Hall: “Most production models of economics are not based on these biophysical laws and principles; in fact, they tend to ignore them.”
For decades mainstream economics has been able to ignore the significance of energy in shaping economies because oil has been cheap and easy to find and extract. Charles Hall tells The Mint why oil is not well and how science has many of the answers but technology alone does not.
US ecologist Charles Hall does a good line in a withering condemnation of modern economics. He says the discipline “lives in a contrived world of its own, one connected only tangentially to what occurs in real economic systems.” He offers what he casts as a more realistic take on economics that is based on scientific principles. “I worked on the concept that most economics is bullshit,” he tells The Mint.
Hall, trained as a natural scientist, aligns with the school of biophysical economics – an approach to economics governed by natural scientific principles rather than the social “scientific” thinking in which it is currently framed. In a 2001 paper he said: “the wealth that is distributed in the markets must be produced in the hard sphere of the material world where all operations must obey the laws and principles of physics, chemistry, and biology. Our concern is that most production models of economics are not based on these biophysical laws and principles; in fact, they tend to ignore and often break them.”
Hall’s challenge to conventional economic thinking had a breakthrough when, In 1981, he made front page news in the Wall Street Journal with a short academic paper – “some of the best four pages I’ve done” – in which he forecast that oil drilling was declining in efficiency and could cease to be a net producer of energy in the US by 2000.
The point that made the news was not that that oil could cease to be, but that it could cease to be of any value as an energy source. Hall wrote: “The time at which domestic petroleum will no longer on average be a net fuel for the nation is not when all the wells run dry but rather at some point before that time when the energy cost of a barrel of oil is the same as the energy in that barrel,”
The findings in the paper looked at the energy required to get oil out of the ground and to the consumer (energy cost) and the energy available from extraction of the oil (energy gained) as a function of drilling activity. He found that a continuation of high 1978 levels of drilling would, as significant oil strikes diminished in number, reduce the difference between energy cost and energy gained to zero, conceivably by the end of the millennium. And a continuation of drilling at the same rate of increase seen between 1971 and 1978 could bring the break-even point even earlier.
Most production models of economics are not based on biophysical laws and principles; in fact, they tend to ignore them.
He relates a conversation of a colleague from the time with an oil industry contact at one of the major producers: “I called him, and I asked him, did you know about this paper that was in Science? He said, ‘Yes, everyone in the industry does. Everybody in the front office is busy denying it, and everybody in the back office knows it’s true.’”
Subsequent falls in oil prices took the steam out of the story. Various developments since then that have intervened include the shale oil boom, tar sands proliferation, and the surge of renewable energy. But the main point in that paper of the falling net value of oil was an early sighting of an idea that has since become well established as diminishing Energy Return on Investment (EROI). It is, as Hall freely accepts, a simple concept – one that “you could explain to a fourth grade student” as he said in a recent presentation.
Arithmetically, EROI is the ratio between the energy produced from an energy gathering process divided by the energy required to carry out the process. The process could be burning petrol or gas to find and produce more oil or gas and the denominator in those instances would be the energy to sink the well and pump the product (or e.g. mine the coal). Some studies include all the other tasks required to get the energy to the consumer such as refining and transportation.
So where are we on the EROI line of extrapolation from oil wells worth drilling for oil to those of no net worth? In the 2011 book: Energy and the Wealth of Nations: An Introduction to Biophysical Economics, Hall and his economist co-author, Kent Klitgaard, show how the EROI for many fuels has diminished over recent decades. The EROI for oil has slid from as much as 30 to 100:1 in the 1930s to 10:1 in 2006. Other findings in the book show the world is consuming oil at up to four times the rate it is finding it, and extrapolations suggest that EROIs are poised to roll away rapidly over the next 25 years. Most renewables and other alternative sources have low EROIs from 3 to 10:1 with wind showing about 20:1 and hydropower still more, but corrections for intermittency, not yet well undertaken, would reduce these numbers substantially.
An EROI across the portfolio of energy sources of 10:1 or less has, Hall explains, a greater significance than simply being historically low. It takes us, he says, close to a “cliff edge” where any further decrease can have a huge impact on the economy. Modern society requires not just a positive EROI but a relatively high one to be able to afford all that we take for granted, including the levels of education, health care and arts that we currently enjoy.
Hall says there is evidence that we are a not only approaching, or possibly have reached, the period of so-called peak oil – after which aggregate oil production goes into irreversible decline. In Hall’s view the still significant remaining reserves tend to be of lower EROI and most are close to the point when they are not worth exploiting. Furthermore, current dwindling global economic growth, he proposes, is a response to tighter resources which might change our outlook on future economic expansion.
Everybody in the front office is busy denying it, and everybody in the back office knows it’s true.
And it’s not just oil. He points to research by others that predicts we will reach peak fossil fuels by 2025, with the possibility of coal peaking before oil. Again this is not because coal is running out. There are vast reserves particularly in the US and Australia. However the recent research suggests that the energy cost of accessing much of this coal is much higher than previously thought. This already appears to be limiting coal exploitation rates in China.
Meanwhile mainstream economics maintains that scarcity of resources should be considered as external to the economic cycle of production and consumption. It ignores depletion on the grounds that human ingenuity will introduce new sources of, or substitutes for, a depleting resource through advances in technology. So it concludes that continual growth is desirable and quite possible. Hall is not so sure.
EROI challenges neoclassical economics with a claim that EROI identifies the degree and urgency of threat in the depletion of energy sources. Hall argues that the ingenuity argument has been preserved by decades of very high-EROI fossil fuels and maintains that the argument collapses when energy is given its rightful place in the equation.
For example he cites findings by one of his co-researchers that counters the widely held interpretation that static prices of various depleting commodities during in the mid 20th century were the result of improvements in technology. The study he cites shows that falling energy prices made more energy intensive production viable and kept prices flat.
He points also to work that refutes a broadly accepted finding within economics: that 20th century GDP growth that could not be attributed to capital and labour increases – the so-called Solow residual – was the product of greater ingenuity. Adding increasing energy use over the study period to the labour and capital trends all but wiped out the residual explains Hall.
I think that almost everything we say about sustainability is not sustainable.
Hall says EROI indicates the point of balance between the opposing forces of technological advances and depleting resources. While he has refuted claims in mainstream economics that technology will always be the cavalry coming over the hill when resources run dry, he accepts that technology can in principle offset the decline. But he says the declining EROI he and others finds for nearly all of our major fuels suggest that it’s not looking good.
“There are people who argue that technological advances are going to happen, and other people who argue that depletion will happen. In fact both are occurring. EROI reflects the balance of the two,” Hall says.
“It could go either way, but the empirical evidence, such as I am able to tell, is that depletion’s winning, because most of the EROI curves all over the world are going down.”
Since the early 1980s Hall has published these ideas extensively in leading scientific journals but economists, he says, have sealed themselves from his ideas: “I’ve been in Science and Nature something like ten times, and always saying the same thing. Economists basically pay no attention.”
Hall’s outlook is derived from his early research in the 1960s as a “systems ecologist.” He saw parallels in the rules governing survival and proliferation of individuals and species in nature and those that underpin the processes and practices in human society. “I was interested in the big blossoming of ecology applied to the human situation, but I think more importantly, I was trained as a systems ecologist. A systems approach looks at a broader perspective and for commonalities, and I found many commonalities between what was going on in, shall we call it, a natural economy, like New Hope Creek, and what was going on in human ecology like the city of London,” he explains.
Yet Hall says he walked away from economics to return to ecology in the mid 1980s. “I went back to doing ecology, and I had essentially no energy papers for a long time,” he says. There was no funding available for “pessimistic” energy work. But the pivotal 1998 paper, The end of cheap oil, by Colin Campbell and Jean Laherrère, along with other encounters lured him back.
“There was a guy who said, ‘You’ve got to get back in this game. You did these critical papers 20 years ago.’ This was around the year 2000. I went to Lisbon, and I met Campbell and Laherrère, and they re-energised me on this issue. Then I got more and more into it.”
Since his return to the economics fray we have seen the emergence of unconventional gas and oil, the growth of green energy and climate change being taken seriously at a global level. How does he see the changes in the energy landscape playing out in the context of diminishing EROI, falling economic growth and imminent peak fossil fuels?
First he says the information isn’t always there on which to base an answer. For example he says it’s difficult to say how unconventional oil and gas has affected the energy balance in the US because the US agencies do not track data as well now as they did decades ago.
“There are several analyses we’ve done, but I think there’s something wrong with the data,” says Hall. “[The data] says that the EROI for fracked oil and gas is pretty high, 12:1 or better, but we think this can’t be true, because at $50 a barrel, even at $80 a barrel, the companies aren’t making any profits.
“Certainly the big energy companies are becoming more and more encumbered with debt. If the trend on EROI continues, they will just not be able to make the returns to service this debt. Once that is realised by their creditors, you have the potential for another major crash as creditors fight to take their money out of big oil.”
You’ve got great energy analysts in England, lots of them, but have you heard of them?
Turning to the green lobby Hall says: “I think that almost everything that is said about sustainability is not sustainable.” He laments what he sees as the lack of systems analysis that he says leaves the arguments for green technology inconclusive and unconvincing. Examples he gives include: addressing the intermittency in wind; the EROI for photovoltaics; and the energy cost of low-energy-use housing.
Hall argues that alternatives to oil have not been developed at the scale needed and green energy is simply growing alongside fossil fuels rather than displacing them. In the preface to Energy and the Wealth of Nations he warns: We must face the possibility that our own economy and civilisation, which is almost universally based on the concept of continual growth of just about everything, may need a massive rethinking for planning for the future —in other words a new economics.
Hall says current economic models fail to represent any real economy, because none has a biophysical basis. But he concedes that biophysical economics too has yet to provide a complete picture. “We must conclude that a truly useful and acceptable model that includes the biophysical basis of the
economy is probably still far in the future,” he says.
Yet he maintains that a biophysical angle on economics today brings a much-needed real world approach: “We know that many economics students, all over the world, are very dissatisfied with the economics they are learning. They seek an alternative, but focus mostly on the social inadequacies of the present approach. While there are certainly many problems there, this is only the tip of the iceberg. If economics is based on models that break or ignore the laws of thermodynamics, have inadequate boundaries and are not developed by testing hypotheses can we accept what they are taught as real, especially as real science? I think not.”
Ultimately Hall sees education as providing the means to navigate the new economic terrain ahead. But the teaching, he says, has to change. “We must teach economics from a biophysical as well as a social perspective. Only then do we have any chance of understanding or solving these problems,” he says.
“Almost all of the education, and most of the stuff that the public sees, is promotional. Somebody’s selling their… whatever. We need independent government or equally good NGO agencies. You’ve got great energy analysts in England, lots of them, but have you heard of them? Do economists pay any attention to what they say? Does the government pay any attention?“
In an article advocating the integration of biophysical science with economics Hall said: By thinking about economies as they actually are, instead of how we might conceptualise them for analytic ease and tractability, we can teach a new generation of economists about the real operations of human economies and the various links to the ‘economies’ of the natural world.”
Signing off our interview, he says: “What you want to do is stop teaching our young people fairy tales.”[BOX]