An exploration of alternative measures of natural resource scarcity: the case of petroleum resources in the U.S.

The concern about natural resource scarcity has traditionally focused on changes in the cost, quality, and availability of energy and material inputs to the production process. Ecological economists are increasingly concerned with an additional aspect of scarcity — the growing scarcity of environmental services that sustain human economic existence. The analysis here explores economic and biophysical indicators of natural resource scarcity. The indices are quantified for the extraction of petroleum resources in the U.S. The economic indicators are the market price of crude oil and natural gas, the unit (capital plus labor) cost of extraction, and the average total cost of extraction (dollars per Btu extracted).
The biophysical index is the energy return on investment (EROI). All indices show a trend of decreasing and then increasing scarcity of petroleum at the wellhead. The economic and biophysical cost indices indicate that the 1960s marked the transition from a decreasing to an increasing cost resource base. The market price of oil is influenced by nonscarcity forces to the extent that it does not reflect that turning point. The increase in the energy cost of petroleum extraction is in stark contrast to the changes in the energy cost of producing other goods and services in the U.S. economy, which generally declined in the last 20 years.
The increase in the energy cost of extraction has important economic implications. From 1954 to 1987, the fraction of total industrial output in the U.S. generated in the petroleum extraction sector declined almost 40%. Despite the declining share of its output, the petroleum industry's share of direct energy use (fossil fuels and electricity) generally increased in that period. The result is a clear increase in the amount of energy diverted from other potential uses to secure an additional unit of output in the petroleum sector. None of the indicators reflect to any degree substantial nonmarketed environmental cost of petroleum extraction. The biophysical perspective, however, emphasizes the coupling between physical scarcity and the demands that extraction places on renewable resources and ecosystem services. The extraction of one barrel-of-oil-equivalent, for example, requires 250 gallons of fresh water and emits more than 60 pounds of CO2, and these costs are increasing.

Published in: Ecological Economics, Volume 7, Issue 2, April 1993, Pages 123-157
Available from: ScienceDirect