EROEI

EROI

EROEI

Concept:

EROEI means energy returned on energy invested. To create energy you need energy. A barrel of oil does not come out of the ground on its own. Machinery, people and energy are needed extract it. The EROEI means how many barrels of oil are needed to extract one barrel of oil. To  remain profitable less energy should be used to operate the machinery of oil extraction than the oil extracted.  Some oil firms or fields can afford to have a negative ratio for brief periods of time, they do this because cash flow is sometimes more important than profit. A ratio above one cannot be sustained indefinitely.

The problem:

The laws of thermodynamics state that:

  • Energy cannot be created or destroyed in an isolated system.
  • The entropy of any isolated system always increases.

According to these laws, humans are continually trying to concentrate energy while nature is doing the opposite, dissipating energy. Our economy can only function when energy is concentrated. As energy dissipates it becomes more expensive to concentrate, which makes it more expensive.

A high oil price means that the non-elite workers cannot afford the goods and services. The biggest input to goods and services is oil. As oil increases the prices of goods and service increase. What this means is that the middle-class which powers the economy loses it’s purchasing power. However, a low oil price means, that only the cheap to extract oil is available and this is not enough to fuel the global economy.

Facts:

Oil is a finite resource.

Challenges to the Hypothesis:

  • Do you need oil to extract oil or could we use renewable energies?
  • Will the world need more or less oil in the future?
  • Will the world invent an alternative oil in the future?
  • Thorium Reactors?
  • Denmark should be fossil free independent in 2050, and they have made great progress towards this objective.
  • If this is such a threat to the life on earth as we know, how come it is not being discussed by all media outlets.


SWOT Analysis.

Strengths

Weaknesses 

  • Energy extraction needs infrastructure, machinery and people these systems use oil. These systems need other support systems, for example, people need energy for food, machinery needs metals which require mines. These indirect support systems also require energy. Without the direct or indirect support systems, the consumption of energy will fizzle out rather than slow down.
  • The use of energy is never 100% efficient; there are losses in the form of heat and transfer of energy, this also creates opportunities for energy efficient solutions.

Opportunities

  • Oil is the engine of global trade, as global trade needs transport. Without global business, local sourced products will become more valuable.
  • Assets are prices according to the availability of energy. A business without a predictable supply of energy will need to readjust its value. For example, a commercial farm without pesticides and fertilisers will need to re-adjust it’s inputs and outputs without these inputs. This means that its value needs to be adjusted as well.
  • FIAT currencies will collapse if this theory is true, alternative currencies in particular gold and silver will become more valuable. The trillions of dollars, euros and yen around the world will look for a safe haven and most likely they will funnel into gold. Bitcoin could also be one of those assets, but since it uses a lot of energy (in its current format) it will be less attractive.

Threats

  • The higher the ratio, or the more energy needed to extract oil the more infrastructure is needed. It is more difficult for energy producing companies to invest in future oil production if profits are low.
  • Cheap to extract energy is getting harder to find.
  • Oil-rich countries need to use their oil to supply for domestic consumption. This means that the oil shock will compound itself.
  • This topic could become mainstream only when it is too late and when it does it could lead to massive panic buying of certain items and selling of others.

How to profit from EROEI:

  • Oil is in everything, most importantly energy production, food, medicine and transport. Any assets which provide these services without the use of oil will become more valuable.
  • Gold
  • Agriculture investing (the low energy kind)
  • Lithium
  • Possibly the NGeni could offer some solutions to decentralise energy production.

Idea Source:

There are two main blogs for this hypotheses:

v1 15/10/2016
v2 22/10/2016