CAPACITY AND PRICE OF NONRENEWABLE RESOURCE DEPOSITS

Abstract

This paper develops a model to determine the planned rate of production from a nonrenewable resource deposit and applies the model to the U.S. copper industry to estimate changes in aggregate planned copper production as a function of copper price expectations. Standard investment theory is applied in the model to examine the choice of the planned rate of extraction from limited volume resource deposits. A setting is analyzed in which the total production volume from any site is fixed by the size of the resource deposit at that site. Within this setting, the planned rate of resource extraction is a fully endogenous solution of the model. Properties of the model are investigated to determine changes in the planned rate of production caused by variation in operating cost, investment cost and output price parameters. The planned rate of production from any deposit is found to increase at a decreasing rate, given incremental increases in the output price, ceteris paribus. The finding is illustrated with data describing mined and yet-to-be mined copper deposits in the United States. A close match is observed between the calculated production rate for mined copper deposits and the mine capacity (rate of production) chosen by the owners of those deposits, given plausible assumptions about mine owner price expectations. The planned rate of production is aggregated across all deposits and plotted as a function of output price. An aggregate medium run copper supply curve is obtained, indicating the elasticity of planned production to changes in the expected long run output price of copper. This empirical example suggests that doubling the output price from $1 to $2 per pound copper, would triple aggregate planned copper production in the United States.