Economies Are Completely Dependent on Energy

Discussion

Nate Hagens:

"Ecological economics acknowledges that real economies are completely dependent on energy. However, orthodox economic theory remains blind to this reality. As a result, so do our institutions and our citizenry. The disconnect has massive implications for our future. This is so critical it deserves reiteration.

Energy in nature

Energy is and always will be the currency of life. The effectiveness of energy capture is central to biological systems. Any movement, activity or event in nature requires energy. Organisms utilize foraging strategies that optimize energy intake vs. energy expenditure adjusted for time and risk (Krebs and Davies, 1997). In this way, biological organisms too, are investors. A larger energy surplus gives an organism a competitive advantage for growth, reproduction, defense, competition, maintenance and repair (Lotka, 1922). As such it is the ‘net energy’ after energy costs have been subtracted that is the enabler and driver of natural – and human – systems (Hall, 2016).

Energy and power

Biological systems maximize power. Metabolism is the rate at which organisms acquire, transform, and expend energy and materials (Brown et al., 2004; Schröter, 2009). “Power” is energy accessed/utilized per unit-time. Organisms and ecosystems naturally structure themselves to maximize power via accessing energy gradients. An oak tree doesn’t grow one leaf (maximum efficiency) or e.g. 100 thousand leaves (maximum gross energy), but an intermediate amount of leaves placed to maximize the surface area of the tree to the sun for photosynthesis (Schneider and Kay, 1994). Systems which maximize useful power generally outcompete those which do not (Odum, 1995).

Energy benefits

Major transitions in human societies over the past 10,000 years were linked to the benefits from different energy types and availability (Day et al., 2018). Industrialization changed the historic human relationship of energy capture from using the daily flows of nature to using technology fueled by large amounts of cheap fossil energy.

One barrel of crude oil can perform about 1700 kW h of work. A human laborer can perform about 0.6 kW h in one workday (IIER, 2011). Simple arithmetic reveals it takes over 11 years of human labor to do the same work potential in a barrel of oil. Even if humans are 2.5x more efficient at converting energy to work, the energy in one barrel of oil substitutes approximately 4.5 years of physical human labor.

This energy/labor relationship was the foundation of the industrial revolution. Most technological processes requires hundreds to thousands of calories of fossil energy to replace each human calorie previously used to do the same tasks manually. Consider milking a cow using three methods (see Fig. 2): manual (human labor energy only), semi-automated electric milking machines (1100 kW h per cow per year), and fully automated milking (3000 kW h per cow-year). The manual milker, working alone, requires 120 h of human labor per year per cow; semi-automated machines require 27 h of labor; and full automation, 12 h. We’ll estimate that the human milker generates economic value of $5 an hour working alone. Using electric milkers at $0.05 per kWh, output rises significantly and—because cheap electricity substitutes for so many human hours of labor—the revenue increases to $19 per hour with semi-automated milkers and to $25 per hour with the fully automated technologies. (Note: this large economic benefit could go to the owner of the dairy farm, the employees, or to consumers in the form of cheaper milk – or any combination) (Hagens, 2015). This same principle extrapolates to most modern industrial processes: we save human labor and time by adding large amounts of cheap fossil labor (Cleveland et al., 1984; IIER, 2011).

Although modern industrial output is energy inefficient it is extremely cost efficient because fossil energy is much cheaper than human energy. This is the “fossil subsidy”, that makes modern profits, wages and standards of living considerably higher compared to previous civilizations based on diffuse renewable flows. The average human in 2015 produced 14 times more GDP than a person in 1800 – and the average American 49 times more (Lindgren, 2011)! Modern Americans -via their energy subsidy - now have the physical metabolism of 30+ ton primates (Brown and Group, 2013; Patzek, 2011).

However, these windfalls come with a downside. Industrial profitability is vulnerable to energy price increases. As indicated in orange and grey bars in Fig. 2, a doubling or trebling of energy costs makes previously high-profit industries with large energy input requirements unprofitable (e.g. airlines, cement manufacture, aluminum smelting etc.). Additionally, the reduction in profits from energy price increases cannot be offset entirely by efficiency improvements because the business model itself was predicated on large amounts of cheap energy. These “reduced benefits” due to energy price increases are a worldwide phenomenon (EIA, 2013; Kingsley-Jones, 2013).

Energy scale

In 2018, the global economy ran on a constant 17 trillion watts of energy - enough to power over 170 billion 100-watt light bulbs continuously. Over 80% of this energy, shown in Fig. 3, was the 110 billion barrels of oil equivalents of fossil hydrocarbons that power (and is embodied in) our machines, transportation and infrastructure. At 4.5 years per barrel, this equates to the labor equivalent of more than 500 billion human workers (compared to ∼4 billion actual human workers). The economic story of the 20th century was one of adding ancient solar productivity from underground to the agricultural productivity of the land. These fossil ‘armies’ are the foundation of the modern global economy and work tirelessly in thousands of industrial processes and transportation vectors. We didn’t pay for the creation of these armies of workers, only their liberation. Transitioning away from them, either via taxation or depletion, will necessarily mean less ‘benefits.’

Energy substitutability

Modern economic theory considers all inputs fungible and substitutable. If the price of one input gets too high, the market will develop an alternative. However, energy does not cooperate with this theory because different sources of energy exhibit critical differences in quality, density, storability, surplus, transportability, environmental impact, and other factors. For instance, there are hundreds of medium and high heat industrial processes (for textiles, chemicals, cement, steel etc.) using fossil fuels that have no current (or even under development) alternative using low- carbon technology (Khanna et al., 2017). Energy can only be substituted by a similar form/quality energy.

Energy primacy

Energy is so fundamental, that its availability sets the physical limits to our social scale. All life, commerce, work, or creation of order is enabled and limited by available net energy (Hall and Klitgaard, 2011). As GDP increases globally, energy needs to increase in lockstep. Until the 1970s, energy and GDP were nearly perfectly correlated; a 5% increase in GDP required a 5% rise in energy consumption (Cleveland et al., 1984). This was followed by a short-term energy/GDP decoupling due to efficiency advancements resulting from the oil & natural gas price shocks in the United States. This further led to a switching from oil use in power plants to nuclear and natural gas. By the mid-1980s debt and globalization were used to increase access to energy needed to keep GDP growing. Much fanfare is made about long term declines in energy intensity. For instance, from 1965 to 2012 the number of MegaJoules used per $ of global GDP declined from 11 to 8, ostensibly signifying a decoupling. However, averaged annually, over these years, the correlation between energy and GDP remained a tightly linked 99.4% (Energy & Stuff, 2019).

But as a result of these trends, energy intensity improved faster than the historical rate during the last two decades of the 20th century. Heterodox theories linking productivity to energy (Gilliland, 1975) were cast aside in favor of other less limiting descriptions of human economic prosperity. From 2000–2012, the annual rate of relative decoupling dropped back down to 0.3% per year (Energy & Stuff, 2019). Since then, data is inconsistent due to many changes to GDP accounting methods, but the general principle remains: for additional economic activity, we need more energy.

Today, energy is still treated as merely another input into our economic system – $10 of gasoline is considered to have the same contribution to human output as $10 of Pokemon cards. This is in spite of the fact that: a) energy is needed to create and transform all material inputs and b) energy can only be substituted by other energy.

Mainstream economic theory attributes all economic productivity to labor and capital, and therefore assumes the economic importance of energy equals its cost share (Solow, 1994). However, biophysical analysis of all production inputs shows that the economic importance of energy is substantially larger than energy’s share in total factor cost, with the opposite being true for labor. This means that energy has a significantly greater role in our wealth and productivity than its nominal cost share signal. In the case of Japan and Germany over 60% of economic productivity is explained by energy input (Kümmel and Lindenberger, 2014). The relationship would be considerably stronger if tested at the global level (Ayres et al., 2013), because globalization allowed us to shift energy and resource use away from advanced economies (Bank of America Merrill Lynch, 2019). Alternative methods highlight that primary energy consumption is tied to accumulated global wealth via an energy constant of 9.7 ± 0.3 mW per 1990 US dollar (Garrett, 2012). Rather than being an insignificant factor in productivity energy is the major factor.

Prior to the industrial age, all relevant economic theorists (including Adam Smith, David Ricardo and others) used land and land productivity to describe the human ecosystem (Warr, 2011). As the global economy expanded with increasing subsidy from fossil energy, land productivity and physical input constraints were considered unnecessary and eventually removed entirely from economic theory. By the time of the first energy crisis in the 1970s, macroeconomic descriptions had been reduced to labor and capital via the Cobb-Douglas function and Solow Residual, where they (mostly) remain today (Keen et al., 2019; Santos et al., 2018). We had created an infinite growth model on a finite planet.

Economists view capital, labor and human creativity as primary and energy secondary or absent. The opposite is, in fact, true. We are energy blind.

Energy and technology

Most modern technological advances are not stand-alone but powered by either liquid fuel or electricity. Biophysically, there are two general types of technology. Type 1 technology finds ways to use energy more efficiently (power plant improvements, better vehicle fuel efficiency) or invents new energy sources (solar or geothermal). Type 2 technology consists of devices that replace manual human labor (chainsaws, cars) or new ways for humans to use energy (Facebook, Candycrush).

Currently Type 2 dominates technology inventions and increases total global demand for energy (De Decker, 2018). Technology like the ‘cloud’ is not really “virtual”. Computers and cellphones (including servers and networks), consume over 15% of the world’s electricity, and this will increase with the advent of 5 G (Andrae and Edler, 2015).

Technology is an expression of the available energy we can exploit (Brockway, 2013). What we call “technological progress” at any time is mostly the development of the capital base to support an ever-greater throughput of available energy at a later time. With growing GDP as a global goal, extra energy allows for more inventions that in turn make our economy more complex. Furthermore, higher social/technological complexity itself requires higher energy consumption– resulting in the energy complexity spiral (Tainter and Patzek, 2012).

Energy Depletion

Using photosynthesis as a trickle charge, hundreds of millions of years of living biomass were stored as hydrocarbons in Earth’s battery. We are drawing down this carbon battery 10-million times faster than it was charged (Schramski et al., 2015). Estimates of remaining oil and natural gas vary widely (Mohr et al., 2015), but the cheap high quality oil, at scale, has largely been found and exploited (Fustier et al., 2016; Masnadi and Brandt, 2017).

The left side of Fig. 4 conveys a misleading, but common interpretation of current U.S. oil production. Due to technology advancements, U.S.A has become the world’s top oil producer. One is left with the false impression that technology has triumphed depletion making oil abundant and therefore not a risk to future growth. However, reality is more accurately depicted in the right panel, where, collectively, non-shale oil sources are shown to be in permanent decline. The up-tic in total production is a consequence of tight oil (in red), recently scaling to 52% of all production. Tight oil is in the source rock where all other oil originated. Tight oil is economically and ecologically costly and quickly depleted (by as much as 90% in the first 3 years). A typical new well requires complex equipment, 1200 truckloads of water, 100 train carloads of sand and $8-10 million in drilling and completion cost (Robinson, 2014). This explains why the US Drilling Oil and Gas Wells Producer Price Index increased 350% from 2005 to 2014 (U.S. Bureau of Labor Statistics, 2018).

During this time, the market price of oil, has not kept up with its extraction cost. Since Q3, 2014, capital expenditures on shale plays have exceeded cash flow 19 quarters in a row (Rassenfoss, 2019). Because of the steep decline rates of existing fields (shale and conventional), the International Energy Agency asserts that with no new drilling, world oil production would be cut in half by 2025 and to only 15% of today’s output by 2040 (“WEO 2018,” 2018). Of course, we will invest in new oil fields – but doing so will require a higher oil price, which would lead to lower economic growth (see Fig. 2, grey columns).

Energy’s cost share of our economy, after five centuries of decline, reached a low in 1999 and has been increasing since (King, 2015). When obtaining energy requires more energy, materials and money, the economy suffers because discretionary wealth is redirected or drained away (Capellán-Pérez et al., 2019). Earth’s geological battery of energy dense carbon is not unlimited, and we’ve already found and used the cheapest and easiest. Relative to 2008, debates about oil scarcity, and ‘peak oil’ have morphed into ‘peak demand’ and electrification of transportation as solutions. However, the net energy of remaining reserves, their affordability, and society's ability to allocate capital to recover them remain central questions (Brockway et al., 2019).

Energetic remoteness

Barriers of energy, time, materials and complexity separate us from the things we want and need. Our natural subsidy of concentrated ores is declining along with the natural subsidy of fossil hydrocarbons. We don’t face ‘the end’ of oil, copper and water, but we do face increasing effort and cost to extract these resources from lower grade ores. This will have a corresponding effect on benefits to societies.

Energy enters the global economy via exploration, extraction, transformation of natural resources, and transportation. Energy is thus embedded in every industrial process, mineral and material in our economies. Raw materials — such as copper, phosphorous, or aluminum — are easier to extract and refine when they are concentrated. As energy becomes more expensive, and we deplete the concentrated, easy resources, many commodities become more "remote" for our use because they become more expensive to find and extract.

Copper is a key industrial commodity for scaling renewable-based technologies such as electric vehicles (García-Olivares and Ballabrera-Poy, 2015). Fig. 5 shows the annual copper production relative to 2001 (in blue) for the country of Chile. The total energy used to process copper ore and overburden is shown in red. Lower quality ore grades require increased energy (and water), leading to less copper expected to be available in the coming decade (Copper Commission of Chile, 2018) at the same time demand for copper is increasing.

This same ‘energetic remoteness’ applies to many key resources, including water, lithium, and food. We use around two calories of fossil fuel to grow one food calorie in our modern agricultural system – but we use 8–12 additional fossil calories to process, package, deliver, store and cook modern food (Bradford, 2019). In the natural world, this is unsustainable. Organisms that require more energy to find food than the food contains, will die. We only get away with this because our institutions and policies treat the energy subsidy from fossil hydrocarbons as interest, not principal. Everything we do will become more expensive if we cannot reduce energy consumption of industrial processes faster than prices grow.

Energy and money

Society runs on energy and materials, but most people think it runs on money. Indeed, money is the only part of our economies not subject to laws of thermodynamics because it is created as debt subject to mathematical laws of compound interest (Soddy, 1933). Commercial banks are not intermediaries that lend out existing capital (Jakab and Kumhof, 2015), but rather create money by loaning it into existence (McLeay and Radia, 2014). Contrary to what is taught in economics textbooks, money is not lent out from existing wealth– it is created (Werner, 2014; Ament, 2019). This new money eventually gets spent on a good or service which will contain embodied energy. Money is a claim on energy yet its creation is not tethered to energy availability or cost.

Energy and debt

Since money is a claim on energy2, then debt is a claim on future energy. Business schools teach that debt is neutral to the capital structure, an ‘intertemporal transfer of consumption preference.’ Thus, GDP generated with debt, or with cash, are considered equivalent. In an economy of perpetual growth opportunities, this might be appropriate. However, in every single year since 1965, both the USA and World have grown debt more than GDP. This makes debt more accurately an ‘intertemporal transfer of consumption’.

Debt is a social construct with physical consequences. Fig. 6 illustrates how debt pulls resources forward in time. In this hypothetical oil field, the differing shaded areas represent different cost tranches of an oil resource.3 Obtaining access to cheap financing allows a company to expand drilling into marginally commercial areas as long as new creditors believe in future prospects. This debt funding allows the oil company to ‘create a bigger straw’, to extract new higher-cost oil (dark black on right panel) and raise total field production (Hughes, 2019). However, this results in steeper future declines because the temporary increase cannot be sustained: the next tranche available for development yields poorer well and financial performance often accompanied by higher decline rates and lower quality oil. Unconventional oil and gas typifies this phenomenon (Kelly, 2019).

Fig. 6 illustrates not only how oil production responds to debt infusions, but the consumption of entire economies. Low entropy (high concentration, high quality) resources underpin our productivity. Thus debt can be seen as a tool humans use to access an energy gradient, and the resulting goods and services. Debt has been referred to as ‘fake energy’ (Weyler, 2011). More accurately, debt moves real energy and consumption from the future, to the present, unsustainably. But it is fake in the sense that to pay back the debt, we have to also pay back the energy. One could say this amount (and related consumption) is “borrowed” energy.

Energy and well-being

Despite the pervasive belief that more money and energy makes us happier, evidence suggests this is mostly not true. After basic needs are met, additional energy use yields a slower growth of the Human Development Index (Smil, 2017). Although Americans use 20 times more energy per capita than Filipinos, the percentage of ‘very happy’ citizens remains equal (Hagens, 2007) (Fig. 7).

Other biophysical (and psychological) indicators may track human well-being more closely than GDP and energy use (Lambert et al., 2014; Roy et al., 2012). If we have social support structures, many physical inconveniences can be overcome (Venniro et al., 2018). After basic needs are met, the best things in life are free.

“Externalities’ and energy

Society may remain energy blind, but we are rapidly becoming aware of the negative consequences of the global human enterprise (Weyler, 2018). Negative impacts for humans include: topsoil loss, endocrine disrupting chemicals (Fischer, 2019), declining sperm counts (Levine et al., 2017), mounting inequality, water shortages (Schewe et al., 2014), declining median incomes (in the developed world) (Hannon, 2019), populism, depression (Hidaka, 2012) worry about the future, and geopolitical risks. Negative impacts to the natural world include: CO2 risks to climate (C. Oppenheimer et al., 2017) to ecosystems (Saunders, 2005), ocean acidification, coral loss and other ocean impacts (Caesar et al., 2018; Schmidtko et al., 2017; Ward, 2008; Yeo, 1998), deforestation, insect decline (Hallmann et al., 2017; Sánchez-Bayo and Wyckhuys, 2019), bird decline (Allinson, 2018), extinction of primates (Estrada et al., 2017) decline of (wild) mammal populations (Bar-on et al., 2018), plastics in oceans (Eriksen et al., 2014; Koelmans et al., 2014), microplastics and airborne phthalates (Jamieson et al., n.d.; Lenoir et al., 2016), loss of forests, and general risk of a 6th mass extinction (Ceballos et al., 2015; González et al., 2017). All readers of this journal are aware of the social and ecological impacts of economic activity ‘external’ to the market pricing system. Most of these are enabled and worsened by cheap energy, but are absolutely internal to a fossil fuel based economy.

Energy – summary

Soaring GDP in the 20th century was tightly linked to soaring burning of fossil hydrocarbons. Society doesn’t yet recognize these links because we conflate the dollar cost of energy extraction (tiny) with the work value (huge). Energy is only substitutable with other similar quality energy. Increasingly, advanced technology is achieved with energy, and most technological advances increase future energy requirements. We can (for now) readily print money but we can’t print energy to give it value. We can only develop new sources or extract what exists faster or learn to use it more efficiently. We’ve papered over already visible declines in energy growth rates and resource quality by using credit in breathtaking volumes. Modern economic theory ignores or minimizes most of these points, as do our institutions, policies and plans. In the future, the scale, quality, and cost of energy will dictate what sort of human systems are possible. We remain energy blind."

(https://www.sciencedirect.com/science/article/pii/S0921800919310067)