The EROEI Problem

An increasingly serious problem in the energy markets is something we used to call the Energy Profit Ratio (EPR).

Only those of us who worked in the sector BI (Before iPod) ever call it that now. Today it is known as Energy Returned on Energy Invested, or EROEI.

And EROEI is fast becoming one of the biggest problems in the energy sector.

This is a disturbing part of the broad crisis that Chris Martenson, Keith Fitz-Gerald, and I have researched for a long time. The resulting documentary “Your Future: The Ultimate Pyramid Scheme” was released just a week ago.

And it’s is already creating a stir. You can view it right here.

Measuring Production Efficiency

EROEI refers to the amount of energy we need to produce new energy.

Simply put, if the EROEI would be equal to “1,” it takes one barrel of oil to produce one barrel. In other words, it is a wash. And, of course, anything below 1 would mean more energy is being used than gotten. Unless we were in a war or facing a natural disaster, this would be unsustainable.

The problem we face now is that the overall EROEI figure is moving well down into single digits. It is requiring the commitment of greater amounts of energy to produce the energy that rising populations and markets need to survive.

This is adversely impacting energy across the board. This includes sources like oil, which has been around for some time, and renewables and alternative sources more recently. For example, in crude oil, the EROEI figure has been declining steadily for a few reasons:

  • Securing adequate crude oil has required companies to move to smaller fields;
  • Companies now must use more expensive extraction techniques; and
  • Oil is located in less accessible and more energy-demanding onshore and offshore locations.

The days of cheap oil have been over for some time.

Light, sweet (low sulfur content) crude is in short supply. Heavier, sourer oil is what is used now throughout the world. In fact, over 85% of the crude sold each day worldwide has greater sulfur content than either West Texas Intermediate (WTI) or Brent, the dominant oil benchmarks set in New York and London.

This means it’s becoming more expensive and energy intensive to extract raw materials and then process it into the oil products actually used by the retail market. In particular, this has resulted in an accelerating EROEI problem.

In earlier days, when demand admittedly was lower and only the most easily available oil was lifted, it took a lot less energy to produce energy. For example, our “Pyramid” investigation found that the EROEI was about 100 in 1930; that is, upwards to 100 barrels of oil could be produced by expending the energy equivalent of one barrel of oil.

That figure declined to 25 in the 1970s. It reached as low as 10 in some areas by 1990, as the energy expended to find energy increased.

Today, that figure may be approaching 3!

The Shift to Unconventional Energy Sources

As we move to unconventional sources (shale, tight or heavy oil, bitumen, or tar sands), the energy it takes to get it is going up.

Horizontal drilling and fracking (requiring a high diesel-powered footprint on the surface), turning highly viscous production into a flow that can move through pipelines, or synthesizing it so it can be processed at all, are very energy-dependent prospects.

The move to unconventional sourcing may have improved the domestic portion of the oil used, but it has done so at a heavy and expanding EROEI cost.

And the moves to alternative energy sources are even worse.

While the generation of electricity may offer additional options, relying upon renewables for vehicle fuel drives EROEI through the floor. Most biofuels are currently operating at a negative (below 1) ratio-requiring the greater usage of energy in production than is received in end product.

The age of ethanol came and went rather quickly. The major source is corn, and the cost associated with it is now prohibitive, given the multi-year low crop levels. Even without the harvesting problems, however, biofuels are incredibly energy intensive to produce. EROEI here is just dreadful. The most efficient ethanol carries an EROEI of less than 1.7. That translates into having to spend two barrels of oil equivalent to produce three.

As the EROEI crisis intensifies, the cost to the end user will expand right along with it. A transition to natural gas as a primary fuel source is inevitable, but that carries its own EROEI shortcomings.

We are increasingly reliant upon shale gas, tight gas, and coal bed methane. Each of these requires much more energy in the extraction and processing cycle than conventional stand alone gas wells.

The energy ratio problem is becoming a main component in the exponential growth expectations upon which our modern approach to market depends.

And it is unsustainable.

For us investors, however, the lowering of EROEI figures actually provides a number of opportunities. There will be some segments of the energy sector that offer significant profit potential.

Ultimately, we need to harness more efficient energy sources and vehicle fuels in particular. But that’s a process that will take some time. While we are struggling with that strategy, however, there’sbe some significant money to be made.

How we translate the EROEI crisis into a part of an overall energy investment strategy, is what we’ll address in the next OEI.

Have a great weekend.

Sincerely,

Kent