Decline of EROI Directly Impacts on Economic Prosperity

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* Article: How Does Energy Resource Depletion Affect Prosperity? Mathematics of a Minimum Energy Return on Investment (EROI). By Adam R. Brandt. BioPhysical Economics and Resource Quality, March 2017, 2:2

URL = https://link.springer.com/article/10.1007%2Fs41247-017-0019-y

Abstract

"It has been proposed that energy resource depletion and declining energy return on investment (EROI) can disrupt modern, prosperous lifestyles. This is because such lifestyles are dependent on abundant, low-cost energy supplies, to date supplied by fossil energy. We illustrate a mathematical structure by which to analyze the impacts of energy depletion as it affects all sectors of the economy. This framework is based on the reduced availability of discretionary outputs as inter-industry operations become less efficient. We illustrate this mathematical framework, and explore a simple template economy with four sectors. The inputs for each sector are defined at an order-of-magnitude level using data for the US, and the matrix is modified to explore the impacts of resource depletion and uncertainty. We show that the “net energy cliff” concept used in prior studies emerges from the structure of this template economy and appears at similar levels of energy productivity hypothesized in prior work. At levels of net energy return ≤≤ 5 J/J, the fraction of productive outputs free to use in discretionary purposes declines rapidly, resulting in the emergence of an effective “minimum EROI” below which prosperity is burdened by excessive direct and indirect requirements of the energy sector. We explore how uncertainty in the matrix specification impacts the level at which the minimum EROI becomes binding. We also show how changes in other sectors (e.g., efficiency of materials production) can affect the rate at which energy depletion affects prosperity."

Discussion

Nafeez Ahmed::

"Adam Brandt, a leading EROI expert at Stanford University’s Department of Energy Resources Engineering, in the March edition of BioPhysical Economics and Resource Quality proves that the decline of EROI directly impacts on economic prosperity.

Earlier studies on this issue, Brandt points out, have highlighted the risk of a “net energy cliff”, which refers to how “declining EROI results in rapid increases in the fraction of energy dedicated to simply supporting the energy system.”

Axiom: So the more EROI declines, a greater proportion of the energy being produced must be used simply to extract more energy. This means that EROI decline leads to less real-world economic growth.

It also creates a complicated situation for oil prices. While at first, declining EROI can be expected to lead to higher prices reflecting higher production costs, the relationship between EROI and prices begins to breakdown as EROI becomes smaller.

This could be because, under a significantly reduced EROI, consumers in a less prosperous economy can no longer afford, energetically or economically, the cost of producing more energy — thus triggering a dramatic drop in market prices, despite higher costs of production. At this point, in the new era of shrinking EROI, swinging oil prices become less and less indicative of ‘scarcity’ in supply and demand.

Brandt’s new economic model looks at how EROI impacts four key sectors — food, energy, materials and labor.


Exploring what a decline in net energy would therefore mean for these sectors, he concludes:

- “The reduction in the fraction of a resource free and the energy system productivity extends from the energy system to all aspects of the economy, which gives an indication of the mechanisms by which energy productivity declines would affect general prosperity.

A clear implication of this work is that decreases in energy resource productivity, modeled here as the requirement for more materials, labor, and energy, can have a significant effect on the flows required to support all sectors of the economy. Such declines can reduce the effective discretionary output from the economy by consuming a larger and larger fraction of gross output for the meeting of inter-industry requirements.”

Brandt’s model is theoretical, but it has direct implications for the real world.

Insight: Given that the EROI of global fossil fuels has declined steadily since the 1960s, Brandt’s work suggests that a major underlying driver of the long-term process of economic stagnation we’re experiencing is resource depletion." (https://medium.com/insurge-intelligence/the-new-economic-science-of-capitalisms-slow-burn-energy-collapse-d07344fab6be)

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