The purpose of the present paper is to take a closer look at the potential threat posed by depletion of important exhaustible resources, both fuels and minerals, and with a special emphasis on oil, the most important raw material in world trade, whose ample availability is a crucial precondition for keeping the world's transport system rolling.

The following analysis is a contribution to an age-old debate, with highly differing views being aired. There are, first, the alarmists like Meadows et al (1972), Campbell and Laherrere (1998) and Deffeyes (2001), who emphasize the finite quantity of exhaustible resource availability, and point to the dire consequences that will follow once materials of critical importance to humanity are depleted. There are, second, those who attach greater importance to prices, incentives, technological change and substitution, and who argue that the flexibility afforded by these phenomena will keep the threat of depletion at bay. Geologists, engineers and natural scientists predominate in the first camp. The second, to which I clearly belong, is dominated by economists. Tilton (2002) provides a thoughtful account of this debate, seeking to make justice to the alternative approaches to the subject.

My intention is to demonstrate that the doomsday gloom expressed by the first camp is erroneous, that scarcities are not being accentuated, and that in any case, despite the impressive expansion in the exploitation of exhaustible resource products, depletion imposes a diminishing threat to human welfare.

Let me clarify at the outset that I am concerned with depletion in an economic sense, not in a physical or engineering sense. Depletion occurs if the supply of an exhaustible resource material becomes increasingly costly on account of a diminishing volume, or a deteriorating quality of the resource base for that material.

Let me also state that history provides no examples of exhaustible resource depletion in this sense. Sheikh Zaki Yamani, oil minister of Saudi Arabia for many years, is said to have stated that the stone age did not end because stone was depleted; neither will the oil age end because of oil depletion. On a more serious note, let me quote a reassuring analysis that I undertook some years ago, mapping exhaustible resource prices over a reasonably long time. For the period 1900 - 1972, i.e. just before the OPEC cartel took effective control of the petroleum market, the trend of real oil prices in international trade exhibited an average decline of 0.7% per year. For a variety of reasons, long price series are hard to construct for coal and natural gas, but metals and minerals, another importantant exhaustible resource group, also shows a declining long run tendency. The real price index of these materials fell by an annual average of 0.1% over the 72-year period (Radetzki, 1990). The subsequent dramatic price developments for oil (+142% in the 30-year period 1967/1971-1997/2001) have nothing to do with depletion and cost of supply, and have been effectively shaped by the market power of the oil cartel. In contrast, metals and minerals prices, determined in basically competitive markets, continued their long run decline, albeit with much greater speed. The 1997/2001 average minerals and metals price index in real terms was 53% lower than the corresponding index value 30 years earlier. The average annual decline over this period works out at an astounding 1.7% (UNCTAD, 2000; 2001).

The paper is structured as follows. Section 2 provides three examples of depletion scare. Section 3 follows up by showing how these scares were resolved without leaving any lasting mark. Section 4 is devoted to a detailed analysis of the "reserve" concept, and to the development of reserves over time. In section 5, I address the issue of the cost of exhaustible resource supply over time, and of the role of technical progress for cost developments. Section 6 is entirely devoted to oil. It responds to the recent claims of an impending peak in world oil production, and an increasing subsequent scarcity of this material. Section 7, finally, distinguishes between the satisfaction of exhaustible resoures demand, on the one hand, and the satisfaction of human needs, on the other, and concludes that resource exhaustion does not constitute a threat to either. In addition to oil, the materials treatment is somewhat selective. It covers coal, natural gas, copper and iron ore, all belonging to the top group among primary commodities, in terms of production value and international trade.

by Marian Radetzki
Professor of Economics
Lulea University of Technology