1. Natural Resource and Energy Economics
Chapter 17
In this chapter we start looking at the demand for natural resources, including energy, as the world’s population changes. First we will investigate the changes in the global population and what this might mean in terms of the availability of natural resources. In this analysis, resource consumption per capita is included. We will discuss the fact that economists don’t worry that the world will run out of energy and the alternative energies that might be available.
Natural Resource and Energy Economics
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2. Resource Supplies: Doom or Boom?
Population increased from 1 to 7 billion
Standard of living is 12 times higher
Consumption of resources is much higher
Since the Industrial Revolution there have been historically high increases in population and the standard of living. The worldwide population has risen from 1 to 7 billion people, and the standard of living is now 12 times higher. With such a significant increase in the consumption of resources, the obvious question is whether or not our resources will be sufficient to sustain such large increases in the population and the consumption of resources.
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3. Population Growth Thomas Malthus (1798) predictions Replacement rate
Total fertility rate
Modernization
Death rates fall
Fertility rate falls below replacement rate
In his 1798 An Essay on the Principle of Population Thomas Malthus predicted that increases in human living standards were only temporary because the higher standards of living would cause people to have more children. With a higher population, then living standards would fall. Total fertility rate is the average number of children that a woman is expected to have during her lifetime. Many nations have fertility rates below the replacement rate of Demographers expect that the world population will reach a maximum of 9 billion before the population rate begins to fall.
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4. Source: The World Factbook, www.cia.gov. Data are 2012 estimates.
Total Fertility Rates, 2012
Country
Total Fertility Rate
Australia
1.77
Canada
1.59
China
1.55
France
2.08
Germany
1.41
Hong Kong
1.09
Italy
1.40
Japan
1.39
Russia
1.61
South Korea
1.23
Sweden
1.67
United States
2.06
This table shows many nations with fertility rates below the replacement rate of Can governments raise birthrates? Proposed methods have not increased birthrates like second child bounties and increased child benefits. Possible future results might be too few young workers to support retirees and lack of soldiers.
Source: The World Factbook, Data are 2012 estimates.
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5. Resource Consumption Per Person
Increasing commodity demand
Population growth
Rising consumption per person
Commodity supply has risen faster than demand
Commodity prices are falling
As recently as 1968, the theories of Malthus were still being discussed. Paul Ehrlich wrote The Population Bomb and predicted famines in the 1970s. No famines occurred and population growth slowed. The next slide provides evidence to explain the demise of dire predictions about the relationship between prosperity, population, and resource supplies.
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6. Resource Consumption Per Person
This figure shows a commodity price index falling steadily since This fall in long-run real commodity prices provides evidence that over this period of 150 years, resource supply was able to grow faster than resource demand. Commodity prices show volatility but are much lower than they were in the past. Lower commodity prices imply that supply has increased more than the demand for commodities. As a result, the supply of commodities has risen fast enough to satisfy an increasing population and a huge rise in consumption per capita.
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7. Resource Consumption Per Person
Will resource supplies be sustainable in the future?
Prospects are hopeful
Demand for resources will reach a peak and decline with falling birthrates
Resource consumption per capita leveled off or is decreasing
Studies indicate that resource supplies will be sufficient to sustain current standards of living. It is expected that demand for resources will reach a peak and then fall with the decline in the birthrate. Resource consumption per person has either remained constant or started decreasing. Both of these factors indicate that resource supplies will be sufficient to maintain the standard of living.
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8. Resource Consumption Per Person
In this graph, we show the total demand for water and the per capita demand for water in the U.S. Demand for water (per capita water use) in the U.S. peaked in 1975 and then fell 28% before it leveled off.
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9. Resource Consumption Per Person
Leveled off in the rich countries
Demand will increase in poorer countries
Challenge is to move resource supplies from their place of origin to places of need
Resource consumption per capita has leveled off in the rich countries, but demand for resources will increase in poorer countries as they develop. This creates a challenge in moving the resources to the places where they are needed. If we are unable to move these resources to where they are needed, local shortages could develop in poor countries, even though there might be a surplus of the resource in other parts of the world where it is produced.
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10. Resource Consumption Per Person
This graph shows the total and per capita energy use in the U.S. Per capita energy use peaked in 1979 and then leveled off. Total energy consumption between 1950 and 2008 nearly tripled, increasing from 34.6 quadrillion BTUs in 1950 to 97.3 quadrillion BTUs in Since 1990, total energy consumption has increased by an average of only 0.7 percent per year.
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11. Resource Consumption Per Person
In this graph, we look at that total amount of trash created and the per capita trash in the U.S. Trash is studied to show the use of other resources by measuring the generation of solid waste. Per capita consumption of other resources has leveled off since 1990 at 4.7 pounds of trash per capita .
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12. Energy Economics
This figure shows the inflation adjusted GDP per million BTUs of energy consumption in the U.S. from 1950 to It shows an increase in GDP per million BTUs of energy consumption over the period. Technological change increased the amount of goods and services produced, and the GDP per 1 million BTUs of energy rose from $57.90 in 1950 to $ in Between 1988 and 2008, the U.S. produced 39% more goods per person with a constant amount of energy input per person. This is evidence of energy efficiency.
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13. Efficient Electricity Use
The Challenge: Highly Variable Demand
Variations in fixed costs
Daily variations in demand
Different types of generation technology
One of the problems that energy companies face is the massive change in demand over a very short time period, like one day. Demand for energy is quite low at night while people are sleeping and then quickly begins to increase when people get up in the morning. It is a challenge for the electric companies to minimize their costs when demand varies so much, and many of the plants with the lowest operating costs have the highest fixed costs. To help adapt to this problem, electric companies use a mix of different types of generation technology.
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14. Efficient Energy Use
Electric utilities firms use a mix of generation technologies and a variety of energy sources in This figure shows that half of the electricity is generated using large coal-fired plants and the rest comes from a variety of sources.
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Source: United States Energy Information Administration,

15. Running Out of Energy? No likelihood of running out of energy
Running out of cheap energy
Multiple sources of supply
Environmental impacts
Economists don’t worry about running out of energy. There are many sources of energy, but the better question is: “At what price?” The price of alternative energies tends to be quite high, but prices will likely fall as the costs of producing these alternative energies fall. The pollution that is created from the generation of energy is not reflected in the price of energy. There are some sources of energy that are relatively clean and create little or no air pollution. However, their price does not reflect the much lower externalities associated with this kind of energy. If energy prices were high enough for “cheap” and dirty energy creation, the production of the energy could become cleaner as the higher price is sufficient for firms to make the energy generation clean.
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16. Running Out of Energy? LO3
The prices in this table are current alternative prices. As technologies improve the prices will fall, so the costs of replacing oil in the future will fall.
Sources: Cambridge Energy Research Associates, The Economist, April 22, 2006,
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17. Natural Resource Economics
Policies for extracting resources to maximize net benefits
Present vs. future consumption
Present value
Renewables vs. Nonrenewables
Renewable natural resources
Nonrenewable natural resources
Optimal management of natural resources requires incentive structures that consider net benefits today compared to net benefits made in the future. Present value is the measurement tool used to calculate the present-day value of a future amount of money. Using present value enables decision makers to use cost-benefit analysis when the costs and benefits occur at two different points in time. Understanding present value helps to ensure that resources are allocated in the best possible way.
Renewable resources are resources that are capable of growing back if they are harvested at moderate rates. Renewable resources include things like forests, wildlife, oceans, etc. Nonrenewable resources either have a fixed supply or they take an extremely long time to renew themselves.
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18. Natural Resource Economics
Optimal Resource Management
Extraction strategy to maximize stream of profits
User cost
Sell today, cannot sell in the future
Higher expected demand encourages less extraction today
Property rights
Nonrenewable resources include oil, coal, and metals. If the user of a resource chooses to extract the resource now, the user faces the opportunity cost of reduced future extraction – that is, not being able to extract that resource and sell it in the future. With nonrenewable resources, higher expected demand should encourage less extraction today. Property rights can be used to help guarantee that a firm will be able to profit by conserving the resources today.
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19. Natural Resource Economics
TC = EC + UC EC
Dollars B A P
A firm has a two year lease on a mine. How much should it extract in each year to maximize profits? The firm should consider extraction costs (EC) and User Cost (UC). Even in year 1, the firm should calculate per unit profit as P – (EC + UC) or P-TC. In this figure the firm would produce Q1 in year 1 where EC + UC line crosses P at point B. At every point up to point B, the market price P exceeds the total cost. The output between Q1 and Q0 should be extracted in the second year because if you extracted this output in the first year, the first year profit would be less than the UC, the present value of the second-year profit . UC Q2 Q1 Q0
First-year quantity extracted
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20. Natural Resource Economics
TC = EC + UC1
TC = EC + UC0
Dollars EC P
The goal of profit maximizing extracting firms is to extract resources at a rate that will maximize their profits over time. If future demand rises, UC in the current period will rise to UC1 to reflect the increase in future profits, TC shifts up to reflect high UC and the amount of Year 1 consumption falls from Q0 to Q1. This conserves the resource for use in the future when it will be in higher demand. UC Q1 Q0
First-year quantity extracted
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21. Renewable Resources Elephant preservation Strong property rights
Forest management
Optimal forest harvesting
Differences in property rights
Variation in growth rates
In the 1970s and 80s, the African elephant was on the verge of extinction due to illegal poaching for the ivory tusks. In some countries the elephant population had grown rapidly due to strong property rights. If forests are private property or strictly regulated by the government then there are incentives for sustainable harvests. If forests have no government enforcement or property rights there is an incentive for deforestation.
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22. Global Perspective
This chart shows the percentage changes in the amount of land covered by forests. Large variation in growth rates is due to differences in property rights.
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23. Optimal Forest Harvesting
Clear and enforceable property rights to a forest provide the incentive to manage forests on a sustainable basis and to reap long term benefits from conservation. The company plants an acre with seedlings and over time they grow slowly, then quickly slow down to zero growth. The company must decide when to harvest and when to replant.
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24. Renewable Resources Optimal fisheries management
Difficult to assign property rights
Policies to limit catch sizes
Total allowable catch (TAC)
Individual transfer quota (ITQs)
It’s very difficult to assign property rights to fishing except by catching a live fish in the ocean which leads to overfishing. It’s always a race to catch the fish before someone else. Government often tries to impose policies to encourage sustainable catch, but often the side effects of these policies means that the catch ultimately isn’t limited.
The total allowable catch (TAC) is one way to ensure that the number of fish caught is limited by setting a maximum total of fish allowed. However, the different fisheries still race to catch as many as possible before reaching the TAC. Government also imposes the issuance of individual transferable quotas, ITQs, which limit the number of fish each individual is able to catch. The quotas can be traded, and the race is eliminated since each individual is able to catch a certain amount. Market pressures cause the ITQs to be sold to fisherman who can catch the most fish efficiently. Society benefits.
ITQs move production towards producers with the lowest cost. ITQs are only enforceable within 200 miles of the coast. The rest of the ocean is still a free for all!
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25. Renewable Resources Fishery Market Value of Catch Sea scallop
$455,693,743
Lobster
399,476,190
Walleye pollock
282,399,223
Sockeye salmon
278,646,491
Pacific halibut
206,958,364
White shrimp
191,608,324
Blue crab
189,784,233
Pacific cod
146,940,754
Brown shrimp
144,592,574
Dungeness crab
140,443,133
This table identifies the top 10 U.S. fisheries in dollar terms.
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26. Renewable Resources LO5
A fishery collapse happens when the population is sent into a rapid decline due to overfishing. Fish are being harvested faster than they can reproduce. Maine red hake’s decline was abrupt. Atlantic tuna’s collapse was gradual.
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27. Is Economic Growth Bad for the Environment?
Richer countries:
Produce and consume more
Spend more to maintain the environment
Earn higher scores on measures of environmental quality (EPIs)
Evidence indicates that richer countries spend more money to protect the environment. Essentially, protection of the environment is a normal good. As incomes rise due to economic growth, we would expect more environmental protections to be put in place. When countries are poor, they are much more concerned with getting out of poverty, and they are willing to sacrifice the environment to get out of poverty. The EPI compares countries based on how they are doing in terms of 25 environmental indicators including atmospheric carbon emissions, measures of air and water quality, the degree of wilderness protection, energy efficiency, and measures of whether a country’s fisheries and forests are being overexploited.