Money vs. Energy: The True Cost

9 minute read

What makes the economy go? According to standard financial theory, long-run economic growth can be explained as a function of three things: capital, labor, and increases in productivity and technology. Together, these forces are espoused as the true drivers of the economy. This is clearly represented in classic equations such as the Solow-Swan model or the Cobb-Douglas function. This latter equation, which measures the output of any given commodity, reads

 Y = AK^aL^β

where Y is total production, K is capital, L is labor, and A is a factor that accounts for “total productivity.” It is equations such as this that underpin our modern economic thought… but there’s a problem, and it’s a somewhat fundamental one. While capital, labor, and productivity are certainly important factors, these are only proximate explanations for what motivates economic growth. There remains one key input not represented in the above equations which has always been, and remains to be, the key driver of all types of growth around the world: energy.

The basic tenets of ecology and physics teach us that energy underpins all processes of life and growth. As such, every transaction that takes place within our economy, including the supposed “drivers” of growth, requires an energy input. While this statement is a fundamental truism of the physical sciences, it is nonetheless completely disregarded by standard economic thought. This discipline views these entities as abstract ideas, gently reared to maximum efficiency by the all-powerful invisible hand. For example, if you glance back at the Cobb-Douglas Function above, you’ll notice that energy inputs don’t even factor into the equation when calculating economic production. Capital, labor, and technology are presented as fixed values with no recognition that

  1. “Labor” is composed of biological beings with biological needs, investing their energy and work into products;
  2. The “productivity” lended to society by industrialized technological processes is made possible only through the mass burning of fossil carbons; and
  3. “Capital”, as we will see, is strongly linked to global energy consumption.

Energy underpins the entire system. It is the motor, the source, and the basis upon which all of our industrialized grandeur has been built.

Energy is the motor, the source, and the basis upon which all of our industrialized grandeur has been built.

With that in mind, when we see graphs such as the one below…

Wow, that’s probably because of, um, human ingenuity and the, uh, American Spirit! Yeah!

…we must also look to figures like the following.

When looked at from a long-term view like this, it becomes blatantly clear that global GDP and the burning of fossil carbons are highly correlated—but how can we be sure this is a causal relationship? If you’ll indulge me for a moment in a thought experiment, take a look back at the world GDP graph above. Since the agricultural revolution about 12,000 years ago, human history has been punctuated by an ongoing series of vast and complex civilizations. In the year zero CE for example (the first year represented on the above graph), the Roman Empire was in the midst of massive expansion throughout North Africa and the Middle East, while the Han Dynasty held continual dominance over China, and across the globe the Mayan civilization entered its “Modern Period,” an era defined by mass urbanism and burgeoning populations. And these are just some notable examples among a plethora of other complex societies. Put this all together, and it doesn’t even make a dent in global GDP when compared to the massive scale of our present endeavors.

This begs the question: Why? Why didn’t these great civilizations of the past achieve the same level of growth that we’ve experienced in recent centuries? On the other side of the coin, what changed in recent history that permitted contemporary societies to reach such a staggering scale? Clearly, energy is a central part of this picture, but it’s not the entire story. Here, I will cede one point to the economists: technology is an integral part of growth. However, historically its most significant role has been that of a “growth enabler” insofar as it allows for the extraction and conversion of fossil carbons into useful work.

Consider: coal, oil, and natural gas have been around on the planet for ages, a reality that did not escape the notice of past civilizations. According to the ancient Greek historian Heterodotus, Greeks used bitumen in the construction of the wall of Babylon, while the Sumerians used asphalt to attach mosaics to walls, and Ancient Egyptians even mummified some of their dead using bitumen. Nevertheless, without the proper technology to convert these fossil carbons into useful work, these societies never experienced the growth “benefits” that we have in the last two centuries. This might lead one to falsely assume that technology is the true driver of growth. However, no matter how advanced a civilization’s technology might be, without any outside sources of energy available to power their machines, that society’s growth would inherently be constrained to the work they are able to accomplish with human and animal labor alone. With all that in mind, we can understand that, while technology provided a vital adaptation that enabled societies to utilize this stored energy, the powering force behind recent technological advances and associated societal growth came from fossil carbons.

To end this section, I’d briefly like to add some nuance to the admittedly oversimplified picture painted in preceding paragraphs. Although GDP has historically tracked alongside energy expenditure, it is important to note that not every sector of the economy holds the same correlation coefficient. For example, the Finance, Insurance, and Real Estate sector (FIRE economy) does not require energetic inputs to the same extent that, say, the Agriculture or Manufacturing & Machinery sectors do. As such, if one were to look at only one subset of the economy, they may be led to believe that the conclusions drawn in this article are, at best, misleading or, at worst, unfounded. However, when taken from a wide lens perspective, the fundamental tether between GDP and energy expenditure remains strong.

Conflating Monetary Value and Energetic Value

Drum…stick? Drum…kit? Drum…bledore? Nope, just drums. Oil drums.

In our current economic system, the monetary cost of fossil carbons is entirely disconnected from energetic reality. To illustrate this point: as I write this on August 15th, 2020, the current price of one barrel of oil is 42.23 US dollars, while the amount of energy contained in this same barrel of oil is approximately 5.8 million BTUs. For reference, the average manual laborer can sustain an output of about 75 watts of power over a standard 8-hour work shift, or about 2047 BTUs. Compare this to the amount of energy contained in one barrel of oil, and you’ll find that there are about 2,833 work days of human power per barrel. If we were to pay for this amount of work using the current US minimum wage of $7.25 USD per hour, one barrel of oil would end up costing around $164,314 USD. Woah. So each barrel of oil we burn adds value to the economy equal to that of a small home, yet we pay only about 40 dollars for this fossil “labor.” Measured by another standard, that’s about 18% of a penny per hour. That’s crazy.

If I can impart one idea from these startling statistics, it’s that our society drastically undervalues the amount of work provided by these finite energy sources. In our current economic system, we pay only for the extraction of fossil carbons. From there, their market price is determined by financial mechanisms of supply and demand. It goes almost without saying that the market price needed to turn a profit on the extraction cost of a barrel of oil has very little to do with that barrel’s ultimate energetic value. It’s ridiculous that an energy source that provides over one hundred fifty thousand dollars worth of labor should cost the same as ten bags of chips, or half of an airpod.

That being said, the cheap price of carbon has become necessary for continued economic growth on a global scale. In its present form, our economic system is entirely dependent upon this continual flow of cheap oil to keep our many industrialized processes spinning. Nearly every product we consume, even those with small price tags, come with massive energetic footprints. For example, that bag of chips I mentioned earlier could be made with corn from Wisconsin, that was processed and packaged in New Hampshire, and then transported on cargo ships to eventually arrive at a store in Panama. If we were to recalibrate the cost of these products to adequately compensate the fossil laborers involved in their fabrication, a single bag of chips could end up costing thousands of dollars! The global economy would instantly come to a halt….and who am I to say it shouldn’t?

Idealism aside, I am all too aware that corporations and governments will likely continue extracting and using fossil carbons for as long as they find it profitable to do so; and that monetary recalibration of fossil carbons to match their energetic value is an unlikely prospect at best. I say these things more for your personal consideration of the miraculous power contained in these energy sources, a power that is more often than not taken entirely for granted.

Value vs. Worth

In this article, we have discussed at great length the tether between GDP and fossil carbons, as well as the fundamental disconnect between the energetic value of these resources and their monetary value. However, we have yet to break away from this surface level discussion of price and cost to really get to the heart of the matter: what are fossil carbons worth?

The way I see it, this is an inherently personal question. Worth is subjective, and every person will answer this question differently. It starts with one’s boundary of analysis. What are fossil carbons worth to me? What are they worth to my direct descendants? Questions such as these will necessarily have different answers than the following: What are fossil carbons worth to humanity? What is their worth to the biosphere, or to human societies in the deep future? What is their worth to dolphins? To science? To the climate?

Personally, I have advocated that it’s important for us to reconsider and re-value the work provided by these resources, if only to recognize the marvelous scale of our present-day existence, as well as acknowledge the fundamental importance fossil carbons have had in shaping the world we live in today. This does not necessarily mean that I find our current use of these resources worthy. But, just like any important question, this is not an easy one. How worthy is science? What personal value do you place on the developments made in recent decades that would not have been possible without this mass societal surplus? How worthy is a healthy climate? How worthy are airplanes? Or armies? I won’t feign to answer these questions for you, but they are something to consider. We live in a reality shaped by fossil energy. Our governments and economies are built upon this fundamental input. And just as much as we think we have mastered it, our modern systems are dependent upon it. Fully and completely. How much is that worth?

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