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How Much Does Natural Resource Extraction Really Diminish National Wealth? The Implications of Discovery

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  • Alan Gelb
  • Kai Kaiser

    ()

  • Lorena Viñuela

    ()

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    Abstract

    The paper considers the process of discovery for subsoil resources, including both hard minerals and hydrocarbons and estimates its magnitude in recent years, as derived from the sum of extraction and changes in proven reserves. Spurred on by technology change and strong market conditions, discovery has been substantial for most minerals. The value of discovered reserves is high relative to the costs of exploration, particularly when low social discount rates are used to value potential production in the future. Discovery is therefore valuable and should be considered as adding to national wealth through increases in proven reserves. Many countries can continue to generate resource rents far longer than indicated by current reserve estimates and this has implications for decisions on how to plan to spend or save rents. With the high response of discovery to prices and technology, environmental constraints (climate change, water) are more likely than the actual exhaustion of resource deposits to limit resource-based development. The divergence between private and social valuation of discoveries may also justify measures taken by countries to encourage exploration, including through the provision of geo-scientific data to increase interest in discovery as well as competition among mining companies. More information is needed on the payoff to such investments, some of which are supported by donors. However, exploration is, of course, only a slice of the resource value chain. Many countries will need to improve management along the entire chain if resource wealth is to benefit their development. [CGD Working Paper]. URL:[http://www.cgdev.org/files/1426040_file_Gelb_Kaiser_Vinuela_extraction_FINAL.pdf].

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    Bibliographic Info

    Paper provided by eSocialSciences in its series Working Papers with number id:4874.

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    Date of creation: Mar 2012
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    Handle: RePEc:ess:wpaper:id:4874

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    Web page: http://www.esocialsciences.org

    Related research

    Keywords: mining; development; Natural Resource Extraction; discovery; National Wealth; resource rich; hydrocarbons; depletion; extractive; wealth measurement; geoscience; public good; poor countries; national wealth;

    References

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    1. Toman, Michael & Krautkraemer, Jeffrey, 2003. "Fundamental Economics of Depletable Energy Supply," Discussion Papers dp-03-01, Resources For the Future.
    2. Adelman, M. A., 1991. "User cost in oil production," Resources and Energy, Elsevier, vol. 13(3), pages 217-240, September.
    3. Paul Collier & Frederick van der Ploeg & Michael Spence & Anthony J Venables, 2009. "Managing Resource Revenues in Developing Economies," OxCarre Working Papers 015, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    4. Pindyck, Robert S, 1978. "The Optimal Exploration and Production of Nonrenewable Resources," Journal of Political Economy, University of Chicago Press, vol. 86(5), pages 841-61, October.
    5. Bohn, Henning & Deacon, Robert, 1997. "Ownership Risk, Investment, and the Use of Natural Resources," Discussion Papers dp-97-20, Resources For the Future.
    6. Todd Moss, 2011. "Oil to Cash: Fighting the Resource Curse through Cash Transfers," Working Papers id:3489, eSocialSciences.
    7. Kenneth Arrow & Partha Dasgupta & Karl-Göran Mäler, 2003. "Evaluating Projects and Assessing Sustainable Development in Imperfect Economies," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 26(4), pages 647-685, December.
    8. Kirk Hamilton & Giovanni Ruta, 2009. "Wealth Accounting, Exhaustible Resources and Social Welfare," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 42(1), pages 53-64, January.
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    Cited by:
    1. Torfinn Harding & James Cust, 2013. "Institutions and the Location of Oil Exploration," Economics Series Working Papers OxCarre Research Paper 12, University of Oxford, Department of Economics.

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