This post reviews a paper by Nate Gagnon, Charles Hall and Lysle Brinker titled: âo[ogonek]A Preliminary Investigation of Energy Return on Energy Investment for Global Oil and Gas Production,âo[caron] published recently in the peer-reviewed journal Energies. The lead author was my colleague for two years at SUNY-ESF and the second author is currently my Ph.D. advisor and has published numerous guest posts here on The Oil Drum. See here for a list of previous posts relating to work by Dr. Charles Hall, and here to download a full-text PDF of this paper.

EROI of Global Oil and Gas Production

ABSTRACT: Economies are fueled by energy produced in excess of the amount required to drive the energy production process. Therefore any successful societyâo[dot accent]s energy resources must be both abundant and exploitable with a high ratio of energy return on energy invested (EROI). Unfortunately most of the data kept on costs of oil and gas operations are in monetary, not energy, terms. Fortunately we can convert monetary values into approximate energy values by deriving energy intensities for monetary transactions from those few nations that keep both sets of data. We provide a preliminary assessment of EROI for the worldâo[dot accent]s most important fuels, oil and gas, based on time series of global production and estimates of energy inputs derived from monetary expenditures for all publicly traded oil and gas companies and estimates of energy intensities of those expenditures. We estimate that EROI at the wellhead was roughly 26:1 in 1992, increased to 35:1 in 1999, and then decreased to 18:1 in 2006. These trends imply that global supplies of petroleum available to do economic work are considerably less than estimates of gross reserves and that EROI is declining over time and with increased annual drilling levels. Our global estimates of EROI have a pattern similar to, but somewhat higher than, the United States, which has better data on energy costs but a more depleted resource base.

As the title of this article indicates, the authors estimate the energy return on investment (EROI) for global oil and gas âo[ogonek]production.âo[caron] The first thing to note is that the calculation is actually for the EROI of global exploration, development, and production (commonly called E+P or âo[ogonek]upstreamâo[caron]) âo[base "] a much more comprehensive estimate than just production. They estimate that the EROI of global oil and gas E+P in 2006 was roughly 18:1 (above figure). To establish these estimates the authors rely on three datasets: a) the Energy and Information Administration (EIA), and b) the British equivalent of the EIA, and 3) John S. Herold, Inc., a privately managed database consisting of data on total "upstream" costs (i.e. all costs up to the point the oil comes out of the ground) of publicly traded energy firms around the world.

The crux of their analysis depends on the conversion of money numbers into energy numbers. Since global energy costs are not maintained in energy units, but in economic units only, they derived an energy intensity value for each dollar spent in the energy industry. These numbers, derived independently for the energy industries within the U.S. and England, were about the same: roughly 20 MJ per dollar for both countries in 2005. The energy intensity numbers were multiplied by the estimates of money spent to get rough estimates of energy cost of energy production.

In addition to estimating the current upstream EROI of global oil and gas, they extrapolated three trends from their time-series estimates of EROI and show global EROI declining to 1:1 between either 2022 or sometime in the very distant future, with the best estimate being about three decades away. To do this, the authors forecast linearly the historic trend of global EROI, which is, as the authors acknowledge, a forecasting methodology fraught with problems. Nonetheless, the forecasts provide a thought-provoking view of what may happen if society continues along a "business as usual" path.

Linear extrapolations of historic EROI trends

The authors also attempt to answer the question âo[ogonek]What are the reasons for the decline in EROI estimates, especially since 1999?âo[caron] They offer two solutions: 1) technology is seemingly being outpaced by depletion, and/or 2) increasing the annual drilling rate decreases the drilling efficiency. The drilling intensity decreased during the early and mid 1990s when EROI was actually increasing, but has increased since 1999. This has led to a sharp decrease in drilling efficiency (barrels found/produced per well drilled). Their best guess is that both options are operational, a contention with which I am inclined to agree. Improved technology is increasingly used in E+P activities, including, of course, drilling. So the fact that the EROI of E+P has declined over the past 10 years indicates that easier-to-access resources, i.e. high EROI resources, are increasingly rare (if found at all), because even with increasing technology and drilling efforts, we are witnessing declining EROI.

Lastly, the authors address the major assumptions they have made while performing their analysis. This is a crucial step in most large numerical analyses and, unfortunately, one that is often overlooked. The assumptions are:

1) âo[ogonek]changes in monetary expenditures indicate changes in energy expenditures.âo[caron]
2) âo[ogonek]energy intensities are the same the world over.âo[caron]
3) âo[ogonek]We assume a constant energy intensity in the US after 2002, and constant energy intensity in the UK prior to 1998 because there are no data available for those time periods.âo[caron]

The second assumption is the most problematic from a scientific perspective because upstream costs vary widely from deep offshore, to tar sands, to shallow offshore, to onshore drilling. The application of energy intensity numbers, which are derived directly from cost data, from one area of the world to the rest of the world is potentially flawed. But in reality, this is a reflection of one of the conclusions the authors derive from their work, i.e. WE NEED MORE/BETTER DATA. The fact of the matter is that although the authors had access to three extensive data sets, two public and one private, they were still able to access data for only 40% of the worldâo[dot accent]s oil production. Furthermore, many of the data sets that are unavailable to public scrutiny are the most important, i.e. that from Saudi Arabia, Russia, Iran, and every other Nationalized Oil Company.

Some interesting quotes from the manuscript:

This [Herold] data base accounted for about 40% of the oil produced in the world in 2006.

What is clear in the Herold data base is that the amount of oil and gas produced per dollar spent between 1999 and 2006 shows a decline. In 1999 the industry produced about one tenth of a barrel of oil equivalent (boe) per 2005 dollar spent globally in exploration, development and production. By 2006 that number had declined to approximately 50%.

It is important to note that the data we used in this analysis group oil and natural gas production together, since they are commonly produced from the same reservoirs. However, the effort required to pump oil out of the ground is generally much greater than that required to bring natural gas to the surface. We therefore expect that the true EROI of oil is somewhat lower than our results suggest, while that of conventional natural gas is higher.

4:02:39 PM    

I have written a ‘Clarifier’ for Crikey today on the CPRS. It is reproduced over the fold.

<a style="display:none;" id="ddetlink117850614" href="javascript:expand(document.getElementById('ddet117850614'))">Read the article

3:00:06 PM    

Once again, the labour market data in Australia shows a remarkably robust labour market, with seasonally adjusted unemployment stable in July at 5.8%. ANZ CEO Mike Smith last night stated that he saw unemployment here stabilising at 6%, which would be remarkable. The problem is that that would require a fair pick up in the economy in the second half of this year, which is¬[sgl dagger]possible, but far from assured. The latest ANZ forecasts on their webpage have GDP growth through 2009 of 0.3%, which is about what I see from other banks. Estimates of Okun’s law for Australia (see page 130 of our textbook for a quick literature review) suggest that about 3 to 3.5% GDP growth is needed to keep unemployment stable. Every 1.5% lower GDP growth is associated with 1% higher unemployment. Read more

11:23:23 AM    

Last night the new Executive Director of the Lowy Institute,¬Michael Wesley,¬gave a short presentation in Melbourne, with the broad theme being that coming years are likely to see Australia facing the most¬challenging global environment in our history. Key to the argument is the idea that as emerging markets develop, the demand for a limited supply of natural resources will grow, and potentially create conflict.¬ My initial reaction was that it wasn't obvious to me that this should be true. As economies grow and develop they become more service oriented, and eventually less dependent on natural resources to drive growth. Measuring this precisely is not straightforward, but let me give you some numbers, some of which come from a piece by Andy Rothman at CLSA in Shanghai called “China eats the world.” In the end Wesley may have it right, though not certain as you can see from the details below. Read more

11:21:28 AM    

I have a new paper out with Dan Andrews and Christopher Jencks, on the relationship between inequality and growth. We reach a finding that is pretty standard in this literature [base ']Äì when we restrict the sample to 1960-2000, more inequality seems to be good for growth. However, if the inequality arises from a transfer from the bottom 90% to the top 10%, we[base ']Äôre skeptical that the bottom 90% get enough back in growth to make up for their loss in share.

Here[base ']Äôs the abstract:

Do Rising Top Incomes Lift All Boats?
Dan Andrews, Christopher Jencks & Andrew Leigh
Pooling data for 1905 to 2000, we find no systematic relationship between top income shares and economic growth in a panel of 12 developed nations observed for between 22 and 85 years. After 1960, however, a one percentage point rise in the top decile[base ']Äôs income share is associated with a statistically significant 0.12 point rise in GDP growth during the following year. This relationship is not driven by changes in either educational attainment or top tax rates. If the increase in inequality is permanent, the increase in growth appears to be permanent, but it takes 13 years for the cumulative positive effect of faster growth on the mean income of the bottom nine deciles to offset the negative effect of reducing their share of total income.

The paper was written up in the Wall Street Journal last Tuesday, under the headline [base ']ÄúTrickle-Down Economics Fails to Deliver as Promised[base ']Äù. Here[base ']Äôs a snippet:

The paper does not argue that trickle-down economics is without merit. It[base ']Äôs just that it doesn[base ']Äôt appear to generate enough bang for the buck. It was written by Harvard[base ']Äôs Dan Andrews and Christopher Jencks, and Australia National University[base ']Äôs Andrew Leigh.

[base ']ÄúIncreases in inequality lead to more growth,[base ']Äù the paper[base ']Äôs authors wrote. [base ']ÄúThere appears to be some trickle-down effect in the long run, but since the impact of a change in inequality on economic growth is quite small, it is difficult to be sure from our estimates whether the bottom 90% will really be better off or not.[base ']Äù

In an interview, Jencks said it[base ']Äôs a real challenge to gather the information needed to determine whether trickle-down economics works as its advocates believe.

But he concludes the evidence shows [base ']Äúit certainly didn[base ']Äôt deliver as much as many said[base ']Äù and to the degree it did work, [base ']Äúthe effects are really small.[base ']Äù

The paper[base ']Äôs findings were based on data from 12 developed nations, observed over most of the last century into the current century.

Trickle-down economics[base ']Äô day is probably done, for now at least. The financial crisis will bring not just stricter regulation and tighter oversight for many markets. The massive budget deficits that the U.S. will be left with as a consequence of the bailouts and economic stimulus spending will require tax hikes that are likely to reach beyond the rich.

9:48:05 PM    

I have an opinion piece in The Age today on Government 2.0.

Joshua Gans, The Age, 6th July 2009 (see also WA Today)

The Government’s tight control of public information is outdated.

UNLOCKING the information collection by governments [base ']Äî and deciding what information could be of social value [base ']Äî is the aim behind the new ‘Government 2.0′ taskforce headed by economist Nicholas Gruen.

The taskforce’s mission results from a key recommendation in the Cutler Review on Innovation [base ']Äî a taskforce that Dr Gruen served on.

In BusinessDay last August , I highlighted an example with regard to the free availability of public toilet location information [base ']Äî also mentioned in the Cutler review because that information had actually been collected as part of the National Continence Management Strategy and gave Australia perhaps the most comprehensive toilet location map in the world.

However, that information was provided only in ways the Federal Government chose to and it could not easily be viewed on a mobile device.

That has improved, but not to the extent of allowing developers to match the information with devices in a truly usable manner.

Google Maps might have been invented in Australia and they can pull all manner of data [base ']Äî except our toilet locations.

But this is just the tip of the iceberg. Schedules for public transport, TV and radio programming, emergency room information and traffic sits locked within the Government. So the mission of the taskforce to find ways of bringing it out is clearly a critical one.

They will face challenges. Politicians and bureaucrats do not give up control of information lightly. The taskforce will hear excuses.

First, it will be claimed that free use of the data means the Government cannot certify its integrity. That may be the case, but is it really necessary for it to give such certification?

Surely our consumer laws are strong enough to accept clear labelling from those repackaging the information that things may not be up to date. Search for exchange rates on free sites and the disclaimer is there.

Even so, the taskforce should not settle for that. It should be the duty of the Government to not just post some spreadsheets on a website but to work out protocols that, if changes occur, allow those drawing from the information to update it accordingly.

Twitter and Facebook provide developers with this ability in real time. Surely, the Government should be expected to do the same thing?

Second, there are issues of privacy.

Dr Gruen highlighted NSW information on popular baby names from the Registry of Births, Deaths and Marriages as an area where governments are getting it right. But that same information excludes really unpopular names because they might identify (presumably the birth year) of certain people.

That might be possible if your name is derived from Klingon but surely that isn’t a strong reason to limit searches. For instance, you could identify unpopular names by decade rather than year.

These demonstrate the challenges that might come from complacency. But Dr Gruen’s baby names’ example highlights another. He was enamoured with a particular representation of the data as a graph showing 1200 baby names over time. You can hover over bits of it and find out just how many NSW babies had a name in a given year. Perhaps it was neat technologically but it was, in many respects, of no real value. At best, it told you trends of gender-based names around certain areas of the alphabet.

The point is that it shows us that we can do better and indeed, it is precisely why the Government needs to free the information so that others can provide it in a useful form and improve on it.

The problem is that when it comes to NSW baby names, despite the flashy graph, that data is locked within Government. You cannot request a database with the underlying information. And so no one other than Government can present it to us in a form that is actually of use.

I won’t speculate on what that use might be. I just hope this is not what the taskforce has in mind because it highlights precisely the problem rather than the goal.

To be fully successful, this taskforce will have to change the default position of government from tight control to open access. That said, I would be happy if beside every representation of information, there was a ‘click here to download a spreadsheet’ button. If they can’t get that, this taskforce cannot claim to have succeeded in any measure.

Joshua Gans is an economics professor at Melbourne Business School. He contributes to the economics.com.au blog.

9:46:04 PM    

The unemployment numbers yesterday were again remarkably good relative to what is happening elsewhere in the world. The headline u/e rate is up to 5.8%. Since July last year we’ve lost about 160,000 full time jobs, but part time jobs are up about 127,000. Of course we need to create jobs to stop the unemployment rate from rising, but compare these numbers with the US. Paul Krugman this week pointed out that the US has lost ¬[sgl dagger]more than 6 million jobs since the recession started, and it needed to create 8 million jobs to stop the unemployment rate from rising over the same period. The US labour market is roughly 12 times bigger than ours, so equivalent job losses in the Australian market would be roughly 500,000 jobs – instead we’ve lost only about 30,000. The number of unemployed has risen from 484,000 to 662,000 in Australia – thankfully, in terms of labour market behaviour we have become very much decoupled from the US.

9:42:36 PM    

Besides water, energy is the most important substance for life on the planet. For most organisms energy is embodied in the food they eat, be it bugs, nuts or gazelles. The excess of energy consumed to energy expended (net energy) has been integral in the evolution of the structure and form of present day organisms.

Net energy is measured as how much energy is left over after the calories used to find, harvest, refine and utilize the original energy are accounted for. It is a term linked to physical principles and departs in many cases from our current market mechanism of valuing things by price. The alternative energy debate seems to have two firmly entrenched camps - those that acknowledge the importance of energy gain to our society and those who focus on gross energy, energy quality and dollars. This post explores what net energy is, why its important and how its principles may impact the future organization of our society.

[break] For most living things, energy is calories. Over eons, natural selection has optimized the most efficient methods for energy capture, transformation, and consumption.( Lotka) Cheetahs that repeatedly expend more energy chasing a gazelle than they receive from eating it will not incrementally survive to produce offspring.

But humans, in a very brief evolutionary time span, have puzzled out how to unlock the hydrocarbon bonds in fossil fuels, freeing up vastly more energy that can be directly eaten. The vast majority of our per capita energy production is spent on non-nutritive exosomatic consumption. We have gradually, with rapidity at times, advanced modern human civilization to a global scale, with liquid fuel in jets, trucks, and automobiles providing the glue that links people and products together.

WHAT IS NET ENERGY?

To harness and consume energy requires some type of energy investment. This investment is what comprises the difference between gross energy and net energy. There is various nomenclature that describes this concept. Energy profit ratio, surplus energy, energy gain, EROI, and ERoEI all represent virtually the same relationship of how much energy we receive, relative to an energy input(dollars do not factor in). The most referenced metric in the Peak Oil literature is EROI or ERoEI (Energy Returned on Energy Invested), which, in its simplest sense is the ratio:

Energy Output / Energy Input

There is disagreement (sometimes dramatic) in the energy literature not only as to what should be included as energy inputs and outputs (a boundary issue) but how variables are included (how to evaluate co-products, how to include other limiting inputs to an energy technology, etc) These nuances will be covered in a subsequent post.

Net energy is typically given as per unit of energy invested. Thus:

EROI = Net Energy + 1.

(For those of you who've played craps - some tables pay off the hard-ways FOR one and others TO one. EROI and net energy have a similar relationship. EROI is how much energy output FOR an energy input and net energy is the energy output TO the energy input.)

Net energy also can refer to a sum as well as a ratio. For an ethanol process that has an EROI of 1.2:1 -the net energy is just .2, but we can also calculate how much net energy is created for society in a given year or a life-of-resource total. At EROI of 1.2, the 3.9 billion gallons that the US produced in 2005 required 3.29 billion gallons of BTU energy input, resulting in a `net energy' of 610 million gallons. (This post will use net energy and EROI interchangeably - if a sentence uses EROI, just subtract one to get net energy, if I use net energy, just add one to get EROI)

A GROSS vs NET ENERGY GRAPH

Briefly, the above graph shows a theoretical depletable resource which follows the 'best first' concept of resource extraction. The vertical axis is quantity and the horizontal is time. The gross energy resource "X", is the entire area under the curve. ("X" = "A"+"B"+"C"+"D"). Direct energy costs are "D". Indirect energy costs (like tractors and highways and medical insurance and such) are "C". Environmental externalities (in energy terms) are "B". "A" represents the total net energy of the resource after costs have been subtracted. At any given point in time the EROI can be calculated by taking a ratio of the total area divided by the costs (depending on the boundaries). As can be seen, net energy peaks and goes to zero way before the total gross energy is depleted. (This graphic is from an upcoming paper on EROI by a colleague (Kenneth Mulder) and myself.)

ENERGY QUALITY

Energy quality is also relevant. From an economic standpoint, the value of a heat equivalent of a fuel is set by its price, energy density, physical scarcity, cleanliness of the fuel, capacity to do useful work, flexibility, safety, conversion aspects, etc. (1)

(Source - Neal Elliot - ACEEE)

Electricity is currently the highest quality energy we have in our society, largely due to its ability to do work. Although crude oil is of lower energy `quality' than electricity, its use is ubiquitous in allowing other segments of society to transport goods, etc. and its `quality' as measured by price, has been increasing relative to electricity in recent years.

Cutler Cleveland et al. devised one method of `quality correcting' the net energy of oil and gas extraction using, The Divisia Index, which accounts for energy quality of both inputs and outputs(1 )Below is a graphic of the the thermal and quality corrected EROI of US oil and gas extraction.

"The Divisia EROI is consistently much lower than the thermal equivalent EROI. The principal reason for this is the difference in the fuel mix, and hence fuel quality, between the numerator and denominator of the EROI. The outputs are the crude, unprocessed forms of oil and natural gas. The inputs are electricity and refined fuels such as gasoline and other distillate fuels. The latter are higher quality than the former, and have higher prices. Refined fuels and electricity are, therefore, weighted more heavily in the Divisia formulation."(1)

In the 1930s, US oil was easy to recover. In many cases it was almost at the surface and had an EROI of 100:1.(2). It has since declined, depending how one measures it or who one talks to, in the range of 10-15:1. As it gets deeper, harder to find, more viscous, higher sulfur content, etc, the EROI will continue to decline. A typical refining efficiency is about 10:1, so the total refined EROI of our precious liquid fuel is still between 5-10:1. This may not seem so high (compared to 100!), but how many stocks have you owned that make 500-1000%? On each iteration? This is the type of energy subsidy world society has become accustomed to.(My paucity of references for this segment gives evidence to how little concern our leadership has for the issue of net energy. Charles Hall, (with data from John S Herold and Co.) and others are working on new updated oil and gas EROI numbers - but solid energy data is either proprietary or difficult to assimilate)

WHY IS NET ENERGY IMPORTANT?

We all intuitively know the difference between net and gross - we use the concept everyday. If you make $100,000 per year in salary and the government takes 38%, your net is $62,000. If the government took 99%, it really wouldnt matter whether you made $100,000 or $1,000,000, your take home would be very small. The same concept applies to energy, and in particular, whatever energy source is most central to society. Basically, net energy matters because net energy is what we use.

"Energy gain, or EROI, varies with the quality (transformity) of a resource deposit and with the efficiency of the technology used to locate, extract, process, distribute and exploit the resource. As the ease of obtaining or using a resource declines, more energy must be devoted to these activities, causing energy gain to decline. Where an energy budget is substantially constant, allocating more resources to energy production reduces the amount of energy available for other activities. The potential impacts of such a situation on a human system include less leisure time, a lower standard of living, higher taxes, and an increase in childhood mortality. In an animal population, allocating greater effort to energy production may mean less winter fat, increased embryo resorption, lower birth weights, or the like.Tainter(3)

It is fundamentally impossible to maintain a constant level of net energy while the aggregate energy profit ratio drops. Only after the energy profit ratio and the need for new fuel related level off can net energy supplies return to the desired level (4).(This book, Beyond Oil, is 20 years old, but is probably the best book on the concepts of net energy, agriculture and society)

We are currently living in the highest energy gain era of any organism in the history of earth. Although the total amount of BTUs consumed in 2005 was higher than any year in history, world energy per capita peaked in 1979.(5)(One could argue that the plateau in net energy per capita has been maintained by a large wealth transfer from poor to rich, from future to present, and from abstract 'energy' (debt) to real consumption).

There are a finite amount of stored fossil fuels on the planet. Some of the largest, highest quality resources have already been exploited. The remaining resources are in many cases more energetically difficult to harvest, or have negative side effects (e.g climate change and coal).

"Environmental degradation is greater when the resource is of low quality and distributed but heavily used. Thus, a switch to renewable energy sources might bring, ironically, environmental damage comparable in scale to, or greater than, that caused by the use of fossil fuels." (Joseph Tainter)(2)

We already see evidence of this in some of the scaling of biofuel production in Asia

A NET ENERGY PARABLE

Net energy of corn ethanol examples and debates have been presented ad nauseum from both proponents and detractors. The redundancy is trivializing the concept. Though the ethanol debate is critically important in deciding how to deploy of our remaining fossil energy, what follows is a more benign example:

A civilization of 1000 sasquatches lives on a small distant Planet P. They require only food (energy) and water to live but also enjoy a vibrant culture with artisans, builders, and craftspeople. Sasquatches are vegetarians (as everyone knows) but do raise animals for labor help, namely Hephalumps. These animals help them harvest large hempy plants from the mountain near where they live and process them into Saspacks (the finest, sturdiest, durable backpacks in the universe). Each week (which is 10 days long, based on Planet P's sun), the sasquatch colony works very hard for five days and then has leisure time during for the next 5 days. Once a year, a ship from Planet X lands and trades luxury food items (non-caloric but tasty), medicine, comic books, and basic materials in exchange for an agreed upon cargo of Saspacks.

This societies only source of energy(calories) is Waybread, which is a highly energy dense cake made with Spice, water, and the meat from the Mongo nut, which grows in an enormous grove 25 miles from the sasquatch community. Once a Ten-Day, a troupe of the strongest 300 sasquatches traverses 25 miles to the Mongo nut groves, fills up their packs with nuts, and returns home with their energy bounty. It is a one day grueling journey across the Black Plains and through the Black Swamp but they make a ritual of it, telling stories and laughing most of the way until they arrive late at night. They spend a second day climbing trees and picking Mongo nuts, laughing at the colorful monkeys that play in the Mongo trees as well as picking some flowers to bring home to their wives and girlfriends. On the third day they leave at the crack of dawn and are home by nightfall. These same 300 sasquatches then spend two more days, cracking, pounding and combining ingredients together with the nuts to make Waybread; enough for the entire community for the next Ten-Day. All these sasquatches do no other work or leisure on the days they are procuring energy for the tribe. In return, they receive exalted status as the tribes energy providers, and a five day rest.

Since Sasquatches are freakin' huge, each member of their society consumes 4 m-cals a day. They really only require 3 m-cals to survive, but the extra makes them fat and hearty and also contributes to general gastronomic pleasure (sasquatches do not like to feel peckish). Hephalumps are even bigger and the 100 strong herd each requires 8 mcals per day of Waybread to survive and function. Although Waybread is highly nutritious, it is also highly perishable, and must be consumed within one Ten-Day, after which time it gets wormy, and gross.

During the five-day ritual of energy harvesting and preparation, 600 other tribal members are busy harvesting fiber from the mountain, and weaving and stitching it into Saspacks. The remaining 100 bigfoots, mostly youngsters, clean and maintain the village, manage the water supply from the river, and comb the hillsides for Spice. At the end of the fifth day, a feeling of joy emerges in the community as the tribe can look forward to relaxing, dancing and sleeping for five straight days, with plenty of Waybread for everyone. This routine has been going on for as long as any sasquatch can remember. None of them could imagine anything otherwise.

We can determine the energy gain (or net energy) of this society based on the above information. First let's look at the energy output:

Each of the 1000 sasquatches eats 4 mcals per day and there are 10 days per week on their planet. This equates to 40,000 mcals energy consumption per Ten-Day. Each of their herd of 100 Hephalumps requires 8 mcals per day (8,000 mcals per Ten-Day) Therefore the Mongo nut energy source provides them with a flow of energy of 48,000 mcals per Ten-Day. This is their energy output, which is entirely consumed.

How much energy does this society spend in order to get the 48,000 mcals? Well, 300 sasquatches work/travel for three days to acquire the Mongo nuts and then spend two days refining it into edible quality. They have to eat for nourishment during this time otherwise they would not have the strength to do work. Their caloric input (from the prior week's waybread) is 300 sasquatches times 5 days times 4mcals equals 6000mcals.

The energy gain for this society is 48,000 mcals less 6,000 mcals equals 42,000 mcals per ten-day.

The EROI is 48,000mcals/6,000mcals =8:1. The net energy is EROI-1 or 7:1. (Remember, EROI is FOR one and net energy is TO one.) For every unit of energy spent in energy harvesting/refining, 8 are produced. Since they used one unit to produce 8, 7 are left over for other areas of society. (Of the 48,000 mcals of energy available to their society, 6,000 is used for energy production, 12,000 is used to make Saspacks, 2,000 used for cleaning and water procurement, 8,000 to feed the Hephalumps and 20,000 to sustain the tribe during their 5 days of hedonistic leisure.) Sidenote -even though there is a 8:1 EROI, 30% of the tribes members contribute to energy procurement.

One day, the 300 energy procurers arrive at the Mongo grove and find many of the colorful monkeys lying dead on the ground. They were so disturbed that they carried 2 of the carcasses home to show the shaman. They also discovered that the Mongo nuts were no longer as easily reachable from the ground and they had to go either deeper into the forest, or climb higher up the trees to fill their packs with the largest ones. This ended up taking a whole extra day.

After returning home a day late, the community was in a panic. They would have to spend a day out of their Five-Day to finish the procurement of food! And the sight of the dead, dark colored monkeys made many sasquatches cry. It was decided to call an emergency Council, to determine what might be done about the turn of events. Many wise and respected sasquatches voiced their opinions. They were saddened by the dead monkeys, but they were more concerned about the lack of easy to find Mongo nuts - the implications being the 300 energy workers might have to work MORE than 5 days per Ten-Day. One of the senior males suggested "We could save a little time by not stopping to pick and bring home flowers which aren't really needed for our energy supply". A matriarchal sasquatch immediately stood up and chastised "Zeke-Stinky-foot, you come home without flowers and you'll see how much they are needed, Husband-mine!". There was a vote and it was decided to continue to pick and bring home flowers.

During much arguing and debating, the shaman entered the pavilion and everyone quieted down. He exclaimed "Colorful Monkey-friends die from Black poisoning" A sharp intake of breath from the Council-members. "Our energy providers feet put Black Desert and Black Swamp on Mongo trees while they pick nuts. Colorful-monkey friends get on paws then in mouth then die." The Council went into an uproar - Black poisoning! Because of our energy procuring! How awful! Yet what can we do? - We need the Mongo nuts to survive and have energy to work and sing! And if we go around the Black Desert and Black Swamp it will take an extra day in both directions!!" The sasquatches were very upset, and spent most of their Five-Day arguing and trying to make a new plan, where none had ever been needed before. It was decided by the Council to have the 300 workers spend an extra day at the groves to fill up their packs. The Shamans comment about the Black Desert being carried to the trees, and killing monkeys was only talked about by a few, and drowned out by the sasquatch leaders who really wanted at least 4 days of leisure and 4mcals per day. It was also decided to send 100 of the 600 saspack workers on exploratory missions, something that hadn't been done in generations, to see what was beyond a 25 mile radius of their community.

These plans worked out reasonably well and gradually the sasquatch colony adjusted. After all, they still had the same amount of food and energy, even though they had to work slightly harder for it, and produce a few less Saspacks. At the end of each Ten-Day the sasquatches were not quite as well rested, but were happy in their resolve to work a little harder to get energy for the tribe. (The Hephalumps did not notice any of this, and continued to chew their 8,000 mcal of Waybread per week.)

The updated EROI formula is:
Energy output = 48,000 mcal/Energy input =8,000 mcal = EROI of 6:1 (net energy of 5:1)

Now of the 48,000 mcal of production, 8,000 is used for energy procuring, 11,200 is used for industry (Saspacks), 2000 for village maintenance, 8,000 for Hephalump food and 18,800 for leisure. Everyone in the sasquatch civilization still consumed the same amount of energy as before, but societies mix of labor allocation and free time had shifted.

***Sidebar of interest: We also now have information to calculate a more advanced (thorough) form of EROI, one that includes co-products and externalities. Flowers have value to sasquatch society and as such get a `co-product' credit in the EROI calculation. (much like dry distiller grains in the ethanol calculation) Since they are an additional output, we can reduce the amount of energy allocated to getting the Mongo nuts, as some of the sasquatch caloric expenditure is now considered necessary for getting flowers. How we allocate this is a debated but relevant question. We could take the market price of the two products (sasquatch society has none) or allocate by mass( the flowers have 50% of the mass of the Mongo nuts) or by volume (they are very light - only 10% the weight of nuts).

Allocating by mass would increase the EROI quite a bit:

Energy output = 48,000 mcal Energy input =4,000 mcal (4,000 allocated to flowers) = EROI of 12:1 (Net energy of 11:1)

Allocating by weight would increase the EROI slightly:
Energy output = 48,000 mcal /Energy input = 7,200 mcal (800 allocated to flowers) =EROI of 6.66:1 (Net energy of 5.66:1)

Our market system (in my opinion) underestimates the long term value of energy to society and net energy calculations that give so much `energy credit' to things like Dry Distiller Grains, thus overestimate the true energy gain (or underestimate the energy loss).

Regarding externalities, it is difficult to put an energy cost on dead monkeys. However, the poisoning was clearly a direct result of the sasquatches energy harvesting techniques and to exclude it from an energy analysis would not be holistic. Modern EROI analysis is just starting to value externalities as costs (see Patzek and Pimental regarding soil mining and Life Cycle analysis of GHG emissions) Ecological economics attempts to value things that humans need and value but are considered `free' in the market system. Quite possibly, the limiting factor of large scale ethanol production, even cellulosic, is the degradation of soil and assumption of continued ease and availability of irrigation.

Since sasquatches are a peaceful and conscientious race, lets arbitrarily allocate a high energy cost to the biodiversity loss to their culture of 8,000 mcals. The EROI would then be:
Energy output = 40,000 mcal (8,000 were subtracted) / 8,000 mcal energy input
=EROI of 5:1 (net energy of 4:1)

Continuing with our story:

The sasquatches situation, largely beyond their control, deteriorated further. The Mongo nut supply, while still enormous, was becoming more thinly distributed. Also, the nuts, which once averaged 3 lbs were now mostly 1-2 lbs. It took the sasquatches much more time and effort to pick and organize them. It also took more time to process them into Waybread, as the shell to nut ratio had increased substantially. All in all, it took an additional 100 sasquatches (400 total) a total of 7 days to harvest and process the Waybread. They were not beginning to get restive.

One day, while the stressed sasquatch community was hard at work on what was normally their 7th day (2nd of leisure), a troupe of youngsters came running full out into the village "We are saved! We are saved! - We found a new Mongo nut grove with huge nuts and plenty of them!! We'll soon be able to go back to our old routine of dancing and reading comic books! For a Five-Day! These nuts are huge!"

A Council was hastily convened where the youths were eagerly bombarded with questions: "How big was the grove? Were there colorful monkeys? Would you like some water? Have you met my daughter Fern-Blossom?" An old silver-back sasquatch, one of the tribal leaders, stood up and quietly asked "Sons, how far is this grove?" One of the scouts replied "Sir, its 120 miles on the other side of the mountain, but an easy walk, with no Black Swamp or Desert". The leader nodded: "That is 5 days in each direction. If we send our energy workers that far, there will not be enough time for them to process the Waybread upon their return." He paused, "However, our Mongo nuts close to the village are getting smaller. I think we should go harvest this new, bigger energy source you have discovered. We will have to take more of our Saspack workers and our village cleaners too. But you are right, you have saved us."

When everything was sorted out, the sasquatches had to organize 2 energy procurement teams of 375 sasquatches each. One team brought water from the village and met the other team halfway and then returned with the large Mongo nuts to process them. These teams traded off in their duties but worked 8 days total out of every Ten-Day. This left 200 sasquatches to work on the saspacks, and it was decided, to be fair and because they were behind contract, that they also work an eight-day. There were only 50 of the tribe left to work on cleaning, and basic village maintenance. The community was amazed that so much! of their time was spent making Waybread, just to spend it on making more Waybread - very little singing and relaxation time anymore. After a few months, the tribal leader, at a somber Council meeting, announced that everyone would have to cut back, and strict rationing of daily consumption to 3 mcals per sasquatch would be enforced.

Because of the reduction in Saspack labor time, the Hephalumps weren't all needed and some started to roam the village. A large controversy erupted when one of the energy workers, strained from a long ten-day on the road, hit a hephalump on the head and killed it. He wanted to eat it but didn't know how.

The energy gain of this society continued to decrease. The energy output of 48,000 mcal (before the rationing), had an energy input of 750 sasquatches times 4 mcal times 8 days = 24,000 mcals.

The EROI was 48,000 / 24,000 =2:1 (Net energy of 1).
A large portion (50%) of this societies efforts were now allocated to energy procurement. Of the total 48,000 mcals procured, 24,000 was from energy procurement, 8,000 was for their livestock, only (200*8*4mcal) =4,800 mcal devoted to Saspack production, and 1,200 to maintain the village and procure water and 10,000 mcals for leisure and art.

A further problem, (for which I dont plan to attempt the math) was that WATER, not energy was now a limiting factor in the energy harvesting process. Water was much heavier to carry than Waybread so a cache had to be set up midway between the water source and the Mongo nut source. The Energy Return on Energy Invested stood steady at 2:1, but the Energy Return on WATER Invested, was declining dramatically.

After the tribal decision to ration consumption, the energy gain of society upticked. Since each sasquatch only consumed 3 mcals, (and many noticed new clarity of thinking and vitality after initial grumbling), the energy production requirements tapered off a bit:

The tribe still procured the same amount of Waybread (the extra was allocated to the following weeks Mongo picking team). The energy input was now only 750 *3mcal *8days = 18,000 Mcals. Because of their belt tightening (or efficiency) the societal EROI increased to 48,000/18,000 = 2.66 (net energy 1.66).Note: the EROI of energy procuring didnt change, but the societal energy gain, from a Tainter-like perspective, did increase.

At year end, the spaceship landed from Planet X. (There were 14 female sasquatches, and one male, waiting at the landing port, hoping to be rescued.) The alien trader strode down the ships conveyor and frowned when he saw the somewhat disheveled sasquatch community. There were Hephalumps everywhere (a delicacy on his planet), huts and sidewalks were in disrepair, and the tribe looked thin.

He was greeted by the tribal leader who sheepishly stated "Noble trader, our energy supplies have dwindled and we had to spend extra time harvesting a new energy source so only had time to make 3,200 Saspacks, not the 6,000 per our agreement."

The alien snorted, "Silly sasquatches - your world, though small, is FULL of energy - what you call the Black Swamp is also known as crude oil and what you call Black Desert is called coal-both of these substances have way way more energy than your precious Mongo nuts. Since you are good customers, I will give you your materials and [product] the medicine but withhold the tasty treats and comic books until you can make more Saspacks. If you like, I will bring machinery to your planet and help you to harness your Black Swamp, in return for great riches" The community was saddened and confused. How could the Black Desert be strong energy? It was poison. They held an immediate Council and concluded that they could do without the comic books, materials and candy. The local shaman could find his own medicine, and they would continue harvesting Mongo nuts, but would further divide the labor among the tribe and produce Saspacks no more. They also didn't need the Hephalumps anymore and would lead them to the Mongo groves and leave them free next Ten-Day. They waved goodbye to the galactic trader for the last time.

The sasquatches were transitioning from a high to a low gain energy system. By removing the Hephalumps and the Saspack industry, which brought them niceties that they didn't really need, they now only had to procure 30,000 mcals per ten-day. The energy input was still 750 *3mcal*8days = 18,000 Mcals.

The final EROI in our example is 30,000 / 18,000 = 1.66:1 (Net energy of .66). While lower, the community now had reorganized in such a way that 18,000 mcal went to energy procurement and 12,000 were left for leisure and dancing and singing (40% of all energy).

CONCLUSIONS

Sasquatch civilization underwent a decline in net energy. The results were less industry and less free time, as a larger effort had to be made to procure essential food. Eventually, they partially offset this loss in energy gain, by jettisoning certain aspects of their culture that were energy intensive yet did not really provide the satisfaction that it cost. The situation of the Sasquatches is not that different from our own. Our assets are human ingenuity, 1.2 trillion barrels of oil, 179.8 trillion cubic meters of natural gas, and 909,064 million tones of coal (of various qualities)(source BP), and the various renewable flows generated from the planet. Our liabilities are a large population, the seemingly unquenchable human desire for more, a growing realization that we have in fact tapped the 'best-first' energy reserves, and ecosystems that are nearing the limits of their resilience to human extraction and waste absorption.

Our civilization is organized around high energy gain infrastructure - low gain sources, possibly even as low as 5:1 may not have the energy density required to power our liquid fuel intensive society. As can be seen by the below graphic, shopping centers and skyscrapers are part of a high energy infrastructure. Renewable flows, at least thus far do not match up in energy gain. Large scale wind has a higher EROI than oil, but cannot (as of yet), power our planes, trains and automobiles.

(Graphic from Cutler Clevelands EROI powerpoint.)

The corn ethanol and even the cellulosic ethanol debates typically miss a larger point. Much mental effort is spent debating whether the energy balance is slightly positive or slightly negative while society runs on an energy gain significantly higher than any liquid fuel alternative. When we hit $150 oil, there wonâo[dot accent]t be too many parents buying their kids a new GI Joe with the Kung Fu grip toy. At the same time, energy companies will need more and more employees to man wildcats and oil rigs and install solar panels. Though we might not be thinking in these terms at the time, the lack of energy gain (or lower net energy) will be manifesting itself in resources taken away from marginal areas of society (toy companies, hot tubs, hemorrhoid cream, Snausages, poker chips, etc) into energy producing and distributing sectors.

THE BOTTOM LINE:

1) Net energy is more important from a relative basis than absolute. A 3:1 EROI doesn't tell us much unless we know how that compares to what an organism/society has been built on/used to. A 2:1 EROI would have made stone age villagers incredibly rich. A 5:1 EROI may not be enough to power our society. (e.g. as fossil fuels get more expensive they will collapse the economy and no real recovery will ever happen as the high energy gain outputs are already gone)

2) Energy reserves are not as important as energy flow rates. We could have a billion mongo nut trees, but all that matters is the maximum flow that society is able to harvest in real time. (This obviously applies to oil as well)

3) Energy quality depends on the context. High BTU substances, like oil or coal, are clearly very useful to our society, but may not be to others. (the sasquatch colony valued and used Waybread, not oil)

4) Liebigs law of the minimum applies to an energy portfolio. Wind has a high EROI, but our system infrastructure relies on liquid fuels. The net energy of the weakest link matters more than the overall net energy of society. (Adding high EROI wind capacity while net energy of oil dwindles does not solve the problem, unless the energy mix changes from liquid fuels to electricity)

5) Using different boundaries in net energy analysis will lead to different conclusions. A society running at 5:1 EROI would be happy to develop a scalable technology with an 8:1 EROI, however, after environmental externalities are included, it might [The Oil Drum: Net Energy - Discussions about Energy and Our Future]
11:56:36 AM    

Cutler Cleveland of Boston University has reported that the EROI of oil and gas extraction in the U.S. has decreased from 100:1 in the 1930âo[dot accent]s to 30:1 in the 1970âo[dot accent]s to roughly 11:1 as of 2000 (Figure 1). But beyond the fact that society receives currently around 11 barrels of oil for every 1 barrel that it spends getting that oil, What does this mean?

Figure 1. Plot of three estimations of EROI for U.S. oil and gas.

Well, first, it means that, if the trend of declining EROI continues, society will be spending an increasingly larger chunk of their remaining energy to get more energy. This cycle is positively reinforcing:

Declining EROI means that the net energy contained in each unit of energy delivered to society is decreasing over time, requiring the extraction of increasingly greater quantities just to meet societal demand â[integral][base ']
decreases the quantity of energy remaining in the ground for future society â[integral][base ']
makes it more difficult to find and develop the remaining bit of energy.

With every barrel we pull out of the ground we propel ourselves further down this path, creating a more difficult situation for future generations. (note: I assume that the âo[ogonek]Best First Principleâo[caron] applies to this scenario, i.e. society is using the best resources (i.e. oil fields) first, then the second best, etcâo[oe])

More importantly, declining EROI also means that the amount of discretionary energy available to society is FAR less than that predicted by a Hubbert curve (Figure 2). The Hubbert curve represents the total gross quantity of energy available, and, as it is calculated, there are equal quantities of energy available on the left and right side of the peak. This, however, is only true in a gross sense. The net energy available (i.e. discretionary energy) is less. In other words, declining EROI means that there will be much less net energy extracted post-peak than pre-peak on the Hubbert curve.

Figure 2. Hubbert curve as published in 1971. See here for a more detailed discussion of M. King Hubbert and this graph.

To understand this in greater depth, I quantified this relationship by first creating a replicate of the Hubbert curve published in 1971 (Figure 2). I then applied the three point values of EROI over the past century (i.e. 1930 = 100:1, 1970 = 30:1, and 2000=11:1), and interpolated linearly the values between the points and into the future to a minimum EROI of 1.1:1. I have no a priori reason to believe that EROI has declined linearly or that it will decline to 1.1 and then level off, but it has certainly declined in the past and as long as it is declining the general results reported here are valid.

I then used the following equation to calculate the percent of net energy available from the gross energy produced:

Figure 3 shows the results of this analysis. Unlike the original Hubbert curve that shows equal quantities of gross energy resources on the left and right side, the Net Hubbert Curve is skewed so that most resources are on the left. For example, according to the original Hubbert curve, 50% of the energy resource is remaining when production levels reach the peak, but this is quite different for the Net Hubbert curve. Due to declining EROI, by the time peak production is reached, 73% of the net energy available is already used.

Figure 3. Gross and Net Hubbert curves, adapted from Figure 2.

The implications of these results are vast, but in general, declining EROI is going to make it very difficult to meet the net energy needs of future society. Although this study may not be very precise, it does imply that if we have reached Peak Oil (and I think we have), that society has already spent quite a bit more than half of the net (or discretionary) oil energy that will ever be available.

11:53:38 AM    

Educational Catchup Downunder.

A wonderfully ambitious paper just published in the new Journal of Human Capital combines school enrollment data and demographic tables to estimate educational attainment rates for 74 countries over the period 1870-2010. Here[not equal]Äôs the abstract.

The Century of Education (published version, working paper version)
Christian Morrisson & Fabrice Murtin
This paper presents a historical database on educational attainment in 74 countries for the period 1870[not equal]Äì2010, using perpetual inventory methods before 1960 and then the Cohen and Soto database. We use a measurement error framework to merge the two databases, while correcting for a systematic measurement bias in Cohen and Soto’s study linked to differential mortality across educational groups. Descriptive statistics show a continuous spread of education that has accelerated in the second half of the twentieth century. We find evidence of fast convergence in years of schooling for a subsample of advanced countries during the 1870[not equal]Äì1914 globalization period and of modest convergence since 1980. Less advanced countries have been excluded from the convergence club in both cases.

Being a tad parochial, I naturally turned to see how Australia compares. Here[not equal]Äôs our average years of schooling, plotted against the average for the UK and US, over 140 years.

11:08:02 AM    

Jeff Borland has a splendid article (gated, sorry) in the latest Australian Economic Review on what happens to the labour market in recessions. From it, I learned:

1. The impact across industries differs greatly. In past recessions, employment tends to fall in agriculture, manufacturing and construction, but also tends to rise in [base ']Äòrecreation and personal services[base ']Äô, and sometimes also in the [base ']Äòcommunity services[base ']Äô industry.

2. In percentage point terms, youth unemployment tends to rise more than prime-aged unemployment in recessions, but the proportional increase is the same. For example, in the early-90s recession, unemployment rose from 10.4% to 18.4% for 15-24 year olds, and from 4.3% to 8.5% for 25-54 year olds. So both rates approximately doubled, but that represented an 8pp increase for kids, and a 4pp increase for adults.

3. In recessions, long term unemployment tends to increase more than short-term unemployment.

4. Unemployment inflows and outflows both increase. Jeff explains the puzzle.

The flows between employment and unemployment in Australia have followed a regular pattern during recessions and upswings. In particular, both tend to increase during recessions. It should not be surprising that the inflows to unemployment from employment increase during a recession, as this is a time when we expect many workers to lose jobs due to a reduction in demand for firms’ output. However, it might seem curious that the outflows from unemployment to employment also rise during a recession. How can it be that more people are finding jobs in recessions than upswings?

This phenomenon can be explained as follows. The magnitude of the outflows from unemployment to employment from one month to another depends on the number of persons who were unemployed in the initial month and on the probability that a person who was unemployed in that initial month shifts to employment by the next month. Even though the probability of an unemployed person moving to employment falls during recessions (that is, it becomes harder, on average, for any individual unemployed person to find a job), there is also a much larger number of unemployed persons during a recession, and it turns out that the effect of having more unemployed persons is the dominant effect on the magnitude of the flows from unemployment to employment. Hence, the outflows from unemployment to employment are at a peak during recessions.

This finding has quite important implications; for example, for agencies (such as Job Network providers) who are seeking to place unemployed persons into employment. It suggests that their total number of successful placements of unemployed clients into jobs is likely to be the highest during recessions.

5. According to 1997 time use data, 15-20% of unemployed people report job search activity on any given day, with the average time spend searching among those people being 80-100 minutes per day. Multiplying these numbers together, the average time spent job searching across all unemployed people is 16 minutes per day, or a little less than 2 hours per week.

If you can get access to the article, it[base ']Äôs highly recommended reading.

(xposted @ Core)

2:38:29 AM    

Do Smart Parents Raise Smart Kids?.

Not surprisingly, the answer is yes. But we might also be interested in magnitudes.

A new paper using German data finds a parent-child test score correlation of 0.45, which is bigger than the intergenerational earnings correlation in Germany (about 0.2, I think). So a 10% increase in parents[not equal]Äô income raises children[not equal]Äôs income by 2%, but a 10% increase in parents[not equal]Äô test scores raises children[not equal]Äôs test scores by 4.5%.

Do Smart Parents Raise Smart Children? The Intergenerational Transmission of Cognitive Abilities
Silke Anger & Guido Heineck
Complementing prior research on income mobility and educational transmission, we provide evidence on the intergenerational transmission of cognitive abilities using data from the German Socio-Economic Panel Study. Our estimates suggest that individuals’ cognitive skills are positively related to the abilities of their parents, even when educational attainment and family background is controlled for. We differentiate between mothers’ and fathers’ IQ transmission and find different effects on the cognition of sons and daughters. We show that cognitive skills which are based on past learning are more strongly transmitted from parents to children than cognitive skills which are related to innate abilities. Our findings are not compatible with a pure genetic model, but rather point to the importance of parental investments for the cognitive outcomes of children.

(xposted @ CoreEconomics)

8:49:07 PM    

The weak economy is hurting Mac sales to professional and educational customers, but consumer sales and the iPhone and iPod touch have lifted Apple to another impressive financial quarter. Ending the second quarter of 2009, Apple reported a $1.21 billion profit on revenue of $8.16 billion, or $1.33 per diluted share (those numbers compare to a $1.05 billion profit on $7.51 billion in the year-ago quarter). Also contributing to the strong bottom line were low prices for components such as RAM, better freight and warranty costs, and better sales of high-margin products, all of which helped push Apple's gross margin to 36.4 percent (up from 32.9 percent last year).

In a conference call with analysts, Apple Chief Financial Officer Peter Oppenheimer called it Apple's "best non-holiday quarter in history." The company reported $28.9 billion in cash on hand, noting that it's focusing on "preservation of capital" with that cash (and presumably not looking at any major acquisitions).

Macs and iPods -- During the quarter ending 31-Mar-09, Apple sold 2.2 million Macs, a 3 percent decline from last year. Apple attributed the drop to professionals, such as design firms, who are likely holding off purchases to save costs until the economy improves, and to educational customers who have seen state and federal funding dry up. Although U.S. educational sales dropped 11 percent, the company is optimistic that the recently passed U.S. stimulus package will help in future quarters. The desktop refresh in early March (which updated all of Apple's desktop models) boosted sales.

As part of the discussion of Mac sales, the question of netbooks arose during the call. Chief Operating Officer Tim Cook expressed Apple's opinion of the current netbook market, saying, "When I look at what's being sold in the netbook space today, I see cramped keyboards, terrible software, junky hardware, very small screens, and just not a consumer experience and not something that we would put the Mac brand on, quite frankly."

As with his comments during the last quarter's conference call, Cook pointed out that Apple has "some interesting ideas in this space." He also pointed out that the features for which people are buying netbooks - Web browsing and email - can be accomplished with the iPhone or iPod touch.

Led by strong sales of the iPod touch, Apple racked up 11.01 million iPod sales during the quarter, a 3 percent year-over-year improvement. During the call, Oppenheimer and Cook reiterated the strength of the App Store and the iPhone OS (which also runs the iPod touch) as fueling those sales, and reminded listeners that they expected the App Store to mark its 1 billionth download sometime on Thursday. (The billionth app was indeed downloaded on Thursday, by a 13-year-old in Connecticut.) Apple claims it owns 70 percent of the market for music players in the United States.

iPhone 3G -- The star of Apple's financial results, once again, is the iPhone, with 3.8 million iPhones sold in 81 countries, a 123 percent growth over the year-ago quarter. Those numbers represent the GAAP (Generally Accepted Accounting Principles) results - Apple spreads the income for the iPhone and Apple TV over their expected lifespan. Non-GAAP results push Apple's quarterly totals to a $1.66 billion profit on $9.06 billion in revenue (that's money directly received during the quarter).

Apple is also delaying revenue recognition for sales of all iPhones after 17-Mar-09, which is when it announced the iPhone OS 3.0; current iPhones will be able to upgrade to the new operating system for free when it appears later this year.

Unlike the last earnings call, this one didn't offer any incendiary questions or statements. Only one mention of Steve Jobs's health came up, and that was as an aside: Oppenheimer said, "We look forward to Steve returning at the end of June." Analysts also tried to elicit comments about possible legal skirmishes over the Palm Pre and whether it violates Apple's intellectual property (or whether Apple is infringing on Palm's patents), which prompted Cook to end the call with a generic statement about how competition is healthy for the industry and that "we think it's best that other companies invent their own stuff."

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8:10:09 PM    

The Daily Show With Jon Stewart	M - Th 11p / 10c
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10:51:04 PM    

The Australian Government intends to head into the G20 meeting in April with strong warnings against the dangers of growing economic nationalism around the globe, so we should not expect the Government to exhibit any such traits in the lead up to the London meeting.¬[sgl dagger]

On Sunday morning Wayne Swan was offered the chance to pillory ANZ for out-sourcing 500 back office jobs to India.¬[sgl dagger] He was asked on the ABC Insiders program¬[sgl dagger]whether the Government was getting enough in return for the financial guarantees provided to the banks, given that jobs are being sent off-shore.¬[sgl dagger] Swan’s reply was reassuring in its economic liberalism.¬[sgl dagger]¬[sgl dagger]Swan said that the guarantees and off-shoring of jobs were unrelated issues, and he only urged banks to look after their employees.¬[sgl dagger]

So far so good.¬[sgl dagger] But then on Monday we hear that the Government is to slash Australia’s skilled migrant intake.¬[sgl dagger]

¬[sgl dagger]This is a bad¬[sgl dagger]decision on every level.¬[sgl dagger] It trashes the Government’s credibility in arguing against economic nationalism; it restricts the flow of valuable human capital into Australia; and it pulls up the ladder people who are in the pipeline and could reasonably have expected to come to Australia this year.¬[sgl dagger]¬[sgl dagger] Josh Gans explains below that there is little or no evidence that immigration increases either unemployment or rents in a¬[sgl dagger]recession.¬[sgl dagger] ¬[sgl dagger]

We are a nation of immigrants.¬[sgl dagger] Apart from our¬[sgl dagger]indigenous¬[sgl dagger]population, everybody who lives in Australia is descended from immigrants (and/or convicts).¬[sgl dagger] Our immigration policy has served the nation fantastically well and should¬[sgl dagger]not be¬[sgl dagger]used as a semi-annual labour market policy instrument (the skilled immigration quota increased substantially only 9 months ago).

The Government might just as easily have announced that in the global war for talent the GFC¬[sgl dagger]presents a unique opportunity for Australia to bring in a wave of talented and energetic immigrants that will carry us forward for decades.¬[sgl dagger] It might have announced that in the interests of up-skilling the economy and solving the demographic problems of a greying population, skilled migration will be increased by 100% for the next three years.¬[sgl dagger] Skilled immigration is like adrenaline to any society and an opportunity to attract this much talent is unlikely to present itself again, so lets go for it.¬[sgl dagger]

But, alas no.¬[sgl dagger] Instead we have a sop to ACTU lobbying that does a lot of harm and and very little good.

2:13:16 PM    

In early-1993, Australian unemployment peaked at nearly 12%. In 1992-1995, six of Australia’s eight states and territories ousted their government. By contrast, unemployment averaged 5% in 2003-2006. In these years, no state or territory government was ousted from power.

In Australian politics, conventional wisdom has it that the state government oustings of the early-1990s were due to bad leadership, while the victories of the early-2000s were due to skill. But could it be that Carr wasn’t more skillful than Cain & Kirner, just luckier? In a paper that we released last year, Mark McLeish and I showed that Australian state governments were more likely to lose office when the national economy turned sour.*

To check that our results weren’t being driven merely by the modest contribution that state leaders make to economic performance, we were able to show that our results held up even if we only used a purely unrelated source of growth - the US economy. Here’s a chart that shows our central result: the bars indicate the share of state governments losing office in each 5-year period, while the line is the US unemployment rate.

Why do Australian voters turf out their state governments when the US economy tanks? The answer seems to lie in something psychologists call ‘the fundamental attribution error’, which is the fact that humans aren’t very good at separating situational factors from ability when making assessments. So for example managers tend to be bad at taking task difficulty into account when assessing their workers, sports fans don’t appropriately adjust for field conditions when judging ability, and shareholders tend to overpay CEOs when the market booms. Consequently, it isn’t all that surprising that voters aren’t very good at separating out the component of economic growth that lies within the control of state politicians from factors outside their control.

Our results suggest that a 1 percentage point rise in the unemployment rate lowers a Premier’s chances of re-election by 3-5 percentage points. So the 1 1/2 percentage point increase in the Queensland unemployment rate over the past year has lowered Premier Bligh’s chances of re-election on the weekend by 5-8 percentage points (the average Premier in our sample had a 66% chance of re-election).

But the fundamental attribution error doesn’t just affect Australian state elections. In earlier work, Justin Wolfers showed that luck affected US state elections in a similar way (though Australian voters seem a little more gullible than their US counterparts). And in work on national elections, I’ve recently shown that when the world economy slumps, national leaders tend to get voted out of power.

Here’s a chart plotting world growth against re-election rates over recent decades (I exclude the US and Japan, since they make up a large share of world GDP).

We don’t know the optimal turnover rate of governments, so it could be that voters in national elections get rid of too many governments when the world economy slumps. Or perhaps they axe too few when the world economy booms. But either way, some more national leaders are likely to join the ranks of the unlucky unemployed.

One last prediction. I’m guessing that the prognostications of the pundits will over-emphasise competence and under-emphasise luck. After all, it’s not just voters who commit the fundamental attribution error.

* As part of the Australian state elections paper, we also produced estimates of Australian state unemployment rates from 1913-2006, which are available here.

1:25:56 PM    

Google made a practical move with some of the 7 million books it's scanned from academic collections by making 500,000 titles with no remaining copyright protection available to Sony for its electronic book device, the Reader. Reports indicate only books from 1922 or earlier were included, as 1922 is the latest date for which public domain status is entirely clear. (Many works published after 1922 are also in the public domain, but each work has to be researched individually to determine its status.)

Earlier this year, Google added an option to view but not download 2 million public domain books on the iPhone; see "More Ebooks Available for the iPhone/iPod touch," 2009-02-09. Think of it like iTunes song purchases versus a Pandora stream.

Google's program to scan books ran afoul of publishers and authors' concerns about the right to scan and archive titles, and the legality of snippets being displayed from these scanned works. A preliminary settlement between Google and various interested parties should make millions of books available for viewing, printing, download, and purchase in the coming months; these titles could also wind up being previewable and for sale on the Reader. (See "Authors and Publishers Settle with Google Book Search," 2008-10-29.)

It's clear that Google has chosen a side (for now) between the two giants of electronic book readers, Sony and Amazon. The Wall Street Journal notes Sony said its Reader sales are at 400,000 and reported that Citigroup estimated Amazon Kindle sales at 500,000.

The Kindle 2, introduced in February, improves on the design of the original device and has a faster screen refresh. Amazon released Kindle for iPhone shortly after the Kindle 2 hardware. Amazon offers 245,000 books for sale along with subscriptions to dozens of magazines and newspapers, and hundreds of blogs. The iPhone software can download only books, not subscriptions. That may change with Apple's iPhone 3.0 software, which now enables in-application subscriptions and purchases.

Lest we forget, Project Gutenberg's volunteers have been assiduously typing, scanning, and correcting out-of-copyright works for many years. Its catalog, now at 27,000 books, includes downloads in text and other formats, including a DRM-free ePub format that both the Reader and Kindle 2 can handle. Affiliated and partner projects bring a grand total to 100,000 titles.

While Project Gutenberg has a fraction of what Google has made available, the quality should be higher, as works have been prepared for accuracy instead of volume, and represent works of a great likelihood to be interesting to a modern audience instead of historians and researchers.

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12:29:13 PM    

The unemployment rate data published this morning shows a not surprising continuing rise in the unemployment rate. The headline rate is 5.2%, up from 4.8% a month ago, and a low of 3.9% last year. It is well to remember that this is still a very low unemployment rate, but the worrying issue is that the rate is heading up fairly quickly, that full time job losses are large, and that layoffs continue at a fairly rapid pace. In the US the unemployment rate has risen very quickly to a current rate of 8.1% - as recently as April last year the US unemployment rate was below our current 5.2% rate.

So it is appropriate for the government to be spending money to try to slow the rate of unemployment growth. But with the latest payments going out to families and individuals it was interesting to see two recipients on last nights ABC news. One punter was spending the payment on an overseas holiday, while the other was buying a new PC. Both punters are probably creating more jobs in Thailand than in Australia. Once again, the most effective way to create jobs is not to give away handouts, but to spend on infrastructure.

6:37:25 PM