This post isn’t going to win me any friends in the blogosphere, but I’ve donned my Kevlar underoos in anticipation of the response, and it has to be said: Economics trumps energy.
What am I talking about? Simple: There’s this obsession, bordering on a fetish, in some circles with the concept of EROEI (energy return on energy investment). Basically, the idea is that you have to expend energy to extract, process, and deliver it in a useful form. E.g. you have to pull oil out of the ground somewhere, transport it to a refinery, refine it, and then typically transport it at least once more before a customer can actually purchase and consume the final product. That all takes energy, obviously, so you can calculate a return on the investment–you spend X kWh of energy in turning oil in the ground to a usable product at your local gas station, and every gallon of gasoline provides you with Y kWh of energy, so your absolute net energy gain is (Y - X) kWh, and the percentage gain is (Y - X)/X. Simple stuff.
The problem isn’t the math, it’s the way people fall into orbit around the concept. A good example is the post currently up at EcoGeek, Water Powered Car Will Never Work, which focuses exclusively on the physics of the situation. While I agree with the assessment of the energy flows, and I find it hard to see how anyone couldn’t, it misses the point:
We decide which things to do based on economic considerations, not energy flows.
Economics, I will remind you all for perhaps the 48 gazillionth time, is the study of the allocation of scarce resources. But everything is measured in money, and those valuations are intimately tied to how much individual consumers value the things they purchase–in econo-geek speak, their utility functions. Using energy flows as a proxy for valuations only works in those situations when they just happen to agree on the relative cost of various alternatives.
Need a specific example? OK, imagine this: Oil is getting pretty scarce, and therefore very expensive. The cost of gasoline is pushed up by the cost of oil to much higher levels than we’re seeing today. We can cook oil out of the sands and shales in the US and Canadian Rockies, but only by using a lot of some other form of energy. In our scenario the economy is shifting away from oil use, but not nearly fast enough (we have all those old cars still on the road, for example), so the market, reflecting the demand of all those individual consumers, values a kWh of energy in oil much higher than it does a kWh of energy in natural gas (or nuclear power or wind power or…). Therefore, we’ll use one of those non-oil energy sources to cook oil out of the ground because the oil is worth more than the cost to produce it, including all that natural gas or whatever. The net energy gain could well be negative, but until the price of the other energy source rises enough we’ll keep doing it.
Need a more immediate example? Batteries. Not the fancy lithium ion cells in your laptop or the NiMh cells in your Prius, but the penlight cells in your camera or the 17 remote controls on your coffee table. How much energy do you think it takes to make one of those penlight cells, even with the enormous economies of scale from making the immense number we manufacture every year? And do you think the whisper of electrons an AA battery produces is anywhere near that up-front energy input? Of course not. Yet we make and use batteries by the barge load simply because we value what they can do for us more than we have to pay to acquire them. Energy flows don’t come into the picture at all.[1]
You can make an argument that this is yet another reason why public policy is so important. Via public policy we change the relative cost of alternatives and modify behavior in a way that’s in the best interest of society at large. We could (and hopefully will, some day) institute a feebate system to encourage the purchase of more fuel efficient vehicle and discourage the sale of gas guzzlers, for example. Ditto for using some mechanism to put a price on CO2 emissions, and end to the biggest, most destructive single negative externality in the e+e arena. That’s the basic process we use to make the connection between what we collectively think we “should” do and what we “will” do–public policy using the price mechanism to tilt the competitive landscape to everyone’s benefit.
My point is not to beat up EcoGeek, a site I have in my RSS feed reader app and read every day (as should you), or anyone else for that matter. Consider this a plea to remember when you’re reading and thinking about energy, environmental, and economics issues that large groups of people do things based on economic calculations, which means money. Assuming anything else, whether based on optimism that we’ll do the right thing purely because it’s the right thing, or for any other reason, can quickly lead to wrong conclusions.
[1] If you’re going to comment here or e-mail and scold me about not using rechargeable batteries, save your keystrokes. I’m a big fan of them, and I’ve been using them for a long time. I don’t know how much money and environmental impact I’ve saved by not using disposable batteries, but I’m sure it’s a lot. And yes, you should use them, too.
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June 18th, 2008 at 8:59 pm
Economics certainly trumps energy “on the margin”, where day-to-day decisions are made - you have a valid point there. But we can’t deal with big problems on the margin, and a solution that looks economically favourable on a small scale might not work on a large scale.
EROEI is useful because it is robust at large scales and in the long term. It is particularly useful for one thing: evaluating possible ways to supply the world’s primary energy needs. An EROEI greater than 1 is a hard-and-fast requirement for that!
On the other hand, if we are looking for something to replace fossil fuels when they become scarce, an economic analysis based on today’s fossil-fueled economy is unrealistic. (Hydrogen is relatively cheap now, because it can be produced from natural gas, but that doesn’t make hydrogen-powered vehicles part of a long-term solution.)
Of course EROEI is a simplification, since not all forms of energy are equally useful. This can be factored in, to some extent, with an appropriate choice of boundaries and quality factors. And there are plenty of other potential limiting factors, such as availability of raw materials. But EROEI can still reveal useful information that would otherwise be obscured by the complexities of the economy.
June 19th, 2008 at 8:10 am
I’m still not convinced. EROEI as a long term, large scale measure is still useless without a good projection of the development of technology and the availability of substitutes. For example, I’ve seen a lot of people talk about Canada running out of natural gas to cook oil out of the ground, but there’s already been talk of building one (or more!) nuclear reactors to power the process. I’m no fan of that idea, to put it mildly, but it does demonstrate how easily people can be locked into bad assumptions or linear projections when they’re looking that far ahead.
I think we can (and must) formulate the appropriate public policies based on a much simpler analysis: E.g. oil is going to get a lot scarcer relative to worldwide demand, so any country that imports a large portion of its oil will face much higher prices, possibly high enough to derail their economy, or outright shortages, or both.
June 19th, 2008 at 7:40 pm
If we use nuclear power to drive an oil-extraction process with an EROEI less than 1, then our primary energy source is nuclear power, and we’re just converting that energy to a more useful form. (Yes, we’ll know it’s “more useful” if we can make a profit selling it.) Generally, the only substitutes for energy are other forms of energy.
The problem with your simpler analysis is that it’s hard to make it quantitative. Money works well for quantifying value in the present, but there are too many feedbacks and uncertainties to make accurate long-term predictions of prices. Especially if we don’t even try, e.g., by using today’s materials costs to support a claim that “technology X would be profitable if oil cost more than $Y/bbl”. Unfortunately, a lot of economic theory and analysis only works at the margin, i.e., as long as things don’t change too much.
So why not skip the middleman and consider the flows of energy and materials directly? Sure, EROEI is a very simplified form of this, and you’re probably right about people trying to push it too far. But I think this kind of analysis is necessary if we want to know how to achieve a sustainable supply of energy.