Why is oil so expensive, anyway? Angry Bear has a great post on the subject, covering two of the most popular explanations:
1. Inflation is pushing up commodity prices
2. Oil is becoming more scarce.
Of the two, I find the latter much more convincing. But I'll let Stormy explain:
Rapier offers an entirely different approach to the cost of oil. The real cost of oil is directly connected to the cost required to extract it. He explains clearly and concisely the implications of EROIE (Energy Returned on Invested Energy).
Before I turn to his explanation, I wish to make two preliminary points:
1. Oil is the lynch pin of our world. The cost of everything, and I mean everything , is tied to it: from cabbages to cars, from light bulbs to plastic containers, from the cost of fertilizer to the production of iron. Oil is required to make plastic products, even fertilizer. Global transportation depends on it. A sizable chunk of production depends upon the energy oil supplies, to say nothing of our electricity and heat.
2. As the world becomes increasingly populated, more and more people depend upon it. According to the U.N., in 2000 the world was adding 79 million people each year. That means, since 2000, the world has added one country whose population is the equivalent of the United States. While fertility rates in the developed world are decelerating, not static or falling, the developing world continues its rapid growth.
Rapier offers two equations that have important bearing on the cost of oil.
1. EROIE = Energy Input/Energy Output.
2. Net Energy=Energy Output - Energy Input
The first equation is a ratio between the energy used to extract oil and the energy that oil provides. The larger the ratio, the more efficient the extraction is. And, it goes without saying, the cheaper the oil should be.
The second equation measures net energy. Similarly, the larger the number, the cheaper the oil should be.
Bob Lloyd, physicist at the Otago University, asserts that the concept of EROIE is not new. Anyone familiar the first law of thermodynamics understands it. But, because oil has seemingly been so inexpensive to extract, we have neglected the reality of EROIE. Oil has become a commodity similar to pork bellies, as if it were renewable or as if the cost of its creation were static.
The actual cost of oil extraction, in fact, is growing increasingly more expensive. Initially, the cost of extraction was ridiculously cheap. As Matt Simmons is fond of saying, a glass of oil was cheaper than a glass of bottled water... still is.
Texas oil in the 1930's had an EROIE of 1 to 100. It's EROIE was 1/100--very nice ratio. Similary, the Net Energy was 99. These numbers tell us that in the 1930's oil was very inexpensive to extract.
In the 1970's EROIE was 1/30 with Net Energy at 29, three times more expensive, but still ok.
Today, EROIE is at 1/15 with Net Energy at 14. In absolute terms, the cost of extraction is six times more expensive than in 1930.
Now consider the Canadian Tar Sands. Fort McHenry is booming; everyone, including the Norwegians and the Chinese want a piece of the action. Something is happening, for if you consider the actual EROIE of the tar sands, you will understand what I mean.
A report to the legislative leaders and governor of Connecticut concluded that the actual EROIE of the tar sands is 1/3, with Net Energy of 2. In other words, it takes the energy equivalent of one barrel of oil to produce three barrels. The report points out that shale in the Wyoming-Utah-Colorado area has the same EROIE as tar sands oil.
Between 1930 and 2008, the EROIE of oil increased over thirty fold, from 1/100 to 1/3. Net energy has gone from 99 to 2.
One of the things I worry about is this: if oil keeps getting more expensive, what happens to the Green Revolution? It was predicated, in part, on cheap fertilizer--and cheap fertilizer is made possible by petrochemicals. What will replace them when the oil starts running out? I assume the world supplies of bird guano and horse manure are shrinking, not increasing.