The energy return on investment or EROI is a measure of efficiency used by oilcos. This ratio expresses how many units of fossil fuel can be extracted in a process given the input cost of a single unit of fuel. It is used as an indicator of the profitability of an energy resource.

An EROI of 1:1 means that for every unit of energy you put in, you take 1 unit of usable energy out.

An EROI of greater than 1 means you take more energy out than you put in.

Joseph Tainter argued for such a metric in the 1970s to 1990s. In his book The Upside of Down, Thomas Homer-Dixon argued that the EROI of a society was a key indicator of sustainability, and that societies with a falling EROI are headed for social collapse. Tainter had argued similarly.

However, there are fundamental problems with the concept of EROI:
  • The fuel used may not be available at any other site or for any other use, and may go to waste if not used on that site or for that purpose. So-called refinery fuel for instance is not saleable nor easy to transport, and thus will be burned in refineries to replace other fuel which could be transported and sold. So EROI will tend to either uniformly include or exclude this fuel, and can be made to suit the argument
  • The return changes drastically with the technologies and the reliability and efficiency of the infrastructural capital available, making EROI almost site-specific
  • Assumptions about the "average" or "net" across many sites will tend to obfuscate the opportunities to make use of local energy sources unique to a site, and steer investment towards a type of extraction or refining rather than towards exploiting unique features of that site. See GEVAD.
  • Worst of all, there is no agreed way to account for depreciation over time of a very large capital asset such as a hydroelectric dam. Only Capital Cost Allowance would seem to provide a model for such accounting, but this applies not to energy but to financial capital.

For all these reasons, the EROI may only be a misleading veneer on top of traditional cost-benefit methods, subscribing to a bad ontological metaphor of energy as currency. These distortions led Craig Hubley to argue to Ignore Peak Oil and likewise ignore "EROI" and stick to regret measurements based on a proper capital asset model, which would take into account also long term risks such as climate change.

Approximate EROI's amd CBR for different energy sources:
Middle East oil 30+$1/barrel
Tar sands 1.5$18.60/barrel
Hydro power 45 ?
Coal 25 ?
Nuclear 5 – 20 ?
Wind 4 – 10 ?
Solar 5 ?
Corn methanol 0.8?

Diminishing returns

In any human activity, there tends to be what is often referred to as the Law of Diminishing Returns. This means that for any activity, the first part of the process produces the greatest profits or advantages. For example, when a successful oil well is sunk, the oil gushes up under considerable pressure. As the oil reservoir depletes, so more energy has to be applied to extracting what remains. And this energy amount increases as the depletion grows.

It is normal, in human behaviour, to go go for the easier and cheaper returns first. Hence, the easily extracted oil in the Middle East will tend to be at a premium relative to the deep-sea returns from the North Sea, or the heavier oils in Venezuela.

In general, the oil and gas will be extracted before the coal and tar sands. 6 When it comes to any particular resource, such as coal, the easier fields will be exploited first.