Monday, August 23, 2010

The end of squeaky voices

Sometimes I wonder how capitalism can work with natural resources.  Looking at these businesses, you always assume that the price of the commodity falls to the marginal cost of production.  If a bunch of companies go out and dig mines, then the cost of those mines are, literally, sunk.  Once they wake up to their position,mine owners will change their calculations and keep pulling the stuff out of the ground as long as the price pays for the cost of marginal extraction (plus maintenance, the occasional corporate jet and Latvian hookers, etc ...).  So for a while, nobody invests, until finally growing demand or shrinking supply creates a pinch, prices skyrocket, someone gets optimistic, and we dig another hole. 

Lather, rinse, repeat.

It's a bit miraculous to me that anybody invests in this stuff, which implies that it's miraculous that we actually have any of it, which I guess defeats the miraculousness of the first clause.  The whole idea that you get this promising looking hole dug just in time to watch prices fall, and are then obliged to sit there waiting for the next, likely brief, spike in order to try and recoup your capital just seems so ludicrously speculative.  Obviously people do it, but I have to say that I'd be curious to see a calculation (adjusting for survivorship bias of course) of net industry return on capital over the last 50 years,  I suspect (without proof) the mining industry might be like the airline industry -- a public service.

Which actually brings me to the part of the post where I completely change my mind about what I was writing.  I was going to suggest that digging up the commodities necessary to make the economy function seems like a reasonable place to wonder whether the government shouldn't be involved in at least coordinating the amount produced, so that we have enough and at the same time assure that prices don't spike out of control and create shocks.  Naturally though, I was assuming that the government would treat this sector as a regulated monopoly and assure people putting up capital some sort of stable, though modest return on investment.  Alternatively, I guess you could run the whole thing as Big Brother Mining Inc. and just allocate some of the federal budget to digging stuff up, and then set the prices so as to break even.  Now, however, I realize that the system we currently have is much much better.  We can convince these saps to invest even though on balance as an industry they will lose money, at least if it's anything like the airlines.  As a taxpayer, this is better than break-even.  So I say let them drill baby drill.

As it turns out, this whole rant was inspired by one of the extraction industries where the government is already dominant.  We taxpayers own most of the world's helium supplies, it turn out.  In the case of helium, the government apparently took care of this problem for us ... by making it dramatically worse.

Surely industry must be paying more and more for helium if it is in short supply.
No, the price is dictated by a calendar. The US government established a national helium reserve in 1925, and today a billion cubic metres of the gas are stored in a facility near Amarillo, Texas. In 1996 Congress passed an act requiring that this strategic reserve, which represents half the Earth's helium stocks, be sold off by 2015. As a result, helium is far too cheap and is not treated as a precious resource.

No comments: