Energy, Economy and FinanceSparse thoughts on End of an Era

Including some reflections on how to avoid disruptions

Giancarlo Fiorito

Structure• Economics as energy surplus

– money as language not substance• Thermodynamic economic history

– Prometheus I & II• IT Age• 4 drivers of degrowth

– (Creative) Financial bubble– Obscrured by (Data) Clouds– Globalisation (of Debt)– EROEI (Cliff)

• Energy and society• Reflections

– State of fuels– Oil world High K E M intensity

• The need for mechanical energy & the constraint of renewable fuel– EROEI and Well-to-Wheel efficiency– Renewable energy system and Rails

Mirroring • If one asked a representative sample of the public what economics is all

about, there is a very strong likelihood that the consensus answer would be “money”. The vast majority of economists do indeed frame the debate in monetary terms.

• The problem is that the economy is not, fundamentally, a monetary construct at all. Economics is really about the art of combining tangible components (such as labour and natural resources) to meet needs.

• Ultimately, money is a convenient way of tokenising this process. The process itself, on the other hand, is an energy equation.

• The basic misunderstanding over this point – the treatment of money as the substantive challenge, rather than as the language in which that challenge is expressed – lies at the heart of the current economic malaise.

• In essence, an ever-widening wedge has been driven between the monetary and the ‘real’ economies.Tim Morgan

Economics & thermodynamics

• Energy is– Endosomatic food (calories)– Exosomatic service (jouls, kWh)• Society & economy began when agriculture created

an energy surplus – population engaged in non-subsistence activities• Time and calories went on something else– philosophy, manufacturing, art, architecture…Law & governmentMoney to ease exchange

10.000 a.C.• Prometheus I a forest journey* with • Mastery of fire for cooking • Agricultural Revolution• Forests cleared for agriculture, but

Wood is primary energy and material Iron age = ovens to smelt metals

Hephaestus & mythology

crafts, trade, temples, roads, armiesSocietal controlSoil loss

* John Perlin, A forest Journey, The Story of Wood And Civilization

XVIII sec.• Prometheus II a journey underground • Steam engine in coal mines• Exosomatic power (en. slaves) Industrial Revolution Mass manuf., industrial agriculture, ships, cities

Aknowledged complementarity between K and E• And between GDP & Oilhttp://www.locchiodiromolo.it/blog/petroliovs-pil.html

Strict connection of fossil energy with industrial revolution and technical progress more K

K

E

GPD incre

ase

http://tinyurl.com/bmu2j5u

XXI sec. IT Age• Requires more E and materials M• Enhances K mobility Finance: growth of “Creative” $• Globalisation = more distance, more E & M Outsourcing (in OECD) means…

Less (real) production More ConsumptionSkilled L in manufact. Unskilled L in services

PRODUCTION CONSUMPTIONWidening gap = Debt

4 Drivers for the Crisis and why it will last…

• Financial (Creative) bubble• Obscured by (Data) Clouds• Globalisation (of Debt)• EROEI (Cliff)http://www.cityam.com/article/economic-perfect-storm-four-trends-killed-western-growth

http://tinyurl.com/a7qynks

Financial bubble at-glance• “Economy is a energy dynamic…” and real production is

based on harnessing energy to tokenize surplus production (food, crafts etc.)

• Increase in paper-money was a reaction from increased energy prices in the 80’s, possible by new legal (Glass-Steagall) and financial (derivatives)instruments, but also …

• IT technology (globalization) • Process in real terms is

lower EROEI means less net energy, so…Finance increased the debt to hide this Fostering the consumption in service economy

• Pushing away the problem

Statistical data sophistication• Discouraged workers, owner-equivalent rent, core

inflation, hedonic adjustment, geometric weighting…

• A big problem with hedonic adjustment is that it breaks the link between inflation indices and the actual (in-the-shop) prices of the measured goods. Another is that hedonic adjustment is subjective, and seems to incorporate only improvements in product quality, not offsetting deteriorations.

• A new telephone might, for example, offer improved functionality (a hedonic positive), but it might also have a shorter life (a hedonic negative) and, critics claim, the official statisticians are all too likely to incorporate the former whilst ignoring the latter.

• The failure to incorporate hedonic negatives may be particularly pertinent where home-produced goods are replaced by imports, a process which has been ongoing for more than two decades. A Chinese-made airbrush might be a great deal cheaper than one made in America, but is the lower quality of the imported item factored in to the equation?

The result: no inflation!

Owner-equivalent rent

• If a person owns his home, no mortgage or rent is payable, and no money changes hands in respect of the property. But the reporting methodology for US GDP assumes that such a property has a utility which a purely cash-based measure fails to capture. Therefore, GDP contains a sum representing the rent which the owner would have paid (presumably to himself) if he had not owned the property.

• Interest expense is backed out, but the net result remains a major non-cash uplift to GDP. The replacement of actual expenditure with a notional (‘imputed’) rent applies not just to those Americans who own their homes outright, but also to those with mortgages. For example, a person with 50% equity in his home is assumed to pay rent on 100% of it rather than, as is actually the case, mortgage interest on half of it.

Data “smoke curtain”: Growth and Jobs

Globalization, debt and EROEI• Paying the debt is made by financial products

“betting” on global companies future growth• Growth possible IIF cheap & high-EROEI energy• Meanwhile, developed countries live on services

delivered by consuming raw materials, E, K and Goods, produced (and now paid) by others.

• Passing from high to low EROEI, means:– Shrinking employmt, wages & consumption: no Growth– More debt, less “society”: school, health, culture– Deindustrializaton, social unrest, informal economy– Reverting trend toward labour-intensive activities

(bioagriculture, crafts, mechanics, electricians)

Energy, EROEI and the economyEconomy is a surplus energy dynamic, driven by the difference between energy extracted and energy consumed in the extraction process.

Below an EROEI of about 15:1, the “profit” element falls off a cliff, because there is an exponential increase in the “cost” component, which rises from 4.8% at an EROEI of 20:1 to 6.3% at 15:1, 9.1% at 10:1 and 16.7% at 5:1.

From high to low EROEI

NB: flow diagram is in percentage to highlight energy reinvested, the volume of energy in LEVELS is likely to shrink, implying the same for Essentials.

Population, Energy & GDP

• And one to add…energy cost as % of GDP

Toward the End of the Growth era•What is measured here is not the value of energy, but its cost as

a proportion of the value that we derive from it– If cost and value were the same, no surplus exists – Than the economy could not exist either

9.6% GDP

Eroei < 15:1

• If EROEI falls below a threshold, much more energy is consumed in the extraction process, resulting in a corresponding squeeze on the energy available to the economy

• The essentials may still be affordable, but the leverage in the equation is such that energy available for discretionary uses diminishes very rapidly

• Through the EROEI squeeze, goes the car, the holiday, the bigger home, the MP3, the meal out, toys for the children and the soccer match

• If EROEI falls materially, our consumerist way of life is over

Consequences• There are two really nasty stings in the tail of a declining EROEI.• First, net energy availability may fall below the amount required

for essential purposes including healthcare, government and law. It is hardly too much to say that a declining EROEI could bomb societies back into the pre-industrial age.

• Indeed, a decrease in net energy below subsistence levels is an implicit consequence of EROEI decline beyond a certain point – one which is difficult to estimate, but is likely to occur within the next decade – which means that this is when the nastiest results of all start happening.

• Second, a decline in net energy availability could (indeed, almost certainly will) result in conflict driven by competition for access to diminishing surplus energy resources.

The future• Investment in energy infrastructure will grow much more

rapidly than the economy as a whole energy sprawl• Declining energy productivity energy infrastructure increase more than the volume of

produced energy• This process is under way, though principally in the emerging

economies (where energy demand continues to increase)• Some simplified, daunting, calculations

– Hypothesis: Real GDP constant over 10 years – Hypothesis: EROEI from 20:1 to 10:1– Result: Energy costs rise 7,4% per year– Result: Rest of the economy shrinks by 0.5% per year

Signals

• Energy price escalation. The inflation-adjusted market prices of energy (and, most importantly, of oil) move up sharply, albeit in a zig-zag fashion as price escalation chokes off economic growth and imposes short-term reverses in demand.

• Agricultural stress. This will be most obvious in more frequent spikes in food prices, combined with food shortfalls in the poorest countries.

• Energy sprawl. Investment in the energy infrastructure will absorb a steadily-rising proportion of global capital investment.

• Economic stagnation. As the decline in EROEIs accelerates, the world economy can be expected to become increasingly sluggish, and to fail to recover from setbacks as robustly as it has in the past.

• Inflation. A squeezed energy surplus can be expected to combine with an over-extended monetary economy to create escalating inflation.

With the exception (thus far) of inflation, each of these features has become firmly established in recent years, which suggests that the energy-surplus economy has already reached its tipping-point.

A reflection• Solid, liquid and gaseous fuels imply lowering environm. impact lower C/H ratio Impact of energy system depends on EROEI but• EROEI evauation @ national level not straightforward– must include both direct and indirect impact of building,

operating, maintaning and disposing of K equipment related to energy system and economy as whole

• Metal, asphalt, tires, cement (and army!) are oil-related industries with– high KEM intensity– hard to account economic & evironmental cost– “Snowball” effect inertia (big K) and debt (less production)

Energy, engines and societyFuel Engine System & synergies Societal function

Wood, hay, wind, water

Slaves, horses, boats Agriculture Hunting, agr. prod., war

Coal Steam (trains, ships) Mining, machining, textile,

Ind. prod., mass transport

Oil IC (cars, trucks, planes)

Petroch., centralzd electric system, agroindustry

Mass transp., Residential

Nat. Gas IC, Turbine (jets, power plants)

ICT, globalization, central elecric syst., service economy

Mass transp. & cons., Resid., Suburbia, tourism

H2 ? FC ? Servers, local & horiz. energy system, organic agric.

IT-dedicatd power plants, light mobility,

Oil world High K E M intensity

• High K E M intensity service-based society – >90% L in services

• Globalization Gap between Prod. & Cons. more jobs in Agr. & Ind in developing countries more jobs in Services in developed countries more debt in developed countries• Change highly non-linear and un-smooth

More reflections• The accomplishment of societal functions needs

mechanical energy for production and distribution:– agricultural, industrial & transport equipment for– producing and delivering food and essential goods

Requires a Fuel ≠ than Energy source (or electricity)(so far liquid for volumetric density reasons)

• Mechanical energy is an essential condition to maintain an ordered for society, as we know it

• Despite high density (36MJ/lt.) and Well-to-Tank efficiency of liquid (oil products) as fuel Tank–to-Wheel ICE efficiency is ≈ 10% in real conditions Tank–to-Wheel H2-Fuel cell (FC) efficiency is ≈ 50%

The need for mechanical energy and the constraint of renewable fuel

• The only renevable fuels are: 1. Biofuels: energy crops (fertil., water, tractors, soil & biodiv. loss) refining =

negative EROEI2. Hydrogen: excess RE (wind, hydro, PV) electrolysis compression = low

EROEI

• Despite low energetic Well-to-Tank efficiency of the RE-H2-FC cycle– High energetic Tank-to-Wheels efficiency of H2 in FC engines (tractors, vans, small

power plants), – High economic Well-to-tank efficiency of generating high-value H2 from low-value

excess RE Excess energy (intermittent & dispersed RE grid stabilization) can be economically

stored and efficiently used as H2 in cloudy, windless working days for both production and transport

Enabling a RE-based society to express essential functions like food & industrial production

Renewable energy system and Rails

• The unique efficiency of rail transport on land requires special attention

• Rail is a sustainable trasport infrastructure– Requiring high upfront, public investments– Delivering short and long distance services– Generating minimal maintenance, energy, materials and evironmental

costs (compared to road transport)• The RE system is likely integrate with the railways

– Freight can be moved by disperse renewable sources feeding the railway grid

– Transportation and energy grid might become the same thing

A Wind-Powered Railway

A synergy against Olduvai