The resources crisis econstor Make Your Publications Visible. A Service of zbw Leibniz-Informationszentrum Wirtschaft Leibniz Information Centre for Economics Stern, Louis W.; Zahzah, Tayeb Article — Digitized Version The resources crisis Intereconomics Suggested Citation: Stern, Louis W.; Zahzah, Tayeb (1975) : The resources crisis, Intereconomics, ISSN 0020-5346, Verlag Weltarchiv, Hamburg, Vol. 10, Iss. 6, pp. 179-181, http://dx.doi.org/10.1007/BF02928863 This Version is available at: http://hdl.handle.net/10419/139214 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. www.econstor.eu R a w M a t e d a ~ The Resources Crisis by Louis W. Stern, Tayeb Zahzah, New York * This arUcle utilizes a new concept of supply and demand for raw materials. It emphasizes the need for the use of long run economics rather than short run analysis in the determination of a fair price for raw commodities. T he October War and the oil embargo which followed could have brought us to a new era of military occupation of oil producing countries and possibly to World War II1. Will we again ex- perience the same anguish when another raw material is in short supply? The future will pay tribute to the present world leaders for having kept a low tone during the recent energy crisis. Conflicts, although serious, were low keyed by both the heads of oil produc- ing countries and those of consuming countries. The growth of Japan, Germany and the European world was brought to a halt because one raw material, petroleum, lacked. Balances of trade shifted from red to black for some countries, from black to red for others and from red to even redder for some less developed countries. Sug- gestions ranging from invading the Middle East to using the Jews as a scapegoat were made in private as well as in public. "Artifical or real shortage?", was the topic of much speculation a few months ago. However, questions, suggestions and propositions led to one conclusive warning: the world resources of petroleum are depleting. The price of petroleum moved from approximately $ 2.55/barrel in May 1971 to $ 9.06/barrel in November 1973, an aver- age increase of 120 p.c. a year 1. Why did the price of petroleum rise by 400 p.c. in three years, thus allowing oil exporting countries to increase their income per barrel of oil by 600 p.c.2 ? What has brought the Arabs to the * Baruch College, City University of New York. I Petroleum Press Service, May 1971, pp. 162, December 1973, pp. 448. 2 US Congress Senate Committee on Finance (93:2), Hearing on Profitability of Domestic Energy Company Operation. successful use of oil as a weapon? Has the Law of Supply and Demand failed to regulate? The answers to these questions go far beyond the present situation in the Middle East. They lie in the concept of fair prices for raw materials, rather than the prices imposed only by the pres- ent artificial equilibrium of demand versus supply. The present price of raw materials does not take into consideration future supply and demand but deals instead with present supply and demand. Let us examine the two extremes of the continuum of production and process of raw materials, one at the mine or well and the other at the retail outlet. Causes of Falling Raw Material Prices "Instead of following the trend of international prices for other commodities, the prices of oil started to fall in 1948. They continued in their decline until the oil producing countries joined together and formed the Organization of Petro- leum Exporting Countries (O.P.E.C.). Oil prices stopped declining after August 1960, but they re- mained frozen at the level they reached at that time until the end of 1970. After that, they rose a little to a level that was still lower than their level in 1948." 3 The explanation of this adverse trend in the price of any raw commodity is found in the concept of supply and demand. In the short run analysis, supply means production which, because of the fantastic technological progress, increases at a higher rate than demand, and therefore generates 3 Sheik Ahmed Zaki Y a m a n i , United Nations A/PV 2217, April 1974, pp. 32. INTERECONOMICS, No. 6, 1975 179 RAW MATERIALS a lower price. But in the long run analysis, supply, meaning totat available known and limited re- sources, is depleting at an increasing rate. At the other extreme of the continuum, the con- sumer side, only the short term effect is reflected. Production increases; price decreases. The de- crease in price may not be passed on directly to the consumer but may be reflected in an improv- ed product at the same price. Since the average per capita income increases at about $ 58.00 a year 4 in industrial countries the consumption of products, steel for example, increases proportionally and is balanced by in- creases in production rather than by increases in price. Here the law of supply and demand does not act as a regulator. In short term analysis, re- sources are not scarce. Misled Consumers It is true that for the present, resources are not scarce but the Club of Rome in "Limits to Growth" 5 lists twenty vital minerals which, with the most conservative index of depletion and the most optimistic factor for reserves not yet dis- covered, will be entirely consumed by the year 2050 Obviously the energy crisis should be called the resources crisis and may in the next decade or two repeat itself for every mineral resource. Optimists may hope that by 1990 we will have found substitutes for most raw materials. Such hope would certainly not be that of scholars who have understood the Principle of Conservation, i.e. "only nothing comes from nothing", and who have understood that natural resources are the only inputs to our whole life system. Any substi- tute for one resource is nothing more than an in- crease in the rate of depletion of another, e.g. in- creases in the use of coal as a substitute for petroleum. The consumer, an economic animal, when he has the purchasing power which he has in the United 4 Mohamed A k k a o h e , Capitaux Etranger et Liberation Eco- nomique: I'Exp~rience AIg~rienne, Maspero, pp. 8. s D. L. M e a d o w s etal., The Limits to Growth. A Potomac Associates book, 1972, pp. 8. States, Canada and Sweden, will try to maximize his welfare. But as Abraham Maslow 6 has demon- strated, the needs of man are not static and even the concept of the basic needs varies. The type and definition of basic needs change with the in- crease of per capita income. A television and a car, for instance, are necessities in the US (GNP per capita $ 5072 in 1971)7, but they are luxuries in Algeria ($ 304 GNP per capita in 1971)8 Long-term Determination Of Prices President Haouari Boumedienne of Algeria advo- cates austerity for the developed countries. Speaking to the United Nations he stated, "In particular, it is necessary to eliminate the phe- nomena of overconsumption and gadgetization and, more generally, the waste, which runs ram- pant throughout the developed economies" 9 Is this realistic? Can gadgetization be eliminated? Of course not. "Gadgetization" is the logical con- sequence of abundance. "Gadgetization" and overconsumption cannot be stopped by rules and laws but they can be slowed down by a new def- inition of supply when raw materials are involved. Supply, demand, price and their interrelationships are the only tools that developed countries, in the non-socialist and non-communist world, can use to shape consumer's behavior and moderate his needs. But in order to be effective, price must be determined by the long run analysis. When the per capita income increases there is a corresponding increase in the demand for cer- tain products, gasoline for example. In the long- run economics, there are two ways to slow down this change in demand: One way would be to maintain a constant supply of the raw material. However, this is not advisable because of its negative byproduct, namely rationing and black marketing. Another method is to increase both 6 A. H. M a s l o w , Motivation and Personality. Second Edition, New York, 1970, pp. 24. 7 US Bureau of Census, Statistical Abstract of US 1973. 8 Background notes by US Department of State, August 1972, pp. 3. 9 Discours du President Haouari Boumedienne, Session Extra- ordinaire de I'Assembl~e G~n~rale des Nations Unies, Aprit 1974, p. 41. Resource Real Price Computation Model No. of Years Base Price incremental of Available Factor Supply (Hypothetical) Z Real Price Reflecting Depletion Factor Known Global Reserve Aluminium 31 $10/ton 3.22 Copper 21 $10/ton 4.76 Iron 93 $10/ton 1.08 Petroleum 20 $10/bbl 5.00 $ 32.20/ton $ 47.60/ton $10.80/ton $ 50.00/bbl 1.77x109 tons 308 x 106 tons 1 x 1011 tons 455 x 109 bbls S o u r c e : Data taken from Meadows et al., The Limits to Growth, page 57. 180 INTERECONOMICS, No. 6, 1975 RAW MATERIALS the supply and the price. The increase in price should reflect both changes in demand and a change in the rate of depletion of the raw mate- rial, here petroleum. This increase in the price will serve as feedback to the consumer who will of course reduce his demand. Conclusion and Recommendations As stated earlier, the present prices of most raw materials do not consider an important factor: the rate of the world resources depletion. The price of raw materials must not be left to a short-sight- ed application of demand and production but must be tied to the "depletion factor". An example of the depletion factor can be seen by considering all known world resources of all minerals that may be depleted within the next one hundred years. We must determine a reason- able base price, either the actual price or a nego- tiated price. Then determine the depletion factor which has an inverse relationship to the number of years of available resources. Compute the real price which is the minimum price that must be paid for the raw material: P r - PhZ, where Pr = Real Price, Pt, = base price, Z = depletion factor. The table on p. 180 is an example of the compu- tation of the real price for four raw materials. Of course, more elaborate and dynamic models could be developed by a panel of experts in Sta- tistics, Economics and Management Science. An international body such as the World Bank with a team of experts representative of producers of raw materials from developed and developing countries is in our opinion the best choice for introducing what is called Management of World Resources. A realistic and early approach to the mineral re- source problem will avoid some sporadic and possibly fatal crises, will force conservation, stim- ulate efficient use of raw materials, stimulate re- search for new resources, contribute to cooper- ative rather than competitive international rela- tionships, prevent the otherwise inevitable forma- tion of OPEC-like cartels, and may even help to leave our children, if not a heavenly and peaceful world, at least not an empty one. After all, what is heaven to a hungry man? PUBLICATIONS OF THE HAMBURG INSTITUTE FOR INTERNATIONAL E C O N O M I C S NEW PUBLICATION J~rgen Langer SUBVENTIONIERUNG DER DEUTSCHEN WERFTINDUSTRIE (SubsldlsaUon of the German Shipbuilding Industry) The volume of assistance measures in shipbuilding has grown steadily for more than ten years. In the present study the distribution of subsi- dies and their results and expediency is being judged within the scope of an empirical analysis. The perceptions obtained by this analysis of results form the basis of suggestions for a more efficient subsidisation policy for shipbuilding in which a necessary higher integration of sec- toral and regional shipbuilding policy has been hammered out. (In German language.) Large octavo, 391 pages, 1974, price paperbound DM 42.- ISBN 3-87895-126-4 V E R L A G W E L T A R C H I V G M B H - H A M B U R G INTERECONOMICS, No. 6, 1975 181