Energy, Debt and the Economy

1. Energy, Debt and the Economy LinkingCrisis and EROEI Including some reflections on howtoavoiddisruptions Giancarlo Fiorito

2. Synopsis • The permanentcharacterof 2008-to-present economiccrisisisnotwellunderstood • As in the past, economicthinkershavenotrelatedtechnological progress tonewenergysources, enablingneweconomiccapabilities… • Visionsof the future do notsee the declining net energyavailability • WRONG DIAGNOSIS = NO REAL PROGNOSIS

3. Quoting… • Many scientists from different disciplines have thought deeply about the long-term relation of humans and wealth production • Most have concluded that the best general way to think about how different societies evolved over time is from the perspective of surplus energy. • To chemists Frederick Soddy and William Ostwald, anthropologist Leslie White, archeologist and historian Joseph Tainter, sociologist Fred Cottrell, historian John Perlin, system ecologist Howard T. Odum, sociologist and economist Nicholas Georgescu-Roegen, energy scientist Vaclav Smil, and a number of others in these and other disciplines, human history […] is essentially about exploiting energy and the technologies to do so. • This is not the perspective taught in our schools and the role of energy is essentially missing from our dominant books and teaching about history. • Instead human history is seen in terms of generals, politicians and other personalities. C.A.S. Hall and K. Kiltgaard, Energy and the Wealth of Nations: Understanding the Biophysical Economy, Springer 2012, p. 41

4. Structure • Economics as energy surplus • money as language not substance • Thermodynamic economic history • Prometheus I & II • IT Age • 4 drivers of degrowth • (Creative) Financial bubble • Obscured by (Data) Clouds • Globalization (of Debt) • EROEI (Cliff) • Energy and society • Reflections • State of fuels • Oil world  High K E M intensity • The need for mechanical energy & the constraint of renewable fuel • EROEI and Well-to-Wheel efficiency • Renewableenergy system and Railsmobilitynetworks

5. Mirroring • If one asked a representative sample of the public what economics is all about, there is a very strong likelihood that the consensus answer would be “money”. The vast majority of economists do indeed frame the debate in monetary terms. • The problem is that the economy is not, fundamentally, a monetary construct at all. Economics is really about the art of combining tangible components(such as labour and natural resources) to meet needs. • Ultimately, money is a convenient way of tokenising this process. The process itself, on the other hand, is an energy equation. • The basic misunderstanding over this point – the treatment of money as the substantive challenge, rather than as the language in which that challenge is expressed – lies at the heart of the current economic malaise. • In essence, an ever-widening wedge has been driven between the monetary and the real economies. Tim Morgan

6. Economics & thermodynamics • Energy is • Endosomaticfood (calories) • Exosomatic service (jouls, kWh) • Society & economy began when agriculture created an energy surplus • population engaged in non-subsistenceactivities • Time and calorieswent on something else • philosophy, manufacturing, art, architecture… • Law & government • Money toeaseexchange

7. 10.000 a.C. • Prometheus Ia forestjourney*with • Masteryoffireforcooking • AgriculturalRevolution • Forestsclearedforagriculture, but  Woodisprimaryenergy and material  Ironage = ovenstosmeltmetals Hephaestus & mythology • Crafts, trade, temples, roads, armies • Societalcontrol • Soil loss * John Perlin, A forestJourney, The Story of Wood And Civilization

8. XVIII sec. • Prometheus II a journey underground • Steamengine in coalmines • Exosomaticpower (en. slaves)  Industrial Revolution  Mass manuf., industrial agriculture, ships, cities Aknowledged complementarity between K and E • And between GDP & Oil http://www.locchiodiromolo.it/blog/petroliovs-pil.html  Strict connection offossilenergywith industrial revolutionandtechnical progress  more K K GPD increase E http://tinyurl.com/bmu2j5u

9. XXI sec. IT Age • Requires more E and materialsM • EnhancesKmobility  Finance: growthof“Creative” $ • Globalisation = more distance, more E & M  Outsourcing (in OECD) means… Less(real) production More Consumption Skilled L in manufact. Unskilled L in services PRODUCTION CONSUMPTION Widening gap = Debt

10. 4 Driversfor the Crisisand whyitwilllast… • Financial (Creative) bubble • Obscuredby (Data) Clouds • Globalisation (ofDebt) • EROEI (Cliff) http://www.cityam.com/article/economic-perfect-storm-four-trends-killed-western-growth http://tinyurl.com/a7qynks

11. Financial bubbleat-glance • “Economy is a energy dynamic…” and real production is based on harnessing energy to tokenize surplus production (food, crafts etc.) • Increase in paper-moneywas a reactionfromincreasedenergyprices in the 80’s, possiblebynewlegal (Glass-Steagall) and financial (derivatives)instruments, butalso … • IT technology (globalization) • Process in realtermsis  lower EROEI meansless net energy, so… • Finance increased the debttohidethis • Fostering the consumption in service economy • Pushingaway the problem

12. Statistical data sophistication • Discouragedworkers, owner-equivalentrent, coreinflation, hedonicadjustment,geometricweighting… • A big problem with hedonic adjustment is that it breaks the link between inflation indices and the actual (in-the-shop) prices of the measured goods. Another is that hedonic adjustment is subjective, and seems to incorporate only improvements in product quality, not offsetting deteriorations. • A new telephone might, for example, offer improved functionality (a hedonic positive), but it might also have a shorter life (a hedonic negative) and, critics claim, the official statisticians are all too likely to incorporate the former whilst ignoring the latter. • The failure to incorporate hedonic negatives may be particularly pertinent where home-produced goods are replaced by imports, a process which has been ongoing for more than two decades. A Chinese-made airbrush might be a great deal cheaper than one made in America, but is the lower quality of the imported item factored in to the equation?

13. The result: no inflation!

14. Owner-equivalentrent • If a person owns his home, no mortgage or rent is payable, and no money changes hands in respect of the property. But the reporting methodology for US GDP assumes that such a property has a utility which a purely cash-based measure fails to capture. Therefore, GDP contains a sum representing the rent which the owner would have paid (presumably to himself) if he had not owned the property. • Interest expense is backed out, but the net result remains a major non-cash uplift to GDP. The replacement of actual expenditure with a notional (‘imputed’) rent applies not just to those Americans who own their homes outright, but also to those with mortgages. For example, a person with 50% equity in his home is assumed to pay rent on 100% of it rather than, as is actually the case, mortgage interest on half of it.

15. Data “smokecurtain”: Growth and Jobs

16. Globalization, debt and EROEI • Paying the debt is made by financial products “betting” on global companies future growth • Growth possible IIF cheap & high-EROEI energy • Meanwhile, developed countries live on servicesdelivered by consuming raw materials, E, K and Goods, produced (and now paid) by others. • Passing from high to low EROEI, means: • Shrinking employmt, wages & consumption: no Growth • More debt, less “society”: school, health, culture • Deindustrializaton, social unrest, informal economy • Revertingtrend toward labour-intensive activities (bioagriculture, crafts, mechanics, electricians)

17. Energy, EROEI and the economy Economy is a surplus energy dynamic, driven by the differencebetweenenergyextractedand energy consumed in the extraction process. Below an EROEI of about 15:1, the “profit” element falls off a cliff, because there is an exponential increase in the “cost” component, which rises from 4.8% at an EROEI of 20:1 to 6.3% at 15:1, 9.1% at 10:1 and 16.7% at 5:1.

18. From high to low EROEI NB: flow diagramis in percentagetohighlightenergyreinvested, the volume ofenergy in LEVELS islikelytoshrink, implying the sameforEssentials.

19. Population, Energy & GDP • And onetoadd…energycostas % of GDP

20. Toward the End of the Growth era • What is measured here is not the value of energy, but its costas a proportion of the value that we derive from it • If cost and value were the same, no surplus exists • Than the economy could not existeither 9.6% GDP

21. Eroei < 15:1 • If EROEI falls below a threshold, much more energy is consumed in the extraction process, resulting in a corresponding squeeze on the energy available to the economy • The essentials may still be affordable, but the leverage in the equation is such that energy available fordiscretionaryusesdiminishesvery rapidly • Through the EROEI squeeze, goes the car, the holiday, the bigger home, the MP3, the meal out, toys for the children and the soccer match • If EROEI falls materially, our consumerist way of life is over

22. Consequences • There are two really nasty stings in the tail of a declining EROEI. • First, net energy availability may fall below the amount required for essential purposesincludinghealthcare, government and law. It is hardly too much to say that a declining EROEI could bomb societies back into the pre-industrial age. • Indeed, a decrease in net energy below subsistence levels is an implicit consequenceof EROEI declinebeyonda certain point – one which is difficult to estimate, but is likely to occur within the next decade – which means that this is when the nastiest results of all start happening. • Second, a decline in net energyavailabilitycould (indeed, almost certainly will) result in conflict driven by competition for access to diminishing surplus energyresources.

23. The future • Investment in energyinfrastructure will grow much more rapidly than the economy as a whole  energysprawl • Decliningenergyproductivity  energy infrastructureincrease more than the volume of produced energy • This process is under way, though principally in the emergingeconomies (whereenergydemandcontinuestoincrease) • Some simplified, daunting, calculations • Hypothesis: Real GDP constant over 10 years • Hypothesis: EROEI from 20:1 to 10:1 • Result: Energy costs rise 7,4% per year • Result: Rest of the economy shrinks by 0.5% per year

24. Signals • Energy price escalation. Theinflation-adjusted market pricesofenergy (and, most importantly, of oil) move up sharply, albeit in a zig-zag fashion as price escalation chokes off economic growth and imposes short-termreverses in demand. • Agricultural stress. This will be most obvious in more frequent spikes in food prices, combined with food shortfalls in the poorest countries. • Energy sprawl. Investment in the energy infrastructure will absorb a steadily-risingproportionof global capital investment. • Economic stagnation. As the declinein EROEIs accelerates, the world economy can be expected to become increasingly sluggish, and to fail to recover from setbacks as robustly as it has in the past. • Inflation. A squeezed energy surplus can be expected to combine with an over-extendedmonetary economy to create escalatinginflation.  With the exception (thus far) of inflation, each of these features has become firmly established in recent years, which suggests that the energy-surplus economy hasalreadyreacheditstipping-point.

25. A reflection • Solid, liquid and gaseous fuels imply lowering environm. impact • lower C/H ratio • Impact of energy system depends on EROEI but • EROEI evauation @ national level not straightforward • must include both direct and indirect impact of building, operating, maintaning and disposing of K equipment related to energy system and economy as whole • Metal, asphalt, tires, cement (and army!) are oil-related industries with • high KEM intensity • hard to account economic & evironmental cost • “Snowball” effect  inertia (big K) and debt (less production)

26. Energy, engines and society

27. Oil world  High K E M intensity • High K E M intensity  service-based society • >90% L in services • Globalization  Gap between Prod. & Cons.  more jobs in Agr. & Ind in developing countries  more jobs in Services in developed countries  more debt in developed countries • Change highly non-linear and un-smooth

28. More reflections • The accomplishment of societal functions needs mechanical energy for production and distribution: • agricultural, industrial & transport equipment for • producing and delivering food and essential goods  Requires a Fuel ≠ than Energy source (or electricity) (so far liquidfor volumetric density reasons) • Mechanical energy is an essential condition to maintain an ordered for society, as we know it • Despite high density (36MJ/lt.) and Well-to-Tank efficiency of liquid (oil products) as fuel  Tank–to-Wheel ICE efficiency is ≈ 10% in real conditions  Tank–to-Wheel H2-Fuel cell (FC) efficiency is ≈ 50%

29. The needformechanicalenergy and the constraintofrenewablefuel • The only renevable fuels are: • Biofuels: energy crops (fertil., water, tractors, soil & biodiv. loss)  refining = negative EROEI • Hydrogen: excess RE (wind, hydro, PV)  electrolysis  compression = low EROEI • Despite low energeticWell-to-Tank efficiency of the RE-H2-FC cycle • High energetic Tank-to-Wheels efficiency of H2 in FC engines (tractors, vans, small power plants), • High economicWell-to-tank efficiency of generating high-value H2 from low-value excess RE • Excess energy (intermittent & dispersed RE grid stabilization) can be economically stored and efficiently used as H2 in cloudy, windless working days for both production and transport • Enabling a RE-based society to express essential functions like food & industrial production

30. Renewableenergy system and Rails • The uniqueefficiencyofrailtransport on landrequiresspecialattention • Railis a sustainabletrasportinfrastructure • Requiring high upfront, public investments • Delivering short and long distanceservices • Generating minimal maintenance, energy, materials and evironmentalcosts (comparedto road transport) • The RE system islikely integrate with the railways • Freight can bemovedby disperse renewablesourcesfeeding the railwaygrid • Transportation and energygridmightbecome the samething A Wind-Powered Railway

31. A synergy against Olduvai