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What's Playing Havoc with Economy? Costly Energy

ENERGY & EQUITY: Beyond debt, bubbles and regulatory fiascos lies the crude truth.

Andrew Nikiforuk 20 Sep

Award-winning journalist Andrew Nikiforuk writes the Energy & Equity column for The Tyee. You can read his previous Tyee stories here.

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U of Texas researcher Carey King: 'Declining energy quality is probably root cause of recession.'

According to conventional economic wisdom (or what some call "the empty suits crowd") the U.S. and European debt crisis, along with the stock market roller-coaster, are the unfortunate products of mortgage bubbles, overspending and unregulated financial dealings.

But Carey King and a growing number of other critics (including Robert Ayres, Charles Hall and Jeff Rubin) wonder how much of this economic mayhem are symptoms of a larger energy disorder. The 36-year-old energy system expert at the University of Texas argues that our economic doldrums may mirror powerful long-term declines in energy quality.

In other words, as North Americans spend more of their precious income on hydrocarbons, they are getting fewer services back. "Declining energy quality is probably the root cause of the current recession," concludes King. And when a society spends more on energy that delivers less bang for the buck, the whole place tends to recess. Or decompress. Or grow smaller. In other words, it's the energy stupid.

Petroleum Age in transition

King's novel analysis, which recently appeared in Environmental Research Letters, looked at the quality of energy consumed in the United States (the world’s first petro state) since the Second World War. Combing though oil and natural gas prices, King measured the Energy Intensity Ratio (EIR): the quality of energy that consumers purchased relative to the energy spent to deliver those fossil fuels to market.

Now, EIR is similar to Energy Returned on Energy Investment (EROI), a critical quality yardstick that quantifies energy gain. The Petroleum Age, which is now in transition, basically captured high gains from fossil fuels at relatively low cost. Since 1900 no country has recorded any industrial growth (or complexity) without burning oil, coal or natural gas. But the cheap stuff is now gone.

EIR basically serves as indicator of surplus energy gains, but is one based on actual market prices paid for energy commodities such as hydrocarbons and electricity. A high EIR for oil, which typically ranges between 10 and 30, means lots of growth. But when the EIR of oil stays lower than around 10 it means people are spending more on energy slaves such as gasoline, and less on other stuff.

"High energy quality allows society to come up with more complex ways to make money such as financial hedging strategies and mortgage securities. But declining energy quality makes it harder for a society to pay people to do those sort of things," explains King, a mechanical engineer by training. (Financial fraud may even happen less frequently in low-energy societies but nobody has yet studied the idea.)

Thanks to cheap fossil fuels the average American or Canadian used to spend about four or five per cent of their annual income on energy. But low-quality crude such as bitumen or costly deep sea oil is changing that reality. Many U.S. consumers now fork over more than 10 per cent of their wages for gasoline alone. (And that means less money for mortgage payments.)

The big hydrocarbon hikes

King, a research associate at the Centre for International Energy and Environmental Policy, also found a persistent if not troubling pattern after calculating the EIR for oil, electricity, coal and natural gas over the last several decades. Declining EIRs for fossil fuels preceded the last two deepest recessions on the continent. The current financial struggle of the advanced economies is only surpassed in magnitude by the Great Depression. Quality returns for coal, gas and oil all point downwards. (Natural gas may be an exception because of the shale gale.) During both the 1970s oil shock and the 2008 recession people spent more dollars on increasingly expensive hydrocarbons with less energy payback.

The EIR for oil in particular tells a damnable story. It reached a high of 48 in 1998 (when oil prices tanked) but sank to 8.8 in 2008, a similar value for today at $90 a barrel. It plummeted ever lower during the OPEC oil embargo in 1981. The EIR for gasoline (the refined oil product that most consumers interact with) follows a similar trajectory. It peaked at 10.8 in 1998 and then plunged to 5.5 in 2008. Spending more for fewer energy gains is a bit like chopping wood on a diet of fescue grass. Eventually the axe falls haphazardly, the woodpile shrinks and the fire grows dimmer.

The implications of this sort of research, which the mainstream media largely ignores, are striking. It shows that classical economic thinking (a form of modern voodoo) is not only wrongheaded but also dangerous. It's simply tracking the wrong numbers. The quality of energy, not spending, makes the world's economy go round.

As energy quality declines and prices escalate, the energy gains for society will drop putting the economy in a sort of deep freeze. Running an economy on unconventional fuels such as bitumen will de-energize the market place as thoroughly as a patchwork of renewables because neither resource offers the same energy payback as light oil. Policy makers need reliable energy gain data on renewables as well as on extreme hydrocarbons such as bitumen.

Renewables' ripple effect

For the first time in U.S. history, energy consumption is now stagnant and poised for even further declines. As a consequence EIR, EROI, and other measures of energy gain could be "forward looking measures of the onset of economic difficulties caused by energy price rises." North America's eroding EIR is also a potent reminder that China can do more with cup of oil than we can with a barrel.

When you put all these trends altogether, says King, they paint one under-appreciated scenario. If a society invests in renewable technologies that employ more people than the capital-intensive oil patch yet yield lower energy gains, the employment in energy sector will grow at the expense of other sectors -- exactly the opposite trend since the beginning use of fossil fuels.

"If we aren't fundamentally changing the way we produce or consume energy now, don't expect the economy to grow as much as the past two decades," he adds.

So King's analysis spells out the new energy reality for fossil fuels: higher energy prices equal a shrinking economy. His findings also suggest that the North American experience with oil has now peaked and that diminishing returns appear to be the order of the day.

The transition from a society based on high-energy returns to something radically different has now begun, ready or not.  [Tyee]

Read more: Energy, Science + Tech

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