1. Energy, Economy and Finance
Sparse thoughts on End of an Era
Including some reflections on how to avoid disruptions
Giancarlo Fiorito

2. Structure
• Economics as energy surplus
– money as language not substance
• Thermodynamic economic history
– Prometheus I & II
• IT Age
• 4 drivers of degrowth
– (Creative) Financial bubble
– Obscrured by (Data) Clouds
– Globalisation (of Debt)
– EROEI (Cliff)
• Energy and society
• Reflections
– State of fuels
– Oil world  High K E M intensity
• The need for mechanical energy & the constraint of renewable fuel
– EROEI and Well-to-Wheel efficiency
– Renewable energy system and Rails

3. Mirroring
• If one asked a representative sample of the public what economics
is all about, there is a very strong likelihood that the consensus
answer would be “money”. The vast majority of economists do
indeed frame the debate in monetary terms.
• The problem is that the economy is not, fundamentally, a monetary
construct at all. Economics is really about the art of combining
tangible components (such as labour and natural resources) to
meet needs.
• Ultimately, money is a convenient way of tokenising this process.
The process itself, on the other hand, is an energy equation.
• The basic misunderstanding over this point – the treatment of
money as the substantive challenge, rather than as the language
in which that challenge is expressed – lies at the heart of the
current economic malaise.
• In essence, an ever-widening wedge has been driven between the
monetary and the ‘real’ economies.
Tim Morgan

4. Economics &
thermodynamics
• Energy is
– Endosomatic food (calories)
– Exosomatic service (jouls, kWh)
• Society & economy began when agriculture
created an energy surplus
– population engaged in non-subsistence activities
• Time and calories went on something else
– philosophy, manufacturing, art, architecture…
Law & government
Money to ease exchange

5. 10.000 a.C.
• Prometheus I a forest journey* with
• Mastery of fire for cooking
• Agricultural Revolution
• Forests cleared for agriculture, but
 Wood is primary energy and material
 Iron age = ovens to smelt metals
Hephaestus & mythology
crafts, trade, temples, roads, armies
Societal control
Soil loss
* John Perlin, A forest Journey, The Story of Wood And Civilization

6. XVIII sec.
• Prometheus II  a journey underground
• Steam engine in coal mines
• Exosomatic power (en. slaves)  Industrial Revolution
 Mass manuf., industrial agriculture, ships, cities
K
Aknowledged
complementarity
between K and E
E
• And between GDP & Oil
http://www.locchiodiromolo.it/blog/petroliovs-pil.html http://tinyurl.com/bmu2j5u
 Strict connection of fossil energy with industrial
revolution and technical progress  more K

7. XXI sec. IT Age
• Requires more E and materials M
• Enhances K mobility
 Finance: growth of “Creative” $
• Globalisation = more distance, more E & M
 Outsourcing (in OECD) means…
Less (real) production More Consumption
Skilled L in manufact. Unskilled L in services
PRODUCTION CONSUMPTION
Widening gap = Debt

8. 4 Drivers for the Crisis
and why it will last…
• Financial (Creative) bubble
• Obscured by (Data) Clouds
• Globalisation (of Debt)
• EROEI (Cliff)
http://www.cityam.com/article/economic-perfect-storm-four-trends-killed-western-growth
http://tinyurl.com/a7qynks

9. Financial bubble at-glance
• “Economy is a energy dynamic…” and real production is
based on harnessing energy to tokenize surplus
production (food, crafts etc.)
• Increase in paper-money was a reaction from increased
energy prices in the 80’s, possible by new legal (Glass-
Steagall) and financial (derivatives)instruments, but also …
• IT technology (globalization)
• Process in real terms is
 lower EROEI means less net energy, so…
Finance increased the debt to hide this
Fostering the consumption in service economy
• Pushing away the problem

10. Statistical data sophistication
• Discouraged workers, owner-equivalent
rent, core inflation, hedonic
adjustment, geometric weighting…
• A big problem with hedonic adjustment is that it breaks the link between
inflation indices and the actual (in-the-shop) prices of the measured goods.
Another is that hedonic adjustment is subjective, and seems to incorporate
only improvements in product quality, not offsetting deteriorations.
• A new telephone might, for example, offer improved functionality (a hedonic
positive), but it might also have a shorter life (a hedonic negative) and, critics
claim, the official statisticians are all too likely to incorporate the former whilst
ignoring the latter.
• The failure to incorporate hedonic negatives may be particularly pertinent
where home-produced goods are replaced by imports, a process which has
been ongoing for more than two decades. A Chinese-made airbrush might be a
great deal cheaper than one made in America, but is the lower quality of the
imported item factored in to the equation?

11. The result: no inflation!

12. Owner-equivalent rent
• If a person owns his home, no mortgage or rent is payable, and no money changes
hands in respect of the property. But the reporting methodology for US GDP assumes
that such a property has a utility which a purely cash-based measure fails to capture.
Therefore, GDP contains a sum representing the rent which the owner would have paid
(presumably to himself) if he had not owned the property.
• Interest expense is backed out, but the net result remains a major non-cash uplift to
GDP. The replacement of actual expenditure with a notional (‘imputed’) rent applies not
just to those Americans who own their homes outright, but also to those with
mortgages. For example, a person with 50% equity in his home is assumed to pay rent
on 100% of it rather than, as is actually the case, mortgage interest on half of it.

13. Data “smoke curtain”: Growth and Jobs

14. Globalization, debt and EROEI
• Paying the debt is made by financial products
“betting” on global companies future growth
• Growth possible IIF cheap & high-EROEI energy
• Meanwhile, developed countries live on services
delivered by consuming raw materials, E, K and
Goods, produced (and now paid) by others.
• Passing from high to low EROEI, means:
– Shrinking employmt, wages & consumption: no Growth
– More debt, less “society”: school, health, culture
– Deindustrializaton, social unrest, informal economy
– Reverting trend toward labour-intensive activities
(bioagriculture, crafts, mechanics, electricians)

15. Energy, EROEI and the economy
Economy is a surplus energy dynamic, driven by the difference between
energy extracted and energy consumed in the extraction process.
Below an EROEI of about 15:1, the “profit” element falls off a cliff, because there is an
exponential increase in the “cost” component, which rises from 4.8% at an EROEI of 20:1 to
6.3% at 15:1, 9.1% at 10:1 and 16.7% at 5:1.

16. From high to low EROEI
NB: flow diagram is in percentage to highlight energy
reinvested, the volume of energy in LEVELS is likely to
shrink, implying the same for Essentials.

17. Population, Energy & GDP
• And one to add…energy cost as % of GDP

18. Toward the End of the Growth era
• What is measured here is not the value of energy, but its
cost as a proportion of the value that we derive from it
– If cost and value were the same, no surplus exists
– Than the economy could not exist either
9.6% GDP

19. Eroei < 15:1
• If EROEI falls below a threshold, much more energy is
consumed in the extraction process, resulting in a
corresponding squeeze on the energy available to the
economy
• The essentials may still be affordable, but the leverage in
the equation is such that energy available for
discretionary uses diminishes very rapidly
• Through the EROEI squeeze, goes the car, the holiday, the
bigger home, the MP3, the meal out, toys for the children
and the soccer match
• If EROEI falls materially, our consumerist way of life is over

20. Consequences
• There are two really nasty stings in the tail of a declining EROEI.
• First, net energy availability may fall below the amount required for
essential purposes including healthcare, government and law. It is
hardly too much to say that a declining EROEI could bomb societies
back into the pre-industrial age.
• Indeed, a decrease in net energy below subsistence levels is an
implicit consequence of EROEI decline beyond a certain point – one
which is difficult to estimate, but is likely to occur within the next
decade – which means that this is when the nastiest results of all
start happening.
• Second, a decline in net energy availability could (indeed, almost
certainly will) result in conflict driven by competition for access to
diminishing surplus energy resources.

21. The future
• Investment in energy infrastructure will grow much more
rapidly than the economy as a whole  energy sprawl
• Declining energy productivity
 energy infrastructure increase more than the volume of
produced energy
• This process is under way, though principally in the
emerging economies (where energy demand continues to
increase)
• Some simplified, daunting, calculations
– Hypothesis: Real GDP constant over 10 years
– Hypothesis: EROEI from 20:1 to 10:1
– Result: Energy costs rise 7,4% per year
– Result: Rest of the economy shrinks by 0.5% per year

22. Signals
• Energy price escalation. The inflation-adjusted market prices of
energy (and, most importantly, of oil) move up sharply, albeit in a
zig-zag fashion as price escalation chokes off economic growth and
imposes short-term reverses in demand.
• Agricultural stress. This will be most obvious in more frequent
spikes in food prices, combined with food shortfalls in the poorest
countries.
• Energy sprawl. Investment in the energy infrastructure will absorb a
steadily-rising proportion of global capital investment.
• Economic stagnation. As the decline in EROEIs accelerates, the
world economy can be expected to become increasingly
sluggish, and to fail to recover from setbacks as robustly as it has in
the past.
• Inflation. A squeezed energy surplus can be expected to combine
with an over-extended monetary economy to create escalating
inflation.
 With the exception (thus far) of inflation, each of these features
has become firmly established in recent years, which suggests that
the energy-surplus economy has already reached its tipping-point.

23. A reflection
• Solid, liquid and gaseous fuels
imply lowering environm. impact
lower C/H ratio
Impact of energy system depends on EROEI but
• EROEI evauation @ national level not straightforward
– must include both direct and indirect impact of
building, operating, maintaning and disposing of K equipment
related to energy system and economy as whole
• Metal, asphalt, tires, cement (and army!) are oil-related
industries with
– high KEM intensity
– hard to account economic & evironmental cost
– “Snowball” effect  inertia (big K) and debt (less production)

24. Energy, engines and society
Fuel Engine System & synergies Societal function
Wood, hay, Slaves, horses, boats Agriculture Hunting,
wind, water agr. prod., war
Coal Steam (trains, ships) Mining, machining, Ind. prod.,
textile, mass transport
Oil IC (cars, trucks, Petroch., centralzd Mass transp.,
planes) electric system, Residential
agroindustry
Nat. Gas IC, Turbine (jets, ICT, globalization, central Mass transp. &
power plants) elecric syst., service cons., Resid.,
economy Suburbia, tourism
H2 ? FC ? Servers, local & horiz. IT-dedicatd power
energy system, organic plants, light
agric. mobility,

25. Oil world  High K E M intensity
• High K E M intensity  service-based society
– >90% L in services
• Globalization  Gap between Prod. & Cons.
 more jobs in Agr. & Ind in developing countries
 more jobs in Services in developed countries
 more debt in developed countries
• Change highly non-linear and un-smooth

26. More reflections
• The accomplishment of societal functions needs
mechanical energy for production and distribution:
– agricultural, industrial & transport equipment for
– producing and delivering food and essential goods
 Requires a Fuel ≠ than Energy source (or electricity)
(so far liquid for volumetric density reasons)
• Mechanical energy is an essential condition to maintain
an ordered for society, as we know it
• Despite high density (36MJ/lt.) and Well-to-Tank
efficiency of liquid (oil products) as fuel
 Tank–to-Wheel ICE efficiency is ≈ 10% in real conditions
 Tank–to-Wheel H2-Fuel cell (FC) efficiency is ≈ 50%

27. The need for mechanical energy and
the constraint of renewable fuel
• The only renevable fuels are:
1. Biofuels: energy crops (fertil., water, tractors, soil & biodiv. loss) 
refining = negative EROEI
2. Hydrogen: excess RE (wind, hydro, PV)  electrolysis 
compression = low EROEI
• Despite low energetic Well-to-Tank efficiency of the
RE-H2-FC cycle
– High energetic Tank-to-Wheels efficiency of H2 in FC engines
(tractors, vans, small power plants),
– High economic Well-to-tank efficiency of generating high-value H2 from
low-value excess RE
 Excess energy (intermittent & dispersed RE grid stabilization) can be
economically stored and efficiently used as H2 in cloudy, windless
working days for both production and transport
 Enabling a RE-based society to express essential functions like food &
industrial production

28. Renewable energy system and Rails
• The unique efficiency of rail transport on land requires
special attention
• Rail is a sustainable trasport infrastructure
– Requiring high upfront, public investments
– Delivering short and long distance services
– Generating minimal maintenance, energy, materials and
evironmental costs (compared to road transport)
• The RE system is likely integrate with the railways
– Freight can be moved by disperse renewable sources feeding the
railway grid
– Transportation and energy grid might become the same thing
A Wind-Powered Railway

29. A synergy against Olduvai