Relating Financial and Energy Return on Investment

Carey W King,Charles A.S Hall

doi:10.3390/su3101810

Abstract

For many reasons, including environmental impacts and the peaking and depletion of the highest grades of fossil energy, it is very important to have sound methods for the evaluation of energy technologies and the profitability of the businesses that utilize them. In this paper we derive relations among the biophysical characteristic of an energy resource in relation to the businesses and technologies that exploit them. These relations include the energy return on energy investment (EROI), the price of energy, and the profit of an energy business. Our analyses show that EROI and the price of energy are inherently inversely related such that as EROI decreases for depleting fossil fuel production, the corresponding energy prices increase dramatically. Using energy and financial data for the oil and gas production sector, we demonstrate that the equations sufficiently describe the fundamental trends between profit, price, and EROI. For example, in 2002 an EROI of 11:1 for US oil and gas translates to an oil price of 24 $2005/barrel at a typical profit of 10%. This work sets the stage for proper EROI and price comparisons of individual fossil and renewable energy businesses as well as the electricity sector as a whole. Additionally, it presents a framework for incorporating EROI into larger economic systems models.

Highlights

What is the minimum energy return on energy invested (EROI) that a modern industrial society must have for its energy system for that society to survive? To allow a profitable business venture? To afford arts, culture, education, medical care? To grow? Is it the same as the minimum EROI that a fuel must have to make a meaningful contribution to a society’s material well-being? And what is the price of energy at this minimum EROI? There has been remarkably little discussion of this issue in the last 50 years outside of our own previous papers on the subject [1] even though we believe that it might be a defining aspect of future societies
Our results indicate that Equations (9–11) act as broad but valid representations of the relations between EROI, monetary return on investment (MROI), and the stated technoeconomic factors
Because there are no definitive values to input into Equation (10) for calculating oil price, we calculate price as a function of EROI using a range of reasonable inputs

Summary

Introduction

What is the minimum energy return on energy invested (EROI) that a modern industrial society must have for its energy system for that society to survive? To allow a profitable business venture? To afford arts, culture, education, medical care? To grow? Is it the same as the minimum EROI that a fuel must have to make a meaningful contribution to a society’s material well-being? And what is the price of energy at this minimum EROI? There has been remarkably little discussion of this issue in the last 50 years outside of our own previous papers on the subject [1] even though we believe that it might be a defining aspect of future societies. With the exception of the considerable discussion around whether corn-based ethanol is or is not a net energy yielder [7,8] there has been almost no contemporary discussion of the implications of changing EROI on industrial society. The lack of such studies seems curious as this will be a very important issue relating to our future, during which the mutual impacts of peak oil and declining EROI of fossil resources are likely to cause a very large overall decline in the net energy delivered to our industrial society.

Methods

Results

Conclusion