New research outlines how energy resource depletion and declining energy return on investment (EROI) may affect prosperity.

François-Xavier Chevallerau | April 26, 2017

Modern, prosperous lifestyles are heavily dependent on the availability of abundant, low-cost energy supplies. In fact, a society and its component parts (people, groups, organisations, institutions) are physical systems that require inflows of affordable energy resources with high thermodynamic quality to perform work and power their various functions. To date, modern societies largely source their energy supplies from fossil fuels, which raises important sustainability concerns related to both their exhaustibility and the environmental degradation induced by their large-scale use.

One specific concern regards the ‘energetic productivity’ of energy resources, and its evolution in the face of resource depletion and energy transitions. Gathering energy resources from the environment indeed generally consumes large amounts of labor and capital, but also of energy, meaning that only part of the energy obtained is effectively available to do other things than extracting and producing energy. The amount of energy supplied by an energy resource divided by the energy consumed in gathering that resource can be conceptualized as an energy return ratio (ERR). The most well-known of these ratios is the ‘energy return on (energy) invested’ (abbreviated EROI or EROEI) i.e. the ratio between the total amount of energy delivered by an energy resource during its working lifetime and the amount of energy invested in obtaining it.

EROI is conceptually related to measures of energy productivity. Productive energy resources are those yielding a large amount of energy to society for each unit of energy (or other inputs) expended, while energy resources that require large amounts of energy (or other inputs) and yield only a limited amount of energy surplus are considered unproductive. Since all non-energy sector activities rely, by definition, on the surplus output of the energy sector, this energetic surplus underlies all other economic activities.

In recent years, questions have been raised concerning the link between EROI and overall economic prosperity. A growing body of research indeed suggests that high societal EROI levels are strongly correlated with high standards of living, that the level of prosperity attained by modern, mostly Western, societies is heavily dependent on the use of high-EROI fossil energy sources, and that a minimum aggregate EROI value must be maintained to support modern, prosperous societies. At lowered energy productivity levels – or lower EROI levels – energy becomes expensive and costly to obtain – in energy terms – and consumption of energy to support other functions of society becomes constrained. A number of studies have explored the effects of declining EROI on society and found that, below a certain threshold, declining EROI results in rapid increases in the fraction of energy that must be dedicated to simply supporting the energy system. This phenomenon has become known as the “net energy cliff”, an expression coined by energy analyst Euan Mearns.

EROI studies show that the net energy gain of conventional fossil fuels has historically been high but is declining over time as resources get depleted, decrease in quality and get more difficult to obtain, while alternatives such as unconventional fossil fuels (e.g. shale/tight oil and gas), nuclear, bio-fuels or renewable energy sources tend to have lower energy return ratios. As societies and economies transition away from high net energy resources such as ‘conventional’ fossil fuels and towards lower net energy resources such as unconventional fossil fuels or renewables, either voluntarily (e.g. to fight climate change) or due to resource constraints, a number of researchers and analysts have argued that we might be approaching the “net energy cliff”, beyond which the energy sector would start crowding out other economic activities and our modern, prosperous lifestyles would be endangered.

So far, however, no general mathematical or theoretical framework has been built to support the calculation of quantitative values for the minimum EROI for a prosperous society. A new paper by energy researcher Adam Brandt from Stanford University, recently published in the new peer-reviewed journal dedicated to biophysical economics, BioPhysical Economics and Resource Quality (BERQ), seeks to fill this gap.

How Does Energy Resource Depletion Affect Prosperity? Mathematics of a Minimum Energy Return on Investment (EROI)

BioPhysical Economics and Resource Quality, March 2017, 2:2.

Adam R. Brandt

Brandt’s study addresses the following fundamental questions:

What is the causal mechanism by which declining energy resource productivity (i.e., declining EROI) affects overall societal prosperity?

Do impacts to prosperity arise from the structure of the energy sector, or do they arise due to the relationship of energy sector outputs to other economic activity?

Is the so-called “net energy cliff” an unavoidable aspect of declining energy productivity?

To try to answer these questions, Brandt developed a multi-sector matrix-based method making it possible to quantify, for the first time, the impacts of declining EROI on societal prosperity. His mathematical method is partially based on prior work on matrix-based approaches to computing energy return ratios, but relies more closely on inter-sector flows modeling using formulations from Input–Output (IO) economics.

Brandt defines prosperity as the capacity, for a society, to ensure that a larger fraction of the output from the economic system is free to put to use for discretionary uses. That is, a society is more prosperous when more of the produce of the economic system is not used simply to operate the basic economic system (i.e., inter-industry trade) but can be diverted to use by consumers as they see fit (i.e., final demand). A prosperous society, therefore, is able to invest more of its produce (be it steel, glass, or high-skilled services) into discretionary activities. These might include advanced education, science, entertainment, temperature controlled living and working spaces, or discretionary travel. Such activities, in fact, are only possible when productive sectors are efficient enough that some abundance is left over after the basic requirements of the subsistence economic processes are met.

In highly prosperous societies, a large fraction of a given resource (human labor, energy, materials) is free to allocate as we please, while in societies that are closer to subsistence, a large fraction of the output of any product must be “plowed back” into powering economic processes. Our modern economies are prosperous, in other words, because relatively few of the hours we work, or very little of the material output we consume, are directly related to basic subsistence.

To explore the dynamics of an economic system confronted with declining energy resource productivity, Brandt generates a template economy composed of four sectors. Three of those sectors produce generic physical products (energy, materials, and food), and a generic labor sector is added to include the effects of changes in labor intensity on energy sector outputs. The labor sector consumes the physical products of the other sectors and supplies them with hours of input labor (either physical or intellectual). People therefore serve two functions in this model: they are both consumers of final output and suppliers of labor. The four-sector model generated has similarities with the five-sector capital, labor, energy, materials, and services (KLEMS) models used in some economic sub-disciplines.

Brandt then populates this template matrix using realistic, if approximate, values for each sector’s requirements (energy requirements, materials requirements, food requirements, and labor requirements) based on data available for the modern United States. This makes it possible to define a “baseline” matrix for the simple order-of-magnitude four-sector economy, as illustrated below.

Based on this template four-sector model, Brandt then modulates the productivity of the energy sector to see how this affects the general level of prosperity. Starting with the above “baseline” example model, he simulates a steady increase of the intensity of the energy sector requirements. His results show that the productivity of the energy sector is directly related to the prosperity of the production process, measured as the fraction of a given sector’s output that is ‘free’, i.e. that can be allocated to discretionary uses. As the energy sector becomes less productive, it consumes more materials, labor and energy, and the output of the other sectors of society is increasingly dedicated to supplying inter-industry demand of the energy sector. The mechanism by which energy sector productivity affects overall prosperity is twofold: direct increases in material and energy use by the energy sector itself, and indirect increases due to increased consumption of output of other sectors.

Overall, the so-called “net energy cliff” is observed in all results from Brandt’s model. Despite the fact that the method by which EROI and net energy availability are computed in this model is different from those used in prior studies, a similar qualitative behavior is observed: a decline of the energy system productivity extends to all aspects of the economy by reducing the fraction of each sector’s output that can be allocated to discretionary uses. Below a certain level of net energy return, the fraction of productive outputs free to use in discretionary purposes declines rapidly, meaning that there is effectively a “minimum EROI” below which prosperity is burdened by excessive direct and indirect requirements of the energy sector. Concerning the “minimum EROI” values defining the “net energy cliff”, Brandt obtains different threshold values for different assumptions about the fraction of outputs that can be absorbed to inter-industry demand without affecting prosperity. Overall, however, the minimum EROI values obtained align with results from prior studies.

Brandt’s model thus gives an indication of the mechanisms by which energy productivity declines affect general prosperity, and of how uncertainty in the matrix specification impacts the level at which the minimum EROI becomes constraining. It also shows how productivity changes in other sectors (e.g., efficiency of materials production, or labor productivity) can affect the rate at which energy depletion affects prosperity. Indeed, energy productivity does not just depend on energy extraction performance, but also on other productivity changes throughout the system. It can be dragged down by drops in the efficiency of the labor sector, or by changes in the efficiency of the materials production as well. The proposed model shows how other-sector productivity changes interact with and mediate the role that energy abundance plays in general prosperity.

Brandt proposes that further work be carried out to further explore how energy resource depletion and declining energy return on investment (EROI) may affect prosperity. In particular, future work could focus on the dynamics of energy sector development and technological change, on the possible substitution of energy resources that would become less productive or become increasingly scarce, or on the prosperity implications of gradual vs. sharp declines in energy returns. Perhaps most importantly, future work should also explore in more details the implications of shifts in material flows and net energy availability associated with gradual transitions from fossil to renewable energy sources.

As Adam Brandt points out, transitioning away from fossil fuels and towards alternative energy sources will indeed be much more than just a substitution of certain energy sources by others. It will amount to a re-engineering of humanity’s basic societal ‘metabolism’, i.e. the set of processes by which human societies – and their various components – ‘exchange’ energy and matter with their biophysical environment and between themselves, and use them in various ways and for various purposes. This has only happened a few times in the past, when early hunting and gathering societies gave way to agricultural societies, and when those in turn were supplanted by industrial societies powered by stored chemical energy in the form of fossil fuels. A full transition to renewable energy would represent a shift of similar magnitude. As this transition gets underway, civil society and policy-makers need appropriate models to make fully informed policy decisions, based on a sophisticated understanding of the underlying systems as well as of the associated constraints and uncertainties.