Resource Economics

The series of discussions under the heading 'The Evolution of Economics' may be a necessary prerequisite to reviewing this discussion. While it may be possible to estimate when the world will begin to run out of a particular resource, based on estimated reserves, available technology, extraction costs and market  demand, invariably there are too many variables to be certain. For the amount that can be extracted economically may depend on price, demand and new extraction techniques. As such, any future point of resource depletion may be decided by economic costs, although we also need to consider the cost to the environmental before then.

Are we using and extracting a given resource in a sustainable manner?

For many resources, such as soil, water, fish, forests, the issue of sustainability is defined by the rate by which a resource can be reproduced within the ecosystem. However, some resources are essentially non-renewable, e.g. fossil fuels, fossil groundwater and high-grade minerals. While such resources, once used are gone and cannot be replaced, it is possible that some sustainable replacement might be substituted in time. In the case of pollutants, the sustainable rate of emission is determined by the rate these pollutants can be absorbed, and made harmless, to the environment.

So what happens when a resource nears depletion?

Typically, we would expect the law of 'supply and demand' to apply. However, depletion is not the only factor here, for while rare earth metals are not that rare, there has been a significant price increase in recent years as China has cut back its production, which accounts for 95% of the global output. However, in this case, the reason for the cutbacks was not down to economics alone, as the extraction of these minerals has also been a source of considerable environment damage. As such, it is clear that there can be an economic cost associated with the extraction of a resource in terms of the environmental damage caused.

Can technology be used to reduce both the extraction and environment costs?

While the answer is probably yes, there is also a negative aspect to be taken into consideration. New technology, such as robotic drills and high-strength alloys, is allowing companies to drill deeper, as surface deposits are depleted, while facilitating new areas of exploration, such as undersea mining at ever greater depths. Whether the environmental impacts of such developments is fully understood or even being adequately monitored might be raised as yet another issue of concern. One other way to address the depletion of high grade deposits is to simply mine more low grade deposits, which is then refined to the required quality. Of course, this approach is invariable more expensive and typically leads to excessive waste products, which can further pollute the air, water and soil.

What other economic costs need to be taken into considerations?

The development of hydraulic fracturing combined with horizontal drilling for oil and gas within shale deposits, i.e. fracking, has resulted in so much natural gas is being produced in the US that its price has fallen sharply. However, while this ‘cause and effect’ may make sense in terms of the economics of ‘supply and demand’, it does not necessarily take into account the potential cost to the environment.

So what resources should be of immediate concern?

Normally, fresh water is considered to be a renewable resource, although there are ancient fossil aquifers that contain rain water that fell to Earth thousands of years ago. Such aquifers are therefore essentially equivalent to fossil fuels in that once used, it could take thousands of years for them to recover, even if we assume no climate change over this period. However, there are now ‘renewable’ aquifers, where the extraction rate far exceeds the renewal rate, such that they are also close to depletion. Another source of concern relates to the amount of water being taken from some river systems to irrigate crops, which  although having possibly significant value to local economy, prevents some rivers now reaching the sea. Again, the potential environmental costs in terms of the destruction of downstream wetlands and wildlife is rarely taken in to full account on the economic balance sheet. The net result is that both renewable and non-renewable resources can be over-exploited with detrimental consequences, which are often not realized until it is too late to reverse.

Are there any other knock-on consequence associated with water shortages?

Many developed countries, which are now beginning to experience water-shortages, have started to purchase/acquire land in other undeveloped regions of the world in order to meet the growing demands of its home consumption. While these ‘acquisition’ are perfectly legal in terms of ‘free market trade’, they often do not have the approval of the local population and can cause a distortion of commodity prices on the international markets. Therefore, in order to circumvent these price rises, both governments and private enterprises have been buying up or leasing land on a very large scale, i.e. approaching 1 million square kilometres. Since 2000, it is estimated that 5% of Africa’s agricultural land has been bought or leased under long-term agreements by foreign investors and governments. Normally, these purchases or leases include the right to use water, even though the new demands can often exceed the sustainable quantity of local freshwater available.  Saudi Arabia may be used as an example, where in 1984, fossil water represented more than 50% of all water used in the country. During the 1990’s, more than 75% of the water used was extracted from prehistoric aquifers. As a result, Saudi Arabia became self-sufficient in wheat and was able to meet the demand of over 30 million people. However, by 2008, the fossil aquifer had essentially been depleted and the country now  imports all of its wheat.

So where is the economic dependency for yet more resources leading us?

In all probability, resource problems will only get worse given the current state of politics and the global economy, such that both renewable and non-renewable resources will continue to be exploited on an unsustainable basis. In this respect, many of the resource and ecological problems, both local and global, are being aggravated by how ‘free market capitalism currently operates. As a generalization, this system appears to be driven primarily by short-term profits, which override all and any other concerns. As even more resources continue to approach depletion level, probability suggests that corporations and governments will fight, possibly literally, for control of any remaining economically viable resources. As outlined in earlier discussions, capitalism encapsulates an economic system that appears to be predicated on never-ending growth, which then leads to the use of ever-greater quantities of resources. When growth slows or ceases in cycles of ‘boom and bust’ , history suggests that this system goes into crisis, which results in rising unemployment and a further widening of income inequality within the stratum of society. However, when reflecting on the most recent 2008 financial crisis , what is possibly more worrying is that the main thrust of any economic remedy only appears to want to encourage yet more over-consumption. You are left to consider whether this can ever be considered as a long-term solution for planet Earth and those who will inherit this legacy.

So what is the real problem here?

This series of discussion started anchored in the debate between over-population and over-consumption and while it is being argued that both contribute to the problems we now face, they may not necessarily be the root cause. For while wealth inequality has always existed under all socio-political systems throughout all history, it is unclear that capitalist economics can really provide a long-term solution. The ability of 'private banks' to essentially create new money in the form of loans, which then earns interest has resulted in near perpetual inflation and the need for never-ending growth within the economy. As a result, all facets ofmarket driven consumerism’ only appears to encourage over-consumption through the aspirational promotion of a better life. If this is the case, the end-game must inevitably lead towards all 10 billion inhabitants of planet Earth striving to be part of the top 10% of resource consumers by 2050.

OK, even if this were the ‘real’ problem, what is the solution?

Unfortunately, there does seem to be any practical solution on the horizon. However, it is highlighted that the previous comments are not intended to be a thinly disguised attack on democratic-capitalism in favour some obvious alternative. For history shows that capitalism and democracy have promote the development of free markets and the idea of private property, which then led to a degree of individual freedom outside of state control. The following quote is taken from ‘The Economist’ publication in 2007:

The desire for a democratic political system does not by itself create the capacity for establishing one. The key to establishing a working democracy, and in particular the institutions of liberty, has been the free-market economy. The institutions, skills, and values needed to operate a free-market economy are those that, in the political sphere, constitute democracy.

This said, there are clearly problems within this system, which were recognized from the outset by 'Adam Smith', who published his most famous work ‘The Wealth of Nations’, in 1776, which is now often considered to be one of the foundation stone of capitalism. However, Smith’s work also raised some important caveats against the capitalist system in that should the pursuit of ‘self-interest’  lead to oppression and greed, then governments should still have the right to intervene. So while Smith accepted the right to the self-interests of the individual, he was not so naïve as to believe that the self-interest of all individuals, i.e. when taking the form of a modern multinational corporation, would  always operate in the ‘collective interest’ of society, as a whole. In this respect, it might be argued that the ‘self-interest’ of 21st century capitalism has lost sight of the ‘collective interest’ of society and possibly the future welfare of much of humanity.

If so, what is the ‘real’ problem that needs further consideration?

In many ways, because over-population and over-consumption both help to stimulate economic growth, capitalist economies have a very negative view of populations that do not grow, or do not grow fast enough, or worst still actually decline. So, as a broad generalization, a growing population is seen to require more housing, more household goods, more cars, which all add up to more profit opportunities for corporations, increased tax revenues for governments and wealth for the top 10%, who appear to be the main beneficiaries of a capitalist system. Of course, if and when a capitalist enterprise is faced with the problem of declining local markets, it may naturally seek to maintain profits through exports into developing countries, where population growth is still high, even though wealth distribution is low. Likewise, when a capitalist enterprise is faced with local labour market shortage, as population demographics change, it may simply be able to import labour or export production, which often leads to lower costs. Therefore, without sufficient safeguards, capitalism will continue to pursue its own short-term self-interests with little to no regard for any long-term consequences - see BBC article on corporate tax dodging.

So what long-term consequences are being implied at this point?