William J. Baumol
The Concise Encyclopedia of Economics

Natural Resources

by William J. Baumol and Sue Anne Batey Blackman
About the Author
The earth's natural resources are finite, which means that if we use them continuously, we will eventually exhaust them. This basic observation is undeniable. But another way of looking at the issue is far more relevant for assessing social welfare. Our exhaustible and unreproducible natural resources, if measured in terms of their prospective contribution to human welfare, can actually increase year after year, perhaps never coming anywhere near exhaustion. How can this be? The answer lies in the fact that the effective stocks of natural resources are continually expanded by the same technological developments that have fueled the extraordinary growth in living standards since the industrial revolution.

Innovation has increased the productivity of natural resources (increasing the gasoline mileage of cars, for example). Innovation also increases the recycling of resources and reduces waste in their extraction or processing. And innovation affects the prospective output contribution of natural resources (for example, the coal still underneath the ground). If a scientific break-through in a given year increases the prospective output contribution of the unused stocks of a resource by an amount greater than the reduction (via resources actually used up) in that year, then, in terms of human economic welfare, the stock of that resource will be larger at the end of the year than at the beginning. Of course, the remaining physical amount of the resource must continually decline, but it need never be exhausted completely, and its effective quantity can rise for the indefinite future. The exhaustion of a particular resource, though not impossible, is also not inevitable.

Ever since the industrial revolution, world demand for power and raw materials has grown at a fantastic rate. Some observers (see Darmstadter, Teitelbaum, and Polach; and United Nations) estimate that humankind consumed more energy between 1900 and 1920 than in all previously recorded time. In the following two decades, 1920 to 1940, people again used more power than in the totality of the past (including the preceding twenty years), and each twenty-year period since has experienced a similar rate of increase in energy demands.

Are our natural resources truly being gobbled up by an insatiable industrial world? Table 1 presents some estimates of known world reserves of four important nonfuel minerals (aluminum, copper, iron, and lead). Clearly, even though the mining of these minerals between 1950 and 1980 all but used up the known 1950 reserves, by 1980 the known supplies of these minerals were much greater than in 1950. This increase in presumably finite stocks is explained by the way data on natural resources are compiled. Each year the U.S. Bureau of Mines estimates the amounts of "proven reserves," or quantities of mineral that have actually been located and evaluated (as in table 1). Those quantities can and do rise in response to price rises and anticipated increases in demand. As previously discovered reserves of a resource grow scarce, the price rises, stimulating exploration that frequently adds new reserves faster than the previously proven reserves run out.

World Reserves and Cumulative Production of Selected Minerals: 1950-1980
(millions of metric tons of metal content)

Mineral 1950 Reserves Production 1950-1980 1980 Reserves

Aluminum 1,400 1,346 5,200
Copper 100 156 494
Iron 19,000 11,040 93,466
Lead 40 85 127
SOURCE: Repetto, p. 23.

Clearly, data on "proven reserves" do not show whether a resource is about to run out. There is, however, another indicator of the scarcity of a resource that is more reliable: its price. If the demand for a resource is not falling, and if its price is not distorted by interferences such as government intervention or international cartels, then the resource's price will rise as its remaining quantity declines. So any price rises can be interpreted as a signal that the resource is getting scarcer. If, on the other hand, the price of a resource actually falls, consistently and without regulatory interference, it is very unlikely that its effective stock is growing scarce.

One group of researchers (Barnett and Morse) found that the real cost (price) of extraction for a sample of thirteen minerals had declined for all but two (lead and zinc) between 1870 and 1956. More recently, Baumol et al. calculated the price of fifteen resources for the period 1900 to 1986 and showed that until the "energy crises" of the seventies, there was a negligible upward trend in the real (inflation-adjusted) prices of coal and natural gas, and virtually no increase in the price of crude oil. Petroleum prices catapulted in the seventies under the influence of the Organization of Petroleum Exporting Countries but have since returned to their historical levels. The longer-term prospects for these prices are uncertain, but new energy-producing techniques such as nuclear fusion may be able to keep energy prices at their long-term real levels, or even lower.

The price history of nonfuel minerals is even more striking. Some, like iron, have experienced a very slow rise over the last hundred years or so. The prices of others, like lead, have remained stable. And for some, including aluminum and magnesium, real prices today are far lower than they were seventy years ago. The prices of about half of the mineral resources investigated actually fell after correction for inflation. None of the price rises, aside from those of fuels in the seventies, was very large; in constant dollars most of them rose less than 1 percent per year. While the price decreases tended to be concentrated toward the beginning of the period, perhaps suggesting increasing scarcity (particularly since 1960), this is hardly evidence of imminent exhaustion.

The effective stocks of a natural resource can be increased in at least three ways:

1. A technological innovation that reduces the amount of iron ore lost during mining or smelting clearly increases the effective stock of that resource. Likewise, a new technique may make it economical to force more oil out of previously abandoned wells. This decrease in waste translates directly into a rise in the effective supplies of oil. For example, say that in 1960, with known drilling techniques, only 40 percent of the oil at a site in Borger, Texas, could have been extracted at a cost ever likely to be acceptable, but by 1990 improved technology had raised this figure to 80 percent. Assume, for simplicity, that the amount of oil in Borger was 10 million barrels. Let's say that between 1960 and 1990, 5 percent of the originally available oil—0.5 million barrels—has been used up. Then, by 1990, the effective supply of oil in that part of the Texas Panhandle will have risen from its initial level of 4 million barrels (40 percent of 10 million) to 7.6 million barrels (80 percent of 9.5 million), which yields a net rise of effective supply equal to 90 percent! In other words, there has occurred not a rise in the physical quantity of oil, but an increase in the productivity of the remaining supply.
2. The (partial) substitutability within the economy of virtually all resources for others is at the heart of the second method for increasing the effective stocks of natural resources. The energy crises of the seventies provided some dramatic illustrations of the substitutability of resources. Homeowners increased their expenditures on insulation to save on fuel costs, thus substituting fiberglass for heating oil. Newspapers reported that the cattle drives of earlier eras were being revived, with cowhand labor substituting for gasoline. Technological innovation can reduce the cost of extracting or processing a resource. Because of technological breakthroughs, a new oil rig, for example, may require fewer labor hours to operate and use less electricity and less steel in its manufacture. Those savings of other resources can translate into savings of oil, because those other resources are thus freed up to be used elsewhere in the economy, and some of the alternative uses will entail substitution for oil.

3. The third way we can increase our effective stocks of a natural resource is, of course, by technological changes that facilitate recycling. Say, for example, that a new recycling technique allows copper to be reused before it is scrapped and that no such reuse was economical before. Then this technique has doubled the effective reserves of copper (aside from any resources used up in the recycling process). It is important to note, however, that recycling adopted without regard for economic considerations can actually waste resources rather than save them. For example, some researchers have found that combustion of municipal garbage to generate electricity sometimes actually uses up more energy than it produces.

These three means can all increase the effective supplies of exhaustible resources and can augment the prospective economic contribution of the current inventory of resources, perhaps more than enough to offset the consumption of resources during the same period.

Some people believe that the burst of productivity and increase in living standards that has occurred since the industrial revolution can be attributed to our willingness to deplete our natural heritage at the expense of future generations. But as we have seen here, rising productivity (the source of the great leap in economic growth) may, in a real sense, actually augment humanity's stock of natural resource capital, instead of depleting it, and may be able to do so, for all practical purposes, "forever." Can we expect such technological innovation to continue indefinitely? The evidence of trends in the prices of natural resources suggests that technological innovation has indeed provided continuing increases in the effective stocks of finite resources. But is there a limit to this process—can we expect the wonders of technology to continue to wring ever more out of the earth's resources? Unfortunately, no one knows the answer.

About the Author

William J. Baumol is the director of the C. V. Starr Center for Applied Economics at New York University and professor emeritus at Princeton University. Sue Anne Batey Blackman is the senior research assistant in Princeton's economics department.

Further Reading

Barnett, H. J., and Chandler Morse. Scarcity and Growth. 1963.

Baumol, William J., Sue Anne Batey Blackman, and Edward N. Wolff. Productivity and American Leadership: The Long View. 1989. (Earlier estimates in this entry are taken from Baumol, William J., and Wallace E. Oates, with Sue Anne Batey Blackman. Economics, Environmental Policy and the Quality of Life. 1979.)

Darmstadter, Joel, Perry D. Teitelbaum, and Jaroslav G. Polach. Energy in the World Economy, A Statistical Review of Trends in Output, Trade and Consumption since 1925. 1971.

Repetto, Robert. "Population, Resources, Environment: An Uncertain Future." Population Bureau 42, no. 2 (July 1987).

United Nations. Yearbook of World Energy Statistics. 1979, 1983, and 1986.

On Econlib:
Stroup, Richard and John Baden. "Property Rights and Natural Resource Management." Literature of Liberty. 1979.

Are We Running Out of Oil?

No resource has inspired so great a fear of running out as oil has. This fear is not new. And every time in the last hundred years that an expert predicted we would run out, that prediction has been wrong—and not just wrong, but wrong by a huge margin. In 1891, for example, the U.S. Geological Survey stated that there was little chance that oil would be found in Kansas or Texas. Since then, 14 billion barrels of oil have been produced from just those two states. In 1914 an official of the U.S. Bureau of Mines claimed that the total future U.S. production would be 5.7 billion barrels. In fact, production has already been six times that figure. In 1920 the director of the Geological Survey said that peak annual crude production had almost been reached. By 1948 annual U.S. production was four times its 1920 level. Finally, in one of the most astoundingly wrong predictions, the Interior Department stated in 1939 that U.S. oil supplies would run out in thirteen years. Of course, over sixty years later, the United States is still producing oil.


Source: Baumol, Blackman, and Wolff, p. 214.

Return to top