The Ultimate Resource
In the 1980's Julian Simon (among others) noted that real prices for raw materials
had fallen consistently in constant dollars throughout human history.
Simon was at that time a professor of management at Princeton University.
He wasn't formally a theoretical economist, nor was he spreading what
many people would consider a responsible or prudent message. He
was thus an extremely controversial figure. His paper in Science in 1980
("... an oversupply of bad news") drew no less than 8 published comments
in the letters section of Science.
Famously he bet Prof. Paul Ehrlich (author of "The Population Bomb") that
any $1000 shopping basket of raw materials of Ehrlich's choosing would be less
expensive by 1990. The loser was to pay the winner the difference. In 1990
Ehrlich sent Simon a check for $576.01.
In many circles he was condemned as a neoconservative, and indeed, his message that markets were
doing good job of protecting the environment and that growth
does not reduce the worldwide standard of living were highly
compatible with politically conservative viewpoints.
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Either way, however, his fundamental point about scarcity and prices over time could
not be ignored by either side. For example, the figure below shows the scaricty
of copper expressed as a ratio to the Consumer Price Index and to mean wages
over time.
Figure 10: Copper price relative to wages and prices over time.
The fundamental fact is, copper is not expensive relative to
wages or prices and never has been. Throughout this time, the
amount of proven reserves of copper has held nearly constant, even
as production has risen tremendously. This can be related to the
econonmics of exploration: Exploration (the identification of
new proven reserves) is an expensive undertaking, and tends
to occur primarily in times of rising prices -- this puts a strong
brake on the upward spiral in real terms. Secondly, new methods of
exploration and new methods of extraction have more than kept pace
with demand over time, resulting in lower prices even though the
producers are still turning a profit.
Oil is another case in point (Figure 11 below). Though it may not seem that way,
crude oil now is near a historic low. Recent minor price hikes are nothing
compared to the oil shocks of the 70's. Both of these were the result of
monopolistic, that is, conservational pressure on the part of the
OPEC nations, not because oil is an intrinsically scarce resource,
or is likely to be in the foreseeable future.
Figure 11: Crude oil prices in constant dollars through history.
The point above about exploration is shown very clearly by the statistics
on drilling rig counts in the US. The number of rigs actively drilling for oil
and gas goes up whenever the price does.
Figure 12: Exploration and crude oil prices with time.
Cases where a transient price increase have brought on cries of
impending doom have also been unanimously wrong, and repeatedly so.
Figure 13A shows the price of mercury with time. The two mistakes
made by the author of that graph were to plot the price of mercury in non-adjusted dollars
(the value of the dollar has changed over time, so that constant
dollars, wages or prices are the only valid comparisons. Second,
the price uptick in the seventies evaporated in the 1980's, rather
than following the projected upward path. Figure 13B shows a more
reasnoable representation of the development of mercury prices with time.
Figure 13: Price development of mercury with time.
Thus it appears that mineral prices generally are not the problem they were made out to be in
the 1970's. The ultimate resource appears to be human ingenuity. So far.
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