Application of the SEEDS model to the United Kingdom shows that an escalating real cost of energy poses a major threat to the economy. What are we going to do about it? And do we even know what we are facing?
What with the European elections and other interesting events, it’s been a while since I wrote about my core thesis, surplus energy economics. For anyone not familiar with this – and allow me to recommend my book Life After Growth! – SEE is a discipline which argues that the entire economy is, and always has been, an energy equation and not, as so many people assume, a monetary construct. Society and the economy began when farming gave us the first energy surplus, enabling a small minority of the population to turn to non-subsistence tasks, and the discovery of the heat engine applied dramatic leverage to that surplus, creating the complex societies that we take for granted today.
Of course, energy isn’t ‘free’. In accessing energy, some energy is consumed, be it in drilling oil wells, sinking mine shafts, constructing pipelines and refineries, or fabricating solar panels, wind turbines or nuclear reactors. Where prosperity is concerned, what matters is the difference between the gross amount of energy accessed and the energy consumed in doing so. Obviously, if we used up 100 units of energy to access 100 units, the exercise would be pointless, because there would be no energy left over for us to use.
This cost ratio is measured as EROEI, or the ‘Energy Return On Energy Invested’. If 50 units of energy are accessed and 1 unit is consumed in the process, the EROEI is 49:1. Put another way, the cost of accessing the energy is 1 divided by 49, or 2%, a number which I call the ‘Energy Cost of Energy’, or ECOE.
As we go about our economic activities, the system imposes this ECOE cost on us. With our specimen EROEI of 49:1, we’d hardly notice a 2% levy on our activities, not least because the ways in which we measure economic output (such as GDP, or Gross Domestic Product) are far from perfect. Thus a modest energy ‘levy’ isn’t generally noticeable, especially if it is pretty static over time.
Increase that levy from, say, 3.6% to 5.6%, however, and we begin to notice its effects. For those who persist in regarding the economy as nothing more than a monetary system, the noteworthy features would be an undershoot against growth expectations combined with a big real-terms increase in the cost of the energy that we use.
Those who are familiar with SEE, on the other hand, regard such trends as indicative of a rising ECOE, or in other words a falling EROEI. Looking around the energy scene, they would observe that huge, cost-effective sources of energy are in decline, and that the industry is turning its attention to resources which are far costlier to access.
Despite the sterling efforts of the EROEI community, we do not have an overall calibration of global, national or by-fuel EROEIs and ECOEs. I must stress that my SEEDS (surplus energy economics data system) model cannot possibly be definitive, and neither is it intended to be. Its purpose is to provide, in the absence of anything better, a general outline of where I think ECOE has been, and where it is going.
Alarm bells – the British situation
The application of SEEDS to the United Kingdom shows a worrying deterioration in EROEIs and, consequently, a sharp uptrend in the ECOE (energy cost of energy) as it affects economic performance.
Eleven years ago, in 2003, Britain was continuing to benefit from its North Sea windfall. Our production of energy, at 237 million tonnes of oil equivalent (mmtoe) remained greater than consumption (226 mmtoe), though the surplus had narrowed to 11 mmtoe in 2003 from 50 mmtoe in 1998.
Since then, oil and gas production have both dropped by about 65%, whilst coal output has halved from an already low level. Despite progress with renewables, overall UK energy production has declined from 237 mmtoe in 2003 to about 102 mmtoe today, and seems certain to go on falling.
This has happened at the same time as global ECOEs have been rising sharply. SEEDS shows this global average rising from 3.6% in 1998 to 5.6% in 2008, thus playing a major (though often overlooked) role in the 2008 economic slump. Since then, my estimate of global ECOE has climbed further, to 7%, which helps to explain why oil prices remain well ahead of 2007 levels despite a sharp intervening slump in economic activity.
For Britain, this trend has been far worse, because we have swung from a net exporter to a net importer of oil and gas. Even where EROEIs are the same, by the way, a net exporter gains versus a net importer of energy because costs (and taxes) stay at home. Reflecting this, my estimate of Britain’s overall ECOE has soared from 2.8% in 1998 (when the global average was 3.6%) to 13% today, getting on for twice the global average. Both factors – rising global ECOEs, and a deteriorating energy trade position – are set to continue.
It would be futile, though instructive, for us to lament British energy decisions of the past. Our net export revenues, which we might have saved (like Norway) or invested in the modernisation of our industrial base, were spent instead on tax cuts and the cost of unemployment. Exporting part of our always-modest gas resource, and using more of it to switch to gas-fired electricity production in pursuit of a quick buck, surely needs no comment from me.
What matters now is coping with the future outlook. Basically, high and rising ECOEs are going to undermine our economic performance. What we need to do is to be aware of this, to minimise it where we can, and to manage the broader consequences.
(And, by the way, don’t pin your hopes on a shale bonanza which isn’t going to happen here, and is likely to be over within three or four years in the US).
A troubling outlook
The chart below is designed to give you an outline of where this might lead. The blue line shows real GDP growing at an assumed annual rate of 2% into the future. Of course, our horrendous current account deficit, and our equally horrendous levels of debt, might make this assumption untenable, but let’s stick with it for now as a base-line.
The dark red line adjusts this for ECOE, showing real GDP less the cost of energy. This cost has always been there, of course, but the combination of global trends and our worsening energy trade position are transforming this cost from a barely-noticed irritant to a very serious drag.
The bright red line shows a further adjustment for our current account balance, already very bad but capable of becoming much worse if our net trade in energy (which includes both direct energy and energy-incorporating products such as food) deteriorates as our energy production continues to erode.
Of course, how we counter this is a matter for government. Going ahead with nuclear, after Labour’s long hiatus, is clearly necessary, even if our choice of new reactors seems a strange one. We also need to press ahead with renewables, ultimately making a choice between economic costs on the one hand and NIMBYism on the other.
However you look at it, this is a major challenge. At the very least, ensuring energy continuity is going to be hugely expensive, impairing what we have left to spend on other things.
* Assumes growth of 2% annually from 2014