Extractive Industries Sector

How Exhaustible Resource Sectors Are Different

The extractive sector has a number of features that are distinctive. First and foremost, it is dealing with depletion of an exhaustible resource. Higher production today means less at some future date, raising questions about the rate of depletion and about prospects of the resource running out. These concerns have led to voluminous literatures on the limits to growth imposed by resource exhaustion and on the implications of “peak oil,” despite the fact that the ratio of proved reserves to annual production is at an all time high. Concerns about resources running out are essentially unfounded [Page 537]because of the dual role of the price mechanism. As a resource becomes scarcer, so its price will rise. On the one hand, this encourages the use (or invention) of substitutes and promotes new prospecting and discovery. On the other, the expectation of higher prices in future causes the current rate of depletion to slow; it becomes more worthwhile to hold the resource in the ground rather than deplete it immediately.

The inherent nonreproducibility of exhaustible resources makes them quite different from other goods and services produced in the modern economy. It means that they have a scarcity value that may be many times greater than the costs incurred in exploration, development, and extraction. This asset value raises the question of who owns such natural assets and who receives the rents that are earned from their extraction. The question has an ethical dimension: Should it be whoever discovers the resource? Or should it be citizens of the territory in which it is discovered? If the latter, should the earnings go to the current generation, or current and future generations? The ethical standpoint would usually argue for ownership to be vested in a wide range of citizens—present and future—of the territory in which the resource is located. The discoverer of the resource has a right to a fair return on their investment, but not perpetual ownership of the resource, any more than an inventor should be given an infinite length patent on an invention. The point that present and future generations should benefit is an important one, but it does not mean that the resource itself should be passed on, undepleted, to future generations. Best use may involve depleting the resource but being sure to invest much of the proceeds so that (at least) an equivalent asset value—in human and physical capital—is passed on to future generations. In practice, ownership of subsoil assets is, in almost all countries, vested with the state (the United States being the main exception). In all cases, the state uses resources as a tax base, typically through a combination of selling development rights, royalties on output, profit taxes, and perhaps also state shares in production. This provides fiscal revenues that government can potentially use for the benefit of present and future citizens, although there is no guarantee that revenues will be used this way.

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