DISCUSSION EROEI and the end of growth

by Yolanda Villafuerte _______6th February 2013

Why has there been so little recovery since the 2008 economic slump? Fiscal or monetary, austerity or stimulus, economists and policymakers are struggling to guide the global economy out of double and triple dip recessions. Perfect Storm: energy, finance and the end of growth written by Dr Tim Morgan, Global Head of Research at Tullett Prebon, identifies the four underlying trends that are holding back growth and hindering the effects of tried-and-tested macroeconomic measures.

Firstly, ‘the credit super-cycle’ resulting from the idiocy and madness of individuals. The public who believed that property prices would only ever increase rationalised that it was safe to borrow against equity or spending it.  Pre-2008, regulators added to the idiocy by loosening banking reserve criteria and ignored the obvious warning signs that banks were taking advantage of public idiocy in a catastrophic way. Even worse, policymakers and their advisors celebrated this debt-fuelled growth, ignoring of ignorant of the consequences of its shaky foundation.

Secondly, the fallacy that ‘globalisation’ makes everyone richer. When a corporation outsources to countries which are more competitively priced, jobs are lost in its domestic economy and the increased earnings of the corporation are saturated at the very top. Even as consumption increased, real wages and domestic production levels fell. For the vast majority of the public, this gap was filled by unsustainable levels of borrowing.

Thirdly, the deceptive nature of economic and fiscal statistics. For instance, the American CPI-U inflation benchmark which takes the price of an ‘average shopping basket’ has been understating inflation rates through substitution biashedonic adjustment and geometric weighting.

Unemployment figures are also often misleading as they exclude many categories of people such as ‘discouraged workers’ and the ‘underemployed’. Furthermore, if quasi-debt obligations such as the enormous commitments to pensions were added on the official national balance sheets, most developed governments would be effectively insolvent.

Lastly, the lack of value creation referred to as the concentration on money when ‘money is the language rather than the substance of the real economy’. The report explains that the economy has always been governed by the law of thermodynamics where real growth is determined by EROEI (energy return on energy invested).

Morgan found that the global average EROEI has fallen from 40:1 in 1990 to 17:1 in 2010 and is predicted to decline to 11:1 by 2020. Notably, shale gas is not going to make much difference at EROEI rates of 5:1 and renewable energy is not going to help either as even the wind power estimates of 17:1 assume that electricity is an equivalent to fuel and wind turbines last about 25 years.

Morgan writes that the biggest barrier to growth is the deteriorating relationship between energy production and the energy cost of extraction. The decaying EROEI numbers will mean that everything, including food, will become about 50% more expensive in less than 10 years.

The report diagnoses these underlying problems and suggests some solutions. The first of which is a cultural change away from short-termism and instant gratification. The discovery of a new source of energy with high EROEI or the development of existing sources such as nuclear energy or concentrated solar power could potentially reverse the energy returns crisis. Morgan emphasises that technological breakthroughs cannot be relied on as they use energy rather than create it.  If you were hoping for technology to save us all, as number two of the Moscow Rules states, ‘technology will always let you down’.

Sign-up to our mailing list to receive all our latest discussions, publications and events.