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Metals, Energy and Sustainability : 

Metals, Energy and Sustainability Presented By Barry Golding Submitted in partial fulfilment of the requirements of ECON 8910 School of Economics Faculty of Business, Economics and Law University of Queensland 19 May, 2004

Introduction: 

Introduction One hypothesis is that metals can be produced sustainably even though individual ore deposits are exhaustible. Nevertheless, producing metals from ore deposit of lower grade requires increased energy input per unit mass of metal output. Decreasing ore deposit grades and increasing energy price may cause significant increases in metal prices. This hypothesis will be tested using Index Numbers and analysing the price of four metals, Steel, Aluminium, Copper and Gold over the past fifty years. Predictions of future price trends may be possible.

Hypotheses for testing : 

Hypotheses for testing Metal production is sustainable even though the ore deposits will be of lower grade Energy prices are likely to increase Mining lower grade ore deposit and higher energy price increases the price of metals. These increases may be offset by improvements in technology

Why the interest? Petroconsultants predict oil production will peak soon?: 

Why the interest? Petroconsultants predict oil production will peak soon? Oil hits $40 a barrel for first time since 1990 NEW YORK/LONDON (Reuters) – May 7 2004

Where does this topic fit in the broader economic literature? : 

Where does this topic fit in the broader economic literature? Two economic approaches: economic efficiency and the ideal resource extraction profile adequacy of natural resources to meet sustainable growth

Neo-classical economists: 

Neo-classical economists Developed from http://projects.eu.rmit.edu.au/gs/images/global_timeline.swf

Ecological economics and sustainability: 

Ecological economics and sustainability

Engineers, geologists and statisticians : 

Engineers, geologists and statisticians

Findings in the literature reviewed : 

Findings in the literature reviewed Neo-classical economic literature focuses on economic efficiency and optimal rates of exploration and production. The Hotelling model predicted rising prices assuming no new reserves or technology. Clones did not consider the nature of mineral and fossil fuel deposits. Nevertheless, the theoretical models were developed to understand and were useful in determining appropriate public policy on exhaustible resources. Pindyck’s thought that “Given the economic incentives, reserves can be maintained or increased through further exploration - even though the physical returns decrease as depletion ensues. It therefore makes more sense to think of resources like oil and uranium as being non-renewable rather than exhaustible.”(Pindyck 1978). Such statements offend geologists who understand that oil is a fossil fuel of organic origin and limited by the amount of accumulated organic matter, whilst uranium like other minerals is a component of the earths crust. The ecological economic literature is directed to ensuring sustainable development and placing a value on the natural world’s contribution. This literature is generally pessimistic regarding resource reserves with the Limits to Growth (LTG) model emphasising resource depletion and price rises. The LTG scenario is unlikely and the price increases predicted by Hotelling have not happened. The engineering and geology literature is generally pessimistic with regards to fossil fuel depletion, but optimistic regards the sustainability of minerals.

Methodology : 

Methodology Analyse four metals; steel, aluminium, copper and gold over past 50 years to estimate the impact of energy price and changes in technology on metal price using economic modelling and engineering modelling as verification. Compare alternative energy sources to estimate the cost of the next cheapest alternative to oil and natural gas and estimate the likely increase in energy price and the likely impact on the price of the four metals being studied.

Economic modelling : 

Economic modelling Models being investigated: Production models Index numbers Data development analysis (DEA) and Stochastic frontiers (SF) The Limits to Growth model (LTG)

Production models: 

Production models Berndt and Wood 1975 Assumed a twice differentiable aggregate production function relating Gross output (Y) = f(Capital(K), Labour(L), Energy(E), materials(M)) Corresponding cost function Total cost (G) =G(Y, PK, PL, PE, PM) Where PK equals price of input K etc Estimates of the KLEM translog cost function for US manufacturing Findings: energy demand is responsive to its own price; energy and labour are slightly substitutable; and energy and capital display substantial complementarity

Production models -more findings: 

Production models -more findings Jorgenson-Fraumeni 1981 Estimated a translog model using data from 1958-1974 for thirty-five sectors of the US economy and found that for twenty-nine of them technical change has been energy using, indicating productivity falls as the price of energy increases. Maroney and Trapani 1981 Capital and iron ore are substitutes in the production of basic steel products Capital and bauxite are substitutes in thein aluminium production Capital and refined coper are substitutes in copper rolling and drawing Kopp and Smith 1981 Neoclassical models are best viewed as approximations of the underlaying technologies. A rudimentary knowledge of the process technology is essential to judge whether a particular form of input or technology aggregation will distort the Allen elasticity of input substitution. Griffin 1981 The estimates of Allen elasticity of substitution between energy and capital ranges from: 1.07 in Griffin-Gregory; 0.8 in Pindyck; and -1.01 to 2 in Halvorsen and Ford

Most promising methodology : 

Most promising methodology Index numbers – May be better suited to the structure of metal production The Laspeyres and Paasche Price indexes offer greater flexibility in handling ongoing practical problems in the compiling of the index. The main advantage of these method is that quantities do not need to be calculated. Instead, expenditure data can be used directly in the index formulae Total Factor Productivity index - most likely approach Fisher Index = Output Index (Fisher) Input Index (Fisher) From Coelli, Prasada Rao et al., 1998

Engineering modelling: 

Engineering modelling Model the energy component in mining, mineral processing and metal smelting to derive the overall energy component per unit of metal production. Investigate the impact of technology improvement in the metals being studied

Data Availability : 

Data Availability Metal price and volume data are readily available and have been published. Energy price is more problematic; however, reasonable estimates are possible where data is insufficient. Ore deposit grades and associated extraction costs have proved difficult to isolate (Schmidt 1988). Significant work will be required to understand and developing the model to incorporate technological change.

Benefits of this research: 

Benefits of this research Understanding the impact of energy price increases on metal prices will hopefully enable others to calculate the welfare impact of such changes

Bibliographical Sources : 

Bibliographical Sources Bengt, S. and G. Borg (2002). "An estimation of the coat of sustainable production of metal concentrates form the earth's crust." Ecological Economics 42(3): 401-13. Berndt, E. R. and D. O. Wood (1975). "Technology, Prices and the Derived Demand for Energy." The Review of Economics and Statistics 58(3). Brundtland, H. G., Ed. (1987). Our Common Future. Oxford, Oxford University Press. Coelli, T., D. S. Prasada Rao, et al. (1998). An Introduction to Efficiency and Productivity Analysis. Boston, Kluwer Academic Publishers. Dasgupta, P. and G. Heal (1974). "The Optimal Depletion of Exhaustible Resources." Symposium on the Economics of Exhaustible Resources 41(Symposium on the Exhaustible Resources): 3-28. Deffeyes, K. S. (2001). Hubbert's Peak. Princeton, Princeton University Press. Gordon, R. L. (1974). "A Reinterpretation of the Pure Theory of Exhaustion." Journal of Political Economy 75(3): 274-286. Griffin, J. M. (1981). The Energy-Capital Complementarity Controversy: A progress Report on Reconciliation Attempts. Modeling and Measuring Natural Resource Substitution. E. R. Berndt and B. C. Field. Massachusetts, Massachusetts Institute of Technology. Heal, G. (1974). "Introduction to Symposium on the Economics of Exhaustible Resources." The Review of Economic Studies 41(Symposium on the Economics of Exhaustible Resources): 1-2. Hotelling, H. (1931). "The Economics of Exhaustible Resources." Journal of Political Economy 39(2): 137-175. Jevons, W. S. (1865). "The Coal Question: An Inquiry Concerning the Progress of the Nation, and the Probable Exhaustion of Our Coal Mines." New York, Augustus M. Kelley. Jorgenson, D. W. and B. M. Fraumeni (1981). Relative Price and Technical Change. Modeling and measuring natural resource substitution. E. R. Berndt and B. C. Field. Massachusetts, Massachusetts Institute of Technology.

Bibliographical Sources-Continued: 

Bibliographical Sources-Continued Kopp, R. J. and V. K. Smith (1981). Measuring the Prospects for Resource Substitution under Input and Technology Aggregations. Modeling and Measuring Natural Resource Substitution. E. R. Berndt and B. C. Field. Massachusetts I, Massachusetts Institute of Technology. Lomborg, B. (1998). The skeptical environmentalist - measuring the real state of the world. Cambridge, Cambridge University Press. Manne, A. S. (1974). "Waiting for the Breeder." The Review of Economic Studies 41(Symposium on the Economics of Exhaustible Resources): 46-65. Moroney, J. R. and J. M. Trapani (1981). Alternative Models of Substitution and Technical Change in Natural Resource Intensive Industries. Modeling and Measuring Natural Resource Substitution. E. R. Berndt and B. C. Field. Massachusetts, Massachusetts Institute of Technology. Pindyck, R. S. (1978). "The Optimal Exploration and Production of Nonrenewable Resources." Journal of Political Economy 86(5): 841-861. Pindyck, R. S. (1981). "The Pricing of Durable Exhaustible Resources." The Quarterly Journal of Economics 96(3). Pindyck, R. S. (1993). "The Present Value Model of Rational Commodity Pricing." The Economic Journal May. Schmidt, R. H. (1988). "Hotelling's rule repealed? An examination of exhaustible resource pricing." Economic Review Journal of Federal Reserve Bank of San Francisco. Skinner, B. J. (1993). Finding Mineral Resources and the Consequences of Using Them: Major Challenges in the 21st Century. The Australasian Institute of Mining and Metallurgy Centenary Conference, Adelaide, The Australasian Institute of Mining and Metallurgy. Slade, M. E. (1982). "Trends in Natural-Resource Commodity Prices: An analysis of the Time Domain." Environmental Economics and Management 9. Solow, R. M. (1974). Intergenerational Equity and Exhaustible Resources. Symposium on the Economics of Exhaustible Resources, The Review of Economic Studies. Solow, R. M. (1993). The Economics of Resources or the Resources of Economics. Economics of the Environment. R. Dorfman and N. S. Dorfman. London, W.W.Norton.

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