Winning the energy race
One way of looking at the energy industry today is to liken it to a horse race: coming out of the backstretch, oil is leading natural gas by a nose and coal is half a length back.
If you had placed your bets before the race began, you would feel pretty comfortable as oil, natural gas, and coal head for the wire – a trifecta win already warming your wallet.
But wait, what’s this? Here comes energy efficiency making a late charge as the horses enter the home turn. The jockey on energy efficiency uses his riding crop to encourage his horse and it responds as it thunders toward the finish line.
In the winner’s circle, energy efficiency is crowned the champion. Oil came up empty, natural gas showed brief foot and tired, while coal broke down and had to be destroyed. Solar, wind, geothermal and tidal were all making up ground at the three-quarter pole despite being ridden by apprentice jockeys.
Nuclear wasn’t entered in this race as it hasn’t raced for more than 45 days and is currently laid off. (Horses that are significantly laid off tend to not perform to their normal standards because they need at least one race to get back on track, pun intended.)
Racing analysts had tipped fossil fuels to win, place and show. How could the daily racing form have handicapped the race so badly?
Efficiency a steady performer
Obviously, the track reporters missed the great past performances by energy efficiency, a horse that has always been a stretch runner and is definitely not a sleeper. Efficiency advances – not new energy supplies – have fuelled three-quarters of the energy needed to grow the U.S. economy over the last 40 years. And in case you’ve forgotten, that’s the world’s second largest economy.
Energy efficiency has been invisible to many racing tipsters; consequently few were investing their para-mutuel pool dollars on this thoroughbred.
Bookies obviously weren’t consulting Bloomberg New Energy Finance who report that more than $6.5 billion of venture capital and private equity capital has been invested in efficiency since 2007. Bloomberg says $19.2 billion was invested in 2011 in energy-smart technologies, including smart grid, power storage, efficiency and advanced transport.
Straight bettors – those who bet to win only – should also have paid attention to the Institute for Electric Efficiency which reports that state budgets for efficiency programs climbed to record levels in 2011, to $6.8 billion – a 25 percent increase over 2010 investments.
And a study by the United Nations Foundation, relying on the expertise of some two dozen international energy experts, called energy efficiency both the largest and least expensive energy resource.
Saving energy, creating employment
Another report from the Rockefeller Foundation and Deutsche Bank Group estimates building energy efficiency retrofits in the United States offer a $279 billion investment opportunity that could produce more than $1 trillion in energy savings over 10 years, equivalent to savings of approximately 30 percent of the annual electricity spend in the U.S. The Rockefeller/Deutsche Bank report says if all their recommended retrofits were undertaken, more than 3.3 million cumulative job years of employment could be created.
Experts at the American Council for an Energy-Efficient Economy (ACEEE) – who in 2010 told us 87 percent of the energy we use is wasted – estimate that consumers currently invest $200 billion annually in energy-efficient technologies, making the efficiency market actually larger than traditional fossil fuels. ACEEE estimates that this level of investment could double to $400 billion and carbon dioxide emissions could be cut by one-third to one-half – if we can develop and expand the financial mechanisms for this growing market.
Just like horse race bookmakers and bettors, energy financiers are concerned about their return on investment.
Modern energy extraction is more and more about energy return on investment (EROI) – the ratio of the amount of usable energy acquired from a particular resource to the energy expended to acquire that energy.
As a formula, EROI is energy out divided by energy in.
An analysis of EROI is becoming the acceptable approach to determining the economic viability of a project – let’s call them the “odds” in keeping with our horserace analogy.
At the dawn of the oil age in 1930, it was only necessary to invest one barrel of oil to extract 100 barrels. This can be written simply as 100:1 – pretty good return for winning ticket holders.
Over time, as the easily accessible deposits were drained dry, oil became more difficult to find and bring to the surface in increasingly remote locations. Today, conventional petroleum drilling and refining returns only 10 units of energy for every one invested. Now what used to be 100:1 is 10:1 – a much lower payoff on that winning ticket.
The term peak oil really means we’re nearing the peak of both cheap oil and quality oil. For the first time in 140 years we’re trying to grow an economy primarily using a product that is declining in both quantity and quality.
A barrel of oil contains 6.142 gigajoules of energy – equivalent to that used by 707 100-watt filament-type incandescent bulbs for 24 hours. Each time energy is used to extract that oil, there is less oil remaining in the barrel.
Is Northern Gateway viable?
C.J. Peter Associates Engineering of Prince George decided to compute the energy return on investment of the oil extracted from the tar sands in northern Alberta and shipped to China through the Enbridge Northern Gateway pipeline.
The project would include two 1,172-kilometre pipelines between Bruderheim, Alberta, and a new marine terminal at Kitimat, BC. One pipeline would transport 525,000 barrels a day of diluted bitumen (commonly called dilbit) to Kitimat while the other would bring 193,000 barrels a day of condensate to dilute the bitumen from Kitimat to Bruderheim.
C.J. Peter’s calculations included the energy in the extraction of the bitumen, the energy in the transport of condensate by tanker, the energy in the transport of products via the Northern Gateway pipeline, the energy in the transport of the diluted bitumen by tanker and the energy in refining dilbit.
The conclusion: an energy return on investment of one barrel of oil expended to achieve 2.41 usable barrels of crude oil equivalent at the refinery at the destination. At 2.41:1, the odds are getting pretty close to even.
More relevantly, the calculations omit the energy embedded in the infrastructure required to extract and deliver the project and the energy lost in its end use. Including those figures in the calculations would have rendered the project even less productive.
King Hubbert, the Shell Oil geophysicist who coined the term “peak oil,” famously said:
“A society based on fossil fuels will come to a dead-end when the energy cost of recovering a barrel of oil becomes greater than the energy content of the oil.”
Norman Jacob, an associate of C.J. Peter, presented evidence to the National Energy Board hearing in Prince George on January 18, 2012 that some ecological economists have determined that an energy technology with an EROI of 3:1 or less is not sustainable.
Questioning the risk
One question must be asked in light of these revelations: Is it worth the risk to build this pipeline that will cross more than 600 fish-bearing streams and rivers – including the Fraser and Skeena Rivers, two of the world’s most important salmon waterways – and that will transport oil in between 190 and 250 super tankers (each with a capacity of up to 2 million barrels of oil) that will have to navigate the sensitive and narrow coastal Inside Passage and then across the storm-tossed Pacific Ocean?
The current energy “flavour of the year” is natural gas fracked from shale deposits. Cutler Cleveland and Peter O’Connor of the Department of Geography and Environment at Boston University authored a paper in 2011 on the EROI of shale gas.
They determined that if one includes internal energy (energy in the shale that is used during the process) as an energy cost, the energy return on investment is roughly 1.5:1 for the final fuel product.
Corn ethanol, another substitute energy that garnered huge government subsidies in recent years, has an EROI below 2:1.
Ajay Gupta and Charles Hall wrote a paper in 2011 assessing the EROI of 12 different energy sources. In their conclusion, they wrote:
“Given what we do know, it seems that the EROI of the fuels we depend on most are in decline; whereas the EROI for those fuels we hope to replace them with are lower than we have enjoyed in the past. This leads one to believe that the current rates of energy consumption per capita we are experiencing are in no way sustainable in the long run.”
Forewarned is forearmed
Modern society currently uses around 500 exajoules (1 EJ = 1018 J) of primary energy, 85 percent of which comes from fossil fuels and we have been forewarned about peak oil and our high reliance on fossil fuels.
In 2005, the US Department of Energy published what became known simply as the Hirsch Report – after lead author Robert Hirsch – which examined the time frame for the occurrence of peak oil, the necessary mitigating actions, and the likely impacts based on the timeliness of those actions. The report’s authors state:
“The peaking of world oil production presents the U.S. and the world with an unprecedented risk management problem. As peaking is approached, liquid fuel prices and price volatility will increase dramatically, and, without timely mitigation, the economic, social, and political costs will be unprecedented. Viable mitigation options exist on both the supply and demand sides, but to have substantial impact, they must be initiated more than a decade in advance of peaking.”
To understand the true cost of a product or initiative, we must tally both the direct and indirect costs. When we talk about oil, gas and coal, what is the cost of CO2 spewing into our atmosphere? What is the cost of toxic chemicals leaking into our waterways? What is the cost to public health? What is the cost of each oil war? What is the cost of funding petro-dictatorships?
It is obvious that betting on oil, shale gas, and coal is fast becoming a losing proposition. While the EROI of these fossil fuels plummet, the EROI for renewables such as wind and solar are trending strongly up, with EROIs five to twenty times higher than their fossil fuel counterparts.
David Murphy, an assistant professor of geography at Northern Illinois University, has written extensively about the energy return on investment threshold and his conclusion is that society should avoid energy technologies with an EROI below 8:1.
Choosing where to put your bet
Choosing the energy source that will win tomorrow’s theoretical horse race will require careful analysis and EROI can certainly help. Of course, the easiest option is just to consume less energy.
A smart jockey – one who really wants to win the race – would look at this situation and decide to switch horses.
Energy efficiency is the only energy source that lowers your energy bill and makes you a winner. If you continue to put your money on oil, gas, and coal, you’ll end up backing a losing horse. And just like that jockey, we do have a choice.
Michael Jessen is a Nelson, BC eco-writer, the owner of the consultancy Zero Waste Solutions, and the energy critic for the Green Party of BC. He can be reached by email at firstname.lastname@example.org
The C.J. Peter Associates Engineering written evidence given to the National Energy Board hearing into the Enbridge Northern Gateway is available at https://www.neb-one.gc.ca/ll-eng/livelink.exe/fetch/2000/90464/90552/384192/620327/624910/701951/777684/C.J._Peter_Associates_Engineering_-_Enbridge_Northern_Gateway_Pipeline_Project_Energy_Return_on_Investment_-_A2K4V3?nodeid=777596&vernum=0
The company’s oral testimony is available at https://www.neb-one.gc.ca/ll-eng/livelink.exe/fetch/2000/90464/90552/384192/620327/628981/783833/International_Reporting_Inc._-_Vol.13-WedJan18.12_-_A2L2R0?nodeid=783834&vernum=0&redirect=3&redirect=4
The IEE brief Summary of Ratepayer-Funded Electric Efficiency Impacts, Budgets and Expenditures (2010-2011) is found at http://www.edisonfoundation.net/iee/Documents/IEE_CEE2011_FINAL_update.pdf
The United Nations Foundation study Realizing the Potential of Energy Efficiency can be downloaded from http://www.globalproblems-globalsolutions-files.org/unf_website/PDF/realizing_potential_energy_efficiency.pdf
Peaking of World Oil Production: Impacts, Mitigation, & Risk Management byRobert L. Hirsch, Roger Bezdek, andRobert Wendling is at http://www.netl.doe.gov/publications/others/pdf/Oil_Peaking_NETL.pdf
For anyone wishing to learn more about current thinking on EROI, the following papers are useful:
Energy Return on Investment (EROI) of Oil Shaleby Cutler Cleveland and Peter O’Connor is found at www.mdpi.com/2071-1050/3/11/2307/pdf
A Review of the Past and Current State of EROI Databy Ajay Gupta and Charles Hall can be downloaded from www.mdpi.com/2071-1050/3/10/1796/pdf
A Dynamic Function for Energy Return on Investmentby Michael Dale, Susan Krumdieck, and Pat Bodger is found at http://www.mdpi.com/2071-1050/3/10/1972/pdf
The EROI of Conventional Canadian Natural Gas Productionby Jon Freise can be viewed at http://www.mdpi.com/2071-1050/3/11/2080/pdf
A New Long Term Assessment of Energy Return on Investment (EROI) for U.S. Oil and Gas Discovery and Production by Megan Guilford, Charles Hall, Pete O’ Connor and Cutler Cleveland is found at www.mdpi.com/2071-1050/3/10/1866/pdf
Order from Chaos: A Preliminary Protocol for Determining the EROI of Fuels by David Murphy, Charles Hall, Michael Dale and Cutler Cleveland is at
What is the Minimum EROI that a Sustainable Society Must Have?By Charles Hall, Stephen Balogh and David Murphyis downloadable at www.mdpi.com/1996-1073/2/1/25/pdf