Energy Return On Investment

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Nafeez Ahmed:

"The pandemic has unmasked the unsustainable bubble economics behind the shale boom, revealing an industry with no resilience and inflated on the basis of unrepayable debt levels.

The most important scientific concept needed to understand this is ‘Energy Return on Investment’ (EROI). The metric, pioneered by systems ecologist Professor Charles Hall of the State University of New York’s College of Environmental Science and Forestry, is the foundation of the emerging discipline of ‘biophysical economics’.

EROI is designed to measure how much energy is needed to extract energy from a particular resource. What’s left is known as surplus ‘net energy’, which we can use to support goods and services in the economy outside the energy system. The higher the ratio, the more surplus energy is left for the economy. Over the last decades, that surplus has run increasingly thin.

By the time the world is on the way toward recovering from the Covid-19 crisis, the oil industry will be decimated to an unprecedented degree. In the early twentieth century, the EROI of fossil fuels was sometimes as high as 100:1. This means that a single unit of energy would be enough to extract a hundred times that amount. But since then, the EROI of fossil fuels has dramatically reduced. Between 1960 and 1980, the world average value EROI for fossil fuels declined by more than half, from about 35:1 to 15:1. It’s still declining, with latest estimates putting the value at between 6:1 and 3:1.

As we use more and more energy just to extract energy from our resource base, we are left with less ‘net energy’ to support financing of public goods and services. This has acted as a background ‘brake’ on the rate of economic growth for the world’s advanced industrial economies, which has also declined since the 1970s.

According to Professor Mauro Bonaiuti, an economist at the University of Turin in Italy, mainstream economics has failed to account for these key ‘biophysical’ underpinnings of the economy: material flows are dependent on energy. Since the 1970s, industrial societies have been in a ‘phase of declining returns’, he argues, measured across GDP growth, EROI, along with labour and manufacturing productivity.

To make up the shortfall, Bonauiti argues, we have kept the economy growing based on accelerated levels of debt. After the 2008 financial crash, a massive program of quantitative easing (QE) drove global debt even higher than pre-crash levels — barely sustaining a much slower level of GDP growth.

But the scale of debt keeping the industrial machine chugging along far outweighs our energy resource base. At some point, he warned, this unsustainable heyday was bound to grind to a halt.

These dynamics have made the economics of oil particularly unsustainable. In 2005, conventional crude oil entered a long plateau. To meet growing economic demand the industry shifted to more expensive unconventional forms. Since then, US shale supplied some 71.4 percent of global oil supply growth.

In February, as most of the world was sleepwalking into the Covid-19 pandemic, the Geological Survey of Finland — a Finnish government agency overseeing the EU’s mineral resource modelling — published a comprehensive study. It confirmed my earlier warning that this much-lauded expansion was in reality a debt-driven ‘bubble’.

Although there is ‘plenty of oil left,’ it is ‘increasingly expensive to access’, the report warned. Record shale oil production came at higher costs and declining well productivity. Most shale oil companies faced negative cash flow, compensated for by drawing down billions of dollars of unrepayable debt.

The pandemic was a pin that burst this oil bubble. And it may not ever come back.

Part of the reason is that the demand slump will probably last more than a year. The more optimistic anticipate that a vaccine could be developed within around 18 months, but this estimate doesn’t account for the regulatory hurdles that usually make vaccine development a complex 10-15 year process. So a vaccine is most likely several years away — if one is even possible. According to top systems biologist Professor David States, there are many reasons it may not be.

This means that the most likely scenario will see a prolonged economic contraction keeping demand too low for the global oil industry as we know it to survive. Prior to the pandemic, several analysts suspected that the US shale industry’s debt-levels were largely unrepayable — now it seems plausible that the debt can never be repaid." (