Peak oil is a divisive topic, and bitter battles over its timing and consequences plague the blogosphere. I rarely comment on these debates. As my experience with the subject is limited, the insight I can bring to any discussion on the matter is even more so. My attention is spent simply trying to catch up. For those possessing little expertise with energy issues, this itself is a difficult task. Being able to separate the wheat from chaff is essential to understanding the debate at large. Luckily, there is a simple way to separate the pundits who truly understand the issue and the pundits who do not. Inexperienced analysts debate the size of oil reserves. Serious commentators focus their debates on EROI.
EROI stands for “Energy Return on Investment.” It is – for the purposes of all but the most technically minded – synonymous with another term occasionally heard, “Energy Return of Energy Invested” (ERoEI), and related to another important concept, “Net Energy.” All three terms affirm the importance of the means by which the energy is acquired over the size of retrievable energy reserves.
The idea behind EROI is not hard to understand. Indeed, businessmen use it every day. “Return on Investment” (ROI) is a metric known by every marketer and manager in America. In basic terms, ROI is the amount of profit made for every dollar invested in a product, employee, asset, or any other chosen investment, usually expressed in the form of a percentage.
Movie theaters and gasoline stations provide a fair example of ROI in action. The ROI of a movie ticket or of a gallon of gas is very low (usually less than 4%) because the cost of purchasing refined gasoline or reels of film is high and the demand for both gasoline and movie tickets is highly elastic. It is not surprising that these businesses make most of their money by selling a product with a much higher ROI (often 90%!): overpriced food. Consumers do not choose which gas station or theater to attend on the basis of concession costs, allowing the proprietors to sell their wares at ridiculously high (and unelastic) prices. This is reflected in the balance sheets. While gasoline sells have a very high gross income, the net income made from food and beverage sales is almost always higher.
EROI applies this type of thinking to energetics. The surveying of potential oil sites, the construction and maintenance of oil rigs, and the refinement and transportation of recovered oil all take energy. The energy return on investment is the ratio of energy produced for every unit of energy spent in the production process. Analogous to a business’s net income is net energy, the total amount of energy produced after the energy cost of production has been accounted for.
Real world examples of the relation between net energy, EROI, and global energy supplies abound. The Athabasca tar sands are estimated to contain 1,700 billion barrels of bitumen, placing its proven reserves of petroleum at the same level of magnitude as the rest of the entire world’s proven conventional reserves. However, most petro-geologists, oil companies, and governmental agencies (e.g. the EIA) only include one tenth of this in their estimates of Canada’s oil reserves. Why? All tar sands have an incredibly complex and energy-intensive extraction and refining process. One tenth of the sands can be accessed through open-pit mining; the energy invested is devoted mostly to transporting and refining the sand. However, the remaining 90% lies deep underground. The additional energy cost of mining these sands is enormous. So enormous that the net energy of extracting, processing, and using deep tar sand oil is negative.
This may not always be so. Future advances in technology may lead to the development of a new, less energy intensive extraction method. If this was the case, and the EROI of tar sand oils increased remarkably, so too would the amount of reserves available to humanity. Raising oil’s EROI bears the same result as finding additional reserves.
EROI is not always so helpful to peak oil optimists, however. British Petroleum’s operations in the Gulf of Mexico are a case in point. While British Petroleum has published no official data on the matter, we can be quite sure that the EROI of extracting oil from the Gulf has fallen drastically over the last five months. Beyond the normal energy invested in constructing and maintaining deep-water oil rigs, British Petroleum must invest exorbitant amounts of energy into capping Deepwater Horizon, cleaning up the its spillage, and paying higher insurance costs on its other deep sea rigs.
The interesting thing about these examples is that the EROI of both is completely independent of actual reserve size. This is not true in all cases. However, you will be hard pressed to find a single operation where the net energy is determined on the basis of reserve size and not on location, technology, or political and financial restraints. What happens above ground is more important than what is below it.
The same holds true for peak oil. The day the last well runs dry is not the day humanity stops using oil. That will come the day it takes more barrels to drill the well than can be gained from the drilling.