Resource wealth depends on market orientation

This paper explores the effect of market orientation on (known or available) natural resource wealth using a novel dataset of world-wide major hydrocarbon and mineral discoveries. Our empirical estimates based on a large panel of countries show that increased market orientation causes a significant increase in discoveries of natural resources. In a thought experiment where economies in Latin America and sub-Saharan Africa remain closed, they would have only achieved one quarter of the actual increase in discoveries they have experienced since the early 1990s. Our results call into question the commonly held view that known or available natural resource endowments are exogenous.

That is the abstract of a new paper by Rabah Arezki, Frederick van der Ploeg, and Frederik Toscani, via the excellent Kevin Lewis.

Comments

'of the actual increase in discoveries they have experienced since the early 1990s'

What was the demand for lithium in the early 90s? And might there be some reason why demand for a number of natural resources increased markedly since the 1990s, possibly involving this citation?

'A basic contradiction between socialism and the market economy does not exist.' Deng Xiaoping, quoted in Daily report: People's Republic of China, Editions 240-249 (1993), p. 30

Leading one to suspect that possibly it was not market orientation, but market demand that led to increased discoveries.

Sudan might be an interesting example, particularly considering what a role China played in its oil extraction activities. From the EIA - 'Prolonged sanctions against the unified Sudan allowed Asian national oil companies to dominate Sudan’s and South Sudan’s oil sectors. The China National Petroleum Corporation, India’s Oil and Natural Gas Corporation, and Malaysia’s Petronas hold large stakes in the leading consortia that operate oil fields and pipelines. Sudan and South Sudan’s national oil companies, Sudapet and Nilepet, respectively, also hold small stakes in operations.'

and

'China is the leading export destination for crude oil from Sudan and South Sudan. In 2016, China accounted for 94% and 100% of Sudan’s and South Sudan’s crude oil exports, respectively.

Sudan and South Sudan export the Nile and Dar blends to Asian markets. All crude oil produced in South Sudan is exported via pipeline to Sudan for refining or export, because South Sudan has no refining capacity, and Sudan is the only country in the region with the refining infrastructure capable of processing these particular blends.[34] Crude oil is exported from Port Sudan to Asia via the Bab el-Mandeb Strait. Given the lack of alternative transit routes, Bab el-Mandeb is a strategically important chokepoint that if blocked or closed could lead to significant increases in shipping time and costs'

Bonus note - the American 5th Fleet is responsible for this area, though the Iranians seem to feel they are in a position to dispute that (in several ways), much as the Iranians do (more directly) concerning the Straights of Hormuz. And it is always such a coincidence to see American naval forces in such places. Places detailed here - 'The U.S. Energy Information Administration has released its 2017 World Oil Transit Chokepoints report. Chokepoints are narrow channels along widely used global sea routes for oil transport, with some so narrow that restrictions are placed on the size of the vessel that can navigate through them.' https://www.eia.gov/todayinenergy/detail.php?id=32292

The abstract says the estimates are based on a large panel of different countries. It could be that China’s rising tide lifted all boats, but the more free-market ones were lifted more.

There was a reason Sudan (/South Sudan) was highlighted - considering that the only thing keeping its oil production going is China. The free market is not the only thing that motivates resource extraction. Especially in the sort of situation that makes Sudan(/South Sudan) stand out - because the 'free market' basically abandoned Sudan(/South Sudan) years ago. And the Chinese, at this point, are likely to keep that 'free market' at bay as long as possible.

"What was the demand for lithium in the early 90s?"

Almost as high as it is today. Same for cobalt, aluminum, etc, used in lithium ion batteries.

Prices are set on the margin.

In the 90s, Chile began mining and exportiing lithium in high volumes which flooded the market, and prices collapsed. The US then shutdown lithium mines, while the defense mineral stockpiles of lithium werre being liquidated. The GOP driven reduction in broad infrastructure investment further reduced US demand through the 90s and 00s, further driving lithium production closures.

It wasn't until Obama administration was setting industrial policy in the US and globally that lithium demand increased significantly. In traditional lithium uses, glass and ceramics, grease, etc, substitutes plus efficiencies are available. When lithium is extremely cheap, you can use much more than is needed if it doesnt make the product worse, or even if it does, just not enough to matter.

Consumption of lithium in ceramics and glass increased as much between 2007 and 2014 recovering from recession as consumption for batteries.

While predictions of a crisis in supply have been forecast for 5-10 years, it hasn't happened. Prices have risen, but thats from extremely low and money losing and breakeven to high enough to drive efforts to restart and expand existing mines, with new suppliers trying to get money for new investments. While cash is plentiful, the reality of future demand driving up prices is questioned.

Lithium has seldom been recycled, but lithium battery recycling is growing rapidly, as much to reclaim cobalt as lithium. Just as lead batteries are recycled in excess of 90%, the same is likely to occur for much the same reason: vehiclles are recycled systematically in excess of 90%.

Technology advances consistently reduce the amount of metals required in products when their prices rise, reductions seldom reversed when prices fall. A marginal effect, but consider gold which in the 90s was thought by some to be a constraint on high tech products that required hugh amounts of gold. Then gold use was reduced so much that recycling electronics was no longer profitable for just the gold recovered. Silver and copper was also reduced so today you pay to recycle these products because of the heavy metals, cadmium, lead, also reduced or eliminated.

In any case, its China industrial policy and investment in manufacturing that has actually driven rapid increase in demand for lithium, cobalt.

The fear of China gaining yet a new critical monopoly by investing in manufacturing is the biggest driver of investment in manufacturing the needs lithium and other related resources.

Mining capacity is not the issue as multiple global producers exist, similar to the situation from 1970 to 1985 when OPEC restricted supply of what many saw as their monopoly. Ironically, the US cut mining of fossil fuels while the rest of the world expanded production. This was driven by changing economic theory driving US government policy: let profits decide investment. Profits requires scarcity driving up prices. Thus US economic policy was cut supply to create profits. But the rest of the world was running on policy of increasing supply of fossil fuels even in the face of zero profits or even losses. In most cases, US military policy covered the losses by getting US taxpayers to pay for the business risks, even today.

Ironically, Trump sees the huge subsidy US taxpayer pay for oil supply, but he doesnt call for eliminating oil imports which are still one-third of US consumption. Obama by sanctions imposed the equivalent of a $30+ tariff on every barrel of imported oil, resulting in US oil production doubling. Trump should be imposing a $30 to $50 a barrel of oil tariff on imported oil to pay for the US miliary subsidies that all the nations are using to take advantage of the US taxpayer!

And fossil fuels and lithium and its complements are indirect substitutes.

"Our results call into question the commonly held view that known or available natural resource endowments are exogenous."

Exogenous with respect to what?

Shhh - this is a web site where one of the owners has seriously suggested that the free market is best able to cure drought.

Okay, I'll bite. Could you enlighten us, clockwork_prior, on what superior method you have for reducing water usage or inducing new means of water supply, as compared to market pricing?

It is called precipitation, and has absolutely nothing to do with reducing water usage or inducing new means of water supply. Precipitation also has absolutely nothing to do with a free market, either.

This was written in 2014 by Prof. Tabarrok - 'In the 1970s the US faced a serious shock to the supply of oil but the shortage of oil was caused by price controls. Today, California is facing a serious water drought but the shortage of water is caused by price controls, subsidies and the lack of water markets.' https://marginalrevolution.com/marginalrevolution/2014/10/californias-water-shortage.html

When looked at from the perspective of 2016 or 2018, it is pretty clear that the real problems in California in terms of drought come from a lack of precipitation.

Or to put it a bit differently, lack of an adequate snowpack, as noted in 2015 - 'The spring snowpack on mountains crucial to California's water supply reached its lowest level this year in half a millennium, according to a study published1 on 14 September in Nature Climate Change.

Researchers combined tree-ring measurements from two previous studies to reconstruct the annual spring snowpack in the Sierra Nevada mountains stretching back to 1500. The historical data suggest that this year's low reading was an extreme event, likely unmatched in the past 500 years.

--------------------------------

On 1 April, an official state survey at a site in the Sierra discovered no snow there for the first time in 75 years of tallies. Snow levels throughout the mountain range — which can provide up to 30% of California’s water in a given year — were at 5% of the annual average since the state began taking the measurements in 1950.' https://www.nature.com/news/california-snowpack-lowest-in-past-500-years-1.18345

The market may be able to distribute water - it is unable to create it out of thin air, however. That is what precipitation is all about.

I don't see where you have provided evidence against Alex's point. If anything you are reinforcing it: lower levels of precipitation make it *more* likely that distributional distortions will cause droughts. To prove your point, you would need to show that precipitation levels would be insufficient *even if* distribution were optimal.

'that distributional distortions will cause droughts'

That is not how a drought is typically defined, nor does distribution cause a drought, per se.

However, it is true that being an economist, perhaps Prof. Tabarrok prefers to avoid the three following definitions based on physical reality, and instead goes with 'socio-economic' - 'Here are descriptions of the four main categories of drought:

Meteorological drought is specific to different regions, depending on the amount of yearly precipitation that's average for that area. For example, the southwest portion of the United States averages less than 3 inches (7.6 centimeters) of precipitation per year, while the Northwest gets more than 150 inches (381 cm) per year, according to the U.S. Department of Interior. A decrease in precipitation compared to the historical average for that area would qualify as a meteorological drought.

Agricultural drought accounts for the water needs of crops during different growing stages. For instance, not enough moisture at planting time may hinder germination, leading to low plant populations and a reduction in yield.

Hydrological drought refers to persistently low water volumes in streams, rivers and reservoirs. Human activities, such as drawdown of reservoirs, can worsen hydrological droughts. Hydrological drought is often linked with meteorological droughts.

Socioeconomic drought occurs when the demand for water exceeds the supply. Examples of this kind of drought include too much irrigation or when low river flow forces hydroelectric power plant operators to reduce energy production.'

Not being an economist. my preferred definition is the meteorological one, being based as it is on empirical measurement.

Well, that got a bit mixed up.

However, this link shows the precipitation in California at the time Prof. Tabarrok posted that text - https://governmentshutdown.noaa.gov/ What is ironic is that this link cannot be accessed, as there seems to be another form of drought involved - 'The website you are trying to access is not available at this time due to a lapse in appropriation.'

Man, still chopped up - here is the link to the currently unavailable graphic - http://www1.ncdc.noaa.gov/pub/data/cmb/sotc/drought/2014/09/noaa-hprcc-pcp-pct-us-36m-0930.png

Exogenous with respect to exploration?

(It seems a straightforward example of incentives. Entrepreneurial efforts.)

Hmmm, market economies vs. socialist/command economies -- so little research & analysis has been done on this issue over the past century.

Apparently the two systems are so similar in economic results that it's dull topic nowadays? flip a coin to decide

Exactly what a new college grad would say these days. Or what Ocasio Cortez would say.

Strange times.

The giveaway here is putting "socialist" and "command" on either side of a slash. A smart college grad would know the difference.

Which is the US? Market or command economy.

Since 1990, the US drastically reduced mining and refining of lithium and "rare earths" while China drastically increased processing of the former, supply growing rapidly in Chile, and drastically increasing demand and process the latter.

China considers raw material supply to be so critical to economic growth, its investment in raw materials has risen regardless of profit based on it eliminating connstraints in growing its industrial capacity rapidly.

The US policy has been to cut capacity everywhere to create scarciity profits to fuel slow growth to sustain high profits. Unfortuantely, global markets ave prevented scarcity, prevented profits, so mining, production, and industry have shrunk, except when special interests drive portions of US government central planning. Eg, in farm, dairy, production.

Reagan set in motion resumed reduction in fossil fuel production based on "market economy" creation of scarcity profits, which was in contrast to hundreds of nations either increasing fossil fuel consumption, or cutting consumption, as industrial policy. Once the Nixon and Carter central planning of energy ran its course, US fossil fuel production declined from 1985 to at least 2005 in dollar value. Eg, coal tons increased slower than prices fell, with costs rising for each class of mining method. Same with oil.

Seems to me that based on US economic history over the past century, central planning increases the value for everyone if that is the mission of central planners. Too often, central planners are only interested in gettinng rich, eg, global oil corporate central planners.

For half a century or more, US central planners in government build not only the mining, but also the refining, industrial consumption, and worker consumption.

Switching to markets with corporate central planners focused on profits has reduced mining, refining, production, with government providing the means by way of debt for increased consumption, of increasing imports.

Corporate central planners take no responsibility for funding consumption, instead demanding government fund increased consumption. Tax cuts to put money in consumer pockers, tax credits to put money in consuumer pockers, easy credit to put money in consumer pockets. Bank bailouts to resume credit to put money in consumer pockets.

Trump is the central planner for putting more money in consumer pockets with tax cuts and easier credit to fund higher consumption.

But also the central planner on cutting the money corporations are required to put in worker and thus consumer pockets. The goal of EPA deregulation is killing jobs required to prevent pollution, killing workers, etc.

The model they used took changes in demand into account. Sudan was also one of the countries included.

http://documents.worldbank.org/curated/en/920431531329592002/pdf/WPS8520.pdf

South Sudan, which became independent in 2011, isn't included however.

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