Peak Oil and an Energy Theory of Value

One thing that struck me in The Archdruid Report last week was that the Peak Oil community is really trying hard for what I will call an "Energy Theory of Value". There are some variation on this constructed theory that might be more appropriately called a "Power Theory of Value", but this idea behind all of this theorizing has to do with the embodied energy content of goods or services, and how that relates to value. But first, some definitions.

A "theory of value" is an attempt to answer an age old question, "why do some things cost more than others?" Attempting to understand what was behind the notion of value goes way back; I believe that the ancient Greek made their own attempts at settling the question, and the discussion then was a part of the field we call philosophy. As time went on, Europeans developed more refined but competing notions of values. In the early and late Enlightenment, value theory broke into two camps: a subjective (or external) and an objective ( or internal ) theories. A subjective theory of value suggests that value lies solely in the valuers, while an objective theory of value suggests that value lies in some intrinsic quality in the good or service itself. A famous objective theory is the Labor Theory of Value. Simplistically, this theory claims that the intrinsic value of a good or service is derived from the labor content that went into generating the good or service. A subjective theory will make an appeal to the marketplace. At one of level of subjective theories, people will point to supply and demand curves to suggest prices. At a deeper level, subjective theories will point to the opportunity cost of the good or service, and frame the price in terms of the cost of the next best substitute.

I find objective theories very straightforward. These theories are certainly more computable than are the subjective theory in that to compute a price or cost one sums up the costs of the underlying constituents, such as labor. In an energy theory, you would sum up the embedded energy costs of each product to discover its price.

Subjective theories are mentally slipperier. Prices are set by markets, and you need a set of demand and supply curves to work out prices, or prices are set by something that is forgone. These are kind of virtual prices. Nevertheless, subjective theories dominant the discussion in economics, and it is the slipperiness of opportunity cost that has the power to explain any number of price phenomena.

Now in the Peak Oil discussion, much is made of the necessity of energy inputs into the production of good and services. One example that the Archdruid brought up was the production of iron. The density of iron ore or iron sources is not the problem goes the claim. It doesn't matter how diffuse these sources are, as long as you have sufficient energy, you can extract all the iron you want. A very diffuse source is seawater itself, and yes with sufficient energy you could extract mountains of iron. It is the scarcity of energy and not of iron or water that sets the price of iron.

But that is not the complete picture. It is the relative scarcity of components that will drive the price of iron higher. If the labor, energy, raw material (anything from low-grade ore to saltwater) become more scarce relative to the other components, then the opportunity cost of iron will increase. Energy is just one component in this mix.

There is also a problem with using Energy Returned on Energy Invested (EROEI) as a metric to judge the economic validity of any project. It may be economic to drill oil at an EROEI less than one. The problem with EROEI is that it treats all BTUs as equal. Now physically all forms of energy are equivalent. But not all manifestations of energy are economically equal. There is a well-known example that is currently in practice that illustrates this notion. It has been stated that the number of calories invested in the production of one calorie of food is greater than one, especially in the exercise of American agriculture. This is a perfect example of an EROEI less than one, but where the underlieing activity is economically valid. I could think of other examples. One that just came to mind was the rapid oxidization of iron, which was discussed above. Now, I'm guessing that the oxidization of iron is exothermic -- energy is released in the reaction. With pure oxygen, the right catalists and so on you could use the iron you produced from seawater to drive the power plants that drive the extraction of iron from the sea. Now of course, this would be a (very) losing proposition, but just because the energy return of iron is poor relative to its production, doesn't mean that iron isn't valuable in its own right, for other purposes. Now I agree that EROEI is an important metric in many instances, but care should be employed in its use.

Certainly, the decline of dense, fluid, and relatively safe forms of energy will have an impact on industrial civilization, and I don't currently see a ready replacement. However, oil and gas will continue to be valuable products into the future.

Spent

I finished Geoffrey Miller's "Spent: Sex, Evolution, and Consumer Behavior" a few weeks ago, and found it to present an enlightened and useful view of human behavior, especially in the context of markets. My problem is that Miller's evolutionary psychology seems to explain too much -- like viruses are to doctors, and vortexes are to aerodynamics, EP explains all of human behavior, and there isn't much you can do about it (like viruses and vortexes).

Still, it is such a sexy idea, and does seem to have an explanatory power. One example is Miller's characterization of human personality into 6 categories. The first and most dominant is intelligence, the character that is sometimes quantified by IQ tests. The other five are signalled by the acronym "OCASE", which stands for Openness, Contentiousness, Agreeableness, Stability, and Extroversion. Miller claims that all other human personality characteristics can be factored onto these five elements, that these five elements have a normal-like distribution across individuals, and that there a benefits and disabilities that accrue to individual that sit at opposite ends of these base characteristics. For example, an extremely open person would have opportunities to interact with more environments, situations, and people than would less open person, but at a cost of increased contraction of various aliments, both phyical and mental. The opportunity cost of less openness is to forgo those extreme experiences. Most people will be neither very open or very close, and their behavior may vary from time to time.

Having discussed these six personality characterisics, Miller then proceeds to tie them to marketing and consumption through the idea of signalling. Many of the discretionary products that we purchase are done so to signal the type of person we are, letting potential mates, allies, adversaries, and so on know that we have such and such characteristics. Miller is astonished and somewhat disappointed that marketer have yet to discover his personality basis. Marketers prefer instead to continually refactor markets into smaller and more precisely defined segments that have little to do at first blush to Miller's basis elements. This is testable, I think. One could score people on the basis, then use the score to predict the kinds of articles a person is likely to have purchased or will purchase.

It isn't clear that these six elements are in fact a good basis for human personality. Miller himself seems to want to refactor the "extroversion" element into two qualities, one for real personal extroversion, and the other to represent a kind of personal energy or personal initiative. However, this is also something that could be tested, but determining what is left unexplained by the model.

Still, I have had fun in the past couple of weeks estimating individual OCASE levels for the folks that I deal with on a regular basis. Moreover, Miller suggests ways that we might overcome overconsumption by acknowlegding the signalling purpose to our shopping, and looking for alternatives. I especially like it when he suggest more do-it-yourself activities. In all, Miller's is exposing an interesting and possibly useful theory, his writing is engaging and sometimes over the top, and his book was very enjoyable.

Bill