EROEI and Economic Growth

1. Agcapita Update
September 2011

2. Agcapita Update
Haven’t heard of EROEI? You can be forgiven if its not a
topic that is on the tip of your tongue with issues of sovereign
insolvency, QE3 and the like dominating the airwaves.
I feel confident that EROEI is an acronym that will receive much
wider recognition over the next decade. What is EROEI you
ask? It requires energy to produce energy and that relationship is
expressed as “Energy Return On Energy Invested” or EROEI for
short. Why is EROEI important? Because we are in the process
of transitioning from high EROEI sources of hydrocarbon energy
to low EROEI sources - think Saudi Arabia versus the Alberta oil
sands.
Even if you don’t believe that peak oil is an issue, I would
argue that EROEI decay is most certainly one. Discoveries of
conventional oil total around 2 trillion barrels, of which around 1
trillion barrels have been extracted, leaving approximately 1 trillion
barrels remaining. However the first trillion barrels was found on
shore or nearby, shallow and concentrated in large reservoirs
and generally in politically stable regions - the “easy” oil. The
remaining oil is far offshore or deep underground, in smaller,
harder-to-find reservoirs and mostly in politically unstable locations
- the “difficult” oil.
I believe an increasing dependence on “difficult” oil has some
serious consequences for the global economy.
– The amount capable of being produced from a given quantity
of reserves - the delivery capacity - will be reduced. This
will make it harder to increase overall production even where
reserves remain theoretically abundant.
– The cost of extracting remaining reserves will escalate in
terms of the energy inputs required which in turn will drive real
energy prices upwards.
Current production is around 86 million barrels of oil per day
(“BOPD”). However an 86 million BOPD oil production profile of
high EROEI sources is very different from 86 million BOPD of low
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3. Agcapita Update (continued)
EROEI sources. Effectively the net energy left over for machinery, irrigation, fertilizers, herbicides, storage
to drive economic growth is significantly lower in the and transportation. Here are just a few examples:
latter scenario. Here are some highly approximate
EROEI ratios for various energy sources: – The US and Canada export million of tons of grain
every year - grain that contains large quantities
– 1970s oil & gas discoveries - 30 to 1 of nitrogen, phosphorus, and potassium. The
– Current conventional oil & gas discoveries - 20 to 1 ongoing export of grain would slowly drain the
– 1980 coal - 20 to 1 inherent fertility from cropland if the nutrients were
– Oil Sands - 5 to 1 not replaced with man-made fertilizers.
– Nuclear - 4 to 1 – Irrigation accounts for approximately 20% of US
– Photovoltaics - 4 to 1 farm energy use and in water constrained locales
– Biofuels - 2 to 1 such as India over half of all electricity is used to
drive irrigation pumps.
To engage in a simplistic piece of analysis, assuming
86 million BOPD composed of 1970s oil & gas A rhetorical question - if declining EROEI drives up
reserves - there is around 83 million BOPD net to fuel the real cost of agricultural commodities will it confer
growth. Assuming 100% biofuels then this drops a competitive advantage on land with lower energy
to 43 million BOPD. The farther down the list we intensity - e.g. no need for irrigation and low fertilizer
must go to maintain supply the worse the net energy use - such as Canadian prairie farmland?
situation becomes.
I believe the twentieth century trend of low real
Why do we care about this? commodities prices is in large part a reflection of the
abundant, high EROEI supplies of energy that were
Economic growth is in large part a surplus energy available during that period. Without new sources of
function as well summarized by Chris Martenson high EROEI energy I would argue that this favorable
in his book “Crash Course”. A reduction in surplus trend will reverse.
energy will increase energy prices at the same time
it is putting pressure on growth. If the real cost of If this is the case then significant amounts of wealth
hydrocarbon energy is going to increase then the will be transferred from commodity consumers to
real cost of other commodities will also increase as commodity producers - particularly to producers
most have significant energy inputs. On balance, I of commodities with the most inelastic demand
believe the net result will be a transfer of wealth from curves. Declining EROEI is in part why I believe in 1)
commodity consumers to commodity producers. direct investments in western Canadian commodity
production assets and 2) in investments that serve as
In less vague terms, the prospect of deteriorating proxies for the increasing real cost of commodities -
EROEI will certainly increase food prices, as modern e.g. businesses linked to commodity production.
agriculture depends heavily on the use of fossil fuels -
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