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Relating Financial and Energy Return on Investment

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  • Carey W. King

    ()
    (Center for International Energy and Environmental Policy, Jackson School of Geosciences, The University of Texas at Austin, 1 University Station, C9000, Austin, TX 78712, USA)

  • Charles A.S. Hall

    ()
    (Programs in Environmental and Forest Biology, Environmental Science and Environmental Studies, State University of New York–College of Environmental Science and Forestry, Syracuse, NY 13210, USA)

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    Abstract

    For many reasons, including environmental impacts and the peaking and depletion of the highest grades of fossil energy, it is very important to have sound methods for the evaluation of energy technologies and the profitability of the businesses that utilize them. In this paper we derive relations among the biophysical characteristic of an energy resource in relation to the businesses and technologies that exploit them. These relations include the energy return on energy investment (EROI), the price of energy, and the profit of an energy business. Our analyses show that EROI and the price of energy are inherently inversely related such that as EROI decreases for depleting fossil fuel production, the corresponding energy prices increase dramatically. Using energy and financial data for the oil and gas production sector, we demonstrate that the equations sufficiently describe the fundamental trends between profit, price, and EROI. For example, in 2002 an EROI of 11:1 for US oil and gas translates to an oil price of 24 $2005/barrel at a typical profit of 10%. This work sets the stage for proper EROI and price comparisons of individual fossil and renewable energy businesses as well as the electricity sector as a whole. Additionally, it presents a framework for incorporating EROI into larger economic systems models.

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    Bibliographic Info

    Article provided by MDPI, Open Access Journal in its journal Sustainability.

    Volume (Year): 3 (2011)
    Issue (Month): 10 (October)
    Pages: 1810-1832

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    Handle: RePEc:gam:jsusta:v:3:y:2011:i:10:p:1810-1832:d:14304

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    Related research

    Keywords: EROI; return on investment; net energy; energy business; profit;

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    1. Bullard, Clark W. & Penner, Peter S. & Pilati, David A., 1978. "Net energy analysis : Handbook for combining process and input-output analysis," Resources and Energy, Elsevier, Elsevier, vol. 1(3), pages 267-313, November.
    2. Cleveland, Cutler J., 2005. "Net energy from the extraction of oil and gas in the United States," Energy, Elsevier, Elsevier, vol. 30(5), pages 769-782.
    3. Gately, Mark, 2007. "The EROI of U.S. offshore energy extraction: A net energy analysis of the Gulf of Mexico," Ecological Economics, Elsevier, Elsevier, vol. 63(2-3), pages 355-364, August.
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    Cited by:
    1. Lambert, Jessica G. & Hall, Charles A.S. & Balogh, Stephen & Gupta, Ajay & Arnold, Michelle, 2014. "Energy, EROI and quality of life," Energy Policy, Elsevier, Elsevier, vol. 64(C), pages 153-167.
    2. Ayres, Robert U. & van den Bergh, Jeroen C.J.M. & Lindenberger, Dietmar & Warr, Benjamin, 2013. "The underestimated contribution of energy to economic growth," Structural Change and Economic Dynamics, Elsevier, Elsevier, vol. 27(C), pages 79-88.

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