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Fundamental Economics of Depletable Energy Supply - page 20 / 30





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Resources for the Future

Krautkraemer and Toman

model of finite resource depletion does not adequately explain the observed behavior of depletable energy resource prices and in situ reserve values. This is not terribly surprising given the many other features of depletable resource supply already discussed—such as exploration for and discovery of new deposits, technological change, and capital investment—that alter the implications of finite availability. It seems clear that these other factors have overshadowed finite availability of the resource as determinants of the observed dynamic behavior of nonrenewable resource prices and in situ values.

6.2 Data on Reserves

In the theoretical models of depletable energy supply we have discussed, measures of reserves or resources play a significant role as indicators of cost drivers, not just in terms of physical availability. Before looking at efforts to empirically model depletable energy supply, therefore, it is worth making some brief comments on the nature of available data for reserves.

The classification scheme of the United States Geological Survey defines total resources, including energy resources, as materials that have been discovered or might be discovered and used (Brobst 1979). Reserves are that portion of total resources that can be economically extracted. Undiscovered resources are classified as hypothetical, if in a known mining district, or speculative. Identified but currently noneconomic resources are categorized as para-marginal or sub-marginal. The physical measures of reserves often are compared to measures of the rate of use in order to determine the remaining life of the reserves.

Since reserves are defined in terms of economic recovery, whether or not a deposit is classified as a reserve changes with the resource price and extraction cost. In addition, since costly investment is required to “prove” reserves, there is a limited incentive to prove reserves beyond a certain point. The reserve to consumption ratio for petroleum increased from 35 in 1972 (Slade 1987) to 45 in 1990 (World Resources Institute 1994), even though commercial energy consumption increased by more than 50% between 1971 and 1991 (World Resources Institute 1994). Physical measures of reserves thus probably have more meaning as an indicator of inventory on hand than as a more fundamental indicator of resource cost (Adelman 1993).


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