Natural Resources: More Expensive Than You Think
Natural resources contribute towards fiscal revenue, income, and poverty reduction. Among these natural resources are two essentials for humanity: oil and water which have a major effect on human wellbeing and currency. Here, we take a closer look at why you should be more conscious next time you're buying water or fueling up your car, and why it may cost us an arm and a leg in 10 years.
Scarcity and Short-Term Revenue Generation: Is it a real concern?
Natural resources play a significant role when it comes to the real wealth of nations. They are the natural capital out of which other forms of capital are made. They contribute towards fiscal revenue, income, and poverty reduction. Sectors related to natural resources use provide jobs and are often the basis of livelihoods in poorer communities.
Owing to this fundamental importance of natural resources, they must be managed sustainably. Government plays the essential role in putting into place policies that ensure that resources contribute to the long-term economic development of nations, and not only to short-term revenue generation. Therefore, there is constant worldwide debate regarding the allocation of natural resources, the issues of increased scarcity and the exportation of natural resources as a basis for many economies. The vast majority of natural resources are exhaustible and can be used up if they are not managed correctly.
Taxes and Tradable Permits Put in Place.
Natural resource utilization is regulated through the use of taxes and permits. The government and individual states determine how resources must be used and they monitor the availability and status of the resources. An example of natural resource protection is the Clean Air Act. The act was designed in 1963 to control air pollution on a national level. Regulations were established to protect the public from airborne contaminants that are hazardous to human health. The act has been revised over the years to continue to protect the quality of the air and health of the public in the United States.
Natural resources tax revenues are an important instrument in internalizing the costs of resource extraction and use. Taxes as well as prices for concessions to exploit resources ensure that governments and societies capture their share of the value of resources. Deciding how to use revenues from natural resource taxes is also central to their effectiveness. Taxes can simply be added to the state budget, but they can also be put into natural resource management and environmental protection.
Moreover, tradable permits are understood to be an efficient and flexible instrument for managing natural resources by creating cap on resource withdrawals, and allowing quota permit holders to trade the permits, with the market setting the price. However, getting the prices right for permits also means that the full costs of resource extraction must be incorporated into the price of the permit. For instance, fishermen trading permits to catch particular species may keep harvests within the bounds of the total cap on the catch, but if they use fishing gear and methods that destroy parts of the marine ecosystem without internalizing the costs of that destruction, the costs to society will not be reflected in the prices of the permits.
How "A Bottle Of Water" Goes Beyond Simple Economic System
Water is a scarce natural resource. It is not only used as an input to economic activity such as irrigation, household and industrial water use, and hydropower generation, but also provides ecosystem services such as the maintenance of wetlands, wildlife support, and river flows for aquatic ecosystems. Water has been recognized as an essential economic good for its use in economic activity.
However, we are facing increasing water quantity and quality problems as a result of population growth, economic development, and climate change. The quantity problem is closely related to water scarcity (increasing demand and declining supply) for the competing use of water resources or damages from floods in river basins, while the quality problem is related to water pollution, which could be caused by negative externalities and therefore have negative implications on water users.
The basic economic principle in managing water resources is that we need to balance the demand for water and the supply of water resources, which can theoretically be achieved through price signals in water markets. This has led to the emergence of water markets and water pricing. However, water is not a standard private good, because of its physical attributes that lead to the questions of whether it is rival or nonrival for the users and whether the users are excludable or non-excludable from its use. All these special features of water resources imply that we may need to manage water resources by means of interventions that go beyond the simple economic system.
Costs And Impact of Water Scarcity: Are African and Asian Countries Much Different After All?
If water is neglected by societies and governments, then the odds are they will eventually collapse. By 2025, it is projected that two-thirds of the globe's population will face water shortages. Water scarcity is a new addition to our modern lexicon with economic implications that will alter policy-making for rich and undeveloped nations alike.
Water scarcity has an impact on businesses on a worldwide scale, leading to higher operating costs and a struggle to stay competitive. As for global firms, it is difficult to control costs, as they increase in pair with the price of water. This causes firms to regard water access as a competitive advantage and relocate when possible. For example, a firm will give preference to relocating to areas where water risks are lowest, such as moving to a city located by a lake, river, or river basin.
The lack of water will have a domino effect on communities: local commerce declines, incomes go down, tax revenues decrease, population declines due to lack of employment opportunities, cities and the surrounding communities shrink dangerously. The bottom line is that businesses need water: according to UNESCO, the high-income nations' industry accounts for up to 59% of total water use.
Another key economic implication of water scarcity is the effect on agriculture. While agriculture contributes to water scarcity, it is also highly dependent on this resource. In places such as Morocco, dwindling water supplies have meant environmental deterioration and land use loss for agricultural purposes has been estimated at approximately $350 million USD. Water scarcity impacts India, China, and the Middle East which face serious drought conditions thereby causing farms to reduce their crop production and food prices to spike dangerously.
Oil - The Water of The Century?
Another natural resource which is essential for some countries' economies is oil. Because of its importance, the crash of oil prices are always dramatic and we have been witnessing this during the last two weeks. The crash of oil price has majorly affected the currency of the already weak and unstable Russian rouble, which experienced a drastic depreciation in 2014 and has never been able to fully recover ever since. Additionally, the crash of oil price has had a major impact on other major economies, especially the US and Saudi Arabia.
One of the reasons why there has been such a fall in oil price is the excess supply of oil as a result of lack of demand. The recent coronavirus outbreak has affected the travel and transportation industry, thus leading to a collapse in oil demand . Consequently, an excess of oil supply occurs - thus the price drop does not mean that the level of oil production has increased, but rather,because there are severe travel restrictions in place with countless flights cancelled, the cruise industry at a standstill, a reduction of workplace commuting, and a general economic contraction, there is a contraction in demand, resulting in the previous "normal" level of supply now becoming excessive and forcing a glut on the market as it is not utilized and instead sits in storage tanks. Jet fuel is one of the biggest problems, as demand for it has almost completely collapsed with airlines around the world scrapping flights and parking planes because of travel restrictions. Global commercial air traffic will drop by about 20% this year, Rystad predicted.
The Triangle of Russia, Saudi Arabia and the US
The US, Saudi Arabia and Russia are the top 3 oil producers, each producing over 10 million barrels per day and constituting 46.9% of the total oil production in the world. Thus, the actions of these 3 can majorly impact global economies - especially in countries which are highly dependent on natural resources, i.e. Russia itself.
Alongside the coronavirus outbreak and ongoing global economic contraction, Russia has been reluctant to reduce the oil supply by agreeing to production cuts in so called "OPEC+" agreements as it has done previously. Frustrated with the expanding US Shale market share, which has been occuring at the expense of OPEC and Russia's attempts to keep prices stable, Russia announced that it would not reduce its oil output any longer, thus issuing a challenge to both Saudi Arabia and the USA. The reasoning behind this is simple - US Shale oil is more costly and difficult to extract in comparison to Russian oil, thus a prolonged period of low oil prices would send the shale companies into bankruptcy, and prevent the further loss of Russian market share in global energy markets... The competition between Russia and US has led to a severe response from OPEC and more specifically Saudi Arabia, where they decided to slash prices and ramp up production - cutting prices by $4 to $6 a barrel to Asia and $7 to the United States.
This collapse of oil prices will lead to a slowdown in the US oil industry - major oil companies including Chevron (CVX) and ExxonMobil (XOM) have warned of spending and cost cuttings; Occidental Petroleum (OXY) slashed its dividend by 86% and many smaller oil companies riddled with debt will be forced to lay off workers and consider filing for bankruptcy. Highly indebted shale giant Chesapeake Energy (CHK) has reportedly brought in debt restructuring consultants from Kirkland & Ellis LLP, as well as investment bank Rothschild & Co, suggesting that it is on the brink of collapse - a worrying sign of things to come for other companies operating in the US Shale patch if these low prices continue.
Natural Resources Bridging The Gap Between Economics and Ecology?
When speaking about natural resources, it is impossible to ignore the ecological point of view. Ecology challenges the conventional approach towards natural resources, claiming that it undervalues natural capital by considering it as interchangeable with human-made capital-labor and technology.
The impending depletion of natural resources and the increase of climate-changing greenhouse gasses should motivate us to examine how political, economic and social policies can benefit from alternative energy. Shifting dependence on fossil fuels with specific interest within just one of the above-mentioned factors easily benefits at least one other. For instance, solar panels have a 15% efficiency when absorbing the sun's energy, but its construction demand has increased 120% within both commercial and residential properties. Additionally, this construction has led to a roughly 30% increase in work demands.
The potential for the substitution of man-made capital for natural capital is an important debate in ecological economics and the economics of sustainability. The strong sustainability view argues that the stock of natural resources and ecological functions are irreplaceable. Following that, an economic policy has a certain level of responsibility to the greater ecological world and that sustainable development must, therefore, take a different approach to value natural resources and ecological functions.
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Up to 08.02.2020
References:
https://www.oecd.org/env/outreach/2011_AB_Economic%20significance%20of%20NR%20in%20EECCA_ENG.pdf
https://www.oxfordbibliographies.com/view/document/obo-9780199363445/obo-9780199363445-0024.xml
https://globalriskinsights.com/2016/12/economic-cost-global-water-scarcity/
https://www.rferl.org/a/ruble-oil-prices-tumble-after-opec-deal-collapses-amid-coronavirus-fears/30476938.html
https://edition.cnn.com/2020/03/18/business/crude-oil-prices-coronavirus/index.html
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