Topics Today 111808

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Topics Today (11/18/08)

• How do we know if were running out? Resource
  scarcity.
• The bet between Julian Simon and Paul Ehrlich.
• Read chapter 6 in your textbook for next time.

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The Protagonists

• The battle to feed all of humanity is over. In
  the 1970s, the world will undergo famines
  hundreds of millions of people are going to
  starve to death. Ecologist Paul Ehrlich, 1968.
• Natural resources are not finite. Yes, you read
  correctly. Economist Julian Simon 1980.

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The Protagonists

• The Malthusians, a.k.a. the doomsters
• Epitomized by Paul Ehrlich.
• Population growth and increased consumption are
  unsustainable.
• The finite resource stock of the earth cannot
  support ever-increasing consumption.
• Were running out of natural resources.

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The Protagonists

• The Cornucopians, a.k.a. the boomsters
• Epitomized by Julian Simon.
• Human ingenuity has gotten us out of many
  problems in the past.
• More people make it more likely that well come
  up with solutions to future resource problems.
• Were not running out of natural resources.

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The Protagonists

• Ehrlich on Simon
• The leader of a space-age cargo cult convinced
  new resources would miraculously fall from the
  heavens.
• An economist in wonderland.
• Simon on Ehrlich
• Leader of a juggernaut of environmentalist
  hysteria.
• As soon as one predicted disaster doesnt occur,
  the doomsayers skip to another.

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The Bet

• If were truly running out of resources, then the
  price of natural resources should rise over time.
• The bet was on the price of chrome, copper,
  nickel, tin, and tungsten.
• The time period was 1980-1990.
• The bet was 1000.

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Factors which mitigate resource scarcity

• Substitution
• The ability to substitute one resource for
  another.
• Eliminates scarcity.
• Exploration
• The search for new resources increases economic
  reserves.
• Reduces marginal user cost.
• Technological progress
• New technologies can lower extraction costs or
  make previously unavailable resources available.
• Reduces marginal user cost.

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Detecting Resource Scarcity

• Criteria for an ideal scarcity indicator
• Foresight
• The ability to be forward looking.
• Should incorporate future demand, alternative
  sources, future extraction costs, etc.
• Comparability
• Allow direct comparisons to be made among
  resources.
• Evaluate seriousness of scarcity across
  resources.
• Computability
• Readily calculated.
• Information available.

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Indicator 1 Resource Lifetime

• Resource lifetime
• A physical indicator.
• The economic reserve divided by annual
  consumption rate.
• Fisher used resource lifetime in 1974 to estimate
  that the world would run out of copper by 2019.
• Strengths of this indicator
• Easily computable.
• Comparable across resources.

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Indicator 1 Resource Lifetime

• Problems with resource lifetime
• If resource gets scarce, prices may rise.
• Consumption may fall.
• Substitutes look more attractive.
• Exploration.
• The size of economic reserves may change over
  time.
• Scarcity may be alleviated.

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Indicator 2 Real Prices

• Real prices
• Economic indicator.
• Prices adjusted for inflation.
• Strengths of this indicator
• Forward looking, encompassing future demand,
  potential substitutes, etc.
• Easily comparable across resources.

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Indicator 2 Real Prices

• Problems with this indicator
• Market prices are not the efficient price if
  there are externalities (e.g. oil and air
  pollution).
• Producer cartels like OPEC may be able to use
  market power to influence prices.
• Government intervention (e.g. price controls,
  subsidies, etc) may reduce efficiency.
• The ability of resource markets to exhibit
  foresight depends on the ability of producers to
  exhibit foresight.

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Indicator 3 Unit Cost

• Unit cost
• Economic indicator.
• Essentially looks at capital and labor costs of
  extraction.
• Barnett and Morse (1963) calculated unit cost
  measure for a variety of resources for the 1870
  1957 period.
• Unit costs decreased for all resources except
  timber.

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Indicator 3 Unit Cost

• Strengths of this indicator
• It doesnt suffer from the problem of
  externalities, like prices do.
• It reflects technological progress and changes in
  economic reserves.
• Problems with this indicator
• Based on past experience and not forward looking.
• Past use of this indicator has failed to include
  energy cost.

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Indicator 4 Marginal user cost (economic rent)

• Marginal user cost
• Economic indicator.
• Price minus marginal extraction cost.
• Ex/ Irland (1974) calculated that lumber prices
  were stable between 1860 and 1900 while timber
  prices rose.
• Lumber prices (e.g. the price of a 2x4) were
  stable because of declining transportation and
  milling costs.
• Timber prices (e.g. the price of a standing tree)
  reflected the scarcity of standing trees.

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Indicator 4 Marginal user cost (economic rent)

• Strengths of this indicator
• Theoretically appealing the difference between
  what society is willing to pay and what it costs
  to produce.
• Forward looking.
• Problems with this indicator
• Same problems as those indicated for prices.
• Not easily calculated.

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The Bet

• Ehrlich mailed Simon a check in 1990.
• Each of the five metals chosen by Ehrlich had
  declined in price between 1980 and 1990.
• Simon would have won even without adjustment for
  inflation.
• Change in Real Prices (1980 1990)

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The Bet
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The Bet
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The Bet
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The Bet
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The Bet
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The Bet

• Why did prices fall?
• New nickel mines ended a Canadian companys near
  monopoly of the nickel market.
• Technology (new computers, machines, and chemical
  processes) made the extraction of ore for chrome
  less costly.
• Fiber-optics replaced copper for telephone
  service.
• The international tin cartel collapsed and lost
  market power.
• Aluminum replaced tin in production of cans.
• Ceramics replaced tungsten in cutting tools.

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The Bet

• Simons response to his winning the bet
• Prices can fluctuate in the short term for a
  variety of reasons.
• Hed likely not win during every single time
  period or every single resource.
• Hed likely win on average over long spans of
  time.

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The Bet

• Long-term prices on the five metals in the bet
  are available from U.S. Geologic Service.
• http//minerals.usgs.gov/minerals/pubs/of01-006/
• One recent study examined what would have
  happened to the bet if it had extended from
  1900 to 1998 (McClintick and Emmett 2005).
• 1000 in 1900 would be worth 19,297.03 in 1998
  with inflation.
• Investing 200 in each of the five metals in 1900
  would have yielded 9,176.34 in 1998.

http//www.perc.org/articles/article588.php
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The Bet

• Change in Real Prices (1900 -2006)

Tungsten prices rose by 300 between 2003 and
2006.
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The Bet
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The Bet
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The Bet
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The Bet
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The Bet
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Recent Trends in Mineral Prices
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Historical Example

• Historical events with whale oil (Howe 1979)
• Replaced wood for internal lighting in 9th
  century.
• Whales began migrating to Arctic, making capture
  more costly.
• Innovation in shipbuilding and navigation helped
  overcome difficulties and extend whaling to
  Indian Ocean.
• By 1800, whale stocks became seriously depleted
  gt price of whale oil increased 400 between 1820
  and 1860.
• By 1867, kerosene replaced whale oil, and in
  1870, the price of whale oil plummeted.

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Resource Scarcity

• Factors that mitigate scarcity of resource
  commodities
• Substitutions.
• Research development into technological
  advances.
• Exploration.
• New extraction methods.
• Lower consumption.
• All of these responses are driven by price.

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Resource Scarcity

• Resource amenities are not traded in markets.
• Earths ability to absorb waste.
• Climate change.
• Water pollution.
• Production of ecosystem services.
• Biological diversity.
• Water filtration.
• If resource amenities are not priced, how will
  society respond to scarcity?