy of sustainability unless the wide boundary EROI of the energy CCD capital equipment is such that it can supply society with NEE and the feedback energy needed to replace and repair itself. We heard several papers at the conference that suggested this might not be the case. For example solar PV may have actual EROIs so low that there is no way they can be produced without subsidizing the energy needed with fossil fuels sources. In truth, this is exactly what is happening today. Much of the energy cost for manufacturing, delivering, and installing these systems is borne by still relatively cheap fossil energy. It is looking increasingly less likely that some of these alternative systems collecting what amounts to real-time solar flux will meet the sustainability test shown above.
And high EROI fossil fuels are running out!
This slide expands my original bioeconomic dynamics model presented in “Economic Dynamics and the Real Danger”. In this I've modeled the addition of a crash effort (WWII mobilization level) to produce a sustainable alternative energy subsystem. This assumes that sufficient EROIs are achieved. Sufficient means technically feasible AND enough to produce a sustainable flow of NEE for a much smaller population of much less consuming people. The brown trace represents total assets in emergy value. This includes all human biomass as well as all of our artifacts, long lived as well as perishables. As you can see, the addition of sustainable sources still does not allow business as usual once fossil fuels and NEE from those fuels goes into decline. And note that the initial rate of decline does not appreciably change. It only starts to diminish as the alternative sources ramp up (at about 10% per year after the initial mobilization). This model, by the way, does not take into account the fact that we would have to divert significant amounts of NEE to build out these systems, which have very high front end costs. Eventually the NEE from alternatives will allow a settling into something akin to a steady state economy with total assets being maintained at a level significantly lower than exists today.
So this graph suggests bad news and good news. Yes we will suffer extreme disruption and probably massive loss of life as the NEE flow to society falls off rapidly. But we could also find a level of ‘equilibrium’ or a carrying capacity that is nothing like we have been used to, but definitely not Olduvai either.
But now, we must ask ourselves: How feasible is this kind of scenario? How likely is it that every citizen and the politicians will get it such that they commit to this kind of effort. It would mean extremely significant sacrifices on the part of every human alive today, and for the rest of their lives. It still wouldn't save everyone. And, most of all, it depends entirely on the technical feasibility of those alternatives achieving true sustainability with significant NEE left over. How likely does this seem? To technology cornucopians it will probably seem realistic. So the challenge to them is: Show us the energy. And I mean true NEE, not just the fact that the amount of solar energy falling on the Earth each day exceeds our energy needs for a whole year. Impressive as that might sound, it is a lot of hot air and wishful thinking. Only real capture and conversion with substantial NEE counts. My conjecture is that whatever sustainable technology we will be able to produce in the future (like water wheels!) our collective EROI will just be slightly better than basic photosynthesis (about 1-3% conversion to biomass). Agriculture, hunting, and forestry will be what the majority of people will be engaged in in the future. A few craftsmen will produce our water wheels, clothes, shelters, etc. And, I do suspect that given the amount of knowledge we do posses regarding how things work, and breeding techniques, etc. those alive will not need to live at mere subsistence. But that is another story.
So here are the factors that define our predicament. We know that conventional oil production is at or near its global peak. Non-conventional oil, such as the stuff coming from Alberta's tar sands, is very costly in energy terms as well as environmental degradation (remember the externalities). The same can be said for non-conventional natural gas drilling (fracking). The extraction and delivery of coal is highly dependent on diesel fuel, hence oil. And all fossil fuels come from finite reservoirs of diminishing quality. That means the EROI for fossil fuels is already in steep decline. And that means the NEE is too.
In fact, the dynamics model shows that NEE peaks and declines years before the gross declines. This strongly suggests that the NEE from oil has already been in decline, perhaps since the 1990s. Indeed the inflection point when the accelerating increase of energy flow turned to a deceleration (forming the logistic or “S”-shaped curve) may have come as early as the 1970s. For these reasons I suspect very strongly that the global economic situation correlates with these phenomena. If we had some way of re-connecting money value with energy value we would find that real income growth rates started to decline in the 1970s. Indeed many people think that was the period when, in the OECD, pressure started to be felt on family incomes and people were starting to become poorer. That was a time when many families turned to two incomes just to keep up. Globalization, in effect the attempt to find low energy demand populations to do the labor, was a response to lowering NEE. Families in China and India require less high-energy goods and services for their lifestyles, as compared with American workers, for example. It became cheaper to ship materials to those countries and ship finished goods back to the OECD countries.
But as human nature is universal, now that these cheaper labor markets have gotten a taste of higher incomes and material goods that have been enjoyed in the west, guess what is happening. Companies that enjoyed cheaper labor have to re-think their tactics and logistics, if not their strategies. As oil prices, the major component of transportation these days, continue to rise, the economic advantage of globalization will diminish and relocalization will start to look like a better solution. The only problem is that the distribution of natural resources is not uniform in the world and the NEE to apply to getting them will be too low to make it cost effective.
These are suggestions about what we will have to do as NEE declines further. It is not a given that these will even work. One thing is absolutely certain. From a material standpoint we will all be substantially poorer in the future since physical work can not be sustained at anything like the current levels. It isn't even certain that we can mitigate the effects of entropy on our fixed assets let alone produce new ones. And, in addition to that, what will we do to adapt to the effects of climate change? These are extraordinarily threatening times for humanity.
I don't hold out much hope that we humans will turn to and implement any of these suggestions in a timely fashion. The rate of decline of NEE plus the rate of increase in the climate chaos we are experiencing suggests to me that we will be past the point of no return by the time anyone with the power to do anything comes to the realization that something, indeed, needs to be done.
This is serious business. We are going to be in major contraction. Actually we have already entered the era of contraction but the rate of it will increase significantly in coming years. Get yourselves to a potentially stable climate location, hopefully far from the madding crowds, and learn permaculture. The rest will be sheer luck.