Mineral Depletion, with Special Reference to Petroleum

Two implications of received theory are (1) mineral net prices rise at the riskless rate, and (2) in-ground value is equal to the current net price. Both propositions are. A correct theory has been joined to mistaken premises. resources are inexhaustible. The economic problem is not the intertemporal of a stock but coping with the cost of a flow of reserve accretions. Mineral scarcity price are the uncertain fluctuating result of a tug-of-war between diminishing returns increasing knowledge. Hence minerals are risky assets. cost, finding cost, and user cost (the penalty for development/production instead of tomorrow) are all substitutes. Hence change in any one is a proxy for change in other. Development cost is observable, and has been stable in many countries for pro- periods. User cost was also stable in the USA. There is no sign of any pattern of gradual and rising cost. simple model of an individual reservoir explains observed relations of value and. The rate of interest has both a positive and negative effect upon the rate of reservoir. The net effect of a change is therefore weak. of low-cost oil fields, had they been operated independently to maximize, would have led to drastic increases in depletion rates. The fact of decrease proves restriction of output to maintain prices.