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Energy despite its utmost importance is a topic that doesn’t receive much attention and is a subject that is poorly understood particularly in the mainstream media or even economics. It is curious to think that this is the case especially if we consider that without energy nothing would literally happen. Taken in this context it is easy to see why energy could be regarded as the most critical resource for without it there would be no life on planet Earth.
It seems that one of the major reasons we forget about the importance of energy and take it for granted is the fact energy is ubiquitous in modern day society. If one cares to look outside their window it is likely they will see numerous cars whizzing around at high speeds (they are high if we compared their speeds to humans and animals which was the historic norm before the industrial age). If one thinks about this last point it can be quite an enlightening process; how much energy does it take to cart an object that weighs in excess of 1000kg at around 30MPH? Then think all this energy can be found in a single gallon of gasoline/diesel. And as startling as this thought maybe we can say we consume even more energy in total in our homes and workplaces and that is despite the fact there are over one billion cars – which nearly all run on oil – running across our planet. Quite a thought isn’t it? 
So in short we can say we are addicted to using energy. However this should not come as any surprise because man has always needed SOME energy to ensure his survival. The amount needed for basic survival is relatively modest however since the only real energy source man needed at first was direct consumption through food to stay alive. However through time man found other external inputs of energy that made life easier for him. The heat from fire allowed man to keep warm not to mention allowed him to cook and provide a source of light in the dark. Domesticated animals also reduced the burden of labour in the fields and allowed great productivity not just in hunting but also in managing the fields when man shifted to agriculture.
These external inputs of energy not only allowed man to extend his natural range of environments he could live on but it also spurred growth in population and prosperity as external energy meant more of the burden of labour could be shifted away from man. As time went on the number the external sources of energy increased and so did the amount of energy used by man. It was not until man began harnessing fossil fuels in earnest however that his energy use suddenly exploded. The graph below can clearly attest to this fact.
While this final fact is widely known it is still quite difficult to fully grasp and appreciate how much of a boon these fossil fuels were to mankind. To illustrate just how much energy we can obtain from these fossil fuels I feel it is best to apply a little maths. To make comparisons between different energy sources it is necessary to know what a BTU is. For people unfamiliar with the term a BTU stands for British Thermal Unit and one BTU represents the energy required to heat one pound (454g) of water by one degree Fahrenheit which comes to approximately 1055 joules.  Now if we consider the most expensive fossil fuel, which is oil, then we will find that burning one barrel of oil (42 US gallons or 159 litres) releases 5.8 million BTUs or 6.1 gigajoules of energy.  These large numbers may seem rather abstract and arcane but if we covert this total energy content into man hours then the facts can be more easily absorbed. The energy delivered from 6.1 gigajoules would equate to a man spending 1.45 million kilocalories. If we assume a man consumes somewhere between 100-200 kilocalories an hour then that would mean a barrel of oil produces the equivalent amount of energy as 7,290-14,597 hours of labour depending on how hard the man works. Assuming there are 48 forty hour weeks a year that equates to 3.8-7.6 years of human labour. Armed with this information it makes you wonder how we can ever consider a barrel of oil is overpriced at $90 dollars a barrel when one barrel delivers the equivalent of 3.8-7.6 years labour!
To put this into an even greater context if we decided to pay the man a decent wage of $10 an hour then we would need to pay him anywhere between $73,000-$146,000 to deliver the same amount of work as a barrel of oil. With this perspective it becomes clear what a boon fossil fuels have been proven to be as effectively we have been using these fuels as “energy slaves” due to the fact they produce so much energy at such a low cost. With energy being so cheap it becomes obvious just how profitable the exercise of replacing man and animal labour with capital powered by cheap fossil fuels has been as the price differential between the two markets is simply enormous. And let us not forget in all this that oil is the most expensive fossil fuel in today’s market and its price is abnormally high when compared to historical prices so it was even more economical in the past than it is today.
Saying all that we do need to recognise the flaws in making such comparisons or more generally, using BTUs in general. That is not all work achieved with a certain resource can be easily substituted with another resource for example no amount of men dragging a car would make it travel at 30MPH as could be achieved if the car was powered by oil. Therefore the figures above can only deal with the total energy expenditure and allow comparisons on that end but they say nothing about the quality of the work achieved nor can they describe how easily the work can be substituted with another resource. This is an important concept to grasp as quite often it is stated that we can substitute oil consumption with renewable, nuclear or even coal and gas energy which while such statements are true to a certain extent, not all uses can be substituted for. Coal, renewables and nuclear energy cannot be easily made into a liquid fuel as these energy inputs are primarily used for electrical generation or home heating. It is this lack of fungiblity which results in people often making the distinction between a liquid fuel crisis and an energy crisis as these are two distinct phenomenon as each crisis poses a different set of problems and will therefore require a different set of solutions (assuming solutions even exist) to solve or manage if there are no viable solutions.
Despite these limitations or perhaps because of them we can reach certain conclusions. The increase in the availability and affordability of energy has done more than reduce the cost and amount of work that can be achieved. It has also played a big part in increasing productivity. This increase in productivity comes because, as described in the previous paragraph, there are certain forms of work that can only be utilised with fossil fuels and these activities cannot be done regardless of the amount of men employed in particular tasks. Jobs that are energy intensive such mining, steel production or heavy vehicle transport all require intense and constant inputs of energy. Since they require intense AND constant energy inputs these tasks cannot easily be substituted into labour nor is renewable energy a suitable candidate for substitution due to its intermittent nature. However it cannot be denied all these economic activities contribute to increased productivity as less labour will be needed to be deployed to accomplish these tasks (assuming these tasks could be completed at all without fossil fuels).
Many mining operations such as the tar sands mining operation in Canada would be much harder if not outright impossible without cheap abundant energy inputs provided by fossil fuels.
A more troubling fact does emerge from this however and that is it becomes apparent that our modern industrial society is heavily dependent on not just abundant energy but cheap energy to remain viable. Even today with oil priced at $90 a barrel which is still an excellent deal when taken in the context described above this price is sufficiently high that many developed economies struggle to grow quickly due to the “high” energy costs as we are repeatedly reminded by the media. In fact these high energy costs have resulted in much demand destruction in the major OECD countries for oil that are most sensitive to price changes as demonstrated in graph below.
This demand destruction primarily manifests itself through higher unemployment and reduced oil consumption from remaining employed workers due to a decline in real wages. This high price of oil has not curbed demand in all countries as the developing economies, which are less sensitive to price increases, continue to demand more of the product. This demand increase of the non-OECD countries is roughly equal to the decreased demand in the OCED countries so overall global oil demand has remained constant at around 30 billion barrels per annum.
The more significant trend has not been with changing patterns in oil consumption but with the changing energy mix in which the global economy utilises. Since oil is priced at $90 it is the most expensive fossil fuel in the market. In the US the next most expensive fossil fuel is coal which is priced at $68.15 per short ton. Seeing as one short ton on average releases 19.6 million BTUs of energy which is roughly three times that of a barrel of oil we see that coal is just over 4 times cheaper than oil on BTU basis. In light of this fact it would be natural to think and expect coal consumption to rise rapidly during this period however coal consumption has actually declined in recent years (for the US at least) because the cheapest fuel in recent years has been natural gas which reached levels as low as $1.90 per million BTUs earlier this year. Seeing as coal has been priced generally been priced at around $3 per million BTUs for the last three years it is easy to see how natural gas consumption has surged.
It should be noted however that at this present moment natural gas is currently priced at $3.48 per million BTUs (accurate at time of writing) and seems to be rising in the past few months. If natural gas price rise much further then coal will become the cheapest fossil fuel in the US and demand for this fuel should increase provided the trend of rising natural gas prices continues. If we talk about fuels on a global basis the story is quite different as globally coal is by far the cheapest commodity and it is these cheap prices that have caused global coal demand to surge in recent years. The high price of oil and the fact that main users of coal (Eastern Asia) have seen rapid economic growth in recent years have been other contributing factors in the increase in the amount of coal demanded.
If this trend of growing coal consumption continues it will not be long before coal becomes the top source of energy in the world and this is a fact that is likely to catch many people by surprise. Saying that, one should throw some caution to this current trend of surging coal demand as it is quite likely that growth in the global economy will slow down and may even decline. If that is the case then the rate of increase in demand will decline or demand may even decline entirely should the world enter a global recession.
Another important consideration and one that is almost universally overlooked in the mainstream is the concept of Energy Return on Energy Invested (ERoEI). In the second part of this topic I will discuss this concept in more detail and also explore the laws of thermodynamics that is largely neglected in the media and economics in general. Do not worry; it will not be a boring physics session with lots of large scary numbers. In any case I wish all diners a merry Christmas and a happy new year.
 = World Vehicle Population Tops 1 Billion Units (WARDSAUTO)
 = British thermal unit (Btu) (Business Dictionary)
 = Barrel of oil equivalent (Wikipedia)
 = Coal News and Markets (EIA)
 = What is the average heat (Btu) content of U.S. coal? (EIA)
 = Coal News and Markets Archive (EIA)
 = Commodity Prices (CNN Money)