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Category — Resourceship

The Liberating Theory of Resourceship

“If resources are not fixed but created, then the nature of the scarcity problem changes dramatically. For the technological means involved in the use of resources determines their creation and therefore the extent of their scarcity. The nature of the scarcity is not outside the process (that is natural), but a condition of it.”

- Tom DeGregori (1987). “Resources Are Not; They Become: An Institutional Theory.” Journal of Economic Issues, p. 1258.

“Those in the mineral-resource world think in terms of proved, probable, and speculative quantities. Should another category be added–resourceship–that would make such supply open-ended? Unless peak-oil proponents can demonstrate peak-resourceship, open-endedness should be elevated in the debate.” (below)

The confounding of physics with economics has plagued a real-world understanding of mineral resource developments. The phenomenon of entropy and the laws of thermodynamics rule in their domain. But there is no economic law analogous to the physical conservation of matter. There is no law of conservation of value; value is continually, routinely created by the market process. And this value creation does not deplete–just the opposite.

This insight reorients the peak-oil debate from pessimism about hypothetical future physical resources to here-and-now concerns over incentives and institutions–or the ability of a free market to create a robust energy future.

Market Entrepreneurship … Mineral ‘Resourceship’

Israel Kirzner in the Austrian-School tradition has emphasized the open-endedness of market entrepreneurship. “Entrepreneurial alertness [is] in principle inexhaustible,” Kirzner has stated, [1] wholly rejecting the notion of a “potential stock of entrepreneurial alertness in a society as some quantity ‘available to be used by society’.” [2] In the vernacular of the oil industry, there are no reservoirs of proved, probable, or speculative quantities for entrepreneurship.

The institutionalist conception of knowledge as the ultimate resource powerfully complements an Austrian theory of resources. Thomas DeGregori has defined resources as “a set of capabilities” [3] and “finite but unbounded” [4]. He restated and embellished the “resources are not, they become” thesis of his mentor Erich Zimmermann as follows: [Read more →]

July 15, 2014   1 Comment

M. A. Adelman on Resourceship (Part II)

“The distinction between renewable and non-renewable resources is tenuous and perhaps in the last analysis untenable.”

- M. A. Adelman, The Economics of Petroleum Supply (Cambridge: The MIT Press, 1993), p. 66.

M. A. Adelman, profiled yesterday, was an empirically driven energy economist. He was not a Malthusian because the data suggested otherwise. He found with petroleum what Julian Simon found in the the family of mineral resources.

Adelman’s writings richly describe the way to understand the paradox of expanding depletable resources. He emphasized that oil was a fungible, global commodity, and improving knowledge can overcome diminishing returns in different regions and certainly globally.

And Adelman captured a point that Alex Epstein today stresses: that oil is not a ‘natural resource’ but a man-made one, from finding the treasure in the ground to refining the raw material into useful human products to transporting the inputs to delivering the outputs to points of human consumption. Enter resourceship and oil as a manufactured product.

Here are some of my favorite quotations from the kind professor. [Read more →]

May 13, 2014   2 Comments

“Peak Oil Is Dead”: M. A. Adelman Revisited

“The distinction between renewable and non-renewable resources is tenuous and perhaps in the last analysis untenable.”

- M. A. Adelman, The Economics of Petroleum Supply (Cambridge: The MIT Press, 1993), p. 66.

“The tradition in academic energy economics is to stress the ability to overcome depletion threats.”

- Richard Gordon, The Energy Journal, (Vol. 22: No. 2), 2001, p. 128.

The headline from the May 15th Time article reads: “The IEA Says Peak Oil Is Dead. That’s Bad News for Climate Policy.” Author Bryan Walsh begins:

No one … was really looking forward to a peak-oil world…. Think uncomfortable and violent. Oil is in nearly every modern product we use, and it’s still what gets us from point A to point B—especially if you need to get from A to B in a plane. If we were really to see the global oil supply peak and decline sharply, even as demand continued to go up, well, apocalyptic might not be too large a word.

Walsh then degenerates to the “upside” of the old view–”We’d lose oil but save the world”–to explain why climate-change policy is in (further) trouble. Well, good riddance to climate policy–and expect the collapsing case for climate alarmism to be recognized as good news. Justin Gillis’s recent New York Times piece begins this long-awaited revisionism:

What’s new is that several recent [peer reviewed] papers have offered best estimates for climate sensitivity that are below four degrees Fahrenheit, rather than the previous best estimate of just above five degrees, and they have also suggested that the highest estimates are pretty implausible.

Walsh in Time shares the new “mainstream” view: [Read more →]

May 20, 2013   No Comments

Depletionism Reconsidered: A 2004 Article Revisited

[Editor Note: This nearly decade-old article, Are We Running Out of Oil?, is reprinted by the author for its relevance today. A likely error in the article (even Julian Simon adherents can be too pessimistic!) is conceding that M. King Hubbert correctly predicted the 1970 peak of U.S. oil production (9.6 mmb/d then vs. 5.7 mmb/d in 2011). However, domestic output has increased 13% since 2008 and is rapidly rising. A March 4th article on the failure of peak-oil predictions inspired this look-back.]

“Vainly, economists working in the fixity paradigm have looked for a ‘depletion signal’ in the empirical record—some definitive turning point at which physical scarcity overcomes human ingenuity. A new research program is in order. Applied economists should focus upon institutional change to explain and quantify changes in resource scarcity.”

“This time it’s for real,” says the cover story of the June 2004 issue of National Geographic. “We’re at the beginning of the end of cheap oil.”

Books and articles written by geologists, environmentalists, and others regularly announce a new era of increasing oil scarcity. 1 Today’s resurrected hero of the depletionists is M. King Hubbert (1903–89), a Shell geologist who a half century ago presented a bell-shaped curve depicting oil production over time.

His model correctly predicted that U.S. oil production would peak around 1970. A sister prediction, that U.S. gas production would peak in 1970, was errant, however. And his prediction that global oil production would begin an irreversible decline around 2000 is off to a poor start (Hubbert, 1956). World oil production in 2003 was about 2.5 per cent above 2000. [Read more →]

March 6, 2013   No Comments

McClendon’s Price Lesson at Chesapeake (“Depletable” resources expand)

“[Free energy] markets tend not only to clear, but to clear faster and at lower prices than anticipated.”

The resignation of Aubrey McClendon as CEO of Chesapeake Energy provides a good case to study in corporate strategic planning. Ignoring his financial side deals, for which he has received a good share of criticism, the wisdom of his primary strategy, the aggressive pursuit of shale resources, is an open question to many. Although he has been hailed as a pioneer and risk taker, clearly those risks have gone bad and should be examined.

Higher Prices: A Bad Bet

The core failing was his decision to bet the firm (essentially) on high natural gas prices. From 1997 to 2005, wellhead prices had increased from $3/Mcf to $8/Mcf (2010$), the highest level historically. This, combined with a neo-Malthusian mentality, convinced him and many others that prices would not be mean-reverting, but remain at levels from two to three times the historical average.

In nearly my entire working career, energy executives have complained that prices for energy were too low for them to successfully invest. At one energy economics conference, the moaning about inadequate prices was so frequent that the award winner for contributions to the profession, Richard Gordon of Pennsylvania State University, reminded the audience that markets tend not only to clear, but to clear faster and at lower prices than anticipated.

In a more practical sense, there is a tendency to ignore the fact that mineral and energy prices are both cyclical and mean-reverting, despite being “finite” and thus “running out.” Numerous market analysts have been criticized for excessive bullishness about prices in the past decade, but many have correctly described the situation as one of cyclical behavior, not of a permanent shift to a high price environment. [Read more →]

February 28, 2013   1 Comment

U.S. Energy Innovation (Part I: Expanding “Depletable” Resources)

Ed. note: This three-part post series (Part II: Coal Issues tomorrow; Part III: Federal Lands Potention on Friday) is taken from testimony presented by Mary J. Hutzler on February 5, 2013, before the Subcommittee on Energy and Power, Committee on Energy and Commerce. The hearing was titled: American Energy Security and Innovation: An Assessment of North America’s Energy Resources. A summary of her remarks is here.

The United States has vast resources of oil, natural gas, and coal. In just a few short years, a forty-year paradigm that the U.S.  was energy poor has been reversed. The world’s mineral-energy resource base is enlarging, not depleting–and leading the way is the U.S. with private firms exploring and producing from private lands.

In December 2011, IER published a report entitled North American Energy Inventory that provides the magnitude of these resources for the United States, Canada, and Mexico. [1] As the report shows, the United States is vastly endowed in all three forms of organic fossil energy. In fact, the amount of technically recoverable oil in the United States totals almost 90 percent of the entire oil reserves in the world. [2]

Technically recoverable resources are not equivalent to reserves, but comparing their magnitudes provides a way to measure size. Technically recoverable resources are undiscovered resources that are recoverable with existing drilling and production technologies, but may not be economic at today’s prices. Reserves, on the other hand, are resources that are easily accessible and recoverable with today’s technology and at today’s oil prices. IER’s estimate of technically recoverable oil in the United States is 1,422 billion barrels.

That amount of oil can satisfy U.S. oil demand for 250 years at current usage rates or it can fuel every passenger car in the United States for 430 years. It is also more oil than the entire world has used in all human history.

The technically recoverable natural gas resources in the United States total 40 percent of the world’s natural gas reserves. At 2,744 trillion cubic feet, it can fuel natural gas demand in the United States for 175 years at current usage rates, or selectively, it can satisfy the nation’s residential demand for 857 years or the nation’s electricity demand for 575 years. [Read more →]

February 6, 2013   1 Comment

Bastiat on Malthus: Wisdom from 1850 for Optimism Today

“If we face the facts courageously, we shall see that a large area has been left open for the exercise of our initiative.”

The holiday season is not only a time to count our blessings, but also to imagine (or perhaps simply recognize) an ever-improving future for ourselves and the broader society. To that end, we can be thankful that the theories of doom-and-gloom are wrong, and the disastrous predictions drawn from those theories bear no resemblance to reality.

Being both a great fan of the 19th century classical-liberal political economist Frederic Bastiat and a critic of neo-Malthusianism, I was surprised to discover recently that Bastiat devoted an entire chapter of his work “Economic Harmonies” to Malthus’s theory on population. As Master Resource readers probably know, it was Malthus’s theory on population that prompted historian Thomas Carlyle to refer to economics as “the dismal science.”

It was also Malthus’s theory on population that spawned the still-thriving “neo-Malthusianworldview, which has been laughably wrong but still bleeds into discussions on energy policy. Fears of rampant population growth leading to environmental degradation and shortages in food, resources, energy, etc. were at the core of the environmental movement in the early stages, and neo-Malthusianism still colors the debate on energy abundance and the “sustainable” use of energy-rich resources such as fossil fuels. Prominent neo-Malthusian Paul Ehrlich has even said “[m]y view has become depressingly mainline!” Yes, depressing indeed. [Read more →]

December 7, 2012   2 Comments

Expanding ‘Depletable’ Resources: Solving a Paradox

The following was published at Econlib (Library of Economics and Liberty by Rob Bradley with the editorial help of David R. Henderson.

A website project of Liberty Fund, Econlib offers concise, online classical-liberal scholarship for “students, teachers, researchers, and aficionados of economic thought.”

Mineral resources, not synthetically producible in human time frames,1 are fixed in the earth. As each is mined, less supply remains, suggesting that cost and, thus, price must increase as production cumulates.

Yet, for virtually all minerals, the opposite seems to be true: As more is mined, more is discovered to be mined. Prices and costs do not inexorably rise. What was high-cost yesterday has become lower-cost, undercutting the perennial complaint that “the easy stuff has been found.” Overall, there seems to be little difference between minerals and general goods and services.

The mineral paradox is explainable if we recognize that human ingenuity in market settings is the ultimate resource, as Julian Simon stated. Entrepreneurial discovery is open-ended. Applied to minerals, resourceship can and does find supply that, before, no one knew existed—or that no one considered exploitable. But incentives and, thus, institutions can make all the difference between potential and plenty. [Read more →]

May 9, 2012   7 Comments

Open-Ended Resourceship: Bring on 2012!

“If resources are not fixed but created, then the nature of the scarcity problem changes dramatically. For the technological means involved in the use of resources determines their creation and therefore the extent of their scarcity. The nature of the scarcity is not outside the process (that is natural), but a condition of it.”

- Tom DeGregori (1987). “Resources Are Not; They Become: An Institutional Theory.” Journal of Economic Issues, p. 1258.

The confounding of physics with economics has plagued a real-world understanding of mineral resource development. The phenomenon of entropy and the laws of thermodynamics rule in their domain. But there is no economic law analogous to the physical conservation of matter. There is no law of conservation of value; value is continually, routinely created by the market process. And this value creation does not deplete–just the opposite.

This insight reorients the peak-oil debate from pessimism about hypothetical future physical resources to here-and-now concerns over incentives and institutions–or the ability of a free market to create a robust energy future.

Market Entrepreneurship … Mineral ‘Resourceship’

Israel Kirzner in the Austrian-School tradition has emphasized the open-endedness of market entrepreneurship. “Entrepreneurial alertness [is] in principle inexhaustible,” Kirzner has stated, wholly rejecting the notion of a “potential stock of entrepreneurial alertness in a society as some quantity ‘available to be used by society’.” In the vernacular of the oil industry, there are no reservoirs of proved, probable, or speculative quantities for entrepreneurship.

The institutionalist conception of knowledge as the ultimate resource powerfully complements an Austrian theory of resources. Thomas DeGregori has defined resources as “a set of capabilities” and “finite but unbounded.” He restated and embellished the “resources are not, they become” thesis of his mentor Erich Zimmermann as follows: [Read more →]

December 29, 2011   2 Comments

North America’s Incredibly Expanding Resources (New study puts ‘peak’ oil, gas, and coal in some future century)

“Human beings create more than they destroy.”

- Julian Simon, The Ultimate Resource 2 (Princeton, N.Y.: Princeton University Press, 1996), p. 580.

“People have since antiquity worried about running out of natural resources–flint, game animals, what-have-you. Yet, amazingly, all the historical evidence shows that raw materials–all of them–have become less scarce rather than more….  And there is no reason why this trend should not continue forever.”

- Julian Simon, “The State of Humanity: Steadily Improving,” Cato Policy Report, September/October 1995.

There is only one thing that is going up more than government subsidies for uneconomic wind and solar power: oil, gas, and coal reserves and resources in the United States, according to a new study released yesterday by the Institute for Energy Research (IER) assessing total North American inventory.

The U.S. is the world’s most endowed energy country, followed by Russia, Saudi Arabia, and China. At current consumption rates, we have hundreds of years of domestic oil and gas, and thousands of years of coal.

Stephen Hayward explains this and more in this video: [Read more →]

December 7, 2011   5 Comments