The work week declined from eighty hours to forty hours. The “weekend” was invented, and leisure activities evolved. Telecommunications were invented and constantly improved. More people were freed to specialize even further. Now, we have brain surgeons, some of whom are so specialized they must study until they are forty-five years old (five years beyond the life expectancy of a caveman) before they can practice their life-saving art. Specialization like that, on such a scale, simply could not occur without the freedoms generated by an energy surplus.
In effect, society has leveraged the fact that for most of the last one hundred years, it took a small increment of energy to find and produce substantially more energy. This can be called “energy leverage”—the relationship between energy expended to find and exploit more energy and the additional energy made available through that energy expenditure. Abundant, cheap energy—what we can call a high degree of energy leverage—fueled increased societal complexity and specialization. But now that high energy leverage is ending, and ending quickly, the energy expenditure required to generate new energy is increasing at a very high rate.
Another way to examine the relationship between energy employed to find or produce more energy and that energy found or produced is “EROI," energy return on investment. Over the years, as the “easy oil” began to be depleted by galloping world consumption (now eighty-six million barrels each day), it began to take more and more energy to find and produce energy. The EROI fell to twenty-five to one in the 1970’s. It fell to ten to one by 1990. Today, it is less than four to one.
We are running up against an energy limit (remember the caveman). It is taking more and more of the previously secured energy to produce the nextunits of energy needed to keep the machine of modern, complex society properly greased and fueled up. Today, fewer than four barrels of oil in five are surplus, as opposed to ninety-nine barrels out of one hundred at the dawn of the age a century ago. Energy is becoming more expensive to produce in terms of energy expenditure. We can sum it up by saying we have had to drill deeper and deeper to find smaller pools of conventional oil. (That’s why BP was drilling eighteen thousand feet down in the Gulf of Mexico.) Energy leverage was a blessing when it was high (a large EROI). It gave us the modern world. But it will be a curse as it continues to decline (a small EROI). That decline could take away the modern world.
Energy leverage works much like financial leverage. Say you borrow most of the money necessary to purchase an asset—a shopping center, for example. If that shopping center increases in value, you achieve a high rate of return on the small amount of your own money invested in the deal. There, leverage was beneficial. But if the value of the shopping center declines, your equity is wiped out when the bank forecloses on your loan. Then, leverage was a detriment. As the energy expenditure necessary to find and produce the next unit of energy continues to increase—i.e., as our energy leverage (EROI) declines—our way of life and our complex, specialized society get wiped out. We are forced to live smaller, simpler lives with fewer luxuries and fewer opportunities.
The problem of rapidly declining energy leverage is intertwined with another seemingly intractable problem of our age—debt. Mountains of debt. Debt piled so high that many economists (not employed by, or sympathetic to, the Federal Reserve) believe it cannot be repaid unless we either enslave, through confiscatory levels of taxation, our children and grandchildren (and their children and grandchildren) or create sufficient fiat money to “monetize” the debt, thereby reducing its value. Each of those policy paths can be avoided. Indeed, solving the energy dilemma provides a way to solve the debt conundrum.
Tomorrow: The Debt Conundrum
Jay Zawatsky is the CEO of havePower, LLC (a natural gas infrastructure developer) and a professor of business in the dual degree MBA program of the University of Maryland University College.