Energy Return on Investment

What every schoolkid (and investor) should know, and why it is time for fossil fuel divestment.

Energy Return on Investment (EROI) is easy to understand: how much energy do you get out (R) compared to how much energy you had to put in to get access to that energy (I) –R:I. EROI tells you how much net energy you can expect to use for other things (driving cars, running generators, etc.). Traditional petroleum (think gushing oil wells) used to have a lucas_gusherspectacularly high EROI, about 1000:1 a century ago [1]. Since the 1970s, the EROI of the average barrel of petroleum has been dropping fast – it is now below 5:1 [1].

“The evidence suggests that the global production of conventional oil plateaued and may have begun to decline from 2005.” [2]

Essentially, we are expending a lot of energy to scrape the bottom of the barrel, digging out very hard-to-get stuff in deep seas (think Deepwater Horizon and its attendant complications), tar sands, athabasca_oil_sandsand “tight” shale oil.  Because we have to use so much energy just to get at that fuel, it only makes sense (from a profit perspective) if the selling price of the resulting fuel is very high.

“We find the EROI for each major fossil fuel resource (except coal) has declined substantially over the last century. Most renewable and non-conventional energy alternatives have substantially lower EROI values than conventional fossil fuels.” [1]

As you may have heard (or noticed, if you fill a gas tank), the selling price of petroleum has recently dropped a lot.  Seems weird, but there are explanations (more on that later). What this price drop means is that a lot of places where it used to make sense to be extracting these fossil fuels, places where extraction companies have invested a lot in exploration and infrastructure to get at the stuff, don’t make sense anymore.  This is part of what is meant by “stranded assets” (more below) and it can lead to things like bankruptcy [3].

So if energy from petroleum is increasingly hard to get, why would the price be dropping now? Some of it may be due to a drop in demand because of the global economic slowdown, in turn related to China slowing the pace of its phenomenal economic growth [4].  Some of it may be due to the production boom from short-lived tight oil extraction and fracking taking place in the U.S., where production is high enough at first, but seems to fall off rapidly after about 15 years at each new site [2].

“Thus, despite the fall in crude oil prices from a new peak in June, 2014, after that of July, 2008, the peak oil issue remains with us, and broad economic recovery combined with the consequences of recent oil exploration and production cut-backs will bring back further major oil price rises.” [2]
The truth of the current situation is even more complicated than the EROI, of course. There is also the climate disruption represented by fossil fuel reserves.  And this leads to the other reason that fossil fuel companies should expect collapsing prices: we don’t want it so much anymore.  If we are serious about meeting the targets that global leaders just signed onto, we can’t even burn the fuel reserves that people have already invested in developing, let alone continue to develop new ones.  This concern was laid out by Bill McKibben in 2012 in “Global Warming’s Terrifying New Math,” and is even more relevant in light of the Paris COP 21 agreed ambition to attempt to stay below a 1.5C rise in average global temperatures [5].

When whales get stuck on beaches, helping them back to deeper waters is usually the right thing to do [6].  But when fossil fuel titans are stranded, gasping for profits under the weight of their history, the most merciful response for everyone might just be to put them out of their misery.  A few brief moments of economic pain can spare us all from longer decades of climate and pollution disasters if these beasts are allowed to keep flopping around on- or off-shore.  Sadly, we are past the point of easy, painless solutions now.

“If the oil crisis hits the economy hard, then the prolonged recession that results could dampen the rising demand that everyone projects. If oil prices thus remain relatively depressed for longer than expected, this could hemorrhage the industry beyond repair.”[6]

To hasten the inevitable demise of fossil fuels, there are increasing calls for divestment.

“Divestment is the opposite of an investment – it simply means getting rid of stocks, bonds, or investment funds that are unethical or morally ambiguous.” [7a]

Cities, colleges, foundations and individuals are hearing from activists demanding that they withdraw investments from fossil fuels.  And they are responding, with 517 institutions committed to withdrawing their investments in fossil fuels as of this post [7b].

“For the divestment skeptics who believe I am pushing an environmental agenda at the expense of necessities such as financial aid, let it be clear: The financial argument for divestment is sound, even independent of environmental concerns. The investment literature overwhelmingly shows that fossil fuel-free portfolios have higher risk adjusted returns than those invested in fossil fuel companies, which is understandable, considering the increasing risk of fossil fuel companies’ faulty practices and the imminence of carbon legislation. The San Francisco Chronicle reported in August that California pension funds lost $5 billion due to investment in fossil fuels. ” [8]

If you are so inclined, you might think of divestment as a death penalty for criminal corporations who knowingly perpetrated [9] mass murders [10] in the past and who plan to continue into the future. I generally prefer less retribution-focused imagery, perhaps that of allowing an ill and deranged sufferer the dignity of a quick death, but then again, perhaps that metaphor is less accurate.  Either way, the humane thing to do is to get it over with quickly, before more harm is done.  Keeping fossil fuel extraction on life-support with continued investments is doing no one any good at this point.

Since EROI from fossil fuels will continue to drop, and since there is essentially incontrovertible evidence of harm from the stuff,  why would any sane person invest money in fossil fuel extraction at this point?

Divestment is the rational and compassionate thing to do.

References

(Note: much of the cited information actually came from other primary sources, referenced in the summaries below, because this is just a blog and I didn’t want to take the time to dig for primary sources – not the best scholarship on my part, but still a good starting point for discussion.)

[1] J. Lambert, C. Hall, S. Balogh. 2013.  EROI of Global Energy Resources: Status, Trends and Social Implications  http://r4d.dfid.gov.uk/pdf/outputs/Energy/60999-EROI_of_Global_Energy_Resources.pdf

[2]   M. Jefferson. 2016. A global energy assessment. WIREs Energy Environ 2016, 5:715. doi: 10.1002/wene.179 http://onlinelibrary.wiley.com/doi/10.1002/wene.179/epdf

[3] Carbontracker.org. 2015. The $2 trillion stranded assets danger zone: How fossil fuel firms risk destroying investor returns. http://www.carbontracker.org/report/stranded-assets-danger-zone/

[4] D. Nathman. 2016. Crude Oil Prices In 2016: Made In China?  Forbes.  http://www.forbes.com/sites/dougnathman/2016/01/20/crude-oil-prices-in-2016-made-in-china/#4bc36cb05b23

[5]  N. Scharping. 2016. Half a Degree Makes a Big Difference for Global Climate http://blogs.discovermagazine.com/d-brief/2016/04/22/a-half-degree-makes-a-big-difference-for-global-climate/#.VyWpqjB96Um

[6] Strandednomore.org. 2013. What To Do If You Find A Live Stranded Whale Or Dolphin: An Inconvenient Advice from StrandedNoMore.  http://strandednomore.org/what-to-do-if-you-find-a-live-stranded-whale-or-dolphin-an-inconvenient-advice-from-strandednomore/

[7] N. Ahmed. 2016. This Could Be the Death of the Fossil Fuel Industry — Will the Rest of the Economy Go With It?  http://www.truth-out.org/news/item/35817-we-could-be-witnessing-the-death-of-the-fossil-fuel-industry-will-it-take-the-rest-of-the-economy-down-with-it

[7] Fossilfree.org. 2016. a) http://gofossilfree.org/what-is-fossil-fuel-divestment/ and b) http://gofossilfree.org/commitments/

[8] S. Vaughan. 2015. Divestment Movement Spurs Existential Crisis in Higher Education. http://www.truth-out.org/speakout/item/32926-divestment-movement-spurs-existential-crisis-in-higher-education

[9] S. Hall. 2015. Exxon Knew about Climate Change almost 40 years ago. Scientific American.  http://www.scientificamerican.com/article/exxon-knew-about-climate-change-almost-40-years-ago/

[10] World Health Organization. 2015. Climate change and health.  http://www.who.int/mediacentre/factsheets/fs266/en/

One response to “Energy Return on Investment

  1. Nice summary of the situation, Michelle.

    Like

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