This article is the first in a three-part series on America’s energy crisis.
Most people (at least outside Washington and academia) understand there is an unbreakable relationship between supply and demand. If demand increases more than supply, prices rise. Through the 1970s, demand increases over time were met with supply increases. But that era of elastic supply to meet demand has been coming to an end for commodity after commodity, particularly oil, over the last four decades. Governments have papered over this reality by increasing the supply of the only commodities at their command—fiat money and the debt that emerges from the wicked womb of fiat money.
Now these two realities—debt increase and commodity-supply decrease—are colliding. Southern European countries, including Greece, Italy, Spain and Portugal, are the first nations in the “developed world” to be squeezed by the pincers of debt increase and commodity-supply decline. Soon, the “developing world” will be caught too.
But America appears to have the resources that might help it avoid the coming economic reckoning. Note the word “might.” While the resources exist, their advantageous exploitation will require enormous political resolve. But if America can summon that resolve, the United States once again can become the powerhouse of the world, both literally and figuratively.
In contemplating the economic and technological progress of human society, note that such progress is characterized by increasing complexity and specialization. You do not have to grow your own food. Indeed, 97 percent of Americans do not. We leave it up to the fewer and fewer farmers. You can enjoy a meal at your home in Bethesda, Boston or Baton Rouge with tilapia from Brazil, chardonnay from California, brie from France, clementines from Spain and spring lamb from New Zealand, all delivered fresh to your door. You only have to answer the bell and place the food on the table. You do not have to make your own clothes, as Far East manufacturers do that. In fact, you do not have to leave your house to purchase anything. Just order it on the Internet, and Amazon or Zappos or Petsmart delivers it, via FedEx or UPS.
The level of organization, specialization and complexity exemplified by “just-in-time” delivery of goods and services is based largely on man’s exploitation of an “energy surplus." This concept requires a full understanding. If it took one measure of energy to produce an equal measure of energy, everyone would spend all of his or her time and effort producing the next unit of energy. There would be no time to create anything beyond the basics. That was the caveman’s problem. He enjoyed no energy surplus. He had to spend all of his time finding food, the only “energy” of his day. He had no time to specialize. Thus, society could not become complex. It could not produce doctors or authors or musicians or lawyers or politicians. Everyone was a hunter or a gatherer. Mathematically, we could say that there was a one-to-one ratio of energy found to energy that could be used.
Then fire was domesticated. A cave dweller could gather wood and burn that wood to keep warm and to provide light at night. Having a source of light at night allowed the caveman to become an artist. He hunted during the day and painted his cave walls at night. Around the fire, he told stories of the hunt. Those stories instructed the next generation how to hunt and gather more productively. Animal skins could be sewn into clothing at night, with the light from the burning wood, the new fuel. Bows and arrows could be manufactured to improve the efficacy of the hunt. As the energy unlocked by burning wood allowed for the smelting and forging of metal, spears could be made more lethal, further improving the hunt.
As a result of better tools and weapons, some folks were freed from the hunt. They pursued and perfected other tasks, like planting, weaving and harvesting. People also lived longer. Further specialization ensued—soldiers, surgeons, medicine men—adding to the complexity of society. This increased specialization and complexity was a direct result of surplus energy, from both more food and wood as fuel.
Then, about three hundred years ago, society experienced another great leap ahead with the use of coal. As was the case first with food, then with wood, the use of coal facilitated more societal complexity, more societal specialization and more leisure.
But the greatest leap of all began with the use of oil and its refined products. In 1901, the age of oil began in earnest.
With the energy produced from one barrel of oil, one hundred new barrels could be secured and made available for a use other than finding more oil. That is a formidable energy surplus, one hundred to one. That surplus allowed the modern world to evolve.
In 1900, 38 percent of Americans were farmers. One hundred years later, only 3 percent of Americans were farmers. But the output produced by that 3 percent was nearly three times the output produced by thirteen times as many people a century earlier. Mechanized agriculture, using fossil-fuel-based fertilizers and machines running on the refined products of oil and produced by employing fossil fuels to generate electricity, freed people to leave the farms and move to cities. There, they worked in factories powered by easily produced energy from fossil fuels. Others used their freedom to design new products and new techniques to make life cleaner, easier, healthier, richer.
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.