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
Energy Out (MJ) OIL
Cement
Steel
Other
Inputs
Energy In (MJ) Price and EROI
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Oil Sands
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Average price during
recessions
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Ultra-Deep
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Global Average
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Average price during
expansions
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Saudi Crude
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Extraction
Difficulty,
Time
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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 wellbeing. 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.