Commodities: prices vs. costs

This is a comparison familiar to Peak Oil types: the fact that oil may reach USD100 per barrel doesn’t make tar sands worth the effort. This is because the net energy gain is too low. Sure, it may (or, frankly, may not – but then, so is modern farming) be net positive, but it’s still a terrible payoff for the expenditure of a limited resource.

So to mining. I had shown this story to my Eco 1 students, during some rant about environmental externalities:

“It takes a minimum of two million tonnes of solid waste to produce a single kilogram of gold. Copper produces around 250 tonnes of solid waste per tonne of copper while uranium produces about 2,400 tonnes of low-level radioactive waste per tonne of uranium oxide.”

Like oil, it is about declining grades in yields, coupled with increasing real and environmental costs of extraction (click for the big version):

The full report is pretty bloody interesting, too.

Anyway. I came, via Boing Boing, upon this article in the LA Times:

The mining of gold and other hard-rock minerals on public lands is governed by the General Mining Law of 1872, which has remained virtually unchanged since it was signed by President Grant to encourage settlement of the West. The statute was designed to reward pioneers who survived the trek across the frontier with the opportunity to mine gold and other metals freely and in unlimited amounts.

The prospectors are long gone, but the incentives remain. Today, the highly profitable hard-rock mining industry — much of it foreign-owned — continues to receive generous U.S. tax breaks. And it pays virtually nothing for gold and other precious metals it takes from public lands with few restraints. In sharp contrast, oil, gas and coal companies have been reimbursing taxpayers for decades with billions of dollars in royalties that were paid for resources removed from federal property.

…

The production of just one gold ring generates about 20 tons of waste, according to one mining policy organization, much of it left to litter the landscape as well as polluting rivers and streams. Today, most gold is mined from open pits, which can run a mile long and equally as deep. Utah’s Bingham Canyon, which produces gold as well as copper, silver and molybdenum, forms a crater large enough to be visible from outer space.

Moreover, once the ore has been excavated, mining companies separate the gold from the rock with cyanide — a substance so toxic that voters in Montana have outlawed its use in outdoor chemical processing. According to the Environmental Protection Agency, taxpayers face a bill of more than $50 billion to clean up the waste and water contamination that gold and other hard-rock mining has left behind.

It’s about to get worse. Driven by record demand and a weak U.S. dollar, investors and speculators are snatching up mining claims at an alarming rate. A recent analysis of government data by the nonpartisan Environmental Working Group found that, in the last five years, there has been an 80% increase in the number of new mining claims in 12 Western states, many within a stone’s throw of Grand Canyon, Yosemite and other national parks.

I mentioned a similarly thing, yesterday, with respect to Big Oil. The crux of this article is legislation, passing through the lower house (sorry, Congress) but likely to find a tougher path through the Senate; it will impose a 4% royalty on Pretty Things Taken From The Public Treasury:

Tourists pay $25 per car to enter Yellowstone National Park. Film crews must spend as much as $750 a day to film on federal land in Nevada. And hunters on a wildlife refuge off the Florida panhandle are charged up to $30 to shoot arrows at white-tailed deer or feral hogs.

But mining companies pay nothing to the federal government to extract billions of dollars worth of gold, copper and other valuable minerals from public property, thanks to an 1872 mining law that allows it. Lawmakers and activists are trying to change the situation.

Not such a burden, is it? Like fun. It seem Senator Reid, Majority Leader, is not keen on the idea (his state does a lot of mining). Meanwhile, States are lifting restrictions on mining all over the shop, it seems.

Eco 1 students! Remember our discussion of why there has been no practical Fiscal policy, helping out Bernanke with this so-called crisis? This goes up as one of the reasons. Moreover, as per the Exponential/Hyperbolic discounting arguments, the cost of cleaning up nature becomes more and more expensive as less and less nature remains.

Meanwhile, we continue to see the same sort of attitude here as to most other commodities: because we like this stuff, it should be nice and cheap so everyone can get it (and corporations can make billions where they can). Insane. Is there an Economics Principles class among any of the members of Congress or the Senate? Anywhere?

No more corn for oil (Mr. Fish)

Very amusing.

One did not need a computer to predict the decline of quantitative management

The amount of money managed by so-called quant funds has dropped by up to 40 per cent in the past six months, as the drawbacks of the once rapidly growing strategy have been laid bare by the credit market turmoil.

Quantitative management, which uses computer models to make trading decisions, is behind the success of some of the best known hedge funds and institutional managers. Some estimates pegged the amount managed this way at about $500bn before the slump hit.

However, those using the strategies concede that they were unaware of how popular quant investing had become, and how many quant managers were doing the same trades. As a result, managers deleveraging in times of market turmoil would exit the same trading positions as many other managers, resulting in sharp losses for several previously high-flying funds.

Is commentary even needed, here? Deterministic trading methods were shown to be pretty garbage back when I did my two (utterly wasted) undergraduate semesters in Finance. In fact I learned more from Econometrics than Finance (precisely why quantitative skills are so important!). I’m sure these computer programmes are making quite sophisticated decisions, but when many others are making the same decisions, those trades become enormously foolish ones, timing-wise.