Energy costs

Are we running out of energy?

Hubbert was born in 1903. By 1949 he had concluded that the fossil-fuel era was going to end, and quite soon. Global production would peak around 2000, he predicted, and would decline inexorably thereafter.

Peter Huber doesn't agree.

His "peak oil" theory–which many people are citing these days–is a case study in junk economics.

...continued in full post...

The received word is, you can only burn a barrel of oil once. If you spend two barrels of oil to produce one barrel's worth of energy, you're digging yourself into a hole.

In that case, grocery stores should be out of business. Their profit margins are typically one percent or less. That means they spend 100 dollars on products in order to "refine" one dollar of profit. And we think energy is in trouble?

Today this same nonsense is often dressed up with numbers in an analysis that's dubbed "energy return on energy invested" (Eroei). According to this theory it can never make sense to burn two units of energy in order to extract one unit of energy. The Eroei crowd concedes, for example, that the world has centuries' worth of junk oil in shale and tar sands--but they can also prove it's irrelevant. It takes more energy to cook this kind of oil out of the dirt, they argue, than you end up with in the recovered oil. And a negative Eroei can only mean energy bankruptcy. The more such energy investments we make, the faster things will grind to a halt.

In the real world, however, investors don't care a fig whether they earn positive Eroei. What they care about is dollar return on dollar invested. And the two aren't the same--nowhere close--because different forms of energy command wildly different prices. Invest ten units of 10-cent energy to capture one unit of $10 energy and you lose energy but gain dollars, and Wall Street will fund you from here to Alberta.

The reason "Eroei" is irrelevant is thermodynamics. The first law of thermo means Eroei can never be greater than 100%; the second law guarantees it can never be even that high. Pick your favorite form of energy, and the energy output is always less than the energy input.