TABLE 1.-U.S. NATIONAL STOCKPILE; STATUS AND SALES OF SELECTED METALS AND RELATIONSHIP TO Sales from strategic stockpiles totaled $2.2 billion in F.Y. 1974 compared to $.6 billion the preceding year. All of these metals experienced large price increases in 1973-74 and in many cases short run production was inadequate to meet demand at prevailing prices. The decisions to employ these materials to offset price changes or to reduce unwarranted accumulations from earlier years modified the role of the stockpile and for the first time in recent years the storage and disposal of commodities was considered an instrument of economic policy designed to meet shortages.13 Government has been instrumental not only in reducing prices but in raising them. During the 1930's the government served as a buyer of last resort for many products in order to support floor prices. During World War II production capacity was reduced for some goods, so as to make available increased supplies of others. It has been pointed out that discrepancies between estimated and actual shortages may result from the general tendency to overstate requirements in anticipation of shortages or in the light of optimistic estimates of future demand. On the other hand, anticipated cancellation or changes in end-product specifications are apt to produce dramatic changes in prices and demand for materials.14 Tax policy has an important influence on the market prices of commodities. Special provisions have lightened the tax burden on mineral industries and have served as an indirect subsidy to producers. Perhaps the most important provision, the foreign tax credit, accrues to production abroad which may not become available to relieve shortages. The percentages depletion allowance is equivalent to a subsidy increasing the demand for the product. The depletion allowance extends to a large number of minerals but at rates which differ among them. To the extent that any portion of the allowances reflects itself in lower prices, consumption of minerals is encouraged. Still, the percentage depletion allowance is a very inefficient means of encouraging exploration and development to relieve future shortages 13 Council of Economic Advisers, Written Testimony before the Joint Economic Committee, July 3, 1974. 14 For some excellent examples of World War II difficulties with planning output the study by David Novick, Melvin Anshen, and W. C. Truppner, "Wartime Production Controls" (excerpted in the U.S. Senate, Committee on Government Operations, Permanent Subcommittee on Investigations, Matenas Shortages, Selected Readings on Energy Self Sufficiency and the Controlled Materials Plan. 15 Mason Gaffney, Extractive Resources and Taxation-especially Pt. III. and Dunn, Leroy and Gravelle, Jane "The Tax Treatment of Oil and Gas" C.R.S. (1974). for it permits the petroleum industry, for example, to make deductions, many times greater than the original cost of investment. Recent shortages of minerals have prompted the suggestion that tax provisions favoring the minerals industries be changed so that they appear as direct payments related to increased supplies of the minerals. This can take the form of subsidies to the development of domestic resources, trade regulations to discourage imports from sources considered insecure, or sponsored research and development expenditures in materials production and usage. Other promising areas for increasing supplies in the short term are conservation policy and recycling of materials. It is possible to encourage the use of scrap materials by subsidy or by removing the implicit subsidy in the tax code favoring virgin materials. However, it may be necessary to support the price of a commodity to ensure that producers who agree to supply during periods of shortage are not bankrupted when international commodity flows begin again. One of the important questions relating to materials shortages is how to determine the limits to be placed on the end use of particular resources. Limiting the production of oil, for example, works to the benefit of coal. Regulating natural gas prices in such a way as to subsidize gas users creates shortages of natural gas. It is possible for regulatory authorities to set multiple prices which are designed to compel à change in the mix of used materials. Each industry is attempting to assert or retain an element of monopoly. The coal industry has supported proposals on end use of coal and other products which would benefit the coal industry. It has been argued that differential prices should be employed as a discriminating monopolist would use them so as to ensure priority of use not arrived at in the free market. It is not certain that the free market prices of resources reflect the value of the other things that might have been produced instead of these resources with the same expenditure of effort. It is not certain, in other words that free market prices provide the means of achieving the best allocation of economic effort. Furthermore, the question remains whether minerals prices are adequate indicators of the social cost of their use. Finally, the Government may act to reduce some of the uncertainties that stand in the way of an efficient resource allocation pattern, interrupt supply lines and generate temporary shortages. A pooling of risks with the aim of diminishing those experienced by any one mineral producer may effectively increase the financial stability of producers as a group. It is inevitable that materials supply and demand imbalances will occur from time to time in the future as they have in the past. Supply shortages will arise not only because of limitations in the very few materials for which substitutes are not obtainable but also in those for which the switch to these substitutes would be too costly. The price system will in some measure, even in the short term, encourage economy in use and substitution among materials. Shortages and bottlenecks will arise and pressure will be placed upon government to act as an arbiter in allocating these materials in short supply among competing claimants. The short term price elasticities of demand for many commodities are relatively low-a small percentage increase in price will result in an even smaller percentage decrease in the quantity sold. Hence, price increases will not effectively curb demand. In the 579-835 O-75-3 long run, the price elasticities of demand for most material are high. The price-elasticities of supply of most raw materials are inelastic in both the short and long run unless suppliers can eliminate substitutes. This is normally difficult to achieve among producers without government support, both from their own governments and those of the buyers or users. The role of the tariff and tax mechanism in the determination of commodity prices is an important one especially in relation to commodities whose supply is managed by cartels. Faced with the prospect of increases in short-run prices, governments have been pressed to consider alternatives to the price mechanism as the means of allocating resources. Proposals have ranged from a system of coupon rationing at the consumer level to commodity materials planning at the producer level, with procedures for determining materials requirements, availability and management.16 The case for rationing of commodities depends upon how acute the shortages are and how severe the consequences of price increases. If the price system serves reasonably well, or better than alternatives that may be developed, it should be used, and income transfers to the lower income groups can compensate for the adverse distribution effects of price increases. 16 Novick, Anshen, Truppner, op. cit. SECTION 4 CONCEPT OF RESOURCE: STOCKS AND FLOWS AND THEIR MANAGEMENT A. STOCKS AND FLOWS The arguments that resources derive their value from the uses of their end-products and that a quantitative measure of an inventory of resources is a severely defective indicator have important implications for the interpretation of shorter-run processes. The economic significance of an undeveloped resource is at that time a mere potential, perhaps associated with uncertainty of physical estimate and certainly subject to uncertainties about future technology and future demand. Oil or coal or ore, thought to be present in certain quantity and quality somewhere in a stated area, is quite different from minerals at well- or pit-head. Nobody denies that undeveloped resources can have some putative or speculative value attached to them but, equally, nobody expects that value to be instantly realizable. The extraction of a mineral, like the growth of a crop, takes time. There are barriers to a higher and higher rate of extraction. For these reasons, a fairly good argument can be made that in the short run the valuation process becomes meaningful only as the commodity enters the first stage of the production process, by minerals being brought to the surface or by agricultural products being planted or bred. Thereafter, the technical requirements of each different product determine what quantity of material is needed at successive stages of the production process. The inventory concept becomes economically meaningful. Valuation of the product at each stage of the process becomes possible and, where there exists a price-quoting market, accurate. And the concept of all varieties of production processes is that of a flow through a pipeline, from primary to finished products, requiring a stock, or inventory, of products at each stage of processing. Higher output of final products will usually call for higher stocks in the pipeline, but not necessarily for proportionately higher stocks. Variability of final demand, or variability of rate of the production process, will both require the retention of larger stocks and generate changes in their quantity. Examples are legion. Industry practices may result in customary levels of inventory, and in certain limited provision for storage. In the case of oil, storage tanks in the producing fields, along pipelines and at refineries will set upper limits to the capacity for keeping stocks; seasonally varying demand for heating oil and gasoline will affect both the refinement process and the inventory levels of different end products; at the stage of final distribution the flow of product is still subject to the limitations of storage to keep inventories and to the limitations of the size of the pipeline to maintain sufficient flow of output. Metallic ores have similar characteristics of inventory storage and product flow, although their end-products tend to be incorporated in a variety of manufactures that lose the identity of the natural resources used in their production. Agricultural output, on the other hand, is affected by seasonal swings that are wider than in most other resource extraction. Harvest provides a replenishment and other periods of the year a depletion of the stocks of crops. A granary that is intended never to be totally depleted can be regarded as an insurance against one or two poor harvests, but cannot provide an unlimited buffer against adversity and is not widely used as an indefinitely large receptacle for surpluses. In view of these variations of stocks through replenishment and withdrawal, the structure of the industry or industries that attend to the processing of a resource is of the greatest importance. An industry that is vertically integrated, that is to say, under the same management from the stage of resource extraction to final product, may be in a better position to manage the flow of production and economize in the necessary level of inventories of raw materials, partly finished goods and end products. Depending upon the uniqueness of its products, and the lack of acceptable substitutes available to the consuming public, an integrated industry may be in a position to exercise a powerful economic influence over the price of the final product. This power is never limitless and seldom maintainable in extreme form over the long run; but it may be extremely strong in the short run, and one means of exercising it may be through the manipulation of inventories. It is of course true that variations of stocks can occur inadvertently as well as by intent, and that progressive growth of demand for final products can have a tendency to empty the pipeline at some stage of the production process. The Russian wheat deal, for example. was perhaps only an incidental acceleration of the depletion of world wheat stocks, as growing demand and a succession of poor harvests aggravated the deficiencies of supply. The conditions of unambiguous shortage emerged, with the inevitable accompaniment of soaring prices. But it is not at all certain that the same series of events is occurring in other commodities. Progressively more difficult and more costly extraction is the natural order of things in primary minerals, if there is no technological change. Progressive improvement in the living standards of primary producing countries may contribute to a further upward push on labor costs. This is not the same thing as material shortage. Rather, it is a shift in the terms of doing business, combined with an increase in the difficulty of securing the primary product. Morcover, especially in the case of integrated industries, what is perceived as a materials shortage may really be only a flow blockage accompanied by inventory depletion and large price increases. There is no less copper in the ground by reason of the change of government in Chile. There is no less oil in the ground by reason of the price and embargo decisions of the Organization of Petroleum Exporting Countries. To be sure, there are interested parties, here and abroad competing domestic producers and their employed scientists, who have every reason to create alarm for the purpose of generating the impression that a shortage exists and that a violent increase in prices is the necessary and natural consequence of an avid demand, unresponsive to the change, albeit temporary, in supply conditions and |