4. EROEI MISCONCEPTIONS

Dating back to Hubbert, a misconception has been floating around that fuel production will halt when EROEI drops to or below 1, i.e. when the energy invested in harvesting the fuel equals or exceeds the energy obtained. This is incorrect for a number of reasons:

1) We're already doing it:
"David Pimental, a leading Cornell University agricultural expert, has calculated that powering the average U.S. automobile for one year on ethanol (blended with gasoline) derived from corn would require 11 acres of farmland, the same space needed to grow a year's supply of food for seven people. Adding up the energy costs of corn production and its conversion into ethanol, 131,000 BTUs are needed to make one gallon of ethanol. One gallon of ethanol has an energy value of only 77,000 BTUS. Thus, 70 percent more energy is required to produce ethanol than the energy that actually is in it. Every time you make one gallon of ethanol, there is a net energy loss of 54,000 BTUs."Source
Hubbert says we won't do it, but we already are. So Hubbert is wrong.

2) Cross-energy exchanges can certainly be rational and profitable. If fuel A is plentiful and cheap, and fuel B is in high-demand and expensive, money can be made by harvesting B with A, even at a net energy loss.

3) Even when using oil to recover oil, money can still be made with an EROEI of 1 if inflation is high enough. Oil projects take a long time. You make all the oil investments when oil is at, say, $40, and sell the product when oil is at $80. The net energy gain is 0. The net monetary gain is %100, minus the rate of inflation. Depending on the economic climate, this could even work with an EROEI<1.

4) Expanding on 3) above, how would you even *know* if you had crossed into an EROEI<1 ? No one is doing the energy acccounting, and due to the entrenched resistance of traditional economists, no one will be. So why would production stop due to a variable that no one is calculating?

5) Consider a parable: You have a root in your hand, and if you eat that root, you will have just enough energy to find and dig up the next root. Your EROEI is 1. Would you stop eating and digging? Of course not. Most animals have always lived on an EROEI=1 basis, and that never stopped them. In fact, they still keep going even when EROEI drops below 1. They get frantic and desperate, and continue to operate as long as possible, despite the deficit.

6) Now suppose you have a reserve of oil, and using it, you can produce another reservoir of the same size, would you do it? Hubbert would say no, it's irrational. You might as well just consume the oil, or hold and sell it later because it amounts to the same thing. But that is incorrect because there are beneficial side effects to producing, even though the EROEI=1. If you produce, lots of people can remain employed in the production effort, and get paid and eat, while you use up the first reservoir. And when it's exhausted, you have a whole new reservoir to use or consume, so you haven't lost anything. The situation is analogous to the parable in 5). Therefore, producing oil with an EROEI of 1 is rational.

7) Production with an EROEI of 1 or less can also be rationalized through accounting chicanery. Subsidies and tax breaks are good examples. You socialize the input energy costs, and privatize the output energy profits. Here's a more extreme example: You live in a last-dregs world where oil is virtually non-existent, and worth an astronomical sum. So you capture some people, and work them to death pumping out a barrel of oil from an old well. You don't feed or care for them in any way, so you have minimal costs, and in the end you get a priceless barrel of oil. In short, it's rational to produce oil even with an EROEI of 0.001 if you can force or trick someone else into paying the costs.

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The point is pretty simple: If energy prices inflate, you can profit by buying your inputs low now, and then selling your output later at the inflated price. Of course, this won't give you any traction if the price of everything is inflating at the same rate, but generally that isn't the case. For example, oil has inflated by around 35-40% this year, while CPI inflation is about 3%. If the energy inflation is high enough, and the differential with the CPI is wide enough, you can run an EROEI<1 process and turn a real profit.
For example, suppose that your input is (1.1)X and your output is X, so EROEI<1. Suppose also that energy inflates by 50% between the time you purchase your inputs and sell your output. So you purchase at price p and sell at price 1.5p. Then your profit is: (1.5p)X - p(1.1)X = .4pX. So your original investment has increased by a nominal 36%, and it would take 36% inflation in the CPI to wipe that out. If CPI inflation is, say, 3% over the same period, you have a real profit of about 32%.
In this case you're wasting energy, but you're definitely not wasting money. Is it sustainable? Yes, as long as the following conditions prevail:
1) Energy prices are rising
2) But not so fast that they completely saturate the CPI
3) There is some energy left
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Why is producing oil at EROEI=1 better than hoarding?
Producing oil with an EROEI=1 is rational, provided human beings are fed somehow by the extraction process. For example, make the following assumptions:
1) We will pump oil out of a well using only human labor.
2) We will feed the people by growing their food in caverns under the ground which are lit by grow lamps, and those lamps are driven by oil.
3) The oil pumped out of the well is put into the fuel tank for the grow lamp generator, to produce more food.
4) The people are isolated and have no other food options.

If the original oil is easy to get, these people can live quite comfortably, and build up a surplus of oil and food. But suppose they realize one day that they aren't getting any surplus. Their pumping is producing exactly the amount necessary to produce their food. In other words, they are now at EROEI=1. Then what do they do? Do they decide to stop pumping because they are putting in one barrel of oil to get one barrel of oil, and that is nonsense, like Hubbert says? I say no. I say they keep pumping at EROEI=1 for as long as they can. And when they drop to EROEI<1, they still keep pumping, until they die.

I believe this example applies to the larger world because: a) People are employed in oil production, and hence eat off it because it gives them a paycheck, and b) We eat oil by growing our food with it.

Hoarding is economically rational in the model world, because it is equivalent to food. If I squirrel away a little oil (=rice) in the model world, I can bring it out when everybody is starving, and buy everybody's stuff. Undoubtedly, that would happen to some extent, but there is a limit on it. If everybody is economically rational and squirrels away their little piece of oil (=rice), everyone will die. It's rational to squirrel it away, but it's like a game of seeing who can hold their breath the longest.