RESOURCE DEPLETION AND THERESOURCE DEPLETION AND THELONG-RUN AVAILABILITY OF MINERAL LONG-RUN AVAILABILITY OF MINERAL

COMMODITIES COMMODITIES

John E. TiltonJohn E. TiltonColorado School of Mines and Colorado School of Mines and

Pontificia Universidad Católica de ChilePontificia Universidad Católica de ChileEmail: jtilton@mines.eduEmail: jtilton@mines.edu

Birkbeck, University of London

October 17, 2012

PURPOSE & SCOPEPURPOSE & SCOPE

• Explore the threat of depletion to the Explore the threat of depletion to the long-run availability of mineral long-run availability of mineral commoditiescommodities• Mostly conceptual. Few definitive Mostly conceptual. Few definitive forecastsforecasts• Focus on depletion alone and not other Focus on depletion alone and not other threatsthreats

OVERVIEWOVERVIEW

I.I. Nature & perceptions of depletionNature & perceptions of depletionII.II. Cumulative availability curveCumulative availability curveIII.III. Petroleum Petroleum IV.IV. LithiumLithiumV.V. Conclusions and implicationsConclusions and implications

I. NATURE OF DEPLETION:I. NATURE OF DEPLETION:TWO COMMON VIEWSTWO COMMON VIEWS

• The fixed stock paradigmThe fixed stock paradigm• The opportunity cost paradigmThe opportunity cost paradigm

Fixed Stock ParadigmFixed Stock ParadigmLogicLogic

• Earth is finite• So supply of any mineral

commodity must be a fixed stock• Demand is a flow variable• Depletion inevitable• Interesting question: life

expectancies of available supply

Copper and Petroleum Life Copper and Petroleum Life Expectancies at Current UseExpectancies at Current Use

(years)(years)

Reserves Resources

Resource

Base

Copper 34 264 110 x 106

Petroleum 40 123

Not

available

Fixed Stock ParadigmFixed Stock ParadigmShortcomingsShortcomings

• Recycling• Substitution and backstop technologies• Life expectancies at current rate of use

of resource base can exceed millions of years

• Rising costs will cause economic depletion long before actual physical depletion

Opportunity Cost ParadigmOpportunity Cost ParadigmLogicLogic

• What really matters: the sacrifice society must make for more of a mineral commodity

• Long-run trends in real prices is the most common measure used to reflect trends in opportunity costs

Opportunity Cost ParadigmOpportunity Cost ParadigmDeterminants of PriceDeterminants of Price

• Depletion pushes prices up

• New technology and innovation push them down

• The future – race between the two

• The past – many available studies

Real Price Trends for Aluminum, Real Price Trends for Aluminum, Copper, Nickel, and Zinc, 1900-2011Copper, Nickel, and Zinc, 1900-2011

(Five-Year Average, 1900=1)(Five-Year Average, 1900=1)

Opportunity Cost ParadigmOpportunity Cost ParadigmShortcomings of PriceShortcomings of Price

• Factors other than depletion affect prices (mostly in short run)

• Environmental and other external costs (levels vs trends)

• Future prices unknown

Opportunity Cost Versus Fixed Opportunity Cost Versus Fixed Stock ParadigmsStock Paradigms

• Despite the problems with price, opportunity cost paradigm more useful way of assessing the threat of depletion

Implications for DepletionImplications for Depletion

1. Scarcity not inevitable: A race between the cost-increasing effects of depletion and the cost-reducing effects of new technology

2. Availability can increase over time, and has in the past for some mineral goods

3. Threat is economic depletion - higher costs and prices curtailing demand - not physical depletion

Implications for DepletionImplications for Depletion

4. Probably not a surprise, time to respond

5. Focus on cost and price trends, not life expectancies

III. CUMULATIVE AVAILABILITY III. CUMULATIVE AVAILABILITY CURVECURVE

• Shows total quantity available at various prices over all time

• Scarcity (measured by costs and prices) depends on:– Movement up curve

– Shifts in curve

– Slope and shape of curve

• USBM efforts in 1970s and 1980s

• CAC is not a traditional supply curve

Cumulative primary output

Priceandcosts

Other More Troubling ShapesOther More Troubling Shapes

Cumulative primary output

Cumulative primary output

Priceandcosts

Priceandcosts

Copper and the Skinner Copper and the Skinner HypothesisHypothesis

GradeGrade

Amount of metal available at a given grade

Amount of metal available at a given grade

Source: Skinner (1976)

Unimodal Bimodal

Copper and the Skinner Copper and the Skinner HypothesisHypothesis

104

Ore grade, %Cu

Sulfide ores

107

The mineralogical barrier

106

105

0.001 0.01 0.1 1 10

Energy, BTU/lb of copper

Common rocks

Source: Skinner (1976)

Another Cause of Jumps in CACAnother Cause of Jumps in CAC

• Demand exceeds byproduct Demand exceeds byproduct supply requiring much more supply requiring much more costly main product productioncostly main product production

Three CAC BenefitsThree CAC Benefits

• Useful expository deviceUseful expository device

• Calls into question some Calls into question some common beliefscommon beliefs

• Can provide useful insights into Can provide useful insights into the threat of depletion the threat of depletion

1. Useful Expository Device1. Useful Expository Device

• Shape of the curveShape of the curve• Nature and incidence of mineralization• Other geologic factors

• Movement up the curveMovement up the curve– Growth in metal consumption (consumer

preferences, conservation, material substitution)

– Recycling• Shifts in the curveShifts in the curve

– Changes in input costs– Cost-reducing technological change

2. Questions Some Common Beliefs2. Questions Some Common Beliefs

• Population growthPopulation growth• Renewable resourcesRenewable resources• Resource use in developed Resource use in developed countriescountries

3. Assessing the Future3. Assessing the FutureThreat of DepletionThreat of Depletion

• When shape of CAC is benign – depletion is not a problem

• When shape is not benign – depletion may or may not be a threat

• Requires actual estimation of CAC Cumulative primary output

Priceandcosts

IV. PETROLEUMIV. PETROLEUM

Roberto F. Aguilera and others, 2009. Roberto F. Aguilera and others, 2009. ““Depletion and future availability of Depletion and future availability of petroleum resources,petroleum resources,”” Energy Energy Journal, Vol. 30, No. 1, pp. 141-174Journal, Vol. 30, No. 1, pp. 141-174

ApproachApproach

• Extends two USGS studies – National Oil Extends two USGS studies – National Oil and Gas Assessment (1995) and World and Gas Assessment (1995) and World Petroleum Assessment (2000)Petroleum Assessment (2000)• Estimates resources from Estimates resources from

• Unassessed provinces (using a Variable Shape Distribution model)

• Future reserve growth• Unconventional sources of liquids (heavy oil, oil sands,

and oil shale)

• Estimates production costsEstimates production costs• Many explicit assumptionsMany explicit assumptions

Life ExpectanciesLife Expectancies

Years at 0% DD Growth

Years at 2% DD Growth

Years at 5% DD Growth

ConventionalPetroleum

151 70 43

Conventional and

UnconventionalPetroleum

651 132 70

FindingsFindings

• Quantity of conventional petroleum Quantity of conventional petroleum greater than often assumedgreater than often assumed• Use of unconventional petroleum Use of unconventional petroleum does not cause a big jump in CACdoes not cause a big jump in CAC• Price not likely to rise sharply in Price not likely to rise sharply in near future due to depletionnear future due to depletion• Hard landing unlikely even if Hard landing unlikely even if conventional oil production peaksconventional oil production peaks

V. LITHIUMV. LITHIUM

Andrés Yaksic and John E. Tilton, Andrés Yaksic and John E. Tilton, 2009. 2009. ““Using the cumulative Using the cumulative availability curves to assess the threat availability curves to assess the threat of mineral depletion: The case of of mineral depletion: The case of lithium,lithium,”” Resources Policy, Vol. 24, pp. Resources Policy, Vol. 24, pp. 185-194185-194

ConcernConcern

• Lithium batteries for hybrid and full Lithium batteries for hybrid and full electric automobileselectric automobiles• Demand growth could exceed Demand growth could exceed available resourcesavailable resources• Perhaps R&D should be redirectedPerhaps R&D should be redirected

ApproachApproach

• Literature review and interviews to Literature review and interviews to identify known resources and their identify known resources and their production costsproduction costs• No attempt to estimate undiscovered No attempt to estimate undiscovered resources. So new discoveries can resources. So new discoveries can cause CAC to shift downwardcause CAC to shift downward• Demand scenariosDemand scenarios

Types of Lithium ResourcesTypes of Lithium Resources

• BrinesBrines• Hard rock mineral depositsHard rock mineral deposits• ClaysClays• Seawater Seawater

Lithium from SeawaterLithium from Seawater

• Huge resource - 44.8 billion tons at Huge resource - 44.8 billion tons at 20% recovery rate20% recovery rate• Cost estimates based on 1975 study Cost estimates based on 1975 study by Steinberg and Dang at Brookhaven by Steinberg and Dang at Brookhaven National Lab updated for inflation – National Lab updated for inflation – $7-10 per pound of lithium carbonate$7-10 per pound of lithium carbonate

Estimated Lithium CACEstimated Lithium CAC

FindingsFindings

• Depletion will not be a problemDepletion will not be a problem• Conventional sources sufficient for Conventional sources sufficient for the rest of this century and beyondthe rest of this century and beyond• Lithium from seawater is a huge Lithium from seawater is a huge source of potential supply and only source of potential supply and only raises costs of lithium used in autos raises costs of lithium used in autos from $42 to $150from $42 to $150

V. CONCLUSIONS AND V. CONCLUSIONS AND IMPLICATIONSIMPLICATIONS

• Threat of depletion depends on Threat of depletion depends on three sets of determinantsthree sets of determinants• Movement up and shifts in CAC Movement up and shifts in CAC unknown and unknowableunknown and unknowable• Shape of CAC (though often Shape of CAC (though often unknown) is knowableunknown) is knowable• Knowledge of the shape can Knowledge of the shape can provide useful insights concerning provide useful insights concerning the future threat of depletionthe future threat of depletion

RESOURCE DEPLETION AND THERESOURCE DEPLETION AND THELONG-RUN AVAILABILITY OF MINERAL LONG-RUN AVAILABILITY OF MINERAL

COMMODITIES COMMODITIES

John E. TiltonJohn E. TiltonColorado School of Mines and Colorado School of Mines and

Pontificia Universidad Católica de ChilePontificia Universidad Católica de ChileEmail: jtilton@mines.eduEmail: jtilton@mines.edu

Birkbeck, University of LondonOctober 17, 2012