The Economic Cost of Energy, EROI, and Surplus Energy

In real economies, energy comes from many sources – from imported and domestic sources of oil, coal and natural gas, as well as hydropower and nuclear, and from a little renewable energy – most of that as firewood but increasingly from wind etc. Most of these are cheaper per unit energy delivered than oil. So let’s look at what this real ratio of the cost of energy (from all sources, weighed by their importance) is relative to its benefits.

Economic cost of energy = Dollars to buy energy / GDP

By this token the relation of the proportional energy cost in dollars is similar, as we shall see, to the proportional energy cost in joules; in 2007 roughly 9 percent (1 trillion dollars) of the U.S. GDP was spent by final demand for all kinds of energy in the US economy to produce the 12 trillion dollars worth of total GDP (Figure 1). This ratio certainly increased in the first half of 2008 as the price of oil exceeded $140 a barrel and then fell again. The abrupt rise in the 1970s, subsequent decline through 2000, and increase again through mid 2008 of this value had large impacts on discretionary spending because the 5 to 10 percent change in total energy cost would come mainly out of the 25 or so percent of the economy that is discretionary spending. Thus we believe that changes in energy prices have very large economic impacts. At least thus far the changes in price seem to reflect the generally decreasing EROI only sporadically although that seemed to be changing recently until the economic crash of fall 2008, when collapsing demand took over. What future prices will be is anyone’s guess but even as economies crash there is a great deal of information implying that dollar, and hence presumably energy, costs of fuels are increasing substantially. Our guess is that declining EROI will take a huge economic toll in the future <6>.