[vox_mundi]

Thermodynamic analysis reveals large overlooked role of oil and other energy sources in the economy
http://phys.org/news/2014-12-thermodyna ... ooked.html

In neoclassical growth models, there are two main contributing factors to economic growth: labor and capital. However, these models are far from perfect, accounting for less than half of actual economic growth. The rest of the growth is accounted for by the Solow residual, which is thought to be attributed to the difficult-to-quantify factor of "technological progress."

Although neoclassical growth models help economists understand economic growth, the fact that they leave so much economic growth unexplained is a little unsettling. Even Robert A. Solow, the founder of neoclassical growth theory, stated that the neoclassical model "is a theory of growth that leaves the main factor in economic growth unexplained."



In a new study published in the New Journal of Physics, Professor Reiner Kümmel at the University of Würzburg and Dr. Dietmar Lindenberger at the University of Cologne argue that the missing ingredient represented by the Solow residual consists primarily of energy. They show that, for thermodynamic reasons, energy should be taken into account as a third production factor, on an equal footing with the traditional factors capital and labor.

(By definition, labor represents the number of work hours per year. Capital refers to the capital stock that is listed in the national accounts, which consists of all energy-converting devices, information processors, and the buildings and installations necessary for their protection and operation. Energy includes fossil and nuclear fuels, as well as alternative energy sources.)

The new proposal lies in stark contrast to neoclassical growth models, in which the production factors have very different economic weights, representing their productive powers. In neoclassical growth models, these economic weights or "output elasticities" are set equal to each production factor's cost share: Labor's cost share is 70%, capital's is 25%, and energy's is just 5%.

In their analysis, the researchers found that, unlike in neoclassical models, the economic weights of energy and labor are not equal to their cost shares. While the economic weight of energy is much larger than its cost share, that of labor is much smaller. This means that energy has a much higher productive power than labor, which is mainly because energy is relatively cheap while labor is expensive.



To test their model on reality, Kümmel and Lindenberger applied it to reproduce the economic growth of Germany, Japan, and the US from the 1960s to 2000, paying particular attention to the two oil crises. In neoclassical models, reductions of energy inputs by 7%, as observed during the first energy crisis in 1973-1975, should have caused total economic output reductions of only 0.35%, whereas observed reductions were up to an order of magnitude larger. By using the larger weight of energy, the new model can explain a much larger portion of the total output reductions during this time.

If correct, their findings have major implications. First, the new model doesn't require the Solow residual at all; this residual disappears from the graphs that show the empirical and the theoretical growth curves. Energy, along with the addition of a smaller "human creativity" factor, accounts for all of the growth that neoclassical models attribute to technological progress.

Second, and somewhat unsettling, is the impact that the findings may have in the real world. In 2012, the International Monetary Fund stated in its World Economic Outlook that "…if the contribution of oil to output proved to be much larger than its cost share, the effects could be dramatic, suggesting a need for urgent policy action." ...

Full Journal Paper: http://iopscience.iop.org/1367-2630/16/ ... 08/article


Sokath, his eyes uncovered!

[Tanada]

Tenagra, when the walls fell!

[BobInget]

Makes perfect sense to me, pstarr, Great catch!

[ROCKMAN]

Heady stuff but is it really that complicated? I can plant an acre of wheat and harvest by hand. If anyone has ever planted an acre of anything they know that involves a sh*t load of labor and mucho hours. OTOH I can handle it with a lot less labor with a good mule. But heck: give me a small tractor and a little diesel and I can take care of that acre just on weekends. Or, conversely, I can plant 30 acres and utilize the same amount of labor that it took to grow that one acre by hand.

In that sense isn’t energy essentially equal to labor in many aspects of our lives? Riding a bike to work uses no hydrocarbon energy unlike driving a car. But biking 20 miles each way is going to take a lot more labor then driving. Labor that might have been better utilized at the office.

Bottom line: it’s difficult for me to see how one differentiates between labor and energy. Any labor, regardless of how it’s done, requires some source of energy: human, fossil fuel, solar, wind, etc. IMHO anyone that has overlooked the role of energy in the economy has their head so far up their ass they don't know if it's day or night. LOL

[GHung]

We've all been here before, eh Rock?

What is a Human Being Worth (in Terms of Energy)?
http://www.theoildrum.com/node/4315

Nate was the first to provide an answer:

This has been argued and debated often on TOD, mainly in response to some of my own quotes in media about 1 barrel equating to 25,000 hours of human labour (12.5 years at 40 hours per week). Ultimately the answer to this question depends highly on assumptions - but we can arrive at a good approximation. 1 barrel equates to 6.1 Gigajoules (5.8 million BTUs). Depending on the 'job', humans use roughly 100-700 Kilocalories per hour (Computer work requires an estimated 119.3 Kcals/hr). 1 kilocalorie (Kcal) = 4,184 joules. So 1 barrel of oil has 6.1 billion/4,184 = 1,454,459 kcals. Using a range of 100-700 kcals per human hour of work then results in a range 2078 and 14544 hours per barrel of oil. At 2000 hours per year (40*50), this is would then be 1.0-7.25 years per barrel. This was discussed in the comment thread here.

However, we aren't robots - we need to eat, sleep, breathe (we exhale energy), maintain, etc. So a wide boundary analysis would require other calories not devoted to doing work - thereby increasing the disparity between human work and a barrel of oil - there is a good discussion of human thermal efficiency here.

Lastly, there is the quality issue. Though one could expend enough calories to chop down a tree or carry a cord of firewood by hand, there are many activities which would be physically impossible for humans to directly accomplish -e.g there wouldn't be room for the required number of humans to stand behind a semi-truck and push it down the highway at 100 kph. Or fly a jet, etc.

The average american uses 60+ barrels of oil equivalent(oil, gas and coal) per year (360 billion joules), which implies a fossil fuel 'slave' subsidy of around 60-450 'human years' per person. Depending on assumptions another way to look at it is to take a midpoint of 10,000 hours per barrel. At $20 per hour average payroll compensation, that is $200,000 per barrel, not even quality adjusted....

As long as I can find fuel for my chainsaw and log splitter....

[Timo]

This analysis is so stupid that it even needed to be researched! It's almost the equivalent of doing research to test the theory that the sun will rise in the east and set in the west. I honestly believed, and still firmly do believe, that without energy, there is no economy, at least not as we have developed it. E=mc squared. Humans are matter, therefore humans are energy. Do humans matter? That's another question that i'll leave alone, but humans do require energy, either in the form of a calorie, or the equivalent of some other form of energy like wood, or coal, or oil, or hyrdogen, or even photosynthesis. Humans can't survive without energy. Life, itself, cannot survive without energy. Life without oil can survive just fine, because we have the sun, and our planet is constructed or organic matter, and we have photosynthesis (great invention btw!). But, in terms of energy's place within our economy, one cannot exist without the other. That goes without saying. I'm actually stunned that someone would need to spend the time to prove this obvious fact.

However, now that it's been stated, perhaps this will end up re-shaping our economic forecasts a bit to include energy as a factor in our decisions on economic policies. The health of our economy fundamentally depends on readily available and easily used sources of energy. EROEI. This is NOT a new idea, folks! If TPTB had come to this realization 50 years ago, we'd all be in a far different place today. Probably a better place at that, too!

[35Kas]

The health of our economy fundamentally depends on readily available and easily used sources of energy. EROEI. This is NOT a new idea, folks! If TPTB had come to this realization 50 years ago, we'd all be in a far different place today. Probably a better place at that, too!

It still surprises me that there are still people that think our bureaucratic/oligarchic caste running the world by proxy through institutions such as the Council on Foreign Relations, the FED, the CIA/NSA, don't know and haven't known about the inter relation between power(political), economic prosperity and energy (mostly in the form of oil), for at least 80 years.

If you examine the way foreign policy has been conducted by the American and British governments for at least the last 50 years, you will (hopefully) notice that great emphasis was places in controlling the majority of the available fuel energy through whatever means necessary! Assassinations, revolutions, support for authoritarian regimes, war, propaganda... The list is long.

But TPTB most definitely know about this. Sometimes it may seem like they are absurdly stupid, but from my experience that conclusion is reached because we make incorrect assumptions regarding what their values and motives are.

[DesuMaiden]

It's more than obvious that energy is the most important factor in an economy. Without energy, an economy wouldn't even exist.

[Graeme]

Please note this excerpt from the summary and outlook in the paper linked at the bottom of OP.

The resulting danger of unemployment in the less qualified part of the labor force is enhanced by the trend toward globalization, where goods and services produced in low-wage countries can be delivered at small cost to high-wage countries thanks to cheap energy and increasingly sophisticated, highly computerized transportation systems.

The nearly unanimous social and political response to this danger is the call for strategies to stimulate economic growth. But these strategies face obstacles from entropy production, which is coupled to energy conversion and its pivotal role in economic growth: (1) there are thermodynamic limits to the improvement of energy efficiency at unchanged energy services, because entropy production destroys exergy; (2) emissions associated with entropy production, especially the ones of carbon dioxide from the combustion of fossil fuels, threaten climate stability. The question is, whether society will be willing and able to finance the huge investments that are necessary for the transition to a highly efficient production system powered by non-fossil fuels.