Energy Returned on Energy Invested (EROEI) is a key concept that so far has been confined to the blogosphere and the science journals. EROEI has now made it into The Economist, and this is a big deal because abundant supplies of high-EROEI energy sources act like a rocket booster for technological, social and economic advancement: this makes high EROEI energy sources a key driver of the Evolution of Complexity in Human Societies, which goes hand in hand with what we perceive as growth and progress.

Since the discovery of fire, humans have increasingly used external sources of energy to multiply human muscle-power and improve living standards. Some historians have attributed our improved quality of life since then largely to more easily exploited (i.e. higher EROEI) energy sources, which is related to the concept of energy slaves. Thomas Homer-Dixon, in his book “The Upside of Down” demonstrates that a falling EROEI in the Later Roman Empire was one of the reasons for the collapse of the Western Empire in the fifth century CE. Similar arguments, generalized to the rule of “diminishing returns to complexity” which subsumes diminishing EROEI, were advanced by Joseph Tainter in his classic book, “The Collapse of Complex Societies”.

The Economist article, titled “Engine Trouble: A Rise in the Cost of Extracting Energy Will hit Productivity“, appears to “get it”. The article shows clear understanding of the wide-ranging impacts to productivity of a declining EROEI, and properly describes this as yet another headwind that the crisis-battered global economy faces as it struggles to recover:

MANY factors were responsible for the industrial revolution. But the use of fossil fuels was clearly vital in driving a step change in rates of economic and population growth. So the current rise in the cost of extracting such fuels should be the subject of considerable concern.

Until the 18th century mankind’s output had been restricted by the amount of physical force that humans (and domesticated animals) could exert and by the amount of wood that people could chop down. Fossil fuels delivered a massive productivity boost.

Following this introduction, which could have been found on the “getting started” page of any peak oil website, The Economist gets to the heart of the declining EROEI issue:

The key ratio is “energy return on energy invested”… oil discovered in the 1970s delivered around 30 units of energy for every unit invested. By itself this was well down on the returns from oil discovered in the 1930s, which were nearer 100-to-1. Current oil and gas finds, such as undersea reserves, may offer a return between 16-to-1 and 20-to-1. The return on sources such as tar sands and biofuels like ethanol are in the single digits.

Tar sands and biofuels represent only a small part of global energy use. Nevertheless, to the extent that conventional sources of energy production are declining, the high marginal cost of new sources of energy will slowly drive up the average cost. Andrew Lees … writes that the global ratio of energy return on energy invested is around 20, corresponding to energy’s 4-5% share of global GDP. Mr Lees thinks the ratio might fall to five over the next decade, implying that energy’s share of GDP could quadruple. That is probably too extreme a forecast. Nevertheless, the direction of change seems clear. If the world were a giant company, its return on capital would be falling.

The globalized, specialized, interdependent world is just like a giant company. Productivity in this “giant company” will be under attack on the supply side of the world economy as the fossil fuel inputs that “drove a step change in our economic growth” become more and more expensive with declining EROEI.

A surge [in energy costs] propelled by the costs of extraction would be a negative productivity shock for the global economy. That would be a particular problem for Europe, which is also facing significant demographic pressures. There will be a decline in the number of people of working age (15-64) in France, Italy and Germany over the next decade. If there are fewer workers, GDP growth will depend on productivity improvements.

So The Economist conludes that the “old world” economy is already facing an ongoing negative productivity shock caused by the declining EROEI of fossil fuels, just when it will need a productivity boost to offset adverse changes to its demographic mix.

More sovereign debt is not a solution to such problems because we already did that and we have too much of it. Perhaps a gradual increase of retirement age is part of the answer? Governments are trying to raise retirement age, and the underlying reasons for being forced to do so are not only changing demographics, but also the declining EROEI of fossil fuels through its impact on productivity. To the extent that governments are not ignoring the probable impact of the negative productivity shock caused by declining EROEI, the current efforts to raise retirement age may be too little, too late.