I am reposting De's long post in the "wind" thread" to start off a more detailed discussion on this topic.

DeAnander

First of all, thanks for this post which is really enlightening and does set the framework for the debate. ("we're fucked. the only question is - how fast")

Actually, I would like to bring another perspective on this, which shows that things are really not simple.

- as far as we are concerned, we have a virtually unlimited source of energy from the sun - the amount of energy (in the form of radiation in many wavelengths and gravity) that the Earth receives is still many scales of magnitude more than our possible use - for a very, very long time. In addition, nature does a good job to convert a significant (but not infinite) chunk of it into forms which are easily captured by us (chemical energy of plants, kinetic energy of weather patterns (air and water moving around));

- this means that there are some forms of energy which are essentially "free", in the sense that it does not reduce the available supply if we use them. These are the so called "renewables" (solar, wind, tidal) which capture directly or indirectly some of that energy. Nuclear sort of comes into that category as well (the potential energy form either fusion or fission is also unlimited from our perspective), with other side issues which I will not go into here...

- some other forms of energy are not "free", like oil and other hydrocarbons, only because they are stored in a form which is convenient to use (highly concentrated chemical energy) but in limited supply on earth. The limited supply of such convenient energy is the only real constraint we face.

- an intermediate form of energy is, simply, human labor. It is renewable (as long as we are fed, but this can in principle be provided by nature, an indirect transformer of solar energy), but it is not "free" as there is an opportunity cost to use our energy as such or to put it to other (more productive or more pleasant) uses...

So, what's the point of calculating a return on energy if the overall supply is limitless? what we need is actually to put a value on the more convenient form of energy. This value needs to be expressed in a coherent unit throughout, and the simplest way to do this is to convert is all in monetary terms. Before you accuse me, as a financier, of saying that everything has a price, listen me out! The trick is to make sure that the price is real, i.e. that there is no use of "convenient energy" which is forgotten in the way. Money reflects the accumulation of past human labor and other natural inputs (energy and raw materials).

The general principle to evaluate the value of "oil" (as a shorthand for "convenient energy"; coal could be used as well) is to calculate the value of the non-oil resources (renewable energy, labor or capital) which would be needed to obtain the same quantity of "useful energy"without using any oil. Let's simplify things again, and say that our "useful energy" is electricity delivered to our home. In one case, you need oil, you need to build your oil-burning powerplant, you need to build the transmission lines. In the other, you need to manufacure the solar panels and some batteries / storage mechanimsm and install them on your roof, or alternatively, you need to build a big wind farm, the transmission lines, etc...
This sounds fairly easy, all these things have a price and bingo! oil is worth the price that makes it equivalent to make one kWh of wind power, the current cheapest source of renewable power.

The problem is that our whole civilisation being built on oil, the building of the wind farm still requires some oil, which must be taken into account (we want to know what it takes to make electricity without using ANY oil): to transport the goods around, in the energy used in the manufacturing processes, plus we may have used some other resources which are also non-renewable and need to be taken into account. At this point, I am not sure exactly how to proceed forward, as it is clearly impossible to "extract" all the oil-rich items in that manufacturing process.

One suggestion I have is to provide improving "caps" to the absolute oil-free cost of that electricity, which will provide in turn provide a maximum value for the oil.

Biomass is the first obvious step. it is possible to take x% of a forest every year forever, so this is a renewable resource. Before discussing the economics of industrial logging (which, for the time being, requires oil), we can stick to the individual. Using only his labor, it is possible to gather wood to make fire and heat one's home, cook, etc. The main resource required is the time of the person to gather the wood and manage the fire, and you get a form of energy which, while not as polyvalent as electricity, is partially substituable to it for several usual needs that we have. It is thus possible to say that the value of oil is less than the number of hours of human time needed to heat by wood a room, minus the investments needed to convert the oil into heat (here, possibly either directly by transporting it to the home and burning it, or converting it into electricity and transporting it that way).

Another option is to take the world as it is, and consider that the already-existing sources of power were built using only "free" energy. The oil we used up to now is effectively gone, and it is pointless to try to value it, we might as well take advantage of what results are there, however they were obtained (in the same vein that we can use the Transsiberian railway today without accounting for the fact that it was built using slave labor, another form of non-renewable "convenient" energy).

But any additional use of oil should price it correctly. What is needed is to find the right level of tax on oil that is put upon its use - a simple tax per barrel produced is sufficient for that - and percolates throughout the economy as an additional cost on all activities that use oil. The important point is that the tax thus raised must not be spent or invested back into the economy, it must be fully sterilised by whoever collects it (except maybe to pay for the costs of cleaning up the externalities from oil use, i.e. anti-pollution devices, health costs??). That cost must be a pure weight on the economy, not just a way to shift money around.

with that tax, if properly sized (I know that this is what we are trying to do, but this helps to frame the problem in a way which is maybe easier to solve), our existing monetary economy would be able to reflect the real rarity value of oil, and other sources of energy could show under which conditions they become competitive on a fully costed basis.


Anyway... not sure if this helps or creates more confusion, or if i am hopelessly mixing up things of real value (energy) and things of fake value (money). Please help me find the light![/i]

Okay, great.

I understand DeAnander's description of energy returned on energy invested, EROEI (Canadian pronounciation: error eh!) thanks to also Hannah K. o'Luthon for clearing that definition up.

Jerome, you are getting somewhere here. On first reading I see you veering all over the place, second reading shows that you discuss applying tools to change the economic policy, by changing taxes for one, to encourage our shift from oil-based to other-based energy.

Jerome is scoring points by discussing human labor as well.

Jerome could you please help me understand this comment from your post, "One suggestion I have is to provide improving "caps" to the absolute oil-free cost of that electricity, which will provide in turn provide a maximum value for the oil."

I understand that you are positing a method to value energy and I am keenly interested.

But what do you mean by "improving?" I simply miss the meaning here, is it that the goal is to improve something, or that the caps themselves improve ... I am really trying to follow this discussion and foster it.

Sorry I wasn't logged in, message above is me.

Another quote from Jerome's post:

"our existing monetary economy would be able to reflect the real rarity value of oil, and other sources of energy could show under which conditions they become competitive on a fully costed basis."

So far I've just made a first superficial reading Jérôme's posting.
I (too?) am puzzled by the details involved in the "choice of units",
which seems to come down to Kilowatt-hours (a nice "intrinsic" unit
of measure which interfaces well with "mere" monetary measures).
But perhaps I a missing the basic thrust of what J. is aiming at:
he seems very interested in the "non-renewable" nature of petroleum
energy, and I imagine that some academic economist somewhere has thought about asymptotic pricing mechanisms and functions for a finite resource.
I rather enjoy the "theoretical" nature of this discussion, but can't resist suggesting that in a realistic political context the notion of
really being able to sterilize a tax producing so much revenue seems
utopian.

Hannah, the gist of what I am curious about is simply that in our case of diminishing oil production we should know what the real cost of oil is and what it is used for.

So, in addition to fueling our vehicles, oil also fuels our food production by being an ingredient (fertilizer), a reqirement for irrigation (fueling pumps), planting, tending and harvesting (tractors and combines) and also a trasportation method (shipping from farm to consumer). In the case of meat, those costs are part of the feed for the animal.

Oil is used for heat as well. The discussion assumes that most of those needs (except fertilizer I guess) can be served with other energy sources, but they require oil to create, both as energy source and ingredient (plastics are made out of oil). So what is the actual cost of the energy from oil vs. the actual cost of other sources ... becuase we need to know where to invest our resources (research, economic stimulus) to gain the most return on ... energy invested!

So let's wait and see if Jerome can explain in more detail how his suggestions would work.

HKOL

I agree that the actual political feasibility of such a tax is not great - yet (soon, the argument "it's better to put that money in our State's pocket rather in [insert evil oil producing country]'s pockets" will have some weight.
Nevertheless, econometric models might give an indication of the impact of such a tax on activity and relative prices throughout the economy and thus of the level of tax required in theory.

jonku

The "cap" thing is to provide an improving estimate of the cost of substitutes. Simplistic calculations like I provided are likely to give very high values for oil as wood (for instance) can only go so far as a substitute and would cost a lot to use. So further, more sophisticated, calculations would give a more precise (and implicitly lower) estimate for that value.
My point is that we already have technically functioning substitutes for most oil uses. So by substituting our current investments/expenses in pure oil consumption we invested in such technologies, we could build up real self-sustaining alternatives. A first step is to price these with today's current (imperfect) relative prices (that probably underestimates the cost, at it uses current underevelued oil prices embedded in such processes) and then to try to take out the oil form that estimate (for instance by using only energy generated by the first wind turbine to build the second one, and so forth). That secondestiamte would be a "cap" because it is based on current technology. If oil was to be priced at the proposed "value", many changes in economic behavior would occur. Energy, bieng expensive, would be substituted for other, less expensive inputs; new technology working around the new constriants would appear, etc... and we would learn to produce energy in a more efficient fashion - within the context of the new relative prices.

I hope this is clear...

Thanks for the links in the other thread, and the information throughout.

The way this appeals to Americans I know of who have considered this, beyond the obvious environmental appeal, is the idea of selling energy. In the wind energy links from the other thread, there is an example of a school in Iowa, I think it is, that has been able to make money for the school, as well as decreasing its energy costs, by its wind power generator.

I mentioned this to a woman who owns a building in my downtown...not wind, but solar panels on top of her building that could cut her energy bills and make it possible for her to sell energy for surrounding businesses. (The building restrictions in the historic area would make a wind mill impossible because the height of the structure would violate current code.)

She could care less about the environment, sad to say, like most people in their day to day existence. However, if she could be convinced that she could make money from such an investment, and eventually get "free" energy, as well as increase the value of her property with an eye on a future when she might want to sell it...

I'd been asked by more than one person to put together business plans, etc. for just such an idea, which is strange in a way, but I know people who have mentioned this to me after we'd talked about how to make such projects feasible...two of them restore historic buildings, one has a design firm, and another is a small biz owner and city council member. The city council member told me that he's very interested, but the council itself will not take the lead on this...citizens have to bring them the goods.

Plus, the big fight where I live is between developers and the city planning commission (who try or fail to maintain a long-term city plan that came about with imput from the entire community.)

I'd asked the builders and design guy I know about having "alternative energy" plans as part of a "packet of choices" for people who build new structures...it seems to me like that would be a great niche for people and could appeal to the desire to have lower long-term energy costs for businesses and homeowners.

I'd like to know how I can learn more about this whole issue...the very basic and practical and small-scale application...which is how it seems this will come to most of America for the time being.

Here are some of my favourite sites about energy:

1) http://www.greencarcongress.com/
News about cars and alternative energy. Updated daily.

2) http://www.energybulletin.net/news.php
Articles and analyses about energy markets. Updated daily.

3) http://www.peakoil.net/
ASPO' s site. The nest of peak oil gurus.

4) http://www.simmonsco-intl.com/default.asp
and
5) http://www.groppelong.com/Reports/reports.htm
Sane capitalists strike back.

6) http://groups.yahoo.com/group/energyresources/
Forum. Quantity but not quality.

7) http://www.ewea.org/index.asp
All about wind energy.

8) http://www.volkswagen-environment.de/buster/buster.asp?i=wissen_sunfuel_start.asp
Volkswagen's strategy of synthetic fuels for the sort to medium term.

Thanks to Jérôme, Greco e Faux R. for useful discussion and links.
I look forward to further "education" here, and on the Arab culture
thread. Both seem to me to be better for my mental health than the important but bleak political threads at the Moon.