Surplus Energy Economics
Shortly after the publication of Life After Growth, I undertook to produce a Brief Guide to surplus energy economics – and here it is, available for free download. In this article, I discuss some of the findings of the data system that I’ve built to track and predict energy returns, energy costs and economic performance on a worldwide basis.
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Compiling the guide has taken quite a while, because I decided to complete my EROEI database first.
Called “SEEDS” (which stands for ‘Surplus Energy Economics Data System’), this has been a big undertaking.
The first imperative was to track, so far as available information allowed, the course of EROEI in the past, and to project this forward into the future. I found that I was able to go back as far as the 1960s, and the projections go out to 2030. EROEI is tracked by fuel, covering oil, natural gas, coal, nuclear, hydroelectric, wind, solar, biofuels and other forms of renewable energy, with oil and gas further divided between conventional and unconventional sources such as tar sands and shales.
Next, I needed to compile data for consumption, production and net exports, by fuel type, for each of the 43 selected countries – more will be added – together with aggregations for five regions and the overall global picture. This gave me, for each country, data from which two other time series could be plotted – the EROEI of consumption in each country or region, and the overall EROEI for each, after adjustment for net trade in energy.
The inverse of EROEI, of course, is the Energy Cost of Energy, or “ECOE”. Put together with various economic data series, this enabled me to track the “financial” and “real” economies of each country and region. It also enabled me to calculate each country’s legacy of “excess claims” – essentially, the extent to which the financial economy of money and debt economy has entered into commitments that the real economy is not able to meet.
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Here are some of the findings of the SEEDS model.
First, overall EROEI has been declining since the 1960s, and has fallen from 55.7:1 in 1980, and 37.2:1 in 1990, to 24.3:1 in 2000 and 13.6:1 in 2013. Reflecting this, the trend in the Energy Cost Of Energy (ECOE) has risen to 6.8% in 2013, from 1.8% in 1980, 2.6% in 1990 and 3.9% in 2000.
Looking ahead, the model projects EROEIs of 10:1 in 2020 and 7.9:1 in 2025, equivalent, respectively, to ECOEs of 9.1% and 11.2%.
Globally, and expressed in constant (2012) dollars, this means that the real economy will decline pretty gradually, falling by 2.9% between 2013 and 2020, and by a further 5.9% between 2020 and 2025, leaving the real economy some 8.5% smaller in 2025 than it was in 2013.
Unfortunately, it’s going to feel rather worse than that, for two main reasons. First, of course, we’ve long become accustomed to growth. Second, the financial economy already exceeds the real one, because we are continuing to create “excess claims” at the rate of close to US$5 trillion annually. The global real economy of 2020 is projected to be almost 9% smaller than last year’s financial economy – and that’s going to hurt.
How much it will hurt, of course, depends on where you are. On a ranking of 1 to 43, the best-placed countries (in rank order) are Norway, Saudi Arabia, Russia, Indonesia, Australia and Switzerland. At the other end of the scale, the worst-affected countries are Greece (#43), Portugal (#42), Spain (#41), Italy (#40), Hungary (#39), Turkey (#38), Britain (#37), Japan (#36), Slovakia (#35) and India (#34).
Globally, there is huge scope for value destruction, because aggregate excess claims – monetary commitments, that is, which the real economy will be unable to satisfy – total US$63 trillion. This, I should stress, is a net number, with negative scores offset by the positive claims of countries which are net creditors of the system. These include Norway (US$1.8 trillion), Russia (US$2.7 trillion), Saudi Arabia (US$3.5 trillion) and other Middle East countries (in aggregate, US$4.3 trillion).
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The system identifies two critical thresholds. The lower of the two is the “viability threshold”, at an EROEI of about 6:1. At this point, energy costs absorb over 14% of economic output, making the economy barely viable at all.
Well before that point is reached, however, there is the “investment threshold”, set at an EROEI of 14:1. At this point, the cost of energy is 6.7%. Whilst the remaining 93% of output may suffice to keep the economy going, it is insufficient to fund net investment in new capital assets.
What would an economy look like at levels of EROEI below the 14:1 “investment threshold”?
Well, first and foremost, it would not be able to afford net capital investment. What this really means is that the economy’s consumption needs would not leave any scope for capital formation, which, in everyday parlance, means the economy could not afford to save.
So an economy in sub-threshold condition would have to have negative real interest rates, offering a negative return on savings, and deterring any rational person from saving – every available cent would be needed for day-to-day consumption, and it is probable that the sub-threshold economy would be borrowing extensively as well. At the same time, negative real interest rates would be imperative simply to keep the economy going, and to put off the evil day when “value destruction” – the destruction of “excess claims” – kicks in.
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Does this seem familiar? It should, because it describes a swathe of Western economies right now.
Plenty for us to ponder there, I think…..