At what oil price does growth stall?

warning: for EROEI maxis ONLY

EROEI. Energy Return on Energy Invested. You’re going to get real tired of hearing me say this. But I promise you, understand this and you’ll understand the most important foundations of both energy and the growth of civilization.

Here we’ll briefly revisit the principle, use it to extrapolate a scenario where a recession could be triggered at a certain oil price, explain it in terms someone with no prior knowledge of energy could understand, and end it with the truth about the current trajectory of renewable energy and the devastating impact it could have/is having on civilization.

EROEI Review

In laymens terms, EROEI = energy received / energy exerted. You can run this equation on every energy process imaginable, including human foraging for food! In the Old World, humans would receive about 10,000 calories after exerting 1,000. An EROEI of 10:1. Not great! After expending 1,000 calories to obtain the food, 2,750 is consumed, 5,900 is allocated for animal feed and shelter. Physiological needs are covered, leaving an excess of just 250 calories. Little to no energy is left for growth at an EROEI of 10:1. Growth meaning spending time to learn, innovate, populate, and implement more efficient processes to enhance quality of life.

All of this was discussed in our First Principles post. We got into how ever-increasing EROEI’s are the sole reason human could have pushed society forward in terms of tech advancements and population overtime. Every energy transition in human history was a result of the discovery + adoption of a higher EROEI energy source as the legacy source becomes scarcer or more difficult to obtain. Higher difficulty to obtain obtain energy = declining EROEIs = a stagnating nation.

Historic example of a natural energy transition

A quick example of this is the use of charcoal, which comes from burning wood. Before 4,000 BC, wood was used to extract iron from ore to produce tools and weaponry. Charcoal was then discovered, and had twice the efficiency of iron extraction than wood did. Less energy used to produce iron = more surplus energy to do other things, like learn, innovate and expand.

At some point though, deforestation became a problem, and people had to travel far to retrieve wood to burn and create charcoal. So charcoal became more difficult to obtain. More energy exerted to extract iron ore = declining EROEIs. Population and civilization growth stalls as energy needs to secure food, water, shelter etc. rises while surplus energy needed to fulfill the demand diminishes. Something had to be done to address these declining EROEIs and get back to the comfort people had when their basic needs were abundant!

Then came the discovery of coal, a denser and much more efficient hydrocarbon, which kicked off the Industrial Revolution.

Simple EROEI math

EROEIs were about 10:1 for much of human history, where population and tech advancements were relatively stagnant. The 10:1 EROEI ratio does not leave room for growth. We know this because:

Energy consumption averaged 17 GJ/capita throughout most of human history.

an EROEI of 10:1 means 1.7 GJ was used to produce the energy. The rest is excess.

• 4.2 GJ needed for food (2,750 kcal * 365)

• 10 GJ needed for shelter and animal feed

• 1.7 + 4.2 + 10 = 15.9 GJ

Source: ScienceDirect, Goehring and Rozencwajg

which leaves 1.1GJ of excess energy, to be contributed to various aspects of economic growth, but in reality was likely “used” for socialization and maintenance of family/belongings. This explains the historically slow population growth and lack of tech advancement up until the discovery of coal in the 1700s.

Estimates put EROEIs as high as 50:1 at the time of discovery for it was easily obtainable. This explains the exponential population surge along with division of labor, tech advancements, infrastructure feats and so on.

So, we can use an EROEI of 10:1 as a baseline to determine price levels that need to be reached before demand destruction (stalled growth) occurs, given this is the EROEI hunters and gatherers have operated under, which saw little growth during those periods.

Oil price before growth stalls

We can use this concept of EROEI to determine the price of oil that could stall economic growth, as it occurred in 2008. This is of course only a framework, and it is known that many other variables are involved that could trigger a recession. This is just an additional tool one can use when evaluating various decisions. EROEI of 10:1 = 10% of total energy consumed goes to sustaining energy supplies. (EROEI of 50:1 = just 2%)

Once the amount of energy needed to support its production reaches 10% of GDP, growth stagnates.

In 2008, oil made up, let’s say half of total energy consumed in the US (was closer to 40%). This means growth would stall once oil production hits 5% of total GDP.

US consumed 18.8 million bbls/d. Oil hit a peak of $140/bbl, equating to 6.7% of GDP. Recession ensued shortly after. One could argue that if prices were lower, a recession could have at least been delayed as consumers would have excess income to allocate towards mortgage payments vs. transportation, utilities, and food.

At $110/bbl today, oil makes up 3.4% of US GDP. To hit 5% of GDP, prices would need to rise above $160/bbl.

Source: FRED, World Bank, EIA

FAQs

Why focus on just the US?

oil demand is a bit more elastic (sensitive) in developed economies. At $5/gallon of gasoline some families would forgo that vacation they originally planned. Although, studies show this sensitivity/elasticity doesn’t really show up until 6-12 months after crude prices have elevated.

In developing nations oil prices are bit more sticky. This is partially due to some nations subsidizing fuel pricing or enacting some sort of price controls. Every joule of energy is needed for these developing nations to thrive.

Why didn’t we see a recession in 2012-14?

Again this is just a framework. Many other factors are involved that could trigger recessions. At the time, the US was in recovery from the 2008/09 housing crisis and in hyper-QE mode. There was also not much anticipation of a recession, evidenced by the 2s/10s yield curve, known for its historic accuracy in anticipating recessions when it inverts.

Source: FRED

How does inflation tie into all of this?

Oil price inflation reverberates to every other sector of an economy, leading to higher spending on necessities and less spending on discretionary goods and services. Inflation could also lead to rising rates, a tool the Fed uses to reduce demand in order to reel back prices. The result is overall reduced economic activity (not necessarily recessionary).

How does renewable energy tie into all of this?

EROEIs of renewable energy are estimated to be much lower than 10:1, while current fossil fuels stand at above 20, and nuclear about 50. By transitioning to renewables a society goes from paying 2-5% of GDP to produce energy to >10%.

IMPORTANT NOTE: The increase in costs that result from allocating more resources towards the production of energy are entirely borne by the consumer. Energy price increases appear through inflationary pressures which are always passed down to the consumer.

Knowing this, you can imagine the impact that replacing nuclear energy generation with renewables could have on a nation. The overly aggressive push towards a renewable energy future is a major contributor to the traditional energy supply constraints we’re seeing today that has led to record levels of inflation.

What are the implications of climate change on the world’s energy mix?

This author believes climate change is real and should not be taken lightly. A transition to cleaner energy sources is a must. But the decision by policymakers to willingly regress society by forcing the middle and lower class to disproportionately fund their reckless, misled science project through inflationary pressures is nothing short of theft. The most reasonable solution would be somewhere in the middle . A responsible transition towards clean energy sources, which include more than just solar and wind. They also include carbon capture-equipped processing/power plants, GHG neutral LNG, recycled nuclear waste reactors etc.

It’s good to hear some nations recognizing the importance of high EROEI energy natural gas and nuclear power as necessary transition/replacement fuels to dirtier alternatives to assist the shift towards a net zero world.

Stay tuned for…

A deeper dive into certain aspects of renewable energy, such as:

-  Why those famous charts showing wind and solar price declines over the past 10 years are massively deceptive.

-  The majority of the developing world are now hitting their “sweet spot” of economic, therefore energy, growth.

- Amount of materials needed to build renewables if we are to hit net zero by 2050.

- Emissions of these materials, compared with fossil fuel emissions on an energy-equivalent basis

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Is there anything here you strongly agree or disagree with? I’d love to know why, and if the reason comes from a true disagreement or a simple miscommunication. I of course am still learning and developing these mental models as a lens to view the world, so if there’s anything I can use to enhance these lens I would love to know about it!