In the United States, we do not understand the relationship between energy and economics. Oil shale and tar sands, we are told, will create energy independence in the United States and extricate us from the messy world of the Middle East and oil conflicts.
We forget that economics is merely a social construction that organizes the production and distribution of goods and services. Production of goods is dependent on available resources and energy. Period. Yet in this culture, we believe that if we engage in voodoo economics, we can create more energy. This is impossible. Economic systems are made by humans. Energy and resources come from somewhere else – call it nature; call it God. Humans do not create energy. Shell geologist M. King Hubbert, of peak oil fame, noted in 1981 that we are engaged in an impossible dance where a growth-dependent economic system is standing on a planet of energy and resources that cannot grow.
In order to understand the economic/fossil fuels connection, we need to understand four issues: energy returned on energy invested, debt, the petro-dollar and the pricing of oil on the futures market.
Energy returned on energy invested is a basic measure of prosperity. If an entity can invest a modest amount of energy and receive a generous return, there is wealth. At the turn of the 20th century, one barrel of oil invested would lead to a return of 100 barrels. As a result, the United States was wealthy and embarked on the age of oil. Tar sands (which is uncooked oil) has an energy returned on energy invested rate of about one barrel in to 1.5-4 barrels out. A 1:1 ratio results in no net gain and therefore no wealth. Oil shale, which pundits claim to be our way back to the top of the dog pile, is 1:1 or perhaps even 1 to .9. Oil-shale production will not result in wealth.
An economic system dependent on debt rose with the age of oil. Debt requires growth. The borrower will pay back the principal plus interest. Of course debt and banks existed before the 1900s, but these financial practices were not an essential piece of the global economic system. The idea of great bundles of debt being bought and sold for millions would have been unfathomable in 1898. It is not surprising that debt would emerge with the age of oil. If one barrel of oil invested is worth 100 barrels, then similarly to invest a dollar and make two dollars would make sense. The result has been the exponential growth of debt at all levels: student debt, real estate debt, credit card debt, treasury bonds and foreign debt. The only problem is that we no longer have an energy returned to energy invested rate of one to 100. The availability of resources with good return rates is no longer growing. Production of cheap resources are either holding steady or in decline. Debt continues to grow, creating a greater and greater disparity between the available energy and the existing monetary system.
Two economic practices have abstracted the relationship between energy and economics. The first is the petro-dollar, where most oil is traded in dollars. This practice, initiated by Nixon in the 1970s after oil peaked in the United States, resulted in a global economic system flooded with dollars and debt. The second practice, initiated in 1983, is the pricing of oil through the futures market. Oil prices are no longer directly related to the supply of oil or the economics of oil extraction. We live in a world that is flooded with dollars. Those dollars are no longer backed by resources or energy. The dollar divorced energy and remarried debt several decades ago.
The potential production of oil shale and tar sands has produced enormous excitement and a sense of relief that the predictions of peak oil and energy scarcity were wrong. However, a 4:1 ratio of energy returned on energy invested will not support an economy drowning in debt.
We cannot see this now because we still believe that the dollars surrounding the naked emperor constitutes clothing. But dollars are not clothing, they are just a hallucination.
It is important for us to understand where energy comes from, how our economy is connected to energy and begin transitioning to an economic system that can deal with a world of energy contraction. Perhaps the most heart-breaking implication of this hallucination is that it may continue for some time.
And while the hallucination continues, we will choose to pour more greenhouse gasses into our atmosphere and sully millions upon millions of our most important resource: water.
Janine Fitzgerald is a professor of sociology and human services at Fort Lewis College. Reach her at firstname.lastname@example.org.