Declining energy quality could be root cause of current recession

Nov 30, 2010
The worst recessions of the last 65 years were preceded by declines in energy quality for oil, natural gas, and coal. Energy quality is plotted using the energy intensity ratio (EIR) for each fuel. Recessions are indicated by gray bars. In layman's terms, EIR measures how much profit is obtained by energy consumers relative to energy producers.The higher the EIR, the more economic value consumers (including businesses, governments and people) get from their energy. Credit: Carey King

An overlooked cause of the economic recession in the U.S. is a decade long decline in the quality of the nation's energy supply, often measured as the amount of energy we get out for a given energy input, says energy expert Carey King of The University of Texas at Austin.

Many economists have pointed to a bursting bubble as the initial trigger for the current recession, which in turn caused global investments in U.S. real estate to turn sour and drag down the . King suggests the real estate bubble burst because individuals were forced to pay a higher and higher percentage of their income for —including electricity, gasoline and heating oil—leaving less money for their home mortgages.

In economic terms, the quality of the nation's is referred to as Energy Return on Energy Investment (EROI). For example, if an oil company uses a 10th of a barrel of oil to drill, pump, transport and refine one barrel of oil, the EROI for the refined fuel is 10.

"Many economists don't think of energy as being a limiting factor to economic growth," says King, a research associate in the university's Center for International Energy and Environmental Policy. "They think continual improvements in technology and efficiency have completely decoupled the two factors. My research is part of a growing body of evidence that says that's just not true. Energy still plays a big role."

In a paper published this November in the journal Environmental Research Letters, King introduced a new way to measure energy quality, the Energy Intensity Ratio (EIR), that is easier to calculate, highly correlated to EROI and in some ways more powerful than EROI. EIR measures how much profit is obtained by energy consumers relative to energy producers. The higher the EIR, the more economic value consumers (including businesses, governments and people) get from their energy.

When King plots EIR for various fuels every year since World War II, the graphs indicate two large declines, one before the recessions of the mid-1970s and early 1980s and the other during the 2000s, leading up to the current . There have been other recessions in the U.S. since World War II, but the longest and deepest were preceded by sustained declines in EIR for all fossil fuels.

EIR is proportional to EROI, meaning they rise and fall together, but the basic data behind the EIR calculations come out annually as opposed to every five years for EROI. EIR also gives insight into different parts of the supply chain such as at the refinery or at the gas pump, which are harder to study with EROI.

King's analysis suggests if EIR falls below a certain threshold, the economy stops growing. For example, in 1972, EIR for gasoline was 5.9 and in 2008 it was 5.5. During times of robust economic growth, such as the 1990s, EIR for gasoline was well over eight. Compare that to some estimates of EROI and EIR for corn ethanol of around one, and it's clear why corn ethanol has been widely criticized as a low quality energy source.

To get the U.S. economy growing again, King says Americans will have to produce and use energy more efficiently. That's essentially what the U.S. did after the last energy crisis by raising fuel efficiency standards for cars, increasing use of natural gas for electric power generation and developing new technologies such as Enhanced Oil Recovery to coax more oil out of the ground.

"If we aren't fundamentally changing the way we produce or consume energy now, don't expect the economy to grow as much as the past two decades," he says.

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User comments : 9

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wwqq
5 / 5 (5) Nov 30, 2010
Yes, it's just all a big coincidence that we have the fed blowing serial bubbles with super-easy money, record car sales in what ought to have been a deep recession following the tech wreck, massive and ongoing fraud in housing, the legalization of accounting fraud by government(suspension of mark to market), collusion between the big banks and the fed to cover up fraud and insolubility and the perpetration of one of the largest thefts from the tax payer in recorded history.

It's just a coincidence that the government is doing many of the same crazy interventions Hoover and Roosevelt did, but on a much grander scale.
TabulaMentis
5 / 5 (5) Nov 30, 2010
Gasoline prices @ $5.00 per gallon in 2007 preceded the real estate downturn before the recession. Corruption by banks and government officials sealed the fate.
gopher65
not rated yet Nov 30, 2010
wwqq: As stated in the article, this isn't the *only* cause for recessions, but rather it's one of the big causes that most people overlook or ignore.

When you think about it, energy usage patterns and 'percent end-user profit per unit of energy used' are of course going to have an effect on the both the individual's (or organization's) ability to make money economy as a whole.
Corban
4 / 5 (1) Nov 30, 2010
Economic woes inflame tribalism. People are banding together and fighting for their share. This only works when not everyone is doing it. However, that's exactly what's happening.

China lacks much of this infighting. The writing's on the wall.
Modernmystic
3 / 5 (4) Nov 30, 2010
"Many economists don't think of energy as being a limiting factor to economic growth,"

Excuse me? Energy is the BASIS of EVERY single industrial economy.
GaryB
5 / 5 (2) Nov 30, 2010
Another vote for massive development of nuclear breeder technology, hopefully Thorium breeder reactors.
ormondotvos
3.7 / 5 (3) Nov 30, 2010
See theoildrum.com for accurate versions of this crap.

The recession wasn't caused in any significant way by EROI changes. It was caused by using more than we produce, largely by removing a large part of our industry, and by the parasitic finance industry, which specializes in extracting the last ounce of surplus value when our work does have a positive result.

This is all aggravated by buying crap houses, fat cars, junk food and Chinese plastocrud. We're cheering on the banksters that have bought the politicians. We're soooo dumb!
stealthc
5 / 5 (2) Dec 01, 2010
no, it was clearly caused by fraudster bankers and politicians.
Caliban
5 / 5 (1) Dec 01, 2010
The rapid increase in the cost of energy was a further shock to already shaky economies in both of the "recessions", but was still only an aggravating factor, as opposed to a causative one.

Still, worth noting.