“Return on Investment” (ROI) is used in industry to select projects for funding
Essay by S. Tom Bond, Retired Chemistry Professor and Resident Farmer, Lewis County, WV
Part 1 considered “energy return on energy invested” (ERoEI). Unfortunately, there is typically a single value which determines where investment money goes in our economic system. It is how fast an initial investment will grow, including returns less costs, and including increase in value of investment. This is the subject of Part 2 here, “return on investment” or ROI.
Individual investors seek their own advantage, not what is best for society, goals often quite pointedly at odds. In the most extreme argument, if someone becomes wealthy, it “trickles down” to the rest. This is the way jobs get formed, this provides cheapest goods, and this gives the most taxes paid, etc. Beautiful idea, that even the most stupid and careless can be convinced.
However it is totally wrong. Read on. One reason is because the money may be invested in the wrong industry. It makes money without creating real wealth (usable goods and services) or a satisfied population. The idea of a closed world of limited resources has no place in this thinking. The result, as we now see, is the concentration of wealth — and worse.
So it has been, with energy. The increase in use of energy is a determinant of national and personal wealth, with those using the most achieving the greatest real wealth. Real wealth trickles up, not down.
The original source of non-muscle energy was fire. Wood was widely dispersed and free for the labor of taking it, at first. As population increased, the supply of wood became more restricted. Rome had apartment houses where the poor lived, some several stories tall. People ate at a kind of fast-food joint on the ground floor, or close by, in part to minimize the need for wood for cooking, which had to be hauled for miles in carts. Although coal was used as far back as the Bronze Age, it was only used locally. The first large scale use occurred in the Industrial Revolution in the 18th century.
Not so oddly, our energy still comes from compounds (containing carbon and hydrogen) that are burned, producing carbon dioxide and water vapor and heat energy. Very few kinds of devices can turn heat into mechanical energy. The primary ones are the piston engine used for transportation and other small engines, the steam turbine, which uses expanding steam, and is used mostly for generating electricity, the gas turbine and the various kinds of jet engines which are used to propel airplanes at very high speeds. So there are four ways to use burned fuel, with a great variety of designs. This runs our civilization at the present time.
The investment in this system is huge. Extraction, transportation, conditioning or refining and distribution are involved. Each involves huge amounts of capital and the objects and people “owned” are not readily adaptable for other purposes. It is mind boggling to think of any large part of that huge system being abandoned, but it must, almost all of it, to stop increasing carbon dioxide in the atmosphere.
What investors want to do is double down, dump more money into production and accept the inefficiencies that are resulting from having used up all the “easy stuff” that was mined first, and ignore the effect on climate from the effluvia.
The “return on investment” promised to be good from shale drilling at the beginning, particularly since the return was so fast. Huge initial production was assumed to decline like conventional wells. Unfortunately, it took several years to find this is not true, the decline in production is swift and sure. Also unfortunately, everybody wanted to get into the big money seen at the beginning. The result was that only a few specialized operators, like those who took leases and then sold them to the too-eager, made out well.
Now well head prices in some areas of $1.58/Mcf (Marcellusgas.org cloud sourcing for September) have put the industry under stress. The oversupply is huge. An investment newsletter says, “natural gas remains near-bidless, as we enter the traditionally strong winter heating season. Just imagine where we’ll be in April if December is at $2.38.” Some companies face bankruptcy.
With the climate change problem caused primarily by burning carbon, and with the over invested production of oil and gas, this must be a classic case of mistaken investment of capital. It should be going into renewable energy. This would allow the U. S. to be a leader in a forthcoming series of technologies, out-distancing other developed nations in technology and protection of the earth. These technologies could replace burning fossil fuels for electricity generation and for personal transportation.
What our economic system has been good at is aggregating capital. This article lists some figures. Exxon Mobil Corp has $320 billion for potential acquisitions. Chevron is next with $65 billion in cash and its own shares tucked away, followed by BP Plc with $53 billion according to data from corporate filings. Royal Dutch Shell Plc has $32.4 billion available, almost all of it in cash. others include ConocoPhillips with $31.5 billion and Total SA with $30.5 billion. The article speculates that it will go to gobble up companies in trouble. More of the same. “Hope springs eternal in the human breast,” not least so in investors.
High immediate return has deflected much recent investment to carbon burning industry and away from more widely useful projects. No doubt that has slowed considerably of late.
There is one more large point to be made that holds government favor for oil especially. The US oil reserve is vitally important to preserve the operations when needed of the US military, a huge organization that runs principally on petroleum (oil) products.
(Did you know West Virginia’s gross domestic product, the total value of all goods and services, in 20 13 had the largest rate of growth in the nation while adding no new jobs and actually had negative income growth? The increase in GDP is sent out of state. Another demonstration “trickle down” doesn’t work. See here.)
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