RESOURCE DEPLETION AND THE LONG-RUN AVAILABILITY OF MINERAL COMMODITIES

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RESOURCE DEPLETION AND THELONG-RUN AVAILABILITY
OF MINERAL COMMODITIES

• John E. Tilton
• Colorado School of Mines and
• Pontificia Universidad Católica de Chile
• Email jtilton_at_mines.edu
• Birkbeck, University of London
• October 17, 2012

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PURPOSE SCOPE

• Explore the threat of depletion to the long-run
  availability of mineral commodities
• Mostly conceptual. Few definitive forecasts
• Focus on depletion alone and not other threats

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OVERVIEW

• Nature perceptions of depletion
• Cumulative availability curve
• Petroleum
• Lithium
• Conclusions and implications

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I. NATURE OF DEPLETIONTWO COMMON VIEWS

• The fixed stock paradigm
• The opportunity cost paradigm

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Fixed Stock ParadigmLogic

• 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

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Copper and Petroleum Life Expectancies at Current
Use(years)
Reserves Resources Resource Base
Copper 34 264 110 x 106
Petroleum 40 123 Not available
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Fixed Stock ParadigmShortcomings

• 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

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Opportunity Cost ParadigmLogic

• 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

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Opportunity Cost ParadigmDeterminants of Price

• Depletion pushes prices up
• New technology and innovation push them down
• The future race between the two
• The past many available studies

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Real Price Trends for Aluminum, Copper, Nickel,
and Zinc, 1900-2011(Five-Year Average, 19001)
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Opportunity Cost ParadigmShortcomings of Price

• Factors other than depletion affect prices
  (mostly in short run)
• Environmental and other external costs (levels vs
  trends)
• Future prices unknown

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Opportunity Cost Versus Fixed Stock Paradigms

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

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Implications for Depletion

• Scarcity not inevitable A race between the
  cost-increasing effects of depletion and the
  cost-reducing effects of new technology
• Availability can increase over time, and has in
  the past for some mineral goods
• Threat is economic depletion - higher costs and
  prices curtailing demand - not physical depletion

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Implications for Depletion

• 4. Probably not a surprise, time to respond
• 5. Focus on cost and price trends, not life
  expectancies

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III. CUMULATIVE AVAILABILITY CURVE

• 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

Price and costs
Cumulative primary output
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Other More Troubling Shapes
Price and costs
Price and costs
Cumulative primary output
Cumulative primary output
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Copper and the Skinner Hypothesis
Unimodal
Bimodal
Amount of metal available at a given grade
Amount of metal available at a given grade
Grade
Grade
Source Skinner (1976)
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Copper and the Skinner Hypothesis
Source Skinner (1976)
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Another Cause of Jumps in CAC

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

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Three CAC Benefits

• Useful expository device
• Calls into question some common beliefs
• Can provide useful insights into the threat of
  depletion

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1. Useful Expository Device

• Shape of the curve
• Nature and incidence of mineralization
• Other geologic factors
• Movement up the curve
• Growth in metal consumption (consumer
  preferences, conservation, material substitution)
• Recycling
• Shifts in the curve
• Changes in input costs
• Cost-reducing technological change

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2. Questions Some Common Beliefs

• Population growth
• Renewable resources
• Resource use in developed countries

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3. Assessing the FutureThreat 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

Price and costs
Cumulative primary output
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IV. PETROLEUM

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

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Approach

• Extends two USGS studies National Oil and Gas
  Assessment (1995) and World Petroleum Assessment
  (2000)
• 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 costs
• Many explicit assumptions

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Life Expectancies
Years at 0 DD Growth Years at 2 DD Growth Years at 5 DD Growth
Conventional Petroleum 151 70 43
Conventional and Unconventional Petroleum 651 132 70
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Findings

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

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V. LITHIUM

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

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Concern

• Lithium batteries for hybrid and full electric
  automobiles
• Demand growth could exceed available resources
• Perhaps RD should be redirected

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Approach

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

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Types of Lithium Resources

• Brines
• Hard rock mineral deposits
• Clays
• Seawater

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Lithium from Seawater

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

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Estimated Lithium CAC
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Findings

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

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V. CONCLUSIONS AND IMPLICATIONS

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

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RESOURCE DEPLETION AND THELONG-RUN AVAILABILITY
OF MINERAL COMMODITIES

• John E. Tilton
• Colorado School of Mines and
• Pontificia Universidad Católica de Chile
• Email jtilton_at_mines.edu
• Birkbeck, University of London
• October 17, 2012