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RESOURCE DEPLETION AND THE LONG-RUN AVAILABILITY OF MINERAL COMMODITIES. John E. Tilton Colorado School of Mines and Pontificia Universidad Católica de Chile Email: [email protected] Birkbeck, University of London October 17, 2012. PURPOSE & SCOPE.

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RESOURCE DEPLETION AND THE LONG-RUN AVAILABILITY OF MINERAL COMMODITIES

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Resource depletion and the long run availability of mineral commodities

RESOURCE DEPLETION AND THELONG-RUN AVAILABILITY OF MINERAL COMMODITIES

John E. Tilton

Colorado School of Mines and

Pontificia Universidad Católica de Chile

Email: [email protected]

Birkbeck, University of London

October 17, 2012


Purpose scope

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


Overview

OVERVIEW

Nature & perceptions of depletion

Cumulative availability curve

Petroleum

Lithium

Conclusions and implications


I nature of depletion two common views

I. NATURE OF DEPLETION:TWO COMMON VIEWS

The fixed stock paradigm

The opportunity cost paradigm


Fixed stock paradigm logic

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


Copper and petroleum life expectancies at current use years

Copper and Petroleum Life Expectancies at Current Use(years)


Fixed stock paradigm shortcomings

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


Opportunity cost paradigm logic

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


Opportunity cost paradigm determinants of price

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


Real price trends for aluminum copper nickel and zinc 1900 2011 five year average 1900 1

Real Price Trends for Aluminum, Copper, Nickel, and Zinc, 1900-2011(Five-Year Average, 1900=1)


Opportunity cost paradigm shortcomings of price

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


Opportunity cost versus fixed stock paradigms

Opportunity Cost Versus Fixed Stock Paradigms

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


Implications for depletion

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


Implications for depletion1

Implications for Depletion

4. Probably not a surprise, time to respond

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


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

III. CUMULATIVE AVAILABILITY CURVE

Price

and

costs

Cumulative primary output


Other more troubling shapes

Other More Troubling Shapes

Price

and

costs

Price

and

costs

Cumulative primary output

Cumulative primary output


Copper and the skinner hypothesis

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)


Copper and the skinner hypothesis1

Common rocks

107

Energy, BTU/lb of copper

The

mineralogical

barrier

106

105

Sulfide ores

104

0.001

0.01

0.1

1

10

Ore grade, %Cu

Copper and the Skinner Hypothesis

Source: Skinner (1976)


Another cause of jumps in cac

Another Cause of Jumps in CAC

Demand exceeds byproduct supply requiring much more costly main product production


Three cac benefits

Three CAC Benefits

Useful expository device

Calls into question some common beliefs

Can provide useful insights into the threat of depletion


1 useful expository device

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


2 questions some common beliefs

2. Questions Some Common Beliefs

Population growth

Renewable resources

Resource use in developed countries


3 assessing the future threat 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

3. Assessing the FutureThreat of Depletion

Price

and

costs

Cumulative primary output


Iv petroleum

IV. PETROLEUM

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


Approach

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


Life expectancies

Life Expectancies


Findings

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


V lithium

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


Concern

Concern

Lithium batteries for hybrid and full electric automobiles

Demand growth could exceed available resources

Perhaps R&D should be redirected


Approach1

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


Types of lithium resources

Types of Lithium Resources

Brines

Hard rock mineral deposits

Clays

Seawater


Lithium from seawater

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


Estimated lithium cac

Estimated Lithium CAC


Findings1

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


V conclusions and implications

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


Resource depletion and the long run availability of mineral commodities1

RESOURCE DEPLETION AND THELONG-RUN AVAILABILITY OF MINERAL COMMODITIES

John E. Tilton

Colorado School of Mines and

Pontificia Universidad Católica de Chile

Email: [email protected]

Birkbeck, University of London

October 17, 2012


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