Generalised Resource Generalised Resource ScarcityScarcity

We have to make choices We have to make choices urgently.urgently.

• 1908: The National Conservation 1908: The National Conservation Commission – growing concern of Commission – growing concern of scarcityscarcity

• No stable population in immediate future No stable population in immediate future – further ↑ in scarcity – especially in – further ↑ in scarcity – especially in industrialised countries where per capita industrialised countries where per capita income is highincome is high

• Automatic market correctionsAutomatic market corrections• Market & public policy imperfections Market & public policy imperfections • Rising demand - mines / wells exhaustedRising demand - mines / wells exhausted• Is this going to continue? ..?...? Or is Is this going to continue? ..?...? Or is

it an isolated pattern?it an isolated pattern?• Desirability & inevitability of future Desirability & inevitability of future

economic growth – a larger debateeconomic growth – a larger debate

• Should we worry?Should we worry?• Scarcity will affect quality of our lives – Scarcity will affect quality of our lives –

future generations will be affected toofuture generations will be affected too• There are 3 alternatives that defuse the There are 3 alternatives that defuse the

pressures on environment assets that pressures on environment assets that are caused by growth in population & are caused by growth in population & income:income:– Role of exploration & discoveryRole of exploration & discovery– Technical progressTechnical progress– Substitution for scarce resources by Substitution for scarce resources by

abundant ones abundant ones

Exploration & Discovery:Exploration & Discovery:• Will explore until marginal discovery Will explore until marginal discovery

cost = marginal scarcity rent (MSR) cost = marginal scarcity rent (MSR) • MSR is difference between price MSR is difference between price

received & marginal cost of extraction = received & marginal cost of extraction = marginal benefitmarginal benefit

Technological progress:Technological progress:• Reduces cost by finding new ways to Reduces cost by finding new ways to

extract, process & use the oreextract, process & use the ore• Rate & type of technological progress Rate & type of technological progress

are influenced by the degree of resource are influenced by the degree of resource scarcity – as extraction cost increases → scarcity – as extraction cost increases → new opportunity to develop new new opportunity to develop new technologiestechnologies

• Substitution:Substitution:• The easier the substitution the The easier the substitution the

smaller the impact of smaller the impact of availability & availability & costs- F1 & F2 are costs- F1 & F2 are

Substitution possible

S1

O

F1F2

O2

X3

X1

Y2 Y1

X2

rt. Angled iso-rt. Angled iso-quants – quants – F2<F1 – S1: F2<F1 – S1: possibility for possibility for substitution – substitution – tech used by S1 tech used by S1 & F1 are diff - ….& F1 are diff - ….

O1

• Some factors like Some factors like population & population & income, may income, may the likelihood of the the likelihood of the scarcity while these three scarcity while these three (exploration & discovery, (exploration & discovery, technological progress, input technological progress, input substitution) mitigate the substitution) mitigate the seriousness of scarcity. seriousness of scarcity.

• To determine which set of factors To determine which set of factors dominates, we must examine the dominates, we must examine the evidence.evidence.

Detecting Resource Detecting Resource ScarcityScarcity

• Selecting means to detect scarcity : Selecting means to detect scarcity : 11stst step in assessing the seriousness step in assessing the seriousness of scarcity – criterion for ideal of scarcity – criterion for ideal indicators:indicators:

• Foresight: Foresight: • ComparabilityComparability• computabilitycomputability

Applying the CriteriaApplying the Criteria• The physical indicators: The physical indicators: Resource Prices (RPs): efficient RPs Resource Prices (RPs): efficient RPs

maximise net benefit to the society – maximise net benefit to the society – market prices may not be efficient market prices may not be efficient

Scarcity Rent (SR) : payment accruing to Scarcity Rent (SR) : payment accruing to a resource owner when user cost is +ve – a resource owner when user cost is +ve – if future didn’t matter there would be no if future didn’t matter there would be no scarcity rent – can be used as indicator scarcity rent – can be used as indicator for renewable & depletable resources – for renewable & depletable resources – SR for all open access resources is zero - SR for all open access resources is zero - SR SR ↑↑ availability of resource availability of resource

Marginal Discovery Cost (MDC): SR is Marginal Discovery Cost (MDC): SR is not observable directly not observable directly ∴∴ MDC if can be MDC if can be observed is = MSRent – unluckily very observed is = MSRent – unluckily very little information on MDC is available little information on MDC is available ∴∴ not of much usenot of much use

Marginal Extraction Cost (MEC): With Marginal Extraction Cost (MEC): With given technology for extraction as lower given technology for extraction as lower grades are extracted MEC is expected to grades are extracted MEC is expected to - MEC is a signal of the amount of - MEC is a signal of the amount of sacrifice needed to procure each unit of sacrifice needed to procure each unit of resource – can approximate unit resource – can approximate unit extraction cost with available extraction cost with available information – Harold Barnett & Chandler information – Harold Barnett & Chandler Morse (1963): Ci = (Morse (1963): Ci = (ααii L Lii+ + ββii KKii) / ) / QQii

Evidence on Resource Evidence on Resource ScarcityScarcity

• Different studies to understand degree of Different studies to understand degree of scarcity – different approaches – scarcity – different approaches – different conclusions different conclusions

• Physical indicators: reserve-to-use ratios Physical indicators: reserve-to-use ratios – In 1970 many metals had a ratio of less – In 1970 many metals had a ratio of less than 30 yrs – But we have not exhausted than 30 yrs – But we have not exhausted those yet those yet

Demand side: key is in ability to Demand side: key is in ability to substitute renewable for depletable substitute renewable for depletable natural resources – to assess potential natural resources – to assess potential degree of substitution between natural degree of substitution between natural resources & other commodities is to resources & other commodities is to estimate a construct known as ‘elasticity estimate a construct known as ‘elasticity of substitution’ (of substitution’ (бб))

Supply side: studied by Goeller & Supply side: studied by Goeller & Weinberg (1978) – tried to find current Weinberg (1978) – tried to find current & future availability – computed static & future availability – computed static reserve indices for each substance - reserve indices for each substance - phosphorus: will run out 1phosphorus: will run out 1stst will last will last another 1300 yrs – other resources for another 1300 yrs – other resources for millions of years – 2 main conclusions:millions of years – 2 main conclusions:

o except phosphorus, a few trace except phosphorus, a few trace elements for agriculture & energy fossil elements for agriculture & energy fossil fuel, there is virtually unlimited supply fuel, there is virtually unlimited supply

o Transition away from these limited Transition away from these limited resources will mean a relatively little resources will mean a relatively little loss in standards of living – maximum: loss in standards of living – maximum: double prices of current level double prices of current level

• In reality we are somewhere between In reality we are somewhere between pessimism of reserve-to-use ration & pessimism of reserve-to-use ration & optimism of Goeller and Weinberg optimism of Goeller and Weinberg forecastforecast

• Skinner suggested that a different Skinner suggested that a different distribution may be the truth – 3 distribution may be the truth – 3 groups groups

• Skinner hypothesis implies that as we Skinner hypothesis implies that as we mine lower grades of geo-chemically mine lower grades of geo-chemically scarce resources we shall find less scarce resources we shall find less lower grade ore available over some lower grade ore available over some considerable range of grades considerable range of grades

A model of future market in US A model of future market in US for copperfor copper• Rate of extraction rapidly over 100 yrs Rate of extraction rapidly over 100 yrs

– extraction peak at 2100 – peak – extraction peak at 2100 – peak extractextractnn rate 8 times of current rate rate 8 times of current rate

• Will exhaust by 2070 – then from copper Will exhaust by 2070 – then from copper rock - 0.05% maximum grade - rock - 0.05% maximum grade - expensive but no longer scarceexpensive but no longer scarce

• In the LR other substitutesIn the LR other substitutes• Recycling – big businessRecycling – big business• Price Price drastic over next century drastic over next century • Price of copper Price of copper 10 fold – cost of copper 10 fold – cost of copper

related services related services by 10 fold by 10 fold

Economic IndicatorsEconomic Indicators• Extraction cost:Extraction cost: Barnett & Morse’s Barnett & Morse’s

empirical evaluations – found no empirical evaluations – found no evidence of evidence of scarcity except forestry – scarcity except forestry – have given 4 explanations for absence of have given 4 explanations for absence of any evidence of scarcity any evidence of scarcity

Historically, as higher grade resources Historically, as higher grade resources exhausted, lower grade became available exhausted, lower grade became available

Users shifted to less scarce resourceUsers shifted to less scarce resource As price As price ↑ ↑ incentive to explore incentive to explore Technological change → Technological change → ↓↓ cost of cost of

extraction extraction ∴ ∴ Optimistic futureOptimistic future

• Scarcity due to growth is foregone Scarcity due to growth is foregone conclusion – discoveries have conclusion – discoveries have possibilities of substitution - to possibilities of substitution - to unimaginable degree & man has many unimaginable degree & man has many alternatives available alternatives available

• Scepticism may be is more Scepticism may be is more appropriate for such conclusions – appropriate for such conclusions – Barnett & Morse fail to consider Barnett & Morse fail to consider energy costs in measuring cost of energy costs in measuring cost of extraction – whether scarcity is taking extraction – whether scarcity is taking place depends on not only availability place depends on not only availability & cost of labour & capital but also on & cost of labour & capital but also on scarcity of energy scarcity of energy

• Study by Johnson, Bell & Barnett Study by Johnson, Bell & Barnett extended analysis on American unit extended analysis on American unit extraction costs (1980) and found that extraction costs (1980) and found that

- B-M findings of B-M findings of scarcity in forestry was scarcity in forestry was reversed in 1958-70 periodreversed in 1958-70 period

- Out of 15 agricultural commodities all Out of 15 agricultural commodities all had falling unit extraction costs during had falling unit extraction costs during 1958-72 period1958-72 period

- Of 11 mineral & fuel commodity groups Of 11 mineral & fuel commodity groups studied all had extraction cost studied all had extraction cost

- Unit extraction cost have Unit extraction cost have in commercial in commercial fishing from 1962 – only case of fishing from 1962 – only case of scarcity scarcity

• Studies of resource price trendsStudies of resource price trends Scarcity of resources Scarcity of resources then their prices then their prices

should should faster than other goods faster than other goods Today prices of food grains & food items Today prices of food grains & food items

are are faster than other prices mainly due faster than other prices mainly due to less land available for farming to less land available for farming

Slade Margaret (1982) investigated the Slade Margaret (1982) investigated the prices that suggested that “if scarcity is prices that suggested that “if scarcity is measured by relative prices, the measured by relative prices, the evidence indicates that non-renewable evidence indicates that non-renewable natural resources commodities are natural resources commodities are becoming more scarce.” becoming more scarce.”

• Discovery cost:Discovery cost: Fisher (1981) compared with average Fisher (1981) compared with average

discovery cost in US for oil & gas for discovery cost in US for oil & gas for 1950-71. In 1999 -around $16 a barrel. 1950-71. In 1999 -around $16 a barrel. July 2008, peaked at $147 a barrel. In July 2008, peaked at $147 a barrel. In the months that followed, as fears of a the months that followed, as fears of a global recession grew, prices plunged global recession grew, prices plunged to the $75 a barrel range. Now? Now to the $75 a barrel range. Now? Now price has changed for a different reason price has changed for a different reason all together – difficult to estimate all together – difficult to estimate marginal discovery costs because the marginal discovery costs because the magnitude of any given year’s magnitude of any given year’s discoveries remain unknowndiscoveries remain unknown

• Juxtaposing Alternative MeasuresJuxtaposing Alternative Measures: : No single indicator universally No single indicator universally dominates all others better to use dominates all others better to use several indicators, deriving several indicators, deriving informationinformation

To To concludeconclude

• Goeller & Weinberg’s work makes it clear Goeller & Weinberg’s work makes it clear that we have abundant resourcesthat we have abundant resources

• Historically no evidence of scarcity except Historically no evidence of scarcity except for oil & gasfor oil & gas

• Our ability to detect scarcity is limitedOur ability to detect scarcity is limited• We are unable to incorporate various We are unable to incorporate various

environmental costs of increasing resource environmental costs of increasing resource useuse

• If history doesn’t indicate scarcity, doesn’t If history doesn’t indicate scarcity, doesn’t mean that it will not happen in future.mean that it will not happen in future.