The Oil Drum

192 comments on DrumBeat: June 14, 2006

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step back on June 16, 2006 - 9:48pm

Jack,

EROEI is a form of accounting.
But it has nothing to do with money.

Instead we are measuring the amount of useable energy that society has at the end of a process compared to the amount it had at the beginning of the process.

First note in the equation to the right that both the top and the bottom values are always POSITIVE. There is no negative energy and there is no negative value for EROEI.

We want to know if EROEI is greater then 1.0 or not.

Let's make up a simple example.
Suppose you own a coal pit.
Suppose that your truck consumes 10 gallons of gasoline to make the round trip from town, down to the bottom of the coal pit to pick up a load of coal and bring it back to town. (The gasoline station is in-town and useable energy for our example means in-town energy.)

Suppose the amount of energy in each truck load of coal you bring up is equivalent to 9 gallons of gasoline. So in terms of in-town useable energy, you are inputting 10 gallons of gas and getting back 9 with each trip. Is that a wise move? The answer is not an automatic no. There can be other factors. But your EROEI in this example is 9/10 (it is less than one). And the question is how long can you keep playing this game, how many round trips?

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Jack on June 17, 2006 - 12:57am

I understand that EROEI does provide a useful measure of the net energy output of a project and that it does not make sense to put more energy into something than you get out, unless there is a reason not accounted for by EROEI. The same applies for financial ROI, adjusting for time and risk, you wouldn't put more into money into a project than you expect to get out.

However, my question is this:

If energy is priced correctly, is there ever a case where EROEI and ROI diverge? If so why?

In your example, if each input and output were priced correctly, the project should be rejected on either ROI or EROEI terms.

In conclusion, I can not see any circumstances in which EROEI adds to project analysis except for identifying situations in which subsidies or mispricing fool ROI.

So if EROEI is applied to say corn ethanol or tar sands and finds that the EROEI is negative, but financially (ROI) positive, what does it mean?

My claim is that it only identifies a pricing problem.

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step back on June 17, 2006 - 2:32am

So if EROEI is applied to say corn ethanol or tar sands and finds that the EROEI is negative? [err, I meant to say, less than unity], but financially (ROI) positive, what does it mean?
My claim is that it only identifies a pricing problem.

There cannot be a pricing problem. "Price" is whatever "value" two arms-length negotiators ascribe to a certain trade. If they decide, regardless of EROEI being <1 that a certain liquid fuel (say corn ethanol) is worth a given number of currency units (dollars), then that is the price. Period. There is no "problem". The market has spoken.

Is there ever a case where EROEI and ROI diverge? If so why?

Yes of course there is such a case, thousands of them.
Anytime the "consumer" is willing to pay a higher premium for a certain type of useable energy from #2 as opposed to what the consumer is willing to pay for the energy form #1 that was consumed to get energy form #2, then there will be profit (a positive $RO$I).

A simple example is rechargeable cell phone batteries. They have a lousy EROEI per recharge. Yet they provide the convenience of mobile communication. People want convenience and are willing to pay for it. They actually do not care about EROEI.

The ones who care about EROEI are the scientists who are studying whether a given practice is energetically sustainable. So if we are depleting enrgy form #1 (say oil) to obtain another energy form #2 (say corn ethanol) and the EROEI is less than unity, scientist can tell you that all other things being equal, that is a dumb move. Even if EROEI=1 it is a dumb move because what are you gaining for all your effort?

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Jack on June 17, 2006 - 6:01am

Stepback,

Thank you for two good responses. I don't disagree with much of what you say.

What I am trying to accomplish here is to get a fundamental understanding of exactly what EROEI means and how it can be effectively applied in project analysis. EROEI and ROI will be key tools in making energy decisions in the future. My point is that there is a fundamental connection between the two and that they should be identical except in a finite set of conditions that can be defined. Given how frequently the term is used on this site, it makes sense to better understand it.

In some cases - deep sea drilling, a negative EROEI may doom a project. If the amount of oil required is greater than the amount of oil produced, the project is not viable. In others - cell phone batteries - it would not. In a third category - ethanol - it could imply a misalignment of pricing - i.e. energy is wasted, but financial returns are assured through subsidy.

My original post said that there were three reasons for divergence between EROEI and ROI.

"In order to believe that any rational investor could take on a project with a negative EROEI you have to believe that they are:

Using a cheap form of energy to get a more expensive one in return
Not paying the full price for their energy input, or
Going to lose money"

Your cell phone example meets the first criteria, using one form of energy to produce a preferred form of energy. I expect that the corn ethanol meets a variation of point #2, specifically getting paid more than market value of output. I have modified my list to include this as a new criterion.

So I now claim that divergence between ROI and EROEI can be explained by one of the following:

Using a one form of energy to get a more valued one in return
Paying less than market prices for energy input
Receiving higher than market price for energy output

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step back on June 17, 2006 - 1:15pm

Jack,

I think we disagree over what I see as a fundamental issue.

"Pricing" and other "Market" behaviors involve men negotiating with men --humans yakking at other humans about mentally contrived concepts like "values" and what is "fair". Mother Nature is not part of this man-o-man negotiation.

EROEI is one of inumerable mathematical expressions that we humans can concot to better understand how Mother Nature works. She does not need our understanding of her. We need it. Desperately. Experiment after experiment appear to verify that Mother Nature does "conserve" this thing we refer to as "energy". Experiment after experiment show that Mother Nature does "conserve" this thing we refer to as "mass". All our economic machinations will not change this.

If we develop a social order that continuously operates on EROEI being less than one (or negative as you keep refering to it), we are simply driving ourselves faster into the abyss.

Mother Nature doesn't "care". There are no "Care Bears" out in the woods. We are the ones who have to care --if we humans intend to continue as a species for a foreseeable future.

Bottom Line: EROEI and $RO$I have almost nothing to do with each other because "$" is a mental fabrication of mankind.

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