The Pace of Mineral Depletion in the United States

Author(s): Larry L. Dale

Source: Land Economics, Vol. 60, No. 3 (Aug., 1984), pp. 255-267
Published by: University of Wisconsin Press
Stable URL: https://www.jstor.org/stable/3146186
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 The Pace of Mineral Depletion
in the United States

Larry L. Dale

INTRODUCTION rates, a mineral deposit's royalty is the differ-

ence between its extraction cost and the ex-
Mining causes two types of mineral deple-
traction cost of the worst deposit to be mined
tion: a decrease in the quantity of initial re-
in the future. Because discount rates are not
serves and a decline in the quality of remain-
0, the mineral royalty is the discounted differ-
ing reserves. Of these two types of depletion,
ence in cost. In other words, a mineral royalty
the quantity of most marketable minerals left
is a discounted Ricardian rent.
in the earth has changed relatively little The
over royalty modifies the pace of depletion.
the course of mining history because the For example, a high royalty raises the mineral
earth's resource base is large. Quality deple- price and lowers mineral consumption and
tion has had a substantial impact on market thus depletion rates. In theory, a competi-
prices, however, and economists and policy- tively determined mineral royalty will lead to
makers are concerned about its effect on the an optimal pace of depletion (Hotelling
economy. 1931). The paper compares in a simple test
Measures of the pace of quality depletion the pace of copper, oil, and coal depletion in
include physical changes in marginallythe eco-
United States with this theoretically opti-
nomic deposits over time, the economicmal cost
pace. The royalties that would have cov-
of these physical changes, and the scarcity ered past copper, oil, and coal quality deple-
value or royalty implied by these changes. tion costs are compared with market royalty
Quality depletion is detected in changes in the
payments. In general, the two were found to
physical resource such as declines in new be in close agreement. This agreement sug-
mine ore grade, pool volume, or seam thick- gests that the pace of mineral depletion in the
ness. The costs of such depletion can be mea- United States has remained reasonably close
sured by the increase in costs of extracting the to the theoretical optimum.
lower-quality reserves. Another measure of
quality depletion is the mineral royalty, which BACKGROUND
is the scarcity value of minerals in the ground.
A mineral royalty may be compared with a The relationship between the mineral roy-
Ricardian land rent. Both are returns to re- alty and mineral depletion is discussed in
source factors of production, and they arise large body of economic literature. Minera
because of differences in resource quality.deposits have been viewed as exhaustible a
For example, a measure of cropland rent is sets with values equal to their royalties (H
the difference between unit growing costs ontelling 1931). As with other economic asse
a given parcel and on the worst parcel in pro-the deposit royalty is expected to increase
duction (Ricardo 1965). Unlike cropland value over time at the rate of interest. This is
quality, mineral quality differences take time
to appear fully because the worst deposits are
saved for future production. Given 0 discount
Research fellow, East-West Resource Systems Insti-
tute, East-West Center, Honolulu. The author thanks
Land Economics, Vol. 60, No. 3, August 1984 Nancy Williams and Peter Berck for encouragement and
0023-7639/84/003-0255 $1.50/0 helpful comments on an earlier draft. Portions of this re-
? 1984 by the Board of Regents search were funded by the Pacific Southwest Forest and
of the University of Wisconsin System Range Experiment Station.

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256 Land Economics

the basic condition of asset market equilib- hausted and replaced in turn by another. In
rium. In order to satisfy this condition, it Caseis 1, all deposits are alike, and deposit and
usually assumed that mineral prices must rise.current extraction costs are constant and
However, continually rising prices are rarely identical. In Case 2, deposits differ in quality,
observed in mineral markets (Herfindahl and the lowest-cost deposits are extracted
1959, 220-35). This price stability, among first. Therefore, current extraction costs rise
other things, has led many economists to over time even though deposit extraction
doubt whether mineral royalties behave like costs remain constant. The deposit extraction
scarce assets in competitive equilibrium mar- costs are shown as a broken line in Figure 1 to
kets. Some suggest that uncertainty aboutemphasize that low-cost deposits are not usu-
mineral supplies suppresses mineral pricesally saved for later extraction. In Case 3, tech-
(Dasgupta and Heal 1979, 308-13). Others nological improvements just offset the de-
conclude that the lack of futures markets cline in deposit quality over time so that
leads to myopic decision making (Solow current extraction costs are represented by a
1974). Still others contend that minerals are horizontal line. Also, because technological
not yet scarce assets (Herfindahl 1964; Gor- change lowers deposit extraction costs, they
don 1967). Externalities in mineral explora- are shown as a falling line.
tion and production are proposed to explain In all three cases market equilibrium is
suboptimal extraction rates (Hotelling 1931; maintained by a rise in the value of the de-
Peterson 1975). The tendency toward oligo- posit royalty, P,-Ci,. This is accommodated
poly in the mineral industry is cited as another in cases 1 and 2 by a rise in mineral prices. In
reason for a suboptimal pace (Hotelling 1931; Case 3, a price increase is not necessary be-
Solow 1974). cause deposit extraction cost is falling. Al-
Variable deposit quality and technological though the third case may seem contrived, it
advances make it possible for market equilib- is probably most representative of U. S. min-
rium conditions to be satisfied without in- eral industries. Mineral extraction costs and
creasing royalties or prices. For example, ifprices in the United States have remained
mineral deposits of different qualities haveconstant or have fallen slightly over the last
different extraction costs, the deposits thatcentury (Barnett and Morse 1963; Barnett
cost less to extract will tend to be mined be- 1979). The physical quality has decreased
fore the ones that cost more. Although the steadily over the same period. It remains to
royalty on a single deposit will grow in value be seen whether deposit royalties in the
at the interest rate, the royalty paid over time United States covered the cost of quality de-
to more and more costly deposits will grow at pletion.
less than that rate. The royalty paid over time
may be constant or may even fall (Cummings DETERMINING THE PACE OF DEPLETION
1969; Weinstein and Zeckhauser 1974).
Given offsetting improvements in extraction It is possible to determine if the pace of de-
technology, the mineral price may be con-pletion has been too fast by comparing mar-
stant or may fall over time as well (Schultzket royalty payments with royalty payments
1974). required to cover mineral quality depletion
Three different cases of mineral depletion costs. As stated earlier, the royalty at a partic-
illustrate possible extraction cost and royalty ular time 0, Po- Co, should equal the present
paths (Figure 1). The important distinction value of the rise in cost caused by future de-
within each case is between deposit and cur- pletion (Herfindahl and Kneese 1974). Al-
rent extraction costs. Deposit costs, Cit, are though it is not known whether current roy-
the costs of extracting individual deposits. alty payments will cover the present value
These costs are assumed to remain constant cost of future depletion, it is possible to judge
over time in the absence of technological whether past royalty payments covered the
change. Current extraction costs, Ct, combine cost of past depletion.
the costs of several deposits as each is ex- Information was gathered about the qual-

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Dale: Mineral Depletion 257

ity of copper, oil, and coal deposits mined in where r is the discount rate and T is
different years over the past century. The ex- that the worse deposit is brought in
traction cost of past and present mines was tion. If g does not equal r, the royal
then estimated using techniques that assume centage of current cost (R) will be
present technology. The deposits being
mined in the past were higher quality, so the g/(g- r)[e(g-)T - I] [1]
estimated cost of extraction from those mines
was lower than the estimated cost of present(Zimmerman 1981, 92). When Tis large andg
mines. The difference in extraction costs be- is less than r, this expression can be approxi-
tween past and present mines measures the mated by
impact of depletion; that is, the cost increase
imposed by the exhaustion of past mines. g/(r-g) . [2]
(Compare Cu and Ct in Figure 1.)
If this cost increase can be approximated
over time as
I(gl(r-g))Ct equals the optimal mineral royalty only
C, = C(O)eg, if future extraction costs rise at a uniform rate, to time T
infinitely distant. (g/(r-g)) Ct is a close approximation of
where Ct is the current cost in period t and g is the royalty if extraction costs rise more or less uniformly
the average annual rate of increase in costs through time T25 years in the future, given the values of
r and g that prevail in most mineral markets. This may be
caused by depletion, then the present value of
confirmed by the reader by placing different values of g,
that increase, or the royalty, should equal
r and Tin equations [1] and [2]. Of course, anticipated
variation in the average rate of increase of extraction
costs will cause a corresponding variation in the royalty.
T eC(og)eedt= ( g-r) This helps to explain some of the variation in the royalty
C(O)egte-rdt = (g- r)
noted in the text.

FIGURE 1
THREE CASES OF MINERAL DEPLETION

Case 1: Simple Case 2: Quality Case 3: Technological

Asset Model Depletion Model Change Model

it = individual deposit, t = current deposits

Price (P) Pt
and
Cit,Ct Ct
Cost (C)
C(O)vv , %bTit

Time

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258 Land Economics

This approximation was used to estimate the grade, the decline in deposit tonnage, and the
royalty required to cover the cost of copper, rise in the new mine strip ratio. The steady
oil, and coal depletion in the United States quality
in depletion of higher-grade copper re-
the past century. serves is evidenced by the decrease in average
The required royalty represents a standardmining grades from around 2-3% before 1900
to 0.55% in 1978. This was the result of two
against which the pace of mineral depletion in
the United States can be compared. If markettrends: the fall in ore grade of existing mines
royalty payments were far below or above the and the lower-grade reserves in new mines.
required royalty, a case can be made that min-
Grade at the margin is best measured by a de-
eral depletion progressed too rapidly or cline in new mine grades. Seven new mines
slowly for the needs of the economy. opening between 1910 and 1920 had an aver-
age ore grade of 2.1% copper. Sixteen new
mines opening between 1970 and 1980 had an
MINERAL RESOURCE QUALITY average ore grade of .79% copper.2
DEPLETION
Another significant trend was the falling
copper mine reserve tonnage. The 7 major
Quality indices differ in importance among
copper mines that opened between 1910 and
minerals because of factors affecting the ease
1920 each had an average reserve of 3,600,000
with which minerals are found or mined. Cop-
MT of contained copper. The 16 mines that
per, oil, and coal have three indices of quality
opened after 1970 had, on average, only
in common: deposit grade, size, and depth.
1,000,000 MT of copper in reserves (Cox
High-grade copper or high-Btu coal1981).
is de-
The depth of mines also has increased.
sirable because it is easier to mine and process
The mine strip ratio measures the waste rock
per unit of final product. Grade varies more
mined per unit of ore obtained in mining.
among copper deposits than among coal Deeper deposits usually have higher strip ra-
seams or oil fields and therefore tends to be a
tios. The average strip ratio of open pit mines
more accurate index of the quality of copper in 1915 was around 1.9 (Leong, Erdreich, and
than of coal or oil.
Burritt 1940) and for mines opened after
The size of oil and copper deposits is im- 1950, 3.1.3
portant because large deposits are easier to
find and, to some extent, cheaper to develop Oil Resource Depletion
and to exploit than small deposits. Coal de-
posits are usually spread over large areas so Oil resource estimates in the United States
that total resource size is not as critical a cost
vary greatly, depending upon the definition of
variable. However, the thickness of the coal
resource. Broadly defined, more than 500 bil-
seam mined varies greatly and may affect coal lion barrels of oil resources existed in the
mine productivity more than any other single United States before oil drilling began in
variable (Young and Anderson 1952; Zim- 1859. This estimate includes 300 billion bar-
merman 1981). rels remaining in "depleted" oil fields (Dick
Deep deposits are more difficult to find and Wimpfen 1980) and another 30-40 billion
and to mine than shallow deposits. For exam- barrels held in reserve at the end of 1977
ple, to find and develop deeper oil fields, (Root and Drew 1979). Less than one-fourth
deeper and more expensive wells must be of the total, 118 billion barrels, had been con-
drilled. The average depth of oil wells in the sumed by that time. Some estimates suggest
United States has almost doubled since 1920, that relatively little oil remains in undiscov-
and coal and copper mines have also become ered fields in the contiguous 48 states, but
deeper over time.

Copper Resource Depletion 2Personal correspondence with Dennis Cox of the

U. S. Geological Survey.
Three indices of copper resource depletion 3Information averaged from the U.S. Geological
have been traced: the fall in new mine ore Survey and the Bureau of Mines copper mine data.

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Dale: Mineral Depletion 259

there is controversy on this point (Hubbert
1972).
The physical deterioration of the oil re-
source over time has been pronounced. The
oil fields being discovered today are much
smaller and deeper than the fields found ear-
lier in the exploration progress. Between
1900 and 1945 an average of 200 barrels of oil
were discovered for each foot of exploratory
drilling. By 1955, the discovery rate had
dipped to around 40 barrels per foot, where it
has remained quite steady (Hubbert 1969).
This two-step national trend combines ex-
ploratory data from many oil basins around
the country. Detailed information for one
large but fairly typical region, the Permian
basin in west Texas, is revealing. Drilling in
the Permian basin began in 1920 and at first
the discovery rate in the basin was high-
more than 1,500 barrels per foot drilled be-
fore 1938. It dropped to 600 barrels between
1939 and 1946, and to 430 barrels between
1947 and 1950. By 1960, after 16,000 wells
had been drilled, the discovery rate had fallen
to 55, and by 1970 it was 30 (Root and Drew
1979). After 1955, the major oil basins in the
United States had been largely explored and
the national average fell rapidly.
The discovery rate in the United States was
high initially because the first fields discov-
ered were larger and closer to the surface than
fields discovered later. The average oil field
found between 1921 and 1938 in the Permian
basin contained 121.2 million barrels of oil
equivalent (BOE). The average field found in
1950 contained 23 million BOE and after 1960
only between 1.5 and 4.1 million BOE (Root Year tons) (feet) (feet)
and Drew 1979). The average depth of ex- 1872 132 13.2 235
ploratory holes in the Permian Basin in- 1882 401 10.8 310
creased from 4,000 to 7,500 feet during this 1892 838 9.0 360
same period. The later fields required less ex-
ploratory drilling because of increased knowl-
edge of geology, and the number of explor-
atory holes drilled per field discovery fell
from 18.2 to 6.6 between 1921 and 1975. Oil
resource quality in other basins in the United
States would exhibit similar trends.
Coal Resource Depletion
higher-grade, thicker, and more accessible
coal seams is apparent. U.S. coal resources
are currently estimated at 3,200 billion tons
(Averitt 1973, 137). This remains after nearly
two centuries of coal mining during which
some 41 billion tons of bituminous and 5.4 bil-
lion tons of anthracite coal were extracted
(U. S. Dept. of Commerce 1975). If discarded
mine waste is included in the total, more than
95 billion tons have been extracted, or nearly
3% of the total coal resource. However, the
total depletion of high grade bituminous and
anthracite coal within 1,000 feet of the surface
has probably approached 10% (U.S. Geolog-
ical Survey 1980, 134).
Anthracite Coal. Perhaps the best example
of the depletion of any major U.S. mineral
resource is the production history of
anthracite-the highest grade heating coal.
For much of the 19th and 20th centuries, large
quantities of anthracite were mined from a
relatively small area in eastern Pennsylvania.
As mining progressed, the average anthracite
coal seams were thinner and deeper (Table
1); mine productivity fell and costs of mining
rose.
Including waste left in discarded mines,
more than 12.2 billion tons of anthracite have
been consumed since 1860.4 Currently, nearly
40% of the original resource, or more than
TABLE 1
ANTHRACITE COAL DEPLETION
Cumulative Average Average
Production Seam Mine
(million Thickness Depth
1902 1,389 7.8 390
1912 2,195 7.0 400
1922 3,075 6.6 415
1930 3,701 6.3 420
1980 5,400 3-4 NA
Sources: Walter and Lesh
and Heald 1937, 3. Figures f
respondence with Edward F
Philadelphia and Reading C

Although U. S. coal resources are far from 4Assumes 30% coal recov
exhausted, the quality depletion of the after.

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 260 Land Economics

60% of the reserve base, has been depletedthe marginal change in new strip mine over-
(U.S. Dept. of Commerce 1975; Wester- burden-to-seam-thickness ratio. Between
strom 1975). 1920 and 1950 the underground seam thick-
Bituminous Coal. The depletion of eastern ness of established mines in West Virginia,
bituminous coal has been more gradual than Kentucky, and Virginia (states with little strip
the depletion of anthracite coal. Average un- mining) fell from around 5 feet to 4.8 feet.
derground coal seams in key eastern coal The decline in new mine seam thickness dur-
states have not, as a rule, become thinner. In ing this time was probably slightly more
four eastern coal-mining states average un- rapid. After 1946 there was rapid quality de-
derground seams are slightly thicker than in pletion of the strip-mine coal resource but lit-
earlier mines (see Table 2). tle apparent change in underground coal
The increase in average underground- seams (see Table 2). The overburden-to-
mine seam thickness in some states is a reflec- seam-thickness ratio of new strip mines in the
tion of a change to strip mining. In 1920, east- Midwest districts (Illinois, Indiana, and west-
ern strip mining was limited to Ohio, Indiana, ern Kentucky) is estimated to have risen from
and Illinois. Later, strip mining grew in im- an average of 9.8 to 13.7.
portance and by 1977 only one state mined
less than 30% of its coal from strip mines. The
new strip mines replaced the thin-seam un- THE COST OF MINERAL DEPLETION
derground coal mines. States with little strip
mining had declining average seam sizes. In The depletion of higher grade copper, oil,
contrast, the decline in quality of new strip and coal deposits forces an increase in current
mines after 1946 was quite rapid. This decline extraction costs. The difference between ex-
is measured by the change in the overburden- traction costs with and without depletion at
to-seam-thickness ratio (Table 3). any given time is defined here as the cost of
Bituminous coal deterioration is probably depletion.
best measured by taking together the average Improvements in extraction technology
change in underground seam thickness and have offset the cost of depletion of most min-

TABLE 2
UNDERGROUND MINE SEAM THICKNESS IN THE MAJOR COAL STATES

Average
Average Seam Number
Seam Thickness of
Average Thickness New Obser-
Seam Underground Underground vations
Thickness Mines Mines in 1977
(feet) (feet) (feet) Sample

1920 1950 1977

Illinois 6.25 (3.0%) 7.1 (31%) 7.0 (45%) 7

Indiana 5.1 (7.1%) 5.8 (53%) 6.0 (99%) 1
Pennsylvania 5.1 -a 5.1 (25%) 4.4 (54%) 18
Ohio 4.7 (11.0%) 4.7 (60%) 4.7 (70%) 9
West Virginia 5.3 - 5.1 (9%) 3.9 (20%) 28
Kentucky 4.42 - 4.1 (18%) 4.7 (56%) 7
Virginia 5.2 4.8 (9%) 5.5 (39%) 7

Sources: 1920, Hotchkiss et al. 1939, 64, 103

1978.
Note: Figures in parentheses refer to percent
aNo entries when percentages were insignifi

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Dale: Mineral Depletion 261

TABLE 3
AVERAGE OVERBURDEN-TO-SEAM-THICKNESS RATIO OF OPEN PIT COAL MINESa

1946 1950 1977b

Illinois 9.6 (46) 9.4 (81) 16.25 (1)

Indiana 8.9 (50) 9.1 (44) 13.25 (4)
Kentucky, western 4.9 (32) 7.34 (64) 13.36 (3)
Kentucky, eastern 7.7 (24) 6.9 (72) 23.1 (2)
Pennsylvania 6.2 (640) 9.0 (726) .
Ohio 7.0 (197) 9.7 (303) 15.0 (1)
West Virginia 5.1 (186) 7.0 (244) . . .
Virginia 3.6 (15) 8.2 (19) No new mines

Sources: 1946 and 1950, Young and Anderson

aNumber of mines in parentheses.
bNew mines only.

erals, and current mineral extraction costs the following capital and operation cost equa-
generally have not risen. For example, ex- tions:
traction costs in the copper industry stayed Mine and Mill
roughly constant between 1910 and 1957, Capital Cost = 0.885 + 0.258 (strip ratio/
while copper deposit quality declined grade)+0.623 x 10-8
(Herfindahl 1959). This does not mean that (mine capacity)
the depletion in new copper mines had no
cost. The cost of copper extraction would Mine
be and Mill
lower today if the higher-quality deposits Operating Cost = 0.181+0.165 (1/grade)
available to past generations were still availa- + 0.0427 (strip ratio) -
ble. 0.0984 (mine capacity)
For a variety of reasons, the cost of finding
oil and gas has increased because of deple- These cost equations were developed from
a regression analysis of Bureau of Mines
tion. In fact, oil depletion is often measured
by changes in the exploration drilling successcopper-mine cost data (Dale 1982). The
ratio (Hubbert 1969). The cost of finding
equations are used to estimate the capital and
other minerals, such as copper and coal, how-operating extraction costs of copper deposits
ever, probably has not increased much be- developed in 1910 and 1980. Several assump-
cause of depletion. Canadian figures indicate
tions are made to simplify the calculations
that copper and other hard-rock mineral ex-(i.e., mine life is fixed at 25 years and copper
ploration costs are typically only 2-3% of rev-
recovery at 100%), and transport and refining
enues and that the value of minerals found costs of $0.26 are added to operating costs.
per exploration dollar has changed little forThese assumptions and cost equations then
some time (Cranstone 1980, 10). Because are used to estimate the trend in average cop-
most coal fields in the United States were ex- per costs for new mines.
plored and mapped long ago, coal explora- Between 1910 and 1980 copper extraction
tion is relatively unimportant. Therefore, es- costs increased an estimated $.23 per pound
timates of depletion cost here include changes of copper ($.66 to $.89 per pound in 1978 dol-
over time in exploration cost for oil but not lars) because of quality depletion. The trend
for copper and coal. implies that the owner of a typical 1910 de-
posit would have gained an annual cost ad-
Depletion Cost of Copper vantage of 0.6% relative to other producers
simply by holding the deposit in reserve for
Copper depletion costs are measured with development in 1980.

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262 Land Economics

TABLE 4
COST PER BARREL OF OIL IN THE PERMIAN BASIN
(1977 dollars)a

1936- 1970- 30-year

1946 1974 rate of
oil oil cost
fields fields rise

Exploration Cost
Average cost per barrela $.12 $1.65 9.2%
Break-even cost per barrelb $.19c $2.19d 8.7%
Exploration Plus Development Cost
Average cost per barrel $.82 $4.10 5.5%
Break-even cost per barrel $1.24c $5.46d 5.1%
Total Coste
Average cost per barrel $1.24 $4.51 4.4%
Break-even cost per barrel $1.87c $6.01d 4.0%

Sources: Root and Drew 1979; U. S. Geological Survey 19

aField extraction costs were estimated only for oil pools w
pool.
bProduction discounted at 10% rate.
cAssumes 20 years taken to deplete field at exponential rate of decline.
dAssumes 12 years taken to deplete field at exponential rate of decline.
eIncludes production and administrative costs.

Depletion Cost of Oil cost equations developed for open pit and un-
derground mines (Zimmerman 1981, 35):
The cost of oil depletion between 1936 and
1974 is calculated using a cost model devel-
oped to estimate the cost of new oil produc- Open Pit Mines (Midwest)
Average cost = 0.67
tion in the Permian Basin (U.S. G. S. 1980). (overburden ratio)1'63317 + 0.96
This model includes a series of tables and dia-
Underground Mines
grams used to determine exploration, devel- Average cost = 2567/(seam thickness)1'1071
opment, and operating costs of oil and gas
fields as a function of field size and depth. The These equations can be used along with es-
production costs of average fields found in the timates of changes of coal seam size and over-
Permian Basin in 1936 and 1974 are shown in burden-to-seam-thickness ratios to estimate
Table 4.
trends in coal depletion costs.
The largest percentage increase in costs oc- The estimated cost of underground mining
curs in the exploration phase of oil produc- increased only slightly from 1920 to 1950-
tion, largely because the size of new fields has the average in the three states of West Vir-
decreased. However, exploration costs ginia, Kentucky, and Virginia increases from
amount to only 36% of total costs. The largest
$27.6 to $28.9 or $1.3 per ton. Since this esti-
absolute increase in production cost is formate derives from average coal seam figures,
field development, which adds $3.27 a barrel
it gives a low-bound estimate of depletion
to total cost. Oil costs increase $4.14 a barrel
cost. The higher cost of strip mining coal
(or about 4% a year) due to resource deple-
fields after 1946 suggests that the coal deple-
tion. tion trend increased at the time. The esti-
mated cost of 1978 fields is $20 per ton higher
Depletion Cost of Coal than the cost of mining 1946 fields. Since this
change represents only strip-mine depletion,
The depletion cost of bituminous coal in
the eastern coal fields can be measured withit gives a high-bound estimate of depletion

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Dale: Mineral Depletion 263

cost. The initial cost advantage enjoyed by have to be predicted correctly and discount
strip-mine owners seems to have ended and to present value. Because of the obvious
the trend is back to underground mining certainties about predicting cost increas
(Benson and Doyle 1978). doubt is voiced in the economic literature
about whether market royalties have been
Anthracite coal depletion cost is difficult to
measure. The depletion occurred largely be- high enough to cover mineral depletion costs
fore 1930, and no cost models are available to (Dasgupta and Heal 1979, 465-69).
measure that depletion. However, early One cannot know if royalties paid today
figures show a decline in labor productivity will equal the discounted rise in the cost of fu-
that indicates how rapid depletion was. In ture mineral depletion. But it is possible to
spite of technological changes, smaller seam check if past royalties paid the cost of past
sizes and increasing mine depths caused the mineral depletion by comparing mineral roy-
productivity of miners and mine laborers to alties paid between 1900 and 1980 with the
drop 47%, from 7.5 tons per day in 1877 to 4.8 royalties required to cover the depletion cost
tons in 1922 (Walter and Lesher 1925, 661). of past mineral use (see Table 6). Equation
The full impact of depletion was probably [2] is used to estimate copper, oil, and coal
much more severe-a hypothesis implied by royalties that correspond to the extent of de-
the doubling of bituminous coal mine produc- pletion of those minerals.
tivity over the same period (Hotchkiss et al., The agreement between required and mar-
1939, 5). After 1930 demand for anthracite ket royalties in Table 6 suggests, at a mini-
fell off rapidly and overall depletion slowed. mum, that these minerals have not been
grossly undervalued in the marketplace. Oil
TABLE 5
royalties were possibly too low and coal royal-
MINERAL DEPLETION COST TRENDS
ties too high, but a large consistent bias is not
apparent from the data in Table 6. In general,
Depletion the market and required royalties agree
Commodity Years Cost Trends
closely. The highest royalties were paid to the
Copper 1910-1975 .60% owners of the resources being most rapidly
Oil 1936/46-1970/75 4.00% depleted (oil and anthracite); the lowest were
Coal
paid to owners of more plentiful resources be-
Anthracite 1870-1930 >1.00%
Bituminous 1920-1950 >.09%
ing depleted more slowly (bituminous coal
and copper). What differences appear in the
1946-1980 <1.50%
data are more easily explained by mistaken
assumptions about discount rates or cost
The trends in the depletionfunctions
cost thanof by deficiencies in royalty mar-
U.S.
copper, oil, and coal marketskets.
are If past royalty payments anticipated the
summarized
cost of mineral
in Table 5. Of the minerals studied, oildepletion
and reasonably well, it
follows thatmore
anthracite resources were depleted the pace rap-
of mineral depletion ap-
proximated
idly than copper and bituminous the neoclassical
coal. Some- optimum.
time after World War II, the bituminous coal
TRENDS IN
depletion cost trend rose, although itCOPPER, OIL, AND COAL
is dif-
DEPLETION
ficult to determine exactly when this oc-
curred.
The information in Table 6 suggests th
ROYALTIES AND THE COST OF MINERAL royalties are a signal of mineral depletion
DEPLETION the short run. The long-run path of copp
oil, and coal depletion may be foretold b
Mineral depletion generates mineral events
roy-of 50 years ago in the anthracite c
alties. Mineral royalties arise out ofmarket.
future, The history of that market doc
ments ac-
not present, events. To estimate royalties a classic pattern of rising and falli
production and royalties (Figure 2). Duri
curately, future production cost increases

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264 Land Economics

TABLE 6
REQUIRED AND ACTUAL ROYALTIES PAID FOR MINERAL EXTRACTION

Royalties

Commodity Years Required Actual (%)ii

Copper 1960-1980 6 4- 8a
Oil 1929-1940 40 40-50b (California only)

1950-1955 40 12-30c (U.S. average)

Coal 1870 4-11d
Anthracite 1900 20-30e
1913 10 16-25f
1923 108
1939 6h
1940-1950 3- 5i
1970-1980 4- 8i
Bituminous West Virginia Illinois
1900 9kj
1936, 1940 >1 4- 5i,j,k 1-2k
1970-1980 <13 10i 51

Sources:
aBeasley, Harris, and McFarlane 1981, 91, 97, 147.
bBain 1943, 83.
CMcDonald 1963, 32; Magill 1981, 179.
dNorris 1913, 355.
eRoberts 1901, 55.
fNorris 1913, 355.
gWing and Black 1925, 867.
hPapst, 1940.
iPersonal communication, Edward Fox, retired president of the Philadelphia and Reading Coal and Iron Com-
pany.
iPersonal communication, Jessie Core, retired vice president, Coal Mining Operations, U.S. Steel.
kFisher and James, 1955, 372.
'Personal communication, Subash Bhagwat, Illinois state geologist.
Note: Royalties are calculated as a percent of mineral price. The required royalty equals the opportunity cost to
mineral owners of not saving deposits for later production. It was calculated using equation [2], which approximates
the royalty as a fraction of extraction cost. The actual royalty payments, shown in the table, are by industry practice
given as a percent of price using the conversion function 100 [R/(1 + R)]. The discount rate (r) was assumed to be 0.1
and the rate of cost increase (g) was assumed to equal the depletion cost trend values in Table 5. It was assumed that
changes in technology and resource quality progressed smoothly and at rates that will not change dramatically in the
near future. If past resource owners correctly predicted these resource and technological changes up to 1978, they
would have known their opportunity cost and insisted on a royalty to cover that cost. Otherwise, they could have
increased their profits by not producing.

the anthracite depletion cycle, about 40% of
the total anthracite resource was depleted-a
higher percentage than is the case for oil. At
the same time, the coal seams got thinner and
the mines went deeper, resulting in a large
drop in labor productivity (Walter and Lesher
1925, 661). Between 1870 and 1900, technol-
ogy advances and more efficient resource use
kept prices from rising. After 1900, resource
deterioration apparently outpaced technol-
ogy and prices began increasing, at first grad-
ually and then more rapidly, until 1930. After
1930, production and depletion began to
fall-a trend that continues.
Anthracite royalty payments illustrate a
rising and falling cycle similar to, but preced-
ing, the production cycle. Royalty rates (roy-
alty as a percent of the price) reached a peak
between 1900 and 1920, several years before
the peak in production. This indicates that the
market in anthracite royalties signaled the
change in the long-run rate of production and

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Dale: Mineral Depletion 265

depletion. It is an example of the efficient op-copper royalties will not necessarily rise and
eration of mineral royalty markets and sug- fall in a single, regular cycle. Some concerns
gests that royalty rate cycles may be used to have been raised about the availability of cop-
predict mineral depletion cycles. per in grades immediately below those now
A similar cycle of depletion is likely to be being mined (Brobst 1979). If there is to be a
followed by oil and bituminous coal. A de- gap in the copper resource, it may be signaled
cline in U.S. oil production was forecast by a rise in the copper royalty rate.
shortly before it occurred in 1970 (Hubbert
1969, 183). Oil royalty rates, as indicated by CONCLUSIONS
California figures, fell long before the decline
in production (see Table 6). Eventually, ris- Some observations of the U. S. mineral in-
ing costs and competition from other energy dustry suggest that the industry will pursue a
suboptimal pace of depletion due to uncer-
sources will cause oil royalties and production
to decline further. For bituminous coal, cur- tainty about future mineral supply, external-
rent rates of resource deterioration are likely ities in exploration and production, and oligo-
to increase as coal takes over oil markets, but poly.
because of the large size of the coal resource, Despite market imperfections, it may be
royalty rates are not likely to go much above argued that copper, oil, and coal royalty mar-
10% (Zimmerman 1981). Eventually, new kets have regulated the pace of depletion of
sources of energy may bring the coal deple- those minerals fairly efficiently. This argu-
tion cycle to a close. ment relies upon several assumptions of
Copper occurs in the earth down to very which two are most critical: the use of a 10%
low grades and in very large quantities. De- discount rate to characterize society's time
pletion rates could remain stable or go preference, and the extrapolation of constant
through several cycles over long periods of depletion rates into the future. The two as-
time. This suggests that copper depletion and sumptions are interrelated; given a high rate

FIGURE 2
Anthracite Coal Production, Prices, and Royalty

Production
0 00 00
Price
80-
Production mMme
Royalty Rate
(million MT)
60-

Price
(1977$)
40-

Royalty
Rate 20-

(% of price)
a a I e - -

1870 1900 1930 1960

Year

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266 Land Economics

of discount, changes in future depletion rates Va.: Geological Survey, U.S. Department of
matter little and vice versa. The 10% discount the Interior.

rate was chosen because it follows general in- Benson, D.C., and Doyle, F.S. 1978. Projects to
dustry practice. Given that rate, moderate Expand Fuel Sources in Eastern States-An
Update of Info. Circ. 8725. Bureau of Mines,
changes in the future pace of depletion affect
U.S. Department of the Interior.
current and past royalties very little. Brobst, D.A. 1979. "The Systems Approach to
These assumptions notwithstanding, the the Analysis of Resource Scarcity." In Scarcity
market efficiency argument is well supported and Growth Reconsidered, ed. V.K. Smith.
by historical evidence. The lack of futures Baltimore: The Johns Hopkins University
markets and much uncertainty, especially as- Press.
sociated with mineral production, lead not to Cox, D. L. 1981. The Nature and Use of Copper
myopic industry behavior but to farsighted Reserve and Resource Data. Geological Survey
decision making. If royalty markets were far- Professional Paper 907-F. Washington, D.C.:
U. S. Department of the Interior.
sighted in the past, they are likely to remain
Cranstone, D. A. 1980. Canadian Ore Discoveries
so in the future. Therefore, it may be possible
1946-1978. Mineral Policy Sector Internal Re-
to use royalty market signals to predict the port MRI 80/5. Ottawa, Canada: Department
pace of mineral depletion. As an obvious ex- of Energy, Mines and Resources.
ample, oil royalty rates are higher than thoseCummings, R. G. 1969. "Some Extensions of the
of copper or coal. These rates suggest that oil Economic Theory of Exhaustible Resources."
depletion will be more rapid than copper or Western Economic Journal 7(Sept.):201-10.
coal depletion in the near future. Long-run Dale, L. 1982. "Mine Capacity and Mineral
cycles in royalties may be used to predict Price." Pacific Southwest Forest and Range
long-run cycles in the pace of depletion. An- Experiment Station, USDA Forest Service,
Berkeley, Calif.
thracite production rose and fell between
Dasgupta, P. S., and Heal, G. M. 1979. Economic
1870 and 1960, depleting most of the anthra-
Theory and Exhaustible Resources. Cam-
cite resource. This depletion cycle was pre- bridge: Cambridge University Press.
dated by a similar cycle in royalties. Copper, Dick, R. A., and Wimpfen, S. P. 1980. "Oil Min-
oil, and bituminous coal depletion could fol- ing." Scientific American 243(Oct.): 182-88.
low similar cycles in the future. If so, the Fisher, W.E., and James, C.M. 1955. Minimum
peaks of those cycles may be anticipated by Price Fixing in the Bituminous Coal Industry.
peaks in the cycles of royalties. Princeton, N. J.: Princeton University Press.
Gordon, R. L. 1967. "A Reinterpretation of the
Pure Theory of Natural Resources." Journal
of Political Economy 35(June):274-86.
Herfindahl, 0. C. 1959. Copper Costs and Prices,
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