1. RESOURCE DEPLETION AND THE LONG-RUN AVAILABILITY OF MINERAL COMMODITIES RESOURCE DEPLETION AND THE LONG-RUN AVAILABILITY OF MINERAL COMMODITIES John E. Tilton Colorado School of Mines and Pontificia Universidad Católica de Chile Email: jtilton@mines.edu Birkbeck, University of London October 17, 2012

2. PURPOSE & SCOPE Explore the threat of depletion to the long-run availability of mineral commodities Explore the threat of depletion to the long-run availability of mineral commodities Mostly conceptual. Few definitive forecasts Mostly conceptual. Few definitive forecasts Focus on depletion alone and not other threats Focus on depletion alone and not other threats

3. OVERVIEW I. Nature & perceptions of depletion II. Cumulative availability curve III. Petroleum IV. Lithium V. Conclusions and implications

4. I. NATURE OF DEPLETION: TWO COMMON VIEWS The fixed stock paradigm The fixed stock paradigm The opportunity cost paradigm The opportunity cost paradigm

5. Fixed Stock Paradigm Logic Fixed Stock Paradigm Logic Earth is finite So supply of any mineral commodity must be a fixed stock Demand is a flow variable Depletion inevitable Interesting question: life expectancies of available supply

6. Copper and Petroleum Life Expectancies at Current Use (years) ReservesResources Resource Base Copper34264110 x 10 6 Petroleum40123 Not available

7. Fixed Stock Paradigm Shortcomings Recycling Substitution and backstop technologies Life expectancies at current rate of use of resource base can exceed millions of years Rising costs will cause economic depletion long before actual physical depletion

8. Opportunity Cost Paradigm Logic What really matters: the sacrifice society must make for more of a mineral commodity Long-run trends in real prices is the most common measure used to reflect trends in opportunity costs

9. Opportunity Cost Paradigm Determinants of Price Depletion pushes prices up New technology and innovation push them down The future – race between the two The past – many available studies

10. Real Price Trends for Aluminum, Copper, Nickel, and Zinc, 1900-2011 (Five-Year Average, 1900=1)

11. Opportunity Cost Paradigm Shortcomings of Price Factors other than depletion affect prices (mostly in short run) Environmental and other external costs (levels vs trends) Future prices unknown

12. Opportunity Cost Versus Fixed Stock Paradigms Despite the problems with price, opportunity cost paradigm more useful way of assessing the threat of depletion

13. Implications for Depletion 1.Scarcity not inevitable: A race between the cost-increasing effects of depletion and the cost-reducing effects of new technology 2.Availability can increase over time, and has in the past for some mineral goods 3.Threat is economic depletion - higher costs and prices curtailing demand - not physical depletion

14. Implications for Depletion 4. Probably not a surprise, time to respond 5. Focus on cost and price trends, not life expectancies

15. III. CUMULATIVE AVAILABILITY CURVE Shows total quantity available at various prices over all time Scarcity (measured by costs and prices) depends on: –Movement up curve –Shifts in curve –Slope and shape of curve USBM efforts in 1970s and 1980s CAC is not a traditional supply curve Cumulative primary output Price and costs

16. Other More Troubling Shapes Cumulative primary output Price and costs Price and costs

17. Copper and the Skinner Hypothesis Grade Amount of metal available at a given grade Source: Skinner (1976) Unimodal Bimodal

18. Copper and the Skinner Hypothesis 10 4 Ore grade, %Cu Sulfide ores 10 7 The mineralogical barrier 10 6 10 5 0.0010.010.1110 Energy, BTU/lb of copper Common rocks Source: Skinner (1976)

19. Another Cause of Jumps in CAC Demand exceeds byproduct supply requiring much more costly main product production Demand exceeds byproduct supply requiring much more costly main product production

20. Three CAC Benefits Useful expository device Useful expository device Calls into question some common beliefs Calls into question some common beliefs Can provide useful insights into the threat of depletion Can provide useful insights into the threat of depletion

21. 1. Useful Expository Device 1. Useful Expository Device Shape of the curve Shape of the curve Nature and incidence of mineralization Other geologic factors Movement up the curve Movement up the curve – Growth in metal consumption (consumer preferences, conservation, material substitution) – Recycling Shifts in the curve Shifts in the curve – Changes in input costs – Cost-reducing technological change

22. 2. Questions Some Common Beliefs 2. Questions Some Common Beliefs Population growth Population growth Renewable resources Renewable resources Resource use in developed countries Resource use in developed countries

23. 3. Assessing the Future Threat of Depletion When shape of CAC is benign – depletion is not a problem When shape is not benign – depletion may or may not be a threat Requires actual estimation of CAC Cumulative primary output Price and costs

24. IV. PETROLEUM IV. PETROLEUM Roberto F. Aguilera and others, 2009. “Depletion and future availability of petroleum resources,” Energy Journal, Vol. 30, No. 1, pp. 141-174

25. Approach Approach Extends two USGS studies – National Oil and Gas Assessment (1995) and World Petroleum Assessment (2000) Extends two USGS studies – National Oil and Gas Assessment (1995) and World Petroleum Assessment (2000) Estimates resources from Estimates resources from Unassessed provinces (using a Variable Shape Distribution model) Future reserve growth Unconventional sources of liquids (heavy oil, oil sands, and oil shale) Estimates production costs Estimates production costs Many explicit assumptions Many explicit assumptions

28. Life Expectancies Years at 0% DD Growth Years at 2% DD Growth Years at 5% DD Growth Conventional Petroleum 1517043 Conventional and Unconventional Petroleum 65113270

29. Findings Quantity of conventional petroleum greater than often assumed Quantity of conventional petroleum greater than often assumed Use of unconventional petroleum does not cause a big jump in CAC Use of unconventional petroleum does not cause a big jump in CAC Price not likely to rise sharply in near future due to depletion Price not likely to rise sharply in near future due to depletion Hard landing unlikely even if conventional oil production peaks Hard landing unlikely even if conventional oil production peaks

30. V. LITHIUM V. LITHIUM Andrés Yaksic and John E. Tilton, 2009. “Using the cumulative availability curves to assess the threat of mineral depletion: The case of lithium,” Resources Policy, Vol. 24, pp. 185-194

31. Concern Concern Lithium batteries for hybrid and full electric automobiles Lithium batteries for hybrid and full electric automobiles Demand growth could exceed available resources Demand growth could exceed available resources Perhaps R&D should be redirected Perhaps R&D should be redirected

32. Approach Approach Literature review and interviews to identify known resources and their production costs Literature review and interviews to identify known resources and their production costs No attempt to estimate undiscovered resources. So new discoveries can cause CAC to shift downward No attempt to estimate undiscovered resources. So new discoveries can cause CAC to shift downward Demand scenarios Demand scenarios

33. Types of Lithium Resources Types of Lithium Resources Brines Brines Hard rock mineral deposits Hard rock mineral deposits Clays Clays Seawater Seawater

34. Lithium from Seawater Lithium from Seawater Huge resource - 44.8 billion tons at 20% recovery rate Huge resource - 44.8 billion tons at 20% recovery rate Cost estimates based on 1975 study by Steinberg and Dang at Brookhaven National Lab updated for inflation – $7-10 per pound of lithium carbonate Cost estimates based on 1975 study by Steinberg and Dang at Brookhaven National Lab updated for inflation – $7-10 per pound of lithium carbonate

35. Estimated Lithium CAC

36. Findings Findings Depletion will not be a problem Depletion will not be a problem Conventional sources sufficient for the rest of this century and beyond Conventional sources sufficient for the rest of this century and beyond Lithium from seawater is a huge source of potential supply and only raises costs of lithium used in autos from $42 to $150 Lithium from seawater is a huge source of potential supply and only raises costs of lithium used in autos from $42 to $150

37. V. CONCLUSIONS AND IMPLICATIONS V. CONCLUSIONS AND IMPLICATIONS Threat of depletion depends on three sets of determinants Threat of depletion depends on three sets of determinants Movement up and shifts in CAC unknown and unknowable Movement up and shifts in CAC unknown and unknowable Shape of CAC (though often unknown) is knowable Shape of CAC (though often unknown) is knowable Knowledge of the shape can provide useful insights concerning the future threat of depletion Knowledge of the shape can provide useful insights concerning the future threat of depletion

38. RESOURCE DEPLETION AND THE LONG-RUN AVAILABILITY OF MINERAL COMMODITIES RESOURCE DEPLETION AND THE LONG-RUN AVAILABILITY OF MINERAL COMMODITIES John E. Tilton Colorado School of Mines and Pontificia Universidad Católica de Chile Email: jtilton@mines.edu Birkbeck, University of London October 17, 2012