The Macro-Macro View – Fundamental Principles

1. The Macro-Macro View – Fundamental Principles • Energy flow in systems • Work and products • Energy laws and consequences • The economy as a system low potential sink boundary and geometry waste heat raw energy system work product (low entropy material) raw material waste material high potential/concentration source(s) diffuse/degraded

2. A More Refined View • The Economy: Energy, work, and goods/services waste heat rawenergy physical assets users entropic decay consumption work processes services usable energy energy capture & conversion tools stocks equipment, maintenance, & improvements raw material value added

3. A Biological Analog • Cell metabolism and structural component synthesis heat losses enzymes metabolites food ribosome – protein synthesis digestion oxidation all other synthesis investment! mitochondria complex organelles, membranes, etc. ATP replacement of above structures from stocks of complex structures not shown raw components

4. Information Flows material sources energy source waste heat message Proc. A Proc. B Exchange message Information is transmitted between ‘entities’ to coordinate flows of matter and energy waste material sinks Information is encoded in ‘messages’ using very little energy and matter Processes contain mechanisms, ‘receivers’ that can amplify the information into work responses

5. Agriculture as an Economic System An agricultural society waste heat solarenergy discretionary goods physical assets labor Human population Labor services food food plants labor tools hand tools, houses, etc. farming equipment, maintenance, & improvements raw material waste matter

6. Principles of Agriculture • Clear land area for single crop (monoculture) • maximize the area of sunlight capture • plant crops close together, leave room to work (cultivation) • when necessary, bring water to the field • Choose plants that grow best in given climate • Choose seeds from best yielding plants (horticulture) • Focus on grains and legumes for long-term storage

7. Types of Agricultural Practices • Haphazard – throw the seed out there and hope • Slash & burn – move on • Cultivate and renew soils – a systems approach • crop rotation with legumes to renew nitrogen • tilling residues back into the soils after harvest • adding manures to revitalize organic content • Permaculture (new) – whole systems/intensive cultivation

8. Solar Input to Agriculture Average insolation ~ 250 W/m2 in sunny locations Photosynthesis efficiency ~ 0.5 - 3% Roughly requires about 0.75 – 1 hectare per person (vegetarian)

9. Trophic Levels Humans Warming Domestic Animals Photosynthesis Plant Life – Primary Producers Warming & some PS nutrient release Microbial life

10. Our Energy Cocoon Sun fossil fuels infrastructure work organization services health care transportation agriculture utilities services person shelter clothing Labor support protection entertainment hydro energy wind energy governmental services

12. Petroleum • Whale oil for lighting to kerosene (Gesner, 1853) a distillate of oil • Drake, 1859, went looking for and found oil • Otto, 1876, first four-stroke internal combustion engine • Diesel engines, turbines – burn fuels in the cylinder for maximum power transfer • The prime movers using oil and natural gas

13. Transportation • Liquid fuels (stable and themselves transportable) served best • Kerosene, gasoline (petrol), and even diesel fuels are relatively light (compared with water) • Modes of use of ICEs • Land: automobiles, trucks, and buses (trains remained coal-fired until the early 20th century) • Water: large ships of all kinds • Air: airplanes of all kinds

14. Petroleum Composition • Oil types • Kerogen (shale oil) to bitumen (oil sands) • Extra heavy (sour) • Heavy • Light, sweet or regular • Components • Long chain molecules – oils • Medium chains – lighter liquid fuels • Short chains – gasses such from methane to butane

15. Electricity • Electro-magnetic force • Dynamos – producing electricity • Lighting and heating – using electricity • Motors – using electricity • Conduction of current over long distances • Flexibility • Production from • Heat engines (coal-fired boilers and steam turbines • Hydroelectric plants

16. Energy and the Economy

17. Energy Return on Energy Invested • The energy content of the fuel varies by grade, so simple barrel counts are insufficient. • Energy must be expended to invest in energy extraction and conversion infrastructure, e.g. derricks, platforms, ships, pipelines, refineries, tanker trucks, etc. • Energy must be expended to search for new oil deposits • Energy must be expended to drill and pump the oil • EROI (also called EROEI) is the ratio of energy returned for the energy invested – energy returned is the net energy available

18. Bursting All Kinds of Bubbles Why is our economic reality one of many bubbles bursting? The housing bubble The credit bubble The stock market bubble The political bubble The understanding of economics bubble! George Mobus University of Washington Tacoma

19. The Neoclassical View The Economy As A Closed System Resources Products & Services ? Purchases 8 Firms Households Externalities Wages & Profits Wastes ? The Economy Land, Labor, & Capital 8 George Mobus University of Washington Tacoma

20. Growth in a Closed System Assumptions in Neoclassical Economics • Technology will always provide more efficient means of production • Money supplies can be expanded through acceleration (higher rate of throughput) • Debt can be used to finance expansion • Resources are essentially infinite (esp. with substitution) George Mobus University of Washington Tacoma

21. Obvious Fallacies • Infinite resources • Renewable (only if rate of renewal is sufficient) • Non-renewable (always depleting) • Technology cannot be guaranteed to increase efficiency indefinitely • Carnot limit: Every machine has an upper limit • Moore’s Law not applicable to non-digital machines • Growth of natural (physical) systems is always constrained by negative feedbacks (covered later) George Mobus University of Washington Tacoma

22. Ecological Economics – First Approximation of Reality • Embedding the human economy in the global ecology • Ecology, economy – same root: ECOS Greek for HOME Ecological System Solar energy Organics, water, & gasses Solar energy Purification Photosynthesis Products & services Economic System Purchases Resources Purchases Waste recycling Firms Households Wages & Profits Fossil fuel formation Geothermal energy Land, labor, & capital Recycling Processes Deposits Minerals

23. Biophysical Economics • The Economy: Energy, work, and goods/services waste heat rawenergy physical assets users entropic decay consumption work processes services usable energy energy capture & conversion tools stocks equipment, maintenance, & improvements raw material value added

24. The Concept of Assets Anything and Everything Created by Human Endeavor • Tangible • Appropriated natural resources - land, cut timber, ores • Fixed (long-term) – plant, equipment, houses, etc. • life expectancies in decades • wear down with age (entropy) and use, require maintenance • Fixed (intermediate-term) – automobiles, appliances • life expectancies in fractions of decades (e.g. 1 ½ ~ 15 years) • wear out with use and need repair and replacement • Supplies (short-term) – clothing, paper • Consumables (very short-term) – food, plastic packaging • Intangible • Biomass George Mobus University of Washington Tacoma

25. The Concept of Assets (cont) • Tangible • Intangible • Has value but limited physical extent • Knowledge – human memories, documents, patents • Social relationships – organizations, institutions, communities; process frameworks • Biomass – non-food related • People • Pets • Ornamental plants George Mobus University of Washington Tacoma

26. The Concept of Assets (cont) • Possession – exclusive right to use • control over how and when used • may require on-going work to maintain • Obtained through effort expended • created by work process • either directly produced or obtained via a value transaction – traded for something of equal value • Presumed to have a future benefit • can be used to accomplish a valued end • special case – tools, or capital, allow more work to be done (increase income) George Mobus University of Washington Tacoma

27. The Concept of Assets (cont) • Capital assets – Needed to produce more assets in the future; Investment • Physical plants, equipment, and tools • Land • Buildings • Consumables – Objects that are degraded to waste as a result of use (various time scales, but generally short-term) • Discretionary – Objects that are not ‘needed’ but desired (esthetics beyond functionality, e.g. luxury cars, artwork) • Mixed purposes assets – Objects that may be used as either capital or discretionary (esp. in households), e.g. automobiles, computers George Mobus University of Washington Tacoma

28. Assets and Work Processes • All assets derive from work processes • All work processes consume energy (from the definition of energy in physics) • Energy inputs must be of a high potential able to drive the process • All work processes take time • Energy consumed over time = power • Intangible assets are just as much a result of work processes, but generally represented by symbolic forms (e.g. contracts, patents, customer files, computer programs) or embodied in human memories as a result of discovery and education George Mobus University of Washington Tacoma

29. Money is NOT an Asset! • Money is a representation of asset value • Money is a claim on embodied energy • Money flows in a direction opposite to the flow of work/energy, acting as a message to control that flow • Money is a convenient means of conducting transactions where assets are exchanged • Accumulated money (savings) is a virtual asset as long as the representation form maintains its relation to the underlying value in embodied energy – no inflation or deflation

30. Debt As Money • Borrowing from past savings • Profit – creating excess assets through efficiency • Saving excess assets for future use and insurance • Banking and fractional reserves – short term debt • Virtual money • Borrowing from future earnings • Promises to pay back debt with interest from profits to be made in the future • Longer-term investments, it will take time to recoup the principal with interest • Creative paper instruments to represent future money George Mobus University of Washington Tacoma

31. Debt Financing as Betting • Risks in borrowing from the past or the future • Past savings exist as a form of insurance against future disasters – borrowing diminishes resources and puts people at risk • Borrowing from the future is betting that the future will turn out as expected – what happens if it doesn’t? • Both are risky in terms of future contingencies • If ‘rational’ agents have had the experience of the present being better than the past, they will assume that the future will be better still • This worked for most of human history but the reason wasn’t obvious George Mobus University of Washington Tacoma

32. The Reason Debt Worked • For all of human history we have always (generally) experienced increasing access to greater power sources • Through clever observation of nature and trial and error (later science and technology) we have discovered and exploited better energy sources • Clothing and shelters decreased energy loss (effectively increasing energy available), domestication of fire , agriculture and domestication of animals, waterwheels and windmills, coal, petroleum, hydroelectric and nuclear power • The growth of energy resources led to expansion of work processes and accumulation of assets – economic growth – meaning profits George Mobus University of Washington Tacoma

33. Limits to Growth • Appropriation of non-renewable (or slowly renewable) natural resources from finite stocks takes increasing energy to accomplish – Best-First Principle • Fossil fuels, which now supply more than 80% of global energy, are a non-renewable, finite resource • Renewable energy sources can only be exploited by building an infrastructure that requires using high power energy (from fossil fuels!) • Renewable energy sources are based on real-time solar insolation which is diffuse (you can walk around in it)

34. Now for a Real Inconvenient Truth – Limits on Energy Flow Hubbert’s Peak – Fossil Fuels declining oil extraction 1970 diminishing marginal gain rates for lower 48 states, USA today ? exponential rise rapid exploitation

35. The Extraction of Finite Resources • The positive reinforcement of acquisitiveness coupled with increasing population drives increased efforts at extraction - Demand • Eventually the Best-First principle catches up and the Law of Diminishing Returns takes over causing deceleration in extraction rates • At some point it is no longer economical to start new extraction efforts (new wells or mines) and production is based on existing facilities that continue to deplete the resource • There will be an exponential decline in extraction George Mobus University of Washington Tacoma

36. Inevitable! • The only real question has been: when? • The answer is looking like NOW. • Hubbert’s prediction for the peak of production for the lower 48 states in the US for early in the 1970’s (made in 1956) turned out to be right on in terms of timing (actual volume was a bit higher than expected). • His prediction for global oil peak was for in the early 2000’s. Current models and empirical data suggest strongly that world conventional oil production peaked between 2005 and 2008. • Because of Best-First we are now turning to nonconventional sources like tar sands and shale oil. George Mobus University of Washington Tacoma

37. 36 Gross and Net Energy Peaks • Net energy peaks in production before gross energy peaks • The down-side of the curve is steeper than Hubbert’s

38. Effect on Asset Accumulation • Asset accumulation follows energy availability (flow) decline growth decelerating growth feasible Fossil fuels only - BAU

39. Adding in Alternative Sources Assumes a WWII-Style Marshalling of Resources