With gasoline and heating oil prices making pain for so many, the press is full of articles written by those who understand the issue well and those who seem to understand not at all.  The “Energy Bill” was passed by the congress and was signed into law last week.  You might be able to find the signed draft any day now.  So to help you grasp what energy articles and legislation might actually do, this post will get the fundamentals explained so you can start your own assessment of the information.

The news and articles are sure to point to oil and ethanol as the main players in the changing energy mix as set out by the energy bill so we’ll use them as our examples.

The first qualifier must be what we yield compared to what we used to get it.  Many writers use a measure of “energy returned of energy invested” (EROEI), which is a good metric, the trouble is in the who, what, when, where, why and how of doing the measuring to get the energy invested side right.  In a moment’s thinking, it becomes clear that for looking back the process is problematic and a challenge of where to stop including things and looking forward, even far more of a challenge.  That’s not so say that as the analysis is practiced more it won’t get better, the past year has seen good strides in energy invested becoming more valid.  Its becoming more useful and even at the end of 2007 it can be instructive, especially in more mature fields such as petroleum, coal, nuclear and wind.

We often see the EROEI simplified to a ratio.  Ethanol from corn is often quoted now at 1.3 to 1 or 1.3 unit of energy for sale to you for one unit used to make it, ethanol from sugar cane 8 to 1, and petroleum at about 7 to 1.  What we learn form this is the capital return over time of fuel or energy for a particular product.  The problem lies in that ethanol numbers are bulk product for wholesale, ready to ship.  The petroleum is only at the wellhead with a lot of investment in pipelines, refineries and gas stations for getting a saleable product to you. This shows the problem of comparing such different products and the place chosen in the steps to make comparisons.

With this in mind, I can’t use EROEI to compare products, but it sure works good for comparing the history of a product.

A common study of petroleum proposes that in 1930 a barrel of oil invested in petroleum production would yield 100 barrels.  By 1950 that was cut in half, by 1970 halved again, in 1990 another halving so its pretty clear that the inputs needed to yield a barrel of oil in 2010 should be down to 6.25 to 1.  Although this isn’t explained in news stories and articles it is quite clear to the oil companies.  They pay the bills to find oil, with the world’s foremost technology, and sell it into the world’s largest free market, the U.S.  A napkin number look shows that the 1990 $20 barrel would yield 12.5 barrels at $20. or $250.  Then a 2010 $85 barrel would yield 6.25 barrels at $85. or $530.  That may seem reassuring, but in a decline of return ratios, business people notice (in constant valued dollars) that it takes 4.25 times more energy investment money to get 2.1 times more energy sales money.

This is like telling your boss, “I can double the company sales dollars!”  Followed by saying “But you have to pay me four and a quarter times more money.”  What would the boss say?  Ah, what would you say?  Then think, what are the stockholders, analysts, bankers and executives in the oil companies thinking?  Actually, it looks a little better than earlier this year where $60 barrels or 3 times more energy investment earned 1.5 times more energy sales money. But a 15 year 7% annuity would pay 1.62 times and a 25 year 7% annuity would pay 2.12 times over the investment payout, so why bother?  (An annuity would be paid out in the periods mentioned much as an oil reserve would be paid out.)

This is just to get petroleum out of the well; we haven’t covered the pipelines, refineries, gas stations and the rest to fuel a vehicle. Over one hundred years of oil business are on record so the EROEI has a pretty solid footing.

Ethanol is different in that the investment is in the price paid for the sugar cane and corn plus the amortization of the plant and operating costs. This is much closer to the petroleum products coming out of a refinery.  So direct comparison with petroleum production isn’t appropriate.  More over the risk is more diverse, with suppliers to farmers, the farmers, the ethanol manufacturer all taking a part in the total risk.  There are other inputs to the cost structure such as the competition for land to grow food, competition for the resources to make supplies for other crops, and other crops and fuels competing with ethanol, choices in fueling the fertilizer production, powering the distillation process, the value of the leftovers from the ethanol production and so very many others.  Getting a reliable snapshot of such a dynamic and diverse industry is a hugely complex and tremorous task that is obsolete on completion even if a fair picture could be presented.

That makes the 1.3 to 1 EROEI a very suspicious thing.  Nevertheless, the preceding paragraph illustrates where further investment could take place.  Many investments in efficiency can make a big difference in the EROEI.  More on point is that the supplier’s factory, farmer’s land and equipment and investor’s ethanol plants are capital investments that can be modified as opportunities arrive.  I have also noticed that the quotes of EROEI vary widely only to prove that EROEI is an illustrative rather than determinate thing.

When looking at the oft-quoted 8 to 1 of sugar cane ethanol out of Brazil, my suspicions just lock up.  While it seems possible, it doesn’t add up. At 8 to 1 Brazilian ethanol noticeably outperforms petroleum and a very wide array of other investments so the rush to invest would big news, which its not.  Brazilian ethanol is certainly on the rise, in 1975, the yield per acre was 375/gallons annually and it’s a firm 870 gallons per acre in 2006.  Moreover, sugar cane arrives as a sugar and skips the investment to convert cornstarch to fermentable sugar and the leftovers are used to distill the alcohol.

In the U.S. the corn yields 375 gallons/acre with 50 years of private and government research driving higher yields already done.  During those fifty years, the farm industry has yet to build enough storage to store the crop properly.  With cellulosic ethanol thought to be coming, the storage issue will increase perhaps as much as a magnitude.  A corn plant might produce a pint of corn, but the stover, the part of the plant remaining can be 4 to perhaps more than 12 times the volume of the corn.  Whether the plant is corn or another plant the harvest must be covered and protected until processed into ethanol as every airborne bacterium, fungus, microbe and varmint will be attacking it.  Each rain or snow will degrade its value if not completely destroy its fuel value.  There will be a huge increase in energy invested in storage alone before getting an energy return.

The U.S. consumes about 25% of the world’s gasoline or 144,000,000,000 gallons.  In 2007 the U.S. harvested about 90,000,000 acres of corn which could make 33,750,000,000 gallons or 23.5% of the U.S. gasoline.  That’s using all of the corn, with nothing left to make corn sweetener, corn starch, or feed animals so we can have beef, pork, chicken, and farm fish to eat.  The U.S. could nearly double that again by planting corn on the acreage devoted to soybean which could get to 47% of the gasoline use.  There would be little left for food.  This is to show that we overlook an important part of total investment costs when using the EROEI.

EROEI leaves out what the oil companies haven’t come out and said directly, energy is no longer so cheap it can be taken for granted, thought of a high risk high reward business or as an insignificant part of family, business and government budgets.  To have fuel and energy we are going to be making ever more serious and difficult choices.  EROEI is a tool that when used as a particular source metric offers a perspective on where a source is, was and may well be, but for comparing differing sources, just misleading and pointless.

At the other end of the chain is the efficiency of use.  Two thirds of U.S. petroleum use is going to mainly, transport by gasoline, diesel and jet fuel, about equal to U.S. imports, or approximating 288,000,000,000 gallons annually.  That’s said to be 25% of world use so there must be 1.15 trillion gallons out there to be conserved.  At about $2.00 each there is a diamond mine in a goldmine to be explored.

EROEI gets more complex and of lower value when considering the investment people have made in transport, home ventilation and business energy and use consumption.  In every case, there might be choices, but in some cases, there isn’t.  No one I know personally can simply throw away all the devices that use energy and fuel and replace them in an instant.  It will take time for a large share of people to reinvest in highly efficient devices.  At the same time, the demand from consumers isn’t high enough to drive producers to invest in big efficiency gains.  I would choose a 100 mpg car, and pay substantially more to get it, but no one sells one, yet.  See GMs idea.


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