Productivity in Natural Resource Industries

Improvement through Innovation

R. David Simpson

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781135893699
• Edition: 1
• Topic: Technologie et ingénierie
• Subtopic: Gestion de l'environnement

Several senior natural resource analysts study the role played by innovation, particularly technological innovation, in the pursuit of heightened productivity. Increasing the output of a given input improves a firm's bottom line, makes it more competitive internationally, and reduces the potential for resource depletion and shortages. Thus, high productivity is a necessary ingredient of economic prosperity. This book illustrates the importance of technological innovation in achieving an acceptable level of output and efficiency.In this important new offering, a team of resource scholars describes and chronicles the development of recent innovations in selected natural resource industries. The authors also reveal the causes, sources, and net effect of such innovation on productivity. In all of these sectors productivity has increased considerably since the early 1980s, although the level of improvement varies across industries. To what degree did technological innovation contribute to that increase? Individual detailed case studies detail important innovations in America's coal, petroleum, copper, and forest industries. The primary focus is on extraction and production technologies, although the existence and importance of innovation in other areas such as management technique also enter the picture. For example, the combination of new technology with restructuring seems to have breathed new life into a floundering U.S. copper industry. The authors describe the origin and diffusion of important innovation, and the concluding chapter quantifies the net effect of such innovation on productivity.

1

Introduction

Technological Innovation in Natural Resource Industries

R. David Simpson

R. DAVID SIMPSON is a fellow at Resources for the Future.

This book is about technological innovation in the extraction of natural resources and the effects of such innovation on U.S. natural resource industries. It is something of a paradox that the importance of technological innovation is underscored by the relative unimportance of these industries in national income statistics. Of a 1996 gross domestic product (GDP) of some $7.6 trillion, only about $240 billion, or 3.2%, originated in farming, fishing, forestry, and mining (CEA 1998).

This lack of statistical importance appears to belie two important facts. The first is that natural resource industries are essential. We would not have food to eat, clothing to wear, homes to live in, nor any of the other manufactured products that make up a far greater share of our economy, absent the raw materials these industries provide. The second fact is the sheer enormity of natural resource use. American forests produce some 400 million cubic meters of wood annually; if this total were assembled in a single block, it would measure nearly half a mile per side. The magnitudes are similarly astounding for other resources. Americans consume about twenty-five barrels—over 1,000 gallons—of oil per person per year. For all 270 million Americans, visualize this total by thinking of a lake of oil a mile across and half a mile deep. Americans consume about four tons of coal per person per year and nearly 700 pounds of metals per person per year. The physical quantities of natural resources produced and sold are enormous.

Economic significance is measured by the product of physical quantities and prices.¹ Resource industries are not prominent in national income calculations because the prices at which these resources sell remain modest. Economic value is determined by scarcity, and the prices at which natural resources sell indicate that they are not, by and large, scarce. Predictions made a generation ago that by now we would be suffering through a period of resource scarcity and consequent impoverishment have failed to materialize. Food, materials, and energy remain relatively cheap. Consider Figure 1-1; the real price of natural resources² shows a declining trend. The price of these materials has declined by some 40% in the past forty years—although, as the figure demonstrates, this decline has not been uniform.

These price declines, in turn, are related to reductions in the cost of production. In Chapter 6 of this volume, Ian Parry presents statistics on the productivity performance of particular natural resource industries, but we anticipate his more detailed analysis with Figure 1-2. This graph shows how the quantities of at least one important and easily measured input—labor—devoted to the production of one natural resource has declined even as total physical production has increased in most instances. Output per worker has nearly tripled since World War II. As we will see, this finding is echoed in results for finer disaggregations of industries and broader classifications of productive inputs.³

In short, then, the output of the natural resource industries does not comprise a larger share of the national economy because the prices of these essential inputs remain relatively low. Prices remain low because these resources remain relatively abundant. These resources remain relatively abundant—even though their most easily accessed deposits have been depleted over time—because costs of production have not increased. Finally, costs of production have not increased because the inevitable effects of depletion have, to date, been more than offset by improvements in technology.

The task that we have set for ourselves in this volume is to better explain why it is that technology has been effective in controlling costs in the U.S. natural resource industries. There appear to be three factors explaining the technological progress we observe in these industries. The first is simply that necessity is the mother of invention. The most easily accessible reserves of natural resources have been depleted over time. As a consequence, costs of extraction would increase absent investments in cost-reducing technologies.

The second consideration in explaining innovation is that technological breakthroughs are ideas whose time has come. Innovation is an incremental and cumulative process. New machinery and processes are rarely truly novel, consisting rather of recombinations of existing technologies. Moreover, a new technology seldom transforms an industry overnight. The process of technology adoption is typically gradual, with improvements in capability and expansion of applicability resulting from synergies with other technologies. While the depletion of resources may motivate experimentation, the general state of technology determines the set of possible outcomes.

Figure 1-1. Price Index of Total Crude Materials for Further Processing.

Source: CEA 1998.

Figure 1-2. Labor Productivity of the U.S. Mining Sector.

Source: CEA 1998.

The evidence that we have collected in this book provides many examples of depletion inducing innovation and of the combination and recombination of technologies producing still more innovations. There remains the third factor, which involves an ongoing ability to generate innovations. Some other countries supplying resources to world markets had greater initial resource stocks or have experienced less depletion than have U.S. producers. Yet the United States has managed to remain competitive in world resource markets even though geology and a longer history of depletion would seem to place it at a cost disadvantage relative to many other nations. It is true that, in some instances, the scale of U.S. production has declined in absolute terms or relative to world production. The fact remains, however, that U.S. firms are able to produce at costs that make them competitive with foreign rivals. This must be ascribed to an ability to develop and adopt new technologies more readily than can many international competitors.

This introductory chapter is followed by four industry case studies and a final chapter on the productivity performance of the four industries. In the following section of this chapter, we introduce the industries. Then we discuss and summarize the calculations of productivity reported in Chapter 6. We turn next to the three factors discussed above. The fourth section of the introduction describes the ways in which depletion has motivated innovation in the industry case studies. We then review the incremental and cumulative nature of innovation in our industries. In the final section of this introduction we review the evidence from the case studies concerning market, regulatory, and other conditions that may facilitate or impede innovation.

THE INDUSTRY CASE STUDIES

We have taken two approaches in our work. The first involves detailed case studies of important technological innovations in four U.S. natural resource industries. The four chapters that follow this introduction are, respectively, studies of innovation in coal mining, by Joel Darmstadter; in oil and gas exploration, by Douglas Bohi; in copper mining, by John Tilton and Hans Landsberg; and in forestry, by Roger Sedjo. The second approach consists of a statistical analysis of productivity trends in these four industries. The results of this analysis are reported in the final chapter of this volume, written by Ian Parry. In short, then, we have taken both bottom-up and top-down views of innovation in natural resource industries, with the former characterized by detailed examination of particular developments and the latter consisting of an aggregate summary of performance in the industries.

Coal

Several common themes emerge from the case studies. One is that resource industries, despite their long histories, are by no means technologically antiquated. The extraction or harvesting of resources from the land is among the most ancient of human activities. Yet the conditions under which these tasks are now accomplished in the advanced industrial countries bear little resemblance to the practices of the last century or, in some instances, even the last decade.

This point is perhaps made most clearly in Joel Darmstadter’s analysis of coal mining in Chapter 2. Coal, a key resource in U.S. industrial development, continues to play a significant role in the economy due to its importance in electricity generation. An impression of the coal industry based on old photographs of grimy miners toiling under dangerous conditions is very misleading. The modern coal industry makes wide use of advanced technologies and has markedly reduced its labor intensity.

The coal industry also illustrates another theme common to our case studies. Technological innovation is not the only source of productivity change in the coal industry. In coal, as in some of the other industries we have studied, labor relations have significantly affected production. Some of the industry’s poor performance in the 1970s may be ascribed to stormy relations between union labor and mine owners, and some of the subsequent improvement in productivity may be due to improvement in labor relations. Mine safety concerns were partly responsible for the labor unrest. The 1970s saw the passage of stronger mine safety and health regulations, which may have resulted in some reduction in measured productivity as well.⁴

In addition to safety and health regulation, the coal mining industry was also affected by environmental regulations passed in the same period. Restrictions on air emissions in the burning of coal had profound effects on industry structure. A large-scale shift occurred from Eastern, relatively high-sulfur, to Western, relatively low-sulfur coal. This geographical shift was also facilitated by new options for rail transport of coal from West to East. As Darmstadter shows, all of these factors combined with concurrent changes in technology to transform the domestic coal industry. While these effects of regulation are perhaps greatest in the coal industry, all of the industries we study have been affected to some degree by changes in regulation, and these changes have influenced the shape and pace of technological innovation.

Petroleum Exploration and Development

In choosing our industry case studies, we sought to compare and contrast different industries facing different circumstances. One important way in which the industries we studied differ is with respect to their resource reserves. Coal is abundant in many areas. This is in contrast to oil and gas, where decades of extraction have resulted in the depletion of the more easily accessible reserves in the United States. Douglas Bohi’s study of exploration and development in the U.S. petroleum industry in Chapter 3 highlights the role of advanced technologies in the identification of new fields. Here again, the reader may be surprised to discover the sophistication of the technologies employed. Oil prospectors now are able to map geological formations hidden beneath a mile of rock with near-photographic precision. In some respects, this seems a more remarkable accomplishment than that of mapping distant galaxies.

Bohi shows, however, that the improvement in petroleum exploration and discovery cannot be tied to a single innovation. In fact, the main point of his chapter may be that innovations do not occur in isolation and that one technological advance is often augmented by others, with mutually reinforcing effects. This is another theme that comes up in all of our case studies, but it is perhaps most clearly illustrated in petroleum exploration and development. Breakthroughs in computer technology made new imaging technologies economically viable. Moreover, imaging technologies were more valuable as a result of concurrent developments in drilling technology and offshore production. Each technology enhances the effectiveness of the others. We will see this pattern of adoption of technologies from outside the particular resource industry, as well as mutual reinforcement of new technologies within industries, in all of the case studies.

Copper

In Chapter 4, John Tilton and Hans Landsberg’s analysis of innovation in the copper industry makes an interesting contrast to the studies of both the coal and the petroleum industries. Unlike the case of coal, grave doubts were expressed even relatively recently concerning the survival of the U.S. copper industry. While one might expect the depletion of easily accessible deposits to result in an increase in production costs, the key to the viability of the U.S. copper industry appears not to have been the emulation of the exploration and development technologies that maintain the U.S. petroleum industry. In fact, Tilton and Landsberg show that U.S. copper producers have had at least one source of workable reserves lying almost literally under their noses, waiting for the advent of a technology to exploit it. The perfection of the solvent extraction-electrowinning (SX-EW) process enabled producers to recover commercial quantities of copper from waste dumps that had been abandoned after processing by earlier, less-efficient methods. The adoption of new technologies and the restructuring of copper firms have given a new lease on life to an industry once thought to be on its last legs.

Again, the findings in Chapter 4 are echoed in the experiences of other industries. In all of the industries we have studied, the depletion of the most easily accessible reserves has left producers with a choice between relocating extraction to other areas—or countries—or working their current sites more intensively. The latter option has been chosen to some degree in all four industries. Moreover, technological innovation has been an important factor in allowing producers to continue their existing operations.

Another important theme is raised in Chapter 4: the changes experienced in the copper industry were far from painless. Thousands of jobs were lost, mines closed, and companies were sold or went out of business. Many of these events were the consequence of increased competition from foreign suppliers. Despite these consequences of restructuring, Tilton and Landsberg argue that, in the final analysis, the U.S. industry has actually been made stronger as a result of being denied the protection from foreign competition that it requested in the 1970s. Those firms that survived were forced to innovate. As a result, the U.S. industry is arguably more competitive now than are many of its foreign rivals, who, despite the advantage of richer reserves, have not made the same investments in modernization.

While issues of international competitiveness are perhaps most conspicuous in the chapter on the copper industry, this is another theme on which all the case studies touch. The role of competition—or its absence—in motivating innovation has been an important theme of the industrial economics literature for decades. As will be seen throughout this book, competition has been an important element in spurring productivity growth.

Forestry

In contrast to the other three case studies, Roger Sedjo’s discussion of forestry in Chapter 5 focuses on a renewable resource. It is ironic, then, that the consequence of depleting easily accessible resource stocks may be greatest in an industry in which stocks can be regenerated over time. Two broad factors constrain the growth of the U.S. forest products industry. First, many of the forests closest to centers of population and industry have been cut. The depletion of accessible stocks was accelerated by improvements in harvesting technology, which make it possible to eliminate large swathes of forest quickly. With the most easily accessible, easily harvested forests cut, it is more costly to harvest from the remote areas that remain. Second, among the industries we have studied, the forest products industry has perhaps been the most severely affected by environmental and other regulation. Forestlands tend also to be desired for recreational use or biodiversity preservation and are often withdrawn from production.

When it becomes more difficult to expand activities to new areas, production occurs more intensively in existing areas. In this regard, Sedjo argues that plantation forestry represents the wave of the future. Trees are increasingly coming to be treated as “crops” in the same sense as are food and fiber products. Planting increasingly occurs on the...

Table of contents

• Cover
• Title Page
• Copyright Page
• Table of Contents
• Foreword
• 1. Introduction: Technological Innovation in Natural Resource Industries
• 2. Innovation and Productivity in U.S. Coal Mining
• 3. Technological Improvement in Petroleum Exploration and Development
• 4. Innovation, Productivity Growth, and the Survival of the U.S. Copper Industry
• 5. Land Use Change and Innovation in U.S. Forestry
• 6. Productivity Trends in the Natural Resource Industries: A Cross-Cutting Analysis
• Index