The setting of boundaries is hugely important in calculating EROEI. Where do you stop with bringing in other costs? If it’s not on the financial balance sheet can you ignore it? I would say no – if it has an effect, it goes in. That seems to be a limitation of input-output analyses. Where do the costs of externalities feature?

I think Gail Tverberg (Gail the Actuary at TOD), author of this post is onto something. As an aside to talking about removing the limited liability cap for oil spills she talks about the relationship of EROEI to regular ROI.

“If limits [to the liability of oil companies for clean-up costs] are raised from $$75 million to $10 billion, the higher limits will, to some extent, raise costs for oil companies. This is in a way, a form of decreased of Energy Return on Energy Invested (EROI). More costs are now explicitly being paid for (and more money is going to fund lawyers, and expended self-insurance programs). Raising liability to unlimited would theoretically raise costs more, and have a greater impact of EROI.” found via Oil Spill Updates

What the piece is saying is that some of the costs which were external costs to the oil company would now be reabsorbed onto their bottom line. In fact, they would be shared across the oil industry as higher insurance premiums. One of the difficulties with calculating an EROEI based on the financially-based input-output method (as many currently are) is that these costs are unlikely to be captured, especially if the oil company does not even have to be insured for all of them.

However, the issue here is not that the actual EROEI is being reduced as far as society is concerned. The clean-up will still happen (or not happen depending where the spill occurs – see below) with all the associated energy costs for clean-up ships, dispersants, etc. What would happen is that the financial cost of producing oil would come closer to reflecting the true EROEI.

This also says something about the idea of a “true” EROEI. The cost of cleaning up that is undertaken because we feel that the spiller should be doing something may well be higher than the cost of letting nature take its course. So the EROEI of an energy resource is not something inherent to it. In the same way as ROI does, EROEI also depends on the extraneous restraints that are placed on it by society.

As an example of this, another interesting point in the article is an image showing the varying costs of cleaning up a barrel of oil spilled in various places around the world from this paper.

The obvious outlier is the USA. The original paper makes it clear that there are many reasons for this disparity, but come down in large part to location. As an illustration of this, the Exxon Valdez spill was in a very bad location and the effect is had on average clean-up costs is massive, approximately tripling them from around $24,500/tonne to $73,000/tonne.

Countries where there are tight environmental controls and a high value placed on the natural environment will generally have higher clean-up costs. As the paper the map comes from says:

“Media coverage often increases social pressure to return areas impacted by an oil spill to their former “pristine” condition… Especially in the United States, fear of future litigation often impels spillers to mount massive response operations—at considerable expense—to dispel any notions of “irresponsibility.” Estimating Cleanup Costs for Oil Spills

This factor is reflected in the effect on EROEI of the clean-up. This also says something about the idea of a “true” EROEI. The cost of cleaning up that is undertaken because we feel that the spiller should be doing something may well be higher than the cost of letting nature take its course. So the EROEI of an energy resource is not something inherent to it.

Just the same as with financial ROI, the calculation of EROEI depends on the extraneous restraints that are placed on it by society to limit and internalise external costs.

And well it should. The external costs of fossil-fuelled energy are huge and rising the higher the concentration of atmospheric CO2 gets. If the long-term cost of environmental damages were to be properly accounted for in EROEI calculations, I have a feeling fossil fuels would be well on their way to the point of futility.