Peak Oil and EROI: Understanding a Concept

Peak oil is a divisive topic. Bitter battles over its timing and consequences plague the blogosphere. I rarely comment on these debates. My experience with the subject is limited, and thus the insight I can bring to any discussion on the matter is even more so. My attention is spent simply trying to catch up. For those possessing little expertise with energy issues, this is a difficult task. In such a wide ranging debate how can readers even hope to sort the wheat from the chaff? Luckily, there is a simple way to separate the pundits who truly understand the issue from the pundits who do not. Inexperienced analysts debate the size of oil reserves. Serious commentators focus their debates on EROI.
EROI stands for “Energy Return on Investment.” It isfor the purposes of all but the most technically mindedsynonymous with another term occasionally heard, “Energy Return of Energy Invested” (ERoEI), and related to another important concept, “Net Energy.” All three terms affirm the importance of the means by which the energy is acquired over the size of retrievable energy reserves. 
The idea behind EROI is not hard to understand. Businessmen use it every day. “Return on Investment” (ROI) is a metric known by every marketer and manager in America. In basic terms, ROI is the amount of profit made for every dollar invested in a product, employee, asset, or any other chosen investment. It is usually expressed in the form of a percentage.
Movie theaters and gasoline stations provide a fair example of ROI in action. The ROI of a movie ticket or of a gallon of gas is very low (usually less than 4%) because the cost of purchasing refined gasoline or reels of film is high and the demand for both gasoline and movie tickets is highly elastic. It is not surprising that these businesses make most of their money by selling a product with a much higher ROI: overpriced food. Consumers do not choose which gas station or theater to attend on the basis of concession costs, allowing the proprietors to sell their wares at ridiculously high (and inelastic) prices. This is reflected in the balance sheets. While gasoline sales have a very high gross income, the net income made from food and beverage sales is almost always higher.
EROI applies this type of thinking to energetics. The surveying of potential oil sites, the construction and maintenance of oil rigs, and the refinement and transportation of recovered oil all take energy. The energy return on investment is the ratio of energy produced for every unit of energy spent in the production process. Analogous to a business’s net income is net energy, the total amount of energy produced after the energy cost of production has been accounted for.
Real world examples of the relation between net energy, EROI, and global energy supplies abound. The Athabasca tar sands are estimated to contain 1,700 billion barrels of bitumen, placing its proven reserves of petroleum at the same level of magnitude as the rest of the entire world’s proven conventional reserves. However, most petro-geologists, oil companies, and governmental agencies (e.g. the EIA) only include one tenth of this in their estimates of Canada’s oil reserves. Why? All tar sands have an incredibly complex and energy-intensive extraction and refining process. One tenth of the sands can be accessed through open-pit mining; the energy invested is devoted mostly to transporting and refining the sand. However, the remaining 90% lies deep underground. The additional energy cost of mining these sands is enormous. So enormous that the net energy of extracting, processing, and using deep tar sand oil is negative.
This may not always be so. Future advances in technology may lead to the development of a new, less energy intensive extraction method. If this was the case, and the EROI of tar sand oils increased remarkably, so too would the amount of reserves available to humanity. Raising the EROI of oil extraction bears the same result as finding additional reserves.
EROI is not always so helpful to peak oil optimists, however. British Petroleum’s operations in the Gulf of Mexico are a case in point. While British Petroleum has published no official data on the matter, we can be quite sure that the EROI of extracting oil from the Gulf has fallen drastically over the last five months. Beyond the normal energy invested in constructing and maintaining deep-water oil rigs, British Petroleum must invest exorbitant amounts of energy into capping Deepwater Horizon, cleaning up the its spillage, and paying higher insurance costs on its other deep sea rigs.
The interesting thing about these examples is that the EROI of both is completely independent of actual reserve size. This is not true in all cases. However, you will be hard pressed to find a single operation where the net energy is determined more on the basis of reserve size than on limits imposed by location, technology, or political and financial restraints. What happens above ground is more important than what is below it.
The same holds true for peak oil. The day the last well runs dry is not the day humanity stops using oil. That will come the day it takes more barrels to drill the well than can be gained from the drilling.

Leave a Reply to akarlin Cancel reply


Good post and vital issue, TG.

1) If you want to know more about EROEI, I strongly suggest Google-mining The Oil Drum – they have a lot of excellent articles on this issue and its implications. Also check out Robert Ayres' work on the contribution of energy and thermodynamic efficiency to economic growth. Fascinating stuff, once you get to it – and utterly discounted by all mainstream economists (which nowadays makes it really hard for me to take the profession seriously).

2) "Luckily, there is a simple way to separate the pundits who truly understand the issue and the pundits who do not. Inexperienced analysts debate the size of oil reserves. Serious commentators focus their debates on EROI."

I don't really agree with this. The concept of "peak oil" is intuitively obvious, and most educated laymen have some level of familiarity (if not agreement) with it by now. If my non-energy-specific blog posts were to reference "declining EROEI" or "the coming exergy crisis", most readers would go – what? unless I were to throw in lengthy explanations like this post to go with them. So I prefer to use the term "peak oil" as a blanket term to cover the multifaceted energy dilemmas we are beginning to face.

3) IMO, you underestimate the importance of peak oil as its own phenomenon.

A) Whereas an oil peak will not spark an immediate global exergy crisis (because total energy and efficiency can continue growing through substitution and technology), several sectors and regions will be hard hit and experience revolutionary change. The automobile sector. The petro-states. Perhaps even Pax Americana (if said petro-states stop buying US Treasuries).

B) Oil, of course, also produces oil products (gasoline, air fuel, etc) that are hard to substitute in their specific properties, all EROEI matters aside. Resources that could be used elsewhere will have to instead be used to reconfigure the industrial system to a state not as dependent on cheap oil inputs.

C) As the world's most traded commodity and vital input to industrial systems, peak oil may also have unpredicted, negative impacts on the global financial-credit system.

4) While EROEI is a very useful concept, I wouldn't dismiss the value of oil field by oil field bean counting either. After all, it worked for Hubbert for predicted the peaking of US production.

Finally, IMO the best (and easiest) introduction to the math behind peak oil here.


The key phrase in your defense is "non-energy specific posts." Such posts don't need to go into the details of EROI — a post on the geopolitics of China should not be expected to mount a defense of your position on peak oil, much less explain EROI and net energy.*

On the other hand, if you had written an energy specific post, particularly one on peak oil, and never once mentioned EROI or net energy, I would have trouble taking your position seriously.

I think we have a slight disconnect on the EROI issue. You seem to be speaking of global EROI and the related exergy crisis. I hoped to focus on something a bit smaller: the EROI of oil.

As such, I don't disagree with any of the points you make concerning peak oil. My argument is simply that peak oil has much less to do with the physical depletion of remaining reserves than it has to do with the associated EROI of this depletion. In his book Energy in Nature and Society Vaclav Smil argues this point well:

A Superior measure of resource availability is the cost of producing additional or marginal units of a resource. This dynamic approach takes into account the improvements in techniques and the ability to pay for the price of recovery. Exhaustion is then not a matter of actual physical depletion but rather a burden of persistent and eventually insupportable real cost increases resulting in declining availability of a resources. This is a gradual process allowing for adjustments and countermeasures, including innovative techniques, various conservation efforts, and often surprisingly sweeping resource substitutions"

[Vaclav Smil, Energy in Nature and Society, (Cambridge: 2008), p. 205].

And for oil, the best measure for producing additional units of oil is the EROI of oil production.

Which brings me to the over all point: debates over peak oil should be just as much about what is happening above the ground as they are about what can be found below it.

*Though I think net energy is a bit intuitive as well – anybody who has paid taxes knows what net income is, and it is not hard to take this logic and apply it to other situations.