Geology Reference
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would account it as a non-cash expense that offsets its value reduction throughout
its useful life and during the accounting period. Depreciation lowers the company's
reported earnings while simultaneously increasing liquidity. In other words, physi-
cal degradation is compensated for by money. Following on from this idea, Repetto
(1988, 1992) proposed to treat the depletion of non-renewable resources as a form of
capital depreciation; thus paralleling wealth with human-made capital. Therefore
the Net Price Method values non-renewable resources as the market price, minus
the cost of discovery, extraction and marketing and multiplying this difference by
the net quantity extracted each year. This approach considers all revenues obtained
from the extraction as capital consumption. Consequently, the net national income
is zero, as if the resource never existed.
Converting Nature into money liberates cash flow that can then be used in
other purposes that include the acceleration of exploitable but not yet exploited
resources. This idea is based on the Hotelling Rent Model (Hotelling, 1931; Khanna,
2012) which states that under perfect competition, the non-renewable resource rent
will rise with the market interest rate (discount rate), as the resource becomes
increasingly scarce.
This method, focused on the present day value of subsoil assets, considers money
to be a perfect substitution for mine resources. Nothing is thus set aside for future
would-be uses. Furthermore, pollution or depletion costs are not internalised if the
market doesn't account for them. As the method draws parallels between wealth
and income, it implicitly assumes that if there is market demand and capacity to
supply it, the extractor will maximise profits as early as possible and would then
only stop extraction if higher profits are expected in the future. If market supply
and demand is evenly balanced or indeed if the market favours the demand side,
the price of the commodity will fall. On the contrary, if demand exceeds supply, the
price will rise, thus reaching a dynamic equilibrium between the two. Later when
the resource is near exhaustion, the quantity extracted will continuously decline,
leaving its price to rocket and demand to fall. A moment which (eventually) paves
the way for design innovation and the manufacture of viable substitutes. Extraction
will cease when the marginal extraction cost plus the opportunity cost of the firm
meets the commodity price. This method responds to the pure logical interaction
between the extractor and the market, with no attention paid to conservational
interests. Hence, it encourages consumption.
Yet a deteriorated environment or a depleted natural resource endowment in
a given country may not cause the re-estimation of national accounts. This issue
is especially important in the case of developing countries, since they may have
no or limited alternative industrial means for continuing development. Moreover,
while extraction occurs, a false sense of prosperity may cause an overvaluation of the
domestic currency discouraging other exports and thus forging a greater dependence
on that mineral extraction (Dutch disease). The country (or region) then becomes
exposed to the risk of de-development. This lack of foresight affects the economic
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