Charlie Hall's Cheese Slicer - Modeling Energy Investments In The Peak Oil World

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The implications of all this is that if we are to supply into the future the amount of petroleum that the US consumed in the first half of this decade it will require enormous investments in either additional unconventional sources, in import facilities or as payments to foreign suppliers. That will mean a diversion of investment capital and of money more generally from other uses into getting the same amount of energy just to run the existing economy. In other words investments, from a national perspective, will be needed increasingly just to run what we have, not to generate real new growth. If we do not make these investments our energy supplies will falter or we will be tremendously beholden to foreigners, and if we do, the returns may be small to the nation, although of course if the price of energy increases greatly the returns to the individual investor may be large. Another implication is if this issue is as important as we believe it is then we must pay much more attention to the quality of the data we are getting about energy costs of all things we do, including getting energy. Finally the failure of increased drilling to return more fuel calls into question the basic economic assumption that scarcity-generated higher prices will resolve that scarcity by encouraging more production. Indeed scarcity encourages more exploration and development activity, but that activity does not necessarily generate more resources. It will also encourage the development of alternative liquid fuels, but their EROIs are generally very low.

What would be the impacts of a large increase in the energy and dollar cost of getting our petroleum, or of any restriction in its availability? While it is extremely difficult to make any hard predictions, we do have the record of the impacts of the large oil price increases of the 1970s as a possible guide. These “oil shocks” had very serious impacts on our economy which we have examined empirically in past publications (e.g. Hall et al. 1986). Many economists then and now did not think that even large increases in the price of energy would affect the economy dramatically because energy costs were but three to six percent of GDP. But by 1980, following the two “oil price shocks” of the 1970s, energy costs had increased dramatically until they were 14 percent of GDP.

The Cheese Slicer Model

We have attempted to put together a conceptual and computer model to help us understand what might be the most basic implications of changing EROI on the economic activity of the United States. The model was conceptualized when we examined how the U.S. economy responded to the “oil shocks” of the 1970s. The underlying foundation is the reality that the economy as a whole requires energy (and other natural resources derived from nature) to run, and without these most basic components it will cease to function. The other premise of this model is that the economy as a whole is faced with choices in how to allocate its output in order to maintain itself and to do other things. Essentially the economy (and the collective decision makers in that economy) has opportunity costs associated with each decision it makes. Figure 5.6 shows our basic conceptual model parameterized for 1970, before the oil shocks of that decade.

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The “Cheese slicer” diagrammatic model, which is a basic representation the fate of the output of the U.S. economy, 1970. The box in the middle represents the U.S. economy, the input arrow from the left represents the energy needed to run the economy, the large arrow on the left of the box represents the output of the model (i.e. GDP) which is then subdivided as represented by the output arrow going to the right. In other words the economic output is “sliced” into different uses according to the requirements and desires of that economy/society.
(Data principally from the U.S. Department of Commerce. Extrapolations via the Millennium Institute’s T-21 model courtesy of Andrea Bassi))

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Figure 5.9. Same as figure 5.6 but for 2030, with a projection into the future with the assumption that the EROI declines from 20:1 (on average) to 10:1.



Figure 5.10. Same as figure 5.6 but for 2050, but a projection into the future with the assumption that the EROI declines to 5:1.

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http://www.theoildrum.com/node/3412#more

note how little of GDP is available for discretionary and staples consumption by 2050.

Charlie is one smart cookie...and this is the part of it that people just don't get, I think: there is NOTHING LIKE a barrel of light sweet crude for energy return...

and that folks is what really sucks.

The central square "The Economy" stays a constant size in all the graphs. while that's OK if you're just trying to demonstrate changes in the proportional distribution of outputs, it doesn't give a good sense of how much the width of each of those arrows will change in absolute terms.

For instance, my GDP model projects a 5% decline in global GDP by 2050, meaning that the "red cheese" line of discretionary consumption would be even thinner than shown.

And of course, in that time the world population is projected to grow by 40%. That means that the light green arrow labeled "Staples" would have to expand. Two things will happen - the red "Discretionary" consumption arrow would disappear altogether, and the overall "Consumption" output would expand enough that it would squeeze out some of the "Investment" output, starting with the discretionary investment, then gobbling up the maintenance investment (leading to what John Michael Greer calls "Catabolic collapse".

To complicate matters further, the net energy of our remaining sources is going to be declining. That means that the big blue arrow at the top, "Investment in Energy Acquisition" will have to get proportionally wider, putting a further squeeze on discretionary and maintenance investments.

The unhappy eventual outcome is a cheese slicer with two output arrows: "Staple Consumption" and "Investment in Energy Acquisition" with virtually no investment even in infrastructure maintenance, and no discretionary consumption or investment at all.

Of course the thickness of the cheese slices will vary from country to country, with Afrasia quickly showing no discretionary consumption or investment due to the expanding proportion of their economic output being allocated to staple consumption. Meanwhile the USA will show a dramatic increase in the cost of energy acquisition that will similarly impact other forms of investment and discretionary consumption.

A more realistic scenario is that the size of the square falls off dramatically. Due to energy disappearing and people dying.

But, it did capture some interesting relations. There is probably no clean way to represent the interaction of all the moving parts simultaneously. We will learn about all the interactions by living through them.