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Physical and economic models of natural resource scarcity: Theory and application to petroleum development and production in the lower 48 United States, 1955-1985
Abstract
Physical and economic models of the costs of developing and producing petroleum in the lower 48 United States were calculated and compared for the 1955 to 1985 period. The physical scarcity model calculated the energy return on investment (EROI) for petroleum development and production. The EROI is the ratio of the petroleum energy added to reserves or produced to the energy used in the development and production process. The economic scarcity model calculated the average cost of developing and producing petroleum. Statistical trend analysis was applied to the EROI and average cost time series. Both models indicated increasing scarcity at the development stage was evident by the mid-1960's. The EROI for production increased showed decreasing scarcity through the early part of the period, followed by increasing scarcity in the 1970's. Average production costs showed no trend through the early 1970's, after which they exhibited increasing scarcity. The oil price shocks had a significant cost-increasing impact. A cost-effort scarcity model was also applied to the average cost and EROI time series data. Both indices were found to be significantly related to the rate of development and production effort and to cumulative resource depletion. The cost-effort model for development showed increasing scarcity, while the production data showed no trend or decreasing scarcity. A model of optimal depletion was also applied to the average cost time series data for oil production. The results were consistent with the theory of optimal depletion, but were shown to be sensitive to assumptions about the discount rate and the elasticity of demand for crude oil.
... ess. Only industrial energies are evaluated: the fossil fuel and electricity used directly and indirectly to extract coal and petroleum. The costs include only those energies used to locate and extract petroleum and coal and prepare them for siiipment from the wellhead or minemouth. Transportation and reiining costs are excluded from this analysis. Cleveland (1988) gives a detailed description of the system boundaries used in this analysis. Crude oil, natural gas, and natural gas liquids are extracted by Standard Industrial Code sector 13, " Oil and gas extraction " , which includes several subsectors. The oil and gas extraction industry includes firms that explore for oil and gas, drill oil and g ...
... Geophysical surveys and exploratory drilling identify new deposits of oil and gas, but do not lift oil and gas from the ground. In previous work I calculated the EROI for exploration separate from production and also distinguished the extraction of oil from gas (Cleveland, 1988). That procedure required assumptions about the allocation of costs between oil and gas, the allocation of certain activities within sector 13 between exploration and production, and time lags between exploration and production. ...
... I exclude self-generated electricity because including it would double count the fuels used to generate it. I have modified the Census data to correct for reporting errors and omissions based on fuel use data from other sources and from conversations with the Census staff (Cleveland, 1988). Fuel use in years not covered by a Census is estimated with a technique used to construct the National Energy Accounts. ...
The goal of net energy analysis is to assess the amount of useful energy delivered by an
energy system, net of the energy costs of delivery. The standard technique of aggregating
energy inputs and outputs by their thermal equivalents diminishes the ability of energy
analysis to achieve that goal because different types of energy have different abilities to do
work per heat equivalent. This paper describes physical and economic methods of calculating
energy quality, and incorporates economic estimates of quality in the analysis of the
energy return on investment (EROI) for the extraction of coal and petroleum resources in
the U.S. from 1954 to 1987. EROI is the ratio of energy delivered to energy used in the
delivery process. The quality-adjusted EROI is used to answer the following questions: (1)
are coal and petroleum resources becoming more scarce in the U.S.?, (2) is society’s
capability of doing useful economic work changing?, and (3) is society’s allocation of energy
between the extraction of coal and petroleum optimal? The results indicate that petroleum
and coal became more scarce in the 1970s although the degree of scarcity depends on the
type of quality factor used. The quality-adjusted EROI shed light on the coal-petroleum
paradox: when energy inputs and outputs are measured in thermal equivalents, coal
extraction has a much larger EROI than petroleum. The adjustment for energy quality
reduces substantially the difference between the two fuels. The results also suggest that
when corrections are made for energy quality, society’s allocation of energy between coal
and petroleum extraction meets the efficiency criteria described by neoclassical and biophysical
economists.
... Subsequent research such as that by Meadows et al. (1972) emphasized the classical authors' message. However, there has been considerable debate regarding the appropriate measures of scarcity that should be used (Barnett and Morse, 1963;Brown and Field, 1979;Fisher, 1979;Howe, 1979;Smith, 1980;Cleveland, 1988Cleveland, , 1991a. Sometimes the trends measured by different indicators for the same resource have opposite signs. ...
... The comparative approach is displayed in work by Cleveland (1988Cleveland ( , 1991aCleveland ( , 1991b, and ...
Thesis (Ph. D.)--Boston University, 1994. Vita. Includes bibliographical references (leaves 314-336).
... I exclude self-generated electricity because including it would double count the fuels used to generate it. I have modified the Census data to correct for reporting errors and omissions based on fuel use data from other sources and from conversations with the Census staff (Cleveland, 1988). ...
The concern about natural resource scarcity has traditionally focused on changes in the cost, quality, and availability of energy and material inputs to the production process. Ecological economists are increasingly concerned with an additional aspect of scarcity — the growing scarcity of environmental services that sustain human economic existence. The analysis here explores economic and biophysical indicators of natural resource scarcity. The indices are quantified for the extraction of petroleum resources in the U.S. The economic indicators are the market price of crude oil and natural gas, the unit (capital plus labor) cost of extraction, and the average total cost of extraction (dollars per Btu extracted). The biophysical index is the energy return on investment (EROI). All indices show a trend of decreasing and then increasing scarcity of petroleum at the wellhead. The economic and biophysical cost indices indicate that the 1960s marked the transition from a decreasing to an increasing cost resource base. The market price of oil is influenced by nonscarcity forces to the extent that it does not reflect that turning point. The increase in the energy cost of petroleum extraction is in stark contrast to the changes in the energy cost of producing other goods and services in the U.S. economy, which generally declined in the last 20 years. The increase in the energy cost of extraction has important economic implications. From 1954 to 1987, the fraction of total industrial output in the U.S. generated in the petroleum extraction sector declined almost 40%. Despite the declining share of its output, the petroleum industry's share of direct energy use (fossil fuels and electricity) generally increased in that period. The result is a clear increase in the amount of energy diverted from other potential uses to secure an additional unit of output in the petroleum sector. None of the indicators reflect to any degree substantial nonmarketed environmental cost of petroleum extraction. The biophysical perspective, however, emphasizes the coupling between physical scarcity and the demands that extraction places on renewable resources and ecosystem services. The extraction of one barrel-of-oil-equivalent, for example, requires 250 gallons of fresh water and emits more than 60 pounds of CO2, and these costs are increasing.
In this chapter I analyze the societal value of a Swedish wetland system with respect to the various economic functions such as cleansing nutrients and pollutants, maintaining the level and quality of the drinking water, processing sewage, serving as a filter to coastal waters, sustaining genetic diversity and preserving endangered species. The major part of such life-support functions have been lost, due to extensive exploitation. I evaluate the loss in terms of the reduced solar energy fixing ability (Gross Primary Production, GPP) and the deterioration of the stored peat, and compare it to the cost of replacing these environmental functions with technical processes, estimated in monetary terms and industrial energy terms. Such substitutes include irrigation dams, water transportation, well-drilling, water purification, sewage treatment plants, fertilizers, fish farming, and efforts to save endangered species. I find that the undiscounted annual monetary replacement cost is of the order 2.5 to 7 million Swedish crowns (US$0.4–1.1 million), and that the annual industrial energy cost between 15 and 50 TJ approaches the annual loss of GPP of 55 to 75 TJ, when both are expressed in units of the same energy quality (fossil fuel equivalents). The major part of the technical replacements concerns biogeochemical processes and the hydrological cycle. Not more than about 10 per cent are related directry to the biological part of the wetland system. The present biophysical analysis serves as an indicator of the true life-support value of a wetland system, and is thus a useful complement to economic analysis. It is concluded that ecosystems perform a lot of valuable and necessary work at no cost, and that industrial technologies should be developed to supplement and enhance this support instead of having to replace it when it has already been destroyed.
Biomass combustion is commonly perceived as an alternative energy source which will reduce reliance on, and thus conserve, conventional non-renewable fuels. However, in the United States wood collection is energy intensive and requires the expenditure of high-quality fossil fuels to support the technology. The efficiency of an energy collection or delivery system can be estimated by using a net energy analysis (NEA). An energy accounting framework is employed to compare the total output of energy (in joules) delivered for residential space heating to the total energy input required to make the wood energy available. Energy inputs are either direct, such as the petrol used to power the transport vehicle, or indirect, such as the energy required to manufacture the transport vehicle. This study analyses the energy efficiency of three wood-gathering strategies commonly practised in the United States. Energy output-input ratios, calculated for each of the three cases, indicate that the ratios are strongly influenced by situation-specific variables, particularly (1) the distance fuelwood must be transport, (2) the load capacity of the transport vehicle and (3) the combustion efficiency of the wood-burning unit. Incorporating indirect energy costs significantly reduces the energy ratio but, in some situations, burning renewable wood can be as energy efficient as conventional heating systems based on non-renewable fossil fuels, thus providing a locally viable alternative.
Analyses of the relationship between natural resources and economic development frequently neglect the interdependency between the depletion of one resource and the depletion of other resources. Of particular interest is how energy resource extraction is affected by the depletion of nonfuel minerals due to the important role of energy in upgrading minerals to a useful state. Although this relationship has been described in theoretical terms, there is little detailed empirical support. To quantify the relationship between the depletion of mineral and fuel resources, we develop a dynamic model that is based on physical, technological, and economic data. Our analysis quantifies the relationship between the depletion of copper in the United States and the depletion of fossil fuel and uranium energy resources stimulated by the increase in demand for refined copper that is forecast for the next 50 years. The model calculates the increase in the energy cost of extracting energy due to the depletion of copper. The results of the model indicate that this feedback is significant. The energy cost of producing a refined ton of copper increases 23% over the 50-year simulation period due to the diminution in ore grade and diminishing returns to technical change. The increase in the energy cost for copper increases the production of fossil and uranium fuels, which diminishes their quality and increases their energy cost.
In this study, we combine the economic theory of optimal resource use with econometric estimates of demand and supply parameters to develop a nonlinear dynamic model of crude oil exploration, development, and production in the lower 48 United States. The model is simulated with the graphical programing language STELLA. We simulate optimal time paths for crude oil depletion for the years 1985 to 2020. We emphasise the relevance of parameter adjustments for the computer simulation in response to uncertainty in the parameter values. The procedure presented in this study encourages use of economic theory and econometrics in combination with nonlinear dynamic simulation to enhance our understanding of complex interactions present in models of optimal resource use.
A summary is provided of the early history of research on the flow of nonrenewable energy resources through the economy and of the flow of renewable energy resources through a natural ecosystem. The techniques are similar, and many specific applications are provided. A combined economic and ecological technique is also defined. The early history and people of the International Society Ecological Economic are cited.
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