50 survey of current business April 1994 Accounting for Mineral Resources: Issues and bea's Initial Estimates mong natural assets, the characteristics oil is included in gdp even though no explicit en- A of mineralsÐoil, gas, coal, and nonfuel try for its contribution is made: Its value added mineralsÐare the most similar to the character- is in a sense ªappropriatedº by the other factors istics of assets included in traditional economic of production and is included in the rents, royal- accounting systems. Not surprisingly then, min- ties, and proWts of the owners of invested capital. erals have long been considered as candidates for Finally, although the traditional economic ac- a treatment that is symmetrical with the treat- counts do not include an entry for depletion of ment given other assets. Such a treatment is at natural resources, Wrms and investors recognize the heart of the integrated economic and envi- depletion in assessing the value of Wrms and the ronmental satellite accounts (ieesa's), which are sustainability of their current proWt levels. the subject of a companion article, beginning on The treatment of natural resources in the min- page 33. Failure to account symmetrically for ing industry has long been debated in economics mineral resources as a form of capital has been literature.1 While there is a conceptual case blamed both for their over- or under-exploitation for symmetrical treatment of mineral resources and for incomplete analysis and policy decisions and invested capital, the absence of good market in areas relating to productivity and budgeting. prices to value additions, depletion, and stocks The companion article noted three points of has been a stumbling block. Property rights asymmetry between the treatment given assets issues, incomplete information, asymmetry in such as structures and equipment in the tra- bargaining, and the structure of payments for ditional economic accounts and the treatment mineral rights create a situation in which either given natural assets. First, in traditional eco- there are no observable prices or prices are seri- nomic accounts, there is no entry for additions ously incomplete or unrepresentative. Partly as a to the stock of natural resources parallel to the result of this situation, traditional economic ac- entry for additions to the stock of structures and counts have treated the value added of mineral equipment. Second, there is no explicit entry for resources as free gifts of nature, making entries the contribution of natural resources to current neither to the Xow accounts for additions to, or production, as measured by gross domestic prod- depletion of, the stock of these resources nor to uct (gdp), parallel to the entries that capture the the wealth accounts. value added of structures and equipment. Fi- The omission of explicit entries for mineral nally, there is no entry for the using up of the resources has import beyond the economic ac- stock of natural resources parallel to the entry counts. The absence of an entry, or market price, for the depreciation of structures and equipment for depletion mayÐin combination with com- used to arrive at net domestic product (ndp)Ð mon property rightsÐmean that the accounts which is used by some as a shorthand measure do not identify overexploitation. This possibil- of sustainable product. ity is particularly important because a large share This treatment given mineral resources in the of the Nation's mineral resources are on public traditional economic accounts is anomalous in lands. (However, as the current problems in the several respects. First, Wrms spend large amounts New England Wsheries suggest, the issue clearly of time and other resources in ªprovingº mineral has import for a wide range of other resources.) reserves, and these reserves, like structures and Such omissions have also been cited as the source equipment, yield a Xow of services over many of problems in productivity analysis. Despite the years. As Wrms prove these reserves, they are inclusion of land, labor, and capital in the most entered, along with investments in new struc- elementary production function used in studying tures and equipment, in the Wrms' balance sheets. Additions to these reserves are also recognized 1. Business accounting has also long debated issues in accounting for minerals; further, there was a resurgence in interest after the ªenergy crisisº by investors and reXected in Wrms' equity prices. in the mid-1970's. Since then, the Financial Accounting Standards Board has Second, the value added of a resource like coal or issued Wve new standards to improve accounting for mineral resources. survey of current business April 1994 51 • productivity, measures of natural resources have The conceptual and methodological issues dis- generally not been available. Finally, the absence cussed in this section can be divided into two of measures of natural resource stocks and stock main groups. The Wrst group deals with the ac- changes on Federal lands has been cited as con- counting treatment for mineral resources. The tributing to less-than-optimal Federal budgeting second group deals with valuation. decisions.2 As previously mentioned, this article is the Accounting issues second of two articles reporting on the ieesa's. Treatment of additions to reserves.ÐSymmetrical It provides initial estimates of the value of ad- treatment of proved mineral resources with struc- ditions, depletion, revaluations, and stocks of tures and equipment requires treatment of ad- mineral resources and on the impact such es- ditions to the stock as capital formation and timates would have on the estimates of the of deductions as depletion. Capital formation Nation's production, income, and wealth. This records the initial production of the capital, as article begins with a summary of the major con- well as its addition to the capital stock; depreci- ceptual and methodological issues in accounting ation records the reduction in the capital stock for mineral resources. Next, the article de- associated with its use, as reXected in ndp.Over scribes alternative methods of valuation that can the life of the asset, depreciation sums to the be used to develop ieesa estimates for miner- value of the original investment. als, and it then presents estimates for oil, gas, In economic accounting, as in business ac- coal, metals, and other minerals using these counting, what comes oV the books must have methods. An appendix provides information on gone on the books. This business accounting re- data sources and methods. Tables 1±5 appear quirement was one of the reasons why estimates at the end of the article: Table 1.1±1.6 present of depletion of natural resources have not been estimates of oilÐopening stocks, additions, de- included in oYcial estimates of ndp. Beginning pletion, and the revaluation adjustmentÐfor in 1942, depletion allowances for minerals and 1947±91; tables 2.1±2.6 present estimates of gas timber were deducted from gdp in the estimates for 1947±91; tables 3.1±3.4 present estimates of of net national product made by the U.S. De- coal for 1958±91; tables 4.1±4.4 present estimates partment of Commerce. Discoveries of minerals, of metals for 1958±91; and tables 5.1±5.4 present however, were not included in capital formation estimates of other minerals for 1958±91. and net product. The depletion allowances were eliminated in 1947 because of this absence of an Conceptual and Methodological Issues entry for capital formation. Despite this accounting requirement for sym- In addressing conceptual and methodological metrical treatment of additions and reductions, a issues for mineral resources, as for natural re- number of economists have called for a return to sources and the environment more broadly, bea the 1942 treatmentÐthat is, an entry for deple- has attempted to follow two principles. First, the tion but not for additions. This position seems to treatment in the satellite accounts should be con- have been based on at least three considerations, sistent with the principles of economic theory. each of which is evaluated in the paragraphs that Second, the satellite accounts should embody follow. some concepts and deWnitions that diVer from First, an entry for depletion will respond to at those of the existing accounts in order achieve least part of the concern about the treatment of their purpose of showing the interaction of the mineral resources in the traditional accounts. If economy and the environment, but in other re- the goal is to produce a measure of ndp that re- spects they should be consistent with the existing Xects the depletion of mineral resources in gdp, accounts. Satellite accounts provide the Xexibility deduction of depletion to arrive at an alterna- to make changes that are useful in analyzing nat- tive ndp will provide such a measure. Although ural resources and long-term economic growth, it cannot be explicitly identiWed, as noted pre- but consistency with the existing accounts will viously, the contribution of mineral resources is allow the satellite accounts covering mineral re- already included in gdp. Deduction of an esti- sources to link to, and build upon, the existing mate of depletion will give a partial measure of economic accounts, including the input-output sustainability, one that indicates the using up of and regional accounts. the existing stock of mineral resources. 2. See, for example, Gavin Wright [35] and Michael J. Boskin, Marc S. What such a partial measure will not do is al- Robinson, Terrance O'Reilly, and Praveen Kumar [4]. low the detailed identiWcation of the contribution 52 April 1994 survey of current business • of the mineral resource to income, production, Many of the concerns about volatility and the consumption, or wealth, either in the aggregate diVerent nature of additions to mineral reserves or by sector. Nor will it provide a complete can be diVused by placing these values in a measure of sustainability.