Number of words: 367

In greed we trust . Classically trained economists love the idea that the answer to all our problems is to be found in the lure of profit , but unfortunately this idea ignores two fundamental equations in relation to oil . 

Firstly, it is assumed that just because we have the dosh, the oil will follow. This ignores geology. Despite the clear profit incentive, annual discoveries of new oil have been declining since the 1960s and, since 1984 , the oil being consumed has exceeded the oil being discovered , an imbalance that cannot last indefinitely .

Secondly, if it costs more to produce something than can be  earned from selling it, you’d be nuts to invest in it. This is the second biggest flaw in the myth of abundant fossil fuels – it ignores energy return on energy invested (EROEI). Self-evidently, energy needs to be burned in order to do the job of producing new energy. As energy costs rise, the EROEI is depressed, but remember energy input costs aren’t the only costs. It makes no sense to undertake energy production unless the return on the invesment, which includes all costs including labour, energy, plant and equipment etc., is greater than one to one, otherwise there is no profit. More mature oil fields require higher amounts of energy to keep the oil flowing. More water or gases need to be pumped in to maintain field pressure. That costs money. Then there’s the huge expenditure on pipes, people, transport, refining and shipping – all of which are dependent on oil and all of which will be affected by rising energy input costs.

 Analysts examining investments estimate that any new energy business doesn’t make sense unless the return on capital is at least five to one, to allow for the costs of infrastructure, management, etc. But profit comes under significant stress as oil prices rise, because it increases the energy input costs on one side of the equation and, while it also increases the price which can be obtained from the new energy created, the financing of the time gap between expenditure and delivery increases costs and risks.

Excerpted from  pages 33 to 34 of ‘Energise, by Eddie Hobbs