Category — Resourceship

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 →]

“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 →]

“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 →]

“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 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 →]

[Editor note: The posts in this series are The Great Energy Resource Debate (Part I: Peak Oil was … is here!) and The Great Energy Resource Debate (Part II: Neo-Malthusian Alarmism). Part IV will look at the theoretical case for resource expansionism in light of the preceding posts.]

Julian Simon has commented that the logic of expanding oil supply is a hard case to make–not because it is incorrect but because it flies in the face of the deeply ingrained physical-science concept of fixity and depletion. But there is no question that for too many minerals and for too many long periods of time, supply has been expanding rather than depleting in a business/economic sense. And far too many of us have ‘jumped off a tall building and reported everything was nice and breezy on the way down’ but haven’t hit bottom. Peak minerals might not be in the wrong year or decade but the wrong century.

Even the best have been fooled, including Erich Zimmermann, the institutional economist whose functional theory has brilliant insights for the twin Austrian-school open-ended entrepreneurship theory and Julian Simon human-ingenuity theory. “Oil and natural gas are forging ahead rapidly, but because their total reserves are much smaller than those of coal they are bound to lose in relative importance in the not too distant future,” he said in the second edition of his classic, World Resources and Industries. (1)

The quotations below offer evidence of resource pessimists who changed their mind in regard to mineral energies of oil, natural gas, and coal. (Julian Simon, it will be remembered, left Malthusianism because of incongruent data.) Such is good news: an open mind is a terrible thing to waste! It is a sad thing when thinkers (e.g., the late Matthew Simmons) go from the conclusion to the data rather than the other way around.

Industry Voices

“Periodically ever since I was a small boy, there has been an agitation predicting an oil shortage, and always in succeeding years, the production has been greater than ever before.”

- J. Howard Pew, quoted in August Giebelhaus, Business and Government in the Oil Industry: A Case Study of Sun Oil, 1876-1945 (Greenwich, CT: Jai Press, 1980), p. 118.

“I started out as an ardent conservationist…. I was convinced by much reading in college and at Yale Law School [in the late 1920s/early 1930s] that we were going to run out of petroleum. After spending most of my life fighting a surplus, however, I’ve come to believe it will never run out.”

- J. Howard Marshall II, Done in Oil (College Station: Texas A&M University Press, 1994), p. 264. [Read more →]

“Nothing is more fatal to a realistic and usable understanding of resources than the failure to differentiate between the constants of natural science and the relatives of social science, between the totality of the universe or of the planet earth … and … the ever-changing resources of a given group of people at a given time and place….  One has but to recall some of the most precious resources of our age—electricity, oil, nuclear energy—to see who is right, the exponent of the static school who insists that ‘resources are,’ or the defender of the dynamic, functional, operational school who insists that ‘resources become.’”

- Erich Zimmermann, World Resources and Industries (New York:  Harper & Brothers, 1951), p. 11.

Resource optimists are continually rewarded by oil and gas drillers. One can only imagine what world production would be like if private property rights and profit/loss entrepreneurship were the norm as it is in much of the United States.

The only good news is that politically shackled mineral production is ‘reserved’ for the future, further refuting the peak oil (or peak anything else) proponents who fail to see that politics and not a lack of potential is the limit to growth.

Eagle Ford: What ‘Peak Oil’?

Consider Eagle Ford where a new shale drilling technology is creating a private-sector Strategic Petroleum Reserve.

Last month, a Houston Chronicle feature reported on the fast expansion of oil drilling along the 400-mile long Eagle Ford shale formation. While most new shale operations in the U.S. and Eastern Europe have been drilling for gas, at Eagle Ford drilling is for black gold, Texas Tea.

The Chron.com article focuses on new jobs and tax revenues, but the bigger story is the new oil expected to flow over the next 20–30 years across some six million acres.  The article quotes sources expecting 20,000–30,000 wells (you read that right!) to be drilled, ultimately producing up to ten billion barrels of oil.

If ten billion barrels over 30 years is a reasonable estimate, that’s comes to about a million barrels produced each day from this one large shale formation. [Read more →]

[Editor note: The original title of the post of Dr. Brätland (bio at end) was "Institutions and Policies that Impede Capital Maintenance for Extractive Firms." Resourceship is a term used by the late economist Stephen McDonald (1924–2006) to describe entrepreneurship applied to mineral resources.

Dr. Brätland's post below complements a series of entries at MasterResource under the terms resourceship, peak oil (fixity-depletion), and ultimate resource, as well as subsoil privatization.]

Although capital maintenance by extractive firms refutes the exhaustion myth of minerals, this refutation hinges on access to lands, entrepreneurial latitude in managing resources, and secure private-property rights.

In particular, certain institutions of governmental control and jurisprudence hinder entrepreneurial actions of extractive firms striving to maintain capital (defined as the asset value of to-be-extracted minerals).

These hindrances include:

(a) Foreclosure of land access by government ownership of mineral lands;

(b) Foreclosure of entrepreneurial latitude by court imposed covenants enforcing obligations to surface owners; and

(c) In the case of petroleum, the extractive firm’s inability to acquire full control and ownership of reservoirs it has discovered.

The first of these impediments bears on access to land; the latter two impede extractive firms’ ability to manage resource deposits as capital assets. [Read more →]

[The greatest opportunity for wealth creation in many poor countries is oil and gas development. In particular, subsoil privatization can incite resourceship and democratize wealth as explained by Guillermo "Billy" Yeatts in Subsoil Privatization for Energy Sustainability. The following post by Cyril Boynes, Jr. co-chair of the Congress of Racial Equality Uganda, contributes to this discussion.]

I am of a Christian background. However, one of my favorite people was Jewish, and another is Muslim.

The Jewish man was business professor and author Julian Simon. He taught that people are the world’s most valuable resource, and the “ultimate resource” is our creative intellect.

The Muslim is Bangladeshi banker and economist Muhammad Yunus. He says “poor people are like bonsai trees,” planted in a little pot. “There is nothing wrong with their seeds. It’s just that society never gave them an adequate soil base to grow.”

“Once the poor can unleash their energy and creativity,” Dr. Yunus continues, “poverty will disappear very quickly. The poor themselves can create a poverty-free world. All we have to do is free them from the chains that governments have put around them.”

We need freedom, and opportunities to get an education and open businesses. We need a government and legal system that protects our property rights and contracts, regulates dangerous pollution and activities, and protects us from criminals and unscrupulous business people, but without having so many rules that people and businesses cannot function properly.

But even if we have all these things, we still cannot have opportunity, health and prosperity unless we also have energy. Maybe most of all we need enough affordable, reliable electricity to power lights, ovens, refrigerators, computers, machinery, fans and air conditioners, office and hospital equipment, mobile phone chargers and other modern devices.

These technologies let us work past sundown, create good jobs, make products that people need, and provide clean water, surgical centers and countless other benefits.

That’s why Mr. Roy Innis, chairman of the Congress of Racial Equality in America, calls energy the “master resource.” He says our ingenuity is the ultimate, most important resource, because it lets us design, build and operate so many things.

However, without energy that families and businesses can afford, energy that is there every time we need it, even the most modern, creative, educated, technologically advanced country cannot function properly. People in poor countries are even more constricted, like bonsai plants in little pots.

Right here in Uganda, we have many educated, energetic, creative, hard working people. Our legal system lets us open businesses and do many other things. But outside of Kampala and other growing municipalities like Ishaka, Jinja and Gulu, most families, villages and businesses still don’t have electricity – and even in these municipalities frequent power outages create problems. Almost 30 million Ugandans never have electricity or get it only a few hours a week. [Read more →]

The peak oil movement, now trying to turn itself into a pro-government-intervention political movement, draws the wrong conclusion by logically progressing from the wrong assumption.

This post revisits this wrong assumption: fixity. From mineral fixity, it is concluded that every act of production and consumption leaves less supply. In this Harold Hotelling world, costs must go up and prices must go up….

But going from the natural science, perfect knowledge, hypothetical world to the real world, just the opposite is true. There is not a fixed supply, known or unknown, from which extractions leave less supply for the future. Costs do not have to go up, and neither do prices.

Try answering this question to see how the peak oilers have it wrong for the business/economic real world. Do we have more or less oil today than when the nation was founded in 1776? Does the world have more or less oil in 2010 than in 1910?

The natural-science answer is that in a physical sense, there is less oil today that then by the amount of extraction. But in a social science sense, we have much more oil today than in 1776 or in 1910 because today’s supply is inventoried and produced from known reservoirs. The same promises to hold true in the future in a consumer-driven, entrepreneur friendly world. [Read more →]

“Some commentators hope that new technology will lead to important deepwater finds.  Some new deepwater areas with giant potential, such as the Perdido Trend in the western Gulf of Mexico, will no doubt be found, but generally, the geology of most deepwater tracts is not very promising.” 

- Colin Campbell (founder: Association for the Study of Peak Oil),  Noroil, December 1989. 

The past week was a bad one for peak oil enthusiasts, as three separate announcements indicated the abundance of undiscovered petroleum.

First, BP announced that it has found a field in the Lower Tertiary basin in the deepwater Gulf of Mexico, named Tiber, containing something on the order of 3 billion barrels.

Next, Petrobras announced another discovery in the pre-salt basin, this one Guara, containing about 1 billion barrels of recoverable oil.

And in the Bakken Shale, a new zone was proven to be productive and possibly capable of producing another billion or so barrels.

While some (like Matt Simmons and Jeremy Leggett) have pointed to these developments as evidence of the ‘need’ (sic) for going to extremes to find more resources, in fact it highlights the manner in which better technology and knowledge are making previously uneconomic resources viable.

Others have argued that the discovery size of ‘only’ (sic) three billion barrels suggests resource scarcity, since that amount represents only a couple of weeks of consumption. Which is a typical context-free remark: few discoveries amount to more than a small portion of the resource. The super-giant Prudhoe Bay field, for instance, only represents about six months of global oil consumption.  During the 1980s and 1990s, large amounts of production came online around the world in areas like Yemen, Oman, Colombia, where the discoveries were smaller than what is now being found.

More important, each of these recent developments shows progress in a new geological area, and progress can be expected to advance sharply as activity increases and knowledge improves.  This is only the beginning of a long process of exploitation which will see large-scale resources developed; any given field typically represents only ten percent or so of the play’s resources.

But it also discredits the oft-repeated argument that there are no new plays left.  Years ago, when new technology made it possible to perform seismic studies of the large subsalt area of the Gulf of Mexico, I noted to my mentor M. A. Adelman that this was being described as the ‘last new play’ to be exploited. I asked him how many times he’d heard that before.  He said, “all my career” (which began in the 1950s).  Since that time, new plays included the presalt in Brazil and the Lower Tertiary in the Gulf of Mexico.

The assertion by resource pessimists that there are no new areas is based on the false assumption that geological knowledge of the Earth is so extensive that every area must be already identified.  But in fact, while most are identified, at least in a general way, many remain untested for the simple reason that they are difficult to access for political, legal or geographical reasons. 

The recent discoveries in east Africa are a clear demonstration of this:  the government of Uganda had simply been too preoccupied with its political troubles to seek exploration until recently.

The reality remains that the conventional petroleum resource appears so extensive as to satisfy the world’s needs for decades to come, with the primary obstacle being the imagination of the pessimists. And with enough statism and dulled minds in place of vibrant free-market entrepreneurship, the pessimists will be ‘right.’ As David Osterfield wrote: “Perhaps the kernel of truth in the catastrophist position is that a completely closed or controlled society would, in fact, face the ominous prospect of resource depletion.”(1) Well said.

(1) David Osterfeld, Prosperity Versus Planning:  How Government Stifles Economic Growth (New York:  Oxford University Press, 1992), p. 102.