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Relating Financial and Energy Return on Investment

Author

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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)

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.

Suggested Citation

  • Carey W. King & Charles A.S. Hall, 2011. "Relating Financial and Energy Return on Investment," Sustainability, MDPI, Open Access Journal, vol. 3(10), pages 1-23, October.
  • Handle: RePEc:gam:jsusta:v:3:y:2011:i:10:p:1810-1832:d:14304
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    References listed on IDEAS

    as
    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, 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, 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, vol. 63(2-3), pages 355-364, August.
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    More about this item

    Keywords

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

    JEL classification:

    • Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics
    • Q0 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
    • Q3 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products

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