Sunday, November 27, 2016

Tiffany's fallacy: the mineral pie is shrinking, and most of what's left is in the sky




Audrey Hepburn in the 1961 movie: "Breakfast at Tiffany's." From the title of the film, I take the concept of "Tiffany's fallacy": it is not enough to see jewels on the other side of the window to have them. You have to pay for them. The same is true with mineral resources. There may be plenty of oil reserves on paper, but if you want them, you have to pay for their extraction. What follows is a slightly modified excerpt from my upcoming book "The Seneca Effect." 


In the debates that deal with energy and fossil fuels, it is rather common to read or hear statements such as “oil will last for 50 years at the current rate of production.” You can also hear that “we still have one thousand years of coal” (Donald Trump stated exactly that during the US presidential campaign of 2016). When these statements are uttered at a conference, you can sometimes hear the sigh of relief of the audience, the more pronounced, the surer the speaker appears to be. This reaction is understandable if the assessment of a long duration of fossil fuels were to correspond to what we can expect for the future. But can we, really?

The essence of propaganda, as it is well-known, is not so much telling lies, but presenting only one aspect of the truth. That's true also for the depletion debate. Saying that a certain resource will last decades, centuries, or more is not a lie, but not the truth, either. These numbers are based on only one aspect of the problem and on highly simplified assumptions. It is the concept of “reserves to production ratio” (R/P), a number that gives you a duration in years of the resource, supposing that the amount of reserves is known and that extraction will continue at the current rates. Normally, the results of these estimates have a comfortable ring to it. According to the 2016 BP report, the global R/P ratio for crude oil calculated for “proven reserves” was around 50 years, that for natural gas about the same, whereas coal was found to have an R/P ratio of more than a hundred years. If the “possible reserves” are added to the estimate, coal turns out to have an R/P ratio of the order one thousand years or even more.

Most people understand from these data that there is nothing to be worried about oil for at least 50 years and, by then, it will be someone else's problem. And, if we really have a thousand years of coal, then what's the fuss about? Add to this the fact that the R/P ratio has been increasing over the years and you understand the reasons for a rather well-known statement by Peter Odell, who said in 2001 that we are “running into oil” rather than "running out" of it. In this vision, extracting a mineral resource is a little like eating a pie. As long as you have some pie left, there is nothing to be worried about. Actually, the peculiar pie that's crude oil has the characteristic that it becomes bigger as you eat it.

If that sounds too good to you, you are right; this optimistic vision that sees mineral resources as a pie is also firmly placing it in the sky. Just to raise a nagging question, let me cite a report that appeared in 2016 on Bloomberg (not exactly a den of Cassandras), titled “”Oil Discoveries at a 70-year low”.


The data show that the amount of oil discovered during the past decades is way below the amount that's being produced, an assessment that is not changed by some recent, much publicized and overemphasized, discoveries. The situation is about the same with most mineral resources; the R/P ratios keep producing reassuring values: decades of availability, at least. But the number of discoveries keeps diminishing, well below the replacement rate that would be needed to keep production ongoing. See, for instance, this figure, courtesy of AndrĂ© Diederen

So, what's going on, here? If these resources are there, how come that we can't find them? Is this a conspiracy of the oil companies to keep oil prices high? A hoax that the Greens propagate in order to get people to vote for them? An attempt by a cabal of evil scientists who are aiming at obtaining research grants for their depletion studies? If one of these is the case, the coalition of these mighty powers seems to have been especially inept because the past few years have seen oil prices collapsing. But the crude oil world is especially ripe with conspiracy theories; including the one that sees oil as “abiotic” and being continuously formed in enormous amounts in the depths of the Earth – a “fact” that everyone would know were it not for the conspiracy of the oil companies, the Greens, the scientists, etc. That's just one of the many legends pervading the Internet. Just one more expression of our teleological approach to problems that consists in finding evil human agents for explaining them.

But there is no cabal, no hoax, no conspiracy in the estimates of oil and of other mineral resources. The problem is that using the R/P data to assess the future of mineral resources is misleading and it may easily lead you to a dangerous feeling of complacency. It is something that I call “Tiffany’s fallacy”. You probably remember the 1961 movie “Breakfast at Tiffany’s” that features the character played by Audrey Hepburn having breakfast while looking at the jewels on display in Tiffany’s windows. There is no doubt that there is plenty of gold on the other side of the glass, but it would be a fallacy to assume that one is rich just because of that. To get that gold, one must pay for it (or use dangerous and risky methods to get it). That’s the problem with the industry statistical estimates of “reserves.” These reserves are there, probably, but it takes money (and a lot of it) to find them, extract them, and process them. And it is not just a question of money, it takes material resources to extract minerals: drills, trucks, rigs, and every sort of equipment, including transportation and, of course, people able to use all of it. These are things that cannot simply be printed or obtained by magic financial tricks such as “quantitative easing”.

Mineral resources are nothing like a pie that you can eat until you have some of it. They are more like Tiffany's jewelry that you may get only if you have the money to pay for it. And the price of any commodity is directly related to its cost. It costs money to produce anything and nothing is produced if it can’t return a profit when it is sold on the market. So, in the case of minerals, extraction costs keep increasing because, of course, we extract the cheapest resources first. At some moment, we may find that we cannot afford anymore to pay for these costs. And when something costs more than what you can afford, you may as well say that you "ran out" of it, no matter what you read in terms of reserves that should exist somewhere underground.  The mineral pie is shrinking and most of what's left is in the sky.







6 comments:

  1. Hi Ugo,

    I came across two sources recently that say production cost of oil sands is now lower, one of which is from here: http://blog.nature.org/science/2016/11/23/oil-sands-redux/

    Looking forward to your own view, and any further details you care to share.

    Thanks!

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    1. It is part of the ongoing debate and, indeed, there are many claims that technology has lowered down the cost of extraction from this or that resource. My impression is that tar sands could reserve some surprise if the political/financial world were to decide to allocate large resources to their exploitation. In the worst possible case, that would lead to the third, and last, cycle of oil production; the consequences would be so disastrous to be nearly unimaginable. But I am not knowledgeable enough to judge the likelihood of this scenario. You might write to the comments of Art Berman's blog (linked in the post). He is much more expert than me in this field.

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  2. A couple of issues, UGO. A quick application of an exponential function to the issue of resource use over time will show that what is left and how long it will last is selectively quoted and always for the point in time it was used and sometimes that data is decades old as far as resource quantity goes anyhow. But I am perplexed at the rising costs for minerals graphed as oil/energy use is a large component of mining and is either subsidised and or has fallin in price not risen. Labour costs are also static and/or decreasing and the cost of borrowing has also been decreasing over the period showing rising costs. There may have been some increases in taxes and royalties paid but overall mining and minerals have actually enjoyed decreasing costs of labour and capital for some time. However I will agree that it may be the increased cost of having to do more digging etc to get the same amount, in which case the cost curve rising has an explanation, that is not entirely clear here.

    I find the pie analogy more than that as a statistical representation of the distribution of factors it is very useful and you can quickly see that there are many pie graphs and they reveal share more properly for energy used per capita, wealth per capita, resource use per capita etc. I have a suspicion that they can be joined by a common axis to create a mathematical hellical diagram and illustrate how they go together and how distribution of resources and economic output actually works. A simple X and Y axis data without a Z axis no longer is sufficient, any views?

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    Replies
    1. Price of oil and economic activity in USA from Art Berman:
      I surmise that costs of certain kinds of production do not allow much if any profit margin e.g. light tight oil - unless the cash return from sales is historically high. Technology can only reduce a certain amount the inherent costs. Recent N American sources are not like old Saudi Arabian onshore giant fields in their early days.
      http://www.artberman.com/wp-content/uploads/CPI-Adjusted-US-GDP-Trendline-WTI-October-2015_150.jpg

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  3. UGO, When is the book expected to be published . Look forward to reading it .

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Who

Ugo Bardi is a member of the Club of Rome and the author of "Extracted: how the quest for mineral resources is plundering the Planet" (Chelsea Green 2014). His most recent book is "The Seneca Effect" to be published by Springer in mid 2017