Off the keyboard of Monsta666
Discuss this article at the Energy Table inside the Diner.
In the first part of this two part series we discussed how the sheer amount of energy coupled by its cheap cost enabled society to increase the amount of work that could be produced at a much reduced cost. It was this cheap energy subsidy that made the process of arbitrage between human labour and fossil powered capital very profitable as the price difference between hiring labour “energy” and capital “energy” was so vast.
This huge energy subsidy not only provided great wealth to the ruling classes who owned the factories and other capital infrastructure it also enabled the workers to become more materially wealthy as the cost of producing items was reduced drastically. This happened because all work requires energy to transform a basic resource into a commodity that is of economic value. If the energy cost is reduced and the supply of energy is greatly increased then the amount of work that can be achieved by a society will greatly expand and thus the items produced well sell at lower price due to the principles of supply of demand. What is important when discussing these matters of energy availability and will become increasingly important going forward is the concept of net energy. To understand this concept it would be wise to understand the laws of thermodynamics, more precisely the first law of thermodynamics. This law was originally described as:
“In all cases in which work is produced by the agency of heat, a quantity of heat is consumed which is proportional to the work done; and conversely, by the expenditure of an equal quantity of work an equal quantity of heat is produced.” – Rudolf Clausius, 1850
For the mathematically inclined the following
formula captures the law of conservation as
any heat input will equal the work done.
dU = dQ – dW
where U =Internal energy of system, Q = Heat input,
W = work done
To many this statement may seem a little unwieldy and rather abstract but it basically describes the concept that energy cannot be created or destroyed and all energy transactions are merely conversions of one form of energy source to another. This idea is an important one to grasp since we can never actually generate energy; we merely extract it from existing sources.
This statement may seem rather obvious but since terms such as energy production and energy generation are so widespread it is easy to forget this fact. If we were to take such statements as energy production on a literal level they would be a clear violation of the first law of thermodynamics. Perhaps it can be argued this is just an argument over semantics and most people will know you cannot actually create energy but let us not underestimate the power of language and how it can shape conversations and narratives; over time people will believe such statements at face value as true even if they are patently false. This is especially relevant today when we hear so much talk about the US becoming not only energy independence but also becoming the top energy producer in the world.
But I digress, the main thing to take home is no form of energy extraction, be it from coal, nuclear fission (fusion for the optimists) and wind or solar actually generates energy. It just utilises existing energy sources. In the above examples energy is extracted either through nuclear fission/fusion reactions, potential chemical energy in coal/oil/gas or wind and solar energy. Another concept that will come from this basic idea and one that perhaps even more relevant is that it takes energy to get energy. This concept while important is something that rarely (if ever) gets discussed in the mainstream media. Much of the talk about oil, coal or gas “production” only refers to the amount of total energy that can be obtained from burning or utilising a given resource. This amount is merely the gross energy obtained from the ground. If we wish to determine the amount of useful energy available for greater society however we need to subtract the amount of energy used to obtain the resource in the first place. This is because it is only this energy that gets to be used by society for other economy activities. Thus for us to work out net energy we subtract the gross energy by the energy needed to extract the resource as described in the formula.
Gross energy = Total amount of energy obtained from energy source.*
Net energy = Gross energy – Energy required to obtain energy source.
* = Energy maybe expressed in other ways such as barrels of oil or million short tons of coal.
As a note net energy should not be confused with the similar but different term EROEI (Energy Return On Energy Invested) which describes the potential energy return from an energy source. The terms maybe used interchangeably by other commentators in the blogosphere but it would be a mistake to think they are the same thing. The way to calculate EROEI is quite different as demonstrated below:
EROEI =Gross energy / Energy required to obtain energy source.
EROEI = (Net energy/ Energy required to obtain energy source.) + 1
NOTE: Net energy is the energy available to society and thus something greater society would be interested in whereas EROEI is more of a potential concern for the person who wishes to see a return on their investment.
Since it is only net energy that gets used by the greater economy it is this value that we should be interested in knowing about rather than the gross amount. For example it is quite possible for our total gross energy to increase while our total net energy is actually in decline. If this were to happen we could easily see a scenario where we are getting materially poorer even though our total energy output is increasing. This process of increasing gross energy but declining net energy comes about due to the principle of low hanging fruit. That is the easiest and most favourable economic sources of energy – which yield the highest net energy – are extracted first and as those resources are depleted we move onto progressively worse and worse sources. It is this fact that the decline in net energy will be much steeper than gross energy decline.
This trend of declining net energy has likely already past as the newest sources of energy, a lot of which is touted as the energy source that will give the US energy independence actually yield poor amounts of new net energy. This is despite the fact this new energy sources (shale oil/gas) increase the amount of gross energy expended by the economy quite substantially. As a result from an economic standpoint these new sources of energy will deliver less economic benefit to society than would otherwise be believed as the extra net energy available will be more limited. It this reason why we should exercise caution when listening to claims that these sources of energy can offer a panacea to our economic troubles. In fact when hearing such claims it is useful to know the energy returns on energy for various sources as while this is not net energy which is ultimately the most important metric to gauge the EROEI can still provide an insight on how useful these sources will be:
As the graph clearly demonstrates; early sources of energy yielded a very high return of energy on energy invested. These high returns came about because early sources of energy such as shallow coal mines did not need much capital investment to extract the resource furthermore once these resources were obtained they would yield high quality energy such as light sweet oil or in the case of coal high quality anthracite. It is this reason in fact why net energy or EROEI has largely been ignored as historically gross energy for all intents and purposes equalled net energy.
In recent years however this has not been the case and the difference between gross and net energy is sufficiently large to warrant greater attention. Moreover another troubling fact to take note is that once EROEI reaches about 10:1 or lower the graph goes into steep decline. This steep decline means the available net energy that can be used by society will begin dropping at an alarming rate if current trends of extracting lower quality energy sources continue. If we take a recent major discovery of shale oil we discover the EROEI for this resource is 5. In net energy terms this represents 20% of the total gross energy being used to extract the energy source. So from this information we can say that if all existing resources of energy were replaced by sources that were to yield returns equivalent to shale oil then our total net energy available to society would decline by 20%. This assumes there are no efficiency gains in how we utilised this energy and total gross energy remained constant. If that is the case then this would effectively mean we are 20% poorer as less energy would be available for economic transactions.
Off course what is more likely to happen is the EROEI and thus net energy will decline even faster than suggested in the previous paragraph as worse and worse sources of energy come online to replace existing high EROEI resources. As a result we are likely to see a steep decline in net energy available to society and we can say with some certainty that this decline in net energy will be faster than the rate of efficiency gains which has been around 1.7-3.0% per annum since the 1970s. 
What is more due to the rebound effect (see this article for more info) it is likely that any efficiency gains made will need to exceed declines in available net energy by a few percentage points each year if we want sustain economic growth (which is a requirement for the financial system to remain stable). This all seems unlikely particularly if we consider that energy efficiency and conservation strategies will see diminishing rates of return as it becomes harder to increase energy efficiency after each progressing year. After all no economic activity can ever achieve 100% efficiency. Speaking of 100% efficiency this leads on nicely to the second law of thermodynamics which states:
“That the entropy of an isolated system never decreases, because isolated systems spontaneously evolve towards thermodynamic equilibrium — the state of maximum entropy.”
Like the first law, this sentence describing the second law can seem a little unwieldy. In fact it is best to breakup this statement into two sentences as the quotation above addresses two very relevant points the first of which is displayed below:
In other words no energy transaction can ever be 100% efficient meaning some energy will always be lost when converting energy into some form of work. This point while blatantly obvious is often overlooked in the contexts of economics and broader society. It is this reason why there will always be a limit to amount of economic growth that can be realised as the planet has a finite number of resources and there are limits to the amount of efficiency that can be achieved. Another major consequence that does derive from the second law of thermodynamics comes from this statement:
While at first glance, the concept of heat transfers may seem a little out there this statement does pertain to one important idea. That is over time all bodies and structures go from a process of order to disorder. For those that are really curious about this process and wish to learn more about the exact mechanics of this process please look up entropy. If this idea still seems a bit out there consider the fact that all structures, be it capital or labour, degrade over time and require maintenance to allow proper functioning. This maintenance always requires energy and thus some resources will always be needed to maintain current capital or labour.
The entropy of a system can be calculated by applying the following formula:
dS = dQ / T
where S = entropy, Q = Heat input, T = Temperature of system.
If we use the formula from the first law of thermodynamics and
rearrange the formula
shown above this statement can be derived:
dU + dW = TdS
*4 basic thermodynamic relationships develop out of this math
Internal Energy dU=TdS-PdV+ΣμdN
Enthalpy (Heat) dH=TdS+Vdp+ΣμdN
Hemholtz Free Energy dF=-TdS-pdV+ΣμdN
Gibbs Free Energy dG=-TdS+Vdp+ΣμdN
If you do a little basic algebra, you get
This equation gives the Free Energy available in a system as a function of the
Heat Content, the Temperature and the Entropy in the system. Only reactions
with positive dG can go forward without Heat Input.
In the case of labour humans need food to stay alive and remain functioning while capital requires some energy inputs to prevent it from degrading and evening breaking down over time. What is more the greater the complexity of a structure the more energy will be required for maintenance. This is because a more complex structure has a greater degree of order and since things naturally go from a state of order to disorder then more energy will be needed to prevent overcome this natural process.
This is another weakness with applying the logic that technology will save the day as increasing the complexity of technology not only increases the existing maintenance cost due to the second laws of thermodynamics; the cost of producing such items increases as more energy per unit weight are needed in the manufacture of the product. To demonstrate this example a car requires something in the region of 12-25 barrels of oil to build a car depending on the weight of the car but a computer – on a weight by weight basis – requires 10 times the amount of energy to manufacture. A similar cost will be borne in maintaining these two pieces of capital. While in theory there can be energy savings on a production basis as less energy will be consumed despite the increased weight for weight costs (we do not need 1000kg+ worth of computers after all) what will increase significantly are maintenance costs of more complex infrastructure. To give a better idea of this concept at work consider healthcare. As the capital becomes increasingly complex capital then the maintenance costs will rise for the reasons described above.
To summarise this article and the one before it; when we wish to engage in a discussion on energy we need to be aware of range of things. First we need to understand the sheer amount of energy fossil fuels provide. It is truly immense and is a miracle resource and there needs to be a greater appreciation just how much energy they can deliver. From this we can truly grasp the scale of the task an energy transition (if it is even possible) will be. It is seems unlikely to me any combination of renewable or nuclear energy can fill the gap left by fossil fuels. That is not to say renewables cannot make life easier, they do have their uses but we would be setting our expectations too high if we expect them to maintain our current industrial lifestyles.
The other important points that need to be considered is the point we should be interested in not only the quantity of energy delivered but also the quality of energy. At the end of the day it is net energy or EROEI we are really interested in as it is this energy that gets used for greater society. Finally we need to be aware that due to the increasingly complexity of society our maintenance costs will rise due to the second law of thermodynamics so these costs need to be accounted for.
 = Clausius, R. (1850). Ueber die bewegende Kraft der Wärme und die Gesetze, welche sich daraus für die Wärmelehre selbst ableiten lassen, Annalen der Physik und Chemie (Poggendorff, Leipzig), 155 (3): 368-394, particularly on page 373, translation here taken from Truesdell, C.A. (1980), pp. 188-189.
Off the keyboard of Monsta666
Discuss this article at the Energy Table inside the Diner
Energy despite its utmost importance is a topic that doesn’t receive much attention and is a subject that is poorly understood particularly in the mainstream media or even economics. It is curious to think that this is the case especially if we consider that without energy nothing would literally happen. Taken in this context it is easy to see why energy could be regarded as the most critical resource for without it there would be no life on planet Earth.
It seems that one of the major reasons we forget about the importance of energy and take it for granted is the fact energy is ubiquitous in modern day society. If one cares to look outside their window it is likely they will see numerous cars whizzing around at high speeds (they are high if we compared their speeds to humans and animals which was the historic norm before the industrial age). If one thinks about this last point it can be quite an enlightening process; how much energy does it take to cart an object that weighs in excess of 1000kg at around 30MPH? Then think all this energy can be found in a single gallon of gasoline/diesel. And as startling as this thought maybe we can say we consume even more energy in total in our homes and workplaces and that is despite the fact there are over one billion cars – which nearly all run on oil – running across our planet. Quite a thought isn’t it? 
So in short we can say we are addicted to using energy. However this should not come as any surprise because man has always needed SOME energy to ensure his survival. The amount needed for basic survival is relatively modest however since the only real energy source man needed at first was direct consumption through food to stay alive. However through time man found other external inputs of energy that made life easier for him. The heat from fire allowed man to keep warm not to mention allowed him to cook and provide a source of light in the dark. Domesticated animals also reduced the burden of labour in the fields and allowed great productivity not just in hunting but also in managing the fields when man shifted to agriculture.
These external inputs of energy not only allowed man to extend his natural range of environments he could live on but it also spurred growth in population and prosperity as external energy meant more of the burden of labour could be shifted away from man. As time went on the number the external sources of energy increased and so did the amount of energy used by man. It was not until man began harnessing fossil fuels in earnest however that his energy use suddenly exploded. The graph below can clearly attest to this fact.
While this final fact is widely known it is still quite difficult to fully grasp and appreciate how much of a boon these fossil fuels were to mankind. To illustrate just how much energy we can obtain from these fossil fuels I feel it is best to apply a little maths. To make comparisons between different energy sources it is necessary to know what a BTU is. For people unfamiliar with the term a BTU stands for British Thermal Unit and one BTU represents the energy required to heat one pound (454g) of water by one degree Fahrenheit which comes to approximately 1055 joules.  Now if we consider the most expensive fossil fuel, which is oil, then we will find that burning one barrel of oil (42 US gallons or 159 litres) releases 5.8 million BTUs or 6.1 gigajoules of energy.  These large numbers may seem rather abstract and arcane but if we covert this total energy content into man hours then the facts can be more easily absorbed. The energy delivered from 6.1 gigajoules would equate to a man spending 1.45 million kilocalories. If we assume a man consumes somewhere between 100-200 kilocalories an hour then that would mean a barrel of oil produces the equivalent amount of energy as 7,290-14,597 hours of labour depending on how hard the man works. Assuming there are 48 forty hour weeks a year that equates to 3.8-7.6 years of human labour. Armed with this information it makes you wonder how we can ever consider a barrel of oil is overpriced at $90 dollars a barrel when one barrel delivers the equivalent of 3.8-7.6 years labour!
To put this into an even greater context if we decided to pay the man a decent wage of $10 an hour then we would need to pay him anywhere between $73,000-$146,000 to deliver the same amount of work as a barrel of oil. With this perspective it becomes clear what a boon fossil fuels have been proven to be as effectively we have been using these fuels as “energy slaves” due to the fact they produce so much energy at such a low cost. With energy being so cheap it becomes obvious just how profitable the exercise of replacing man and animal labour with capital powered by cheap fossil fuels has been as the price differential between the two markets is simply enormous. And let us not forget in all this that oil is the most expensive fossil fuel in today’s market and its price is abnormally high when compared to historical prices so it was even more economical in the past than it is today.
Saying all that we do need to recognise the flaws in making such comparisons or more generally, using BTUs in general. That is not all work achieved with a certain resource can be easily substituted with another resource for example no amount of men dragging a car would make it travel at 30MPH as could be achieved if the car was powered by oil. Therefore the figures above can only deal with the total energy expenditure and allow comparisons on that end but they say nothing about the quality of the work achieved nor can they describe how easily the work can be substituted with another resource. This is an important concept to grasp as quite often it is stated that we can substitute oil consumption with renewable, nuclear or even coal and gas energy which while such statements are true to a certain extent, not all uses can be substituted for. Coal, renewables and nuclear energy cannot be easily made into a liquid fuel as these energy inputs are primarily used for electrical generation or home heating. It is this lack of fungiblity which results in people often making the distinction between a liquid fuel crisis and an energy crisis as these are two distinct phenomenon as each crisis poses a different set of problems and will therefore require a different set of solutions (assuming solutions even exist) to solve or manage if there are no viable solutions.
Despite these limitations or perhaps because of them we can reach certain conclusions. The increase in the availability and affordability of energy has done more than reduce the cost and amount of work that can be achieved. It has also played a big part in increasing productivity. This increase in productivity comes because, as described in the previous paragraph, there are certain forms of work that can only be utilised with fossil fuels and these activities cannot be done regardless of the amount of men employed in particular tasks. Jobs that are energy intensive such mining, steel production or heavy vehicle transport all require intense and constant inputs of energy. Since they require intense AND constant energy inputs these tasks cannot easily be substituted into labour nor is renewable energy a suitable candidate for substitution due to its intermittent nature. However it cannot be denied all these economic activities contribute to increased productivity as less labour will be needed to be deployed to accomplish these tasks (assuming these tasks could be completed at all without fossil fuels).
Many mining operations such as the tar sands mining operation in Canada would be much harder if not outright impossible without cheap
abundant energy inputs provided by fossil fuels.
A more troubling fact does emerge from this however and that is it becomes apparent that our modern industrial society is heavily dependent on not just abundant energy but cheap energy to remain viable. Even today with oil priced at $90 a barrel which is still an excellent deal when taken in the context described above this price is sufficiently high that many developed economies struggle to grow quickly due to the “high” energy costs as we are repeatedly reminded by the media. In fact these high energy costs have resulted in much demand destruction in the major OECD countries for oil that are most sensitive to price changes as demonstrated in graph below.
This demand destruction primarily manifests itself through higher unemployment and reduced oil consumption from remaining employed workers due to a decline in real wages. This high price of oil has not curbed demand in all countries as the developing economies, which are less sensitive to price increases, continue to demand more of the product. This demand increase of the non-OECD countries is roughly equal to the decreased demand in the OCED countries so overall global oil demand has remained constant at around 30 billion barrels per annum.
The more significant trend has not been with changing patterns in oil consumption but with the changing energy mix in which the global economy utilises. Since oil is priced at $90 it is the most expensive fossil fuel in the market. In the US the next most expensive fossil fuel is coal which is priced at $68.15 per short ton. Seeing as one short ton on average releases 19.6 million BTUs of energy which is roughly three times that of a barrel of oil we see that coal is just over 4 times cheaper than oil on BTU basis. In light of this fact it would be natural to think and expect coal consumption to rise rapidly during this period however coal consumption has actually declined in recent years (for the US at least) because the cheapest fuel in recent years has been natural gas which reached levels as low as $1.90 per million BTUs earlier this year. Seeing as coal has been priced generally been priced at around $3 per million BTUs for the last three years it is easy to see how natural gas consumption has surged.
It should be noted however that at this present moment natural gas is currently priced at $3.48 per million BTUs (accurate at time of writing) and seems to be rising in the past few months. If natural gas price rise much further then coal will become the cheapest fossil fuel in the US and demand for this fuel should increase provided the trend of rising natural gas prices continues. If we talk about fuels on a global basis the story is quite different as globally coal is by far the cheapest commodity and it is these cheap prices that have caused global coal demand to surge in recent years. The high price of oil and the fact that main users of coal (Eastern Asia) have seen rapid economic growth in recent years have been other contributing factors in the increase in the amount of coal demanded.
If this trend of growing coal consumption continues it will not be long before coal becomes the top source of energy in the world and this is a fact that is likely to catch many people by surprise. Saying that, one should throw some caution to this current trend of surging coal demand as it is quite likely that growth in the global economy will slow down and may even decline. If that is the case then the rate of increase in demand will decline or demand may even decline entirely should the world enter a global recession.
Another important consideration and one that is almost universally overlooked in the mainstream is the concept of Energy Return on Energy Invested (ERoEI). In the second part of this topic I will discuss this concept in more detail and also explore the laws of thermodynamics that is largely neglected in the media and economics in general. Do not worry; it will not be a boring physics session with lots of large scary numbers. In any case I wish all diners a merry Christmas and a happy new year.
 = World Vehicle Population Tops 1 Billion Units (WARDSAUTO)
 = British thermal unit (Btu) (Business Dictionary)
 = Barrel of oil equivalent (Wikipedia)
 = Coal News and Markets (EIA)
 = What is the average heat (Btu) content of U.S. coal? (EIA)
 = Coal News and Markets Archive (EIA)
 = Commodity Prices (CNN Money)