Reserves Vs. Resources…

After my rambling economic post yesterday, I continued wondering what exactly my not-so-clear point might have been. It’s not that I only discovered yesterday how supply and demand are related. If there are more people interested in gold, the price goes up, regardless of why people are interested in it or what they might think will happen next year. That most of the gold that is mined is not used for anything doesn’t matter. The crazy thing about gold is that much of it is NOT consumed in any way.

What I found so fascinating was that a statement like: “We’re running out of oil.” really makes no sense. What that really means is that at current prices, it’s becoming increasingly difficult to produce oil. But as soon as prices change (go up), supply changes over night. And that comes down to the (often if not controversial at least non-unanimously agred upon) matter of RESERVES vs. RESOURCES.

For a definition of reserve, see this page here. Reserves according to the US Securities and Exchange Commission (SEC) are “that part of a mineral deposit that can be economically and legally extracted or produced at the time of the reserve determination.” The link doesn’t provide much of a definition for resource, which leaves you assuming that a resource is any other occurrence of potentially useful, mineable, or extractable mineral. Another page puts it in more technical terms: “Mineral resources are defined as natural concentrations of minerals or, bodies of rock that are, or may become, of potential economic interest due to their inherent properties.”

In all this, the emphasis is on: “can be economically produced”. That means that depending on commodity prices, production costs, new technology etc. resources can turn into reserves and vice versa. Reserves present a quantity you can work with, at least while commodity prices remain unchanged. Resource estimates are totally vague (see figure above). Since only reserves are used for SEC disclosure, and SEC rules stipulate that 3-year historic prices are used as commodity prices in estimating reserves, it’s obvious that a change in these prices can dramatically increase reserves when prices go up, i.e. convert resources into reserves or leave feasibilities built on 3-year historic numbers faced with a grim reality once prices change.

My take: It’s not that demand leads to GM to make more cars. No. It’s like all the sudden the scrap that’s been sitting in the lot has turned into cars that nobody recognized as such before, and that’s wild !


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