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.