Estimating the Relationship between Eroi and Profitability of Oil Sands Mining, 1997-2016

Biophysical Economics is a school of heterodox economics built on the premise of the primacy of energy in the economic process. Despite significant progress made in the methodology of net-energy analysis, the literature on the relationships between the biophysical properties of energy sources, such as net-energy ratios, and financial indicators (price, cost, etc.) most economic agents use for decision-making is scant. Are the biophysical qualities of energy sources reflected by market signals? Can the latter guide decision-making in the context of depletion of non-renewable energy resources? The paper examines the relationships between the net-energy ratios and price, cost of production and price-to-cost ratios of the Canadian oil sands from 1997 to 2016. A simple econometric model is developed to estimate the correlation between the Energy Return on Energy Invested (EROI) with the price, cost of production and price-to-cost ratio of each oil sands-derived crude (crude bitumen and synthetic crude) on a 20-year period. Correlation matrices between the indicators complete the estimations. Preliminary results suggest market prices to be the most significant indicator influencing profitability. No discernable correlation is identified between the EROI and financial indicators of either crude stream, suggesting biophysical and financial properties to be sui generis realities