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How much, whom to, and why
does the civilization overpay for oil?

3. How much are raw materials and energy overpaid in modern economics?

All goods that are created by human labor are ultimately produced from raw materials with use of energy, both consumed from the environment. In modern economics raw materials and energy are considered as free market commodities, which, along with all goods produced by human labor, have a certain market price. This can be justified by the fact that the extraction — mining and quarrying — of raw materials and crude oil and other energy sources demands human labor. Thus, raw materials and energy have a certain cost price.

The monetary value of cost price is, unlike its value in terms of labor time, numerically arbitrary and depends on the units of payments currently adopted in economics. In the imaginary case, when labor and production of all working people in the civilization is valued at cost price, the monetary contribution of every economic sector to the annual gross domestic product is proportional to the number of employees in this sector. Consider an economics consisting of two sectors with N1 and N2 employees. Let Gs (dimension money units (e.g. dollars) per person per year) is the mean cost price of goods produced by one person in one year. If the goods made in the first sector of economics are sold at cost price, while in the second sector they are sold at a maximum price Gt > Gs one can write

N1Gs + N2Gt = GDP,    (1)

where GDP is the annual gross domestic product. For the ratio of maximum and cost prices we obtain from (1)

Overpayment formula.    (2)

With use of (2) it is possible to estimate how the current market price of oil is elevated above its cost price. Consider world economy as consisting of two sectors, where N2 people are occupied with oil extraction and mining of other energy resources and related activities, while N1 people produce all other goods and services of the civilization and sell them at cost price.

In 2005 world's nominal gross domestic product equaled GDP = 45 × 1012 US dollars (World Bank, 2007). This figure includes the price paid by the civilization for energy. Global energy consumption in 2005 amounted to 15 × 1012 W = 4.7 × 1011 GJ/year. Mean crude oil price in 2005 was 55 USD/barrel, oil energy content is 5.5 GJ/barrel, i.e. market price of 1 GJ was about 10 USD. Thus, for the price of energy produced and consumed in 2005 and, hence, for the term N2Gt in (2), we obtain N2Gt = 4.7 × 1011 × 10 USD/year $asymp; 5 × 1012 USD/year. Share of world's working population employed in mining and quarrying (i.e. in the output of energy and raw materials) is negligibly small, see Table 1, at about several tenths of per cent (0.7% for the selected countries). Assuming that approximately one half of them is engaged in the output of energy, N1/N2 ≈ 300, and putting the available estimates of N1/N2, N2Gt and GDP into (2) we conclude that the market price of oil is elevated above its cost price by about forty times, Gt/Gs ≈ 40 and Dt ≈ 40Ds. A similar calculation performed on the basis of the data of Table 1 for electric power, which makes up about 10% of total energy production, indicates that for electricity its market price is elevated above its cost price by approximately four times, Dt ≈ 4Ds. (Ds stands for cost price of oil barrel.)

View (Print) Table 1 in a new window

Table 1. Energy consumption, energy production, population and employment in 28 countries,
including world's largest energy consumers and producers (2005)
CountryP,P+,Ntot,N,N/Ntot,Employment by economic activity, % N
 1015
btu/year
1015
btu/year
103103%FoodMiningManuf.Electro.Constr.TradeTransp.Other
U.S.A. 100.669.6 295374 141730 481.6 0.4 11.50.87.9 21.74.4 51.8
China (2002) 67.1 63.2 1284500737400 5744.10.8 11.30.45.3 6.7 2.8 28.7
Russia 30.3 52.7 142754 68169 4810.21.8 18.42.96.7 17.19.2 33.8
Japan 22.6 4.1 127660 63560 504.4 0.0 18.40.68.9 24.16.1 37.5
India (1991) 16.2 11.7 838568 314131 3761.00.6 9.4 0.41.8 5.6 2.7 18.6
Germany 14.5 5.3 82465 36566 442.4 0.3 22.00.96.6 17.95.3 44.7
Canada 14.3 19.1 32805 16170 492.7 1.3 13.60.86.3 23.87.1 44.3
France 11.4 5.1 62947 24919 403.8 0.2 16.60.86.8 16.86.4 48.7
United Kingdom 10.0 8.7 58653 28166 481.4 0.4 13.20.67.8 19.66.9 50.2
Brazil (2004) 9.3 7.7 149760 84596 5621.00.4 13.90.46.3 20.94.6 32.6
Italy 8.1 1.2 58135 22563 394.2 0.2 21.40.78.5 19.85.5 39.7
Iran 7.3 13.0 67032 19760 2924.90.6 18.41.010.4 15.18.8 20.8
Mexico 6.9 10.3 103831 40792 3914.90.5 16.90.57.8 28.94.5 26.1
Saudi Arabia (2006) 6.7 25.5 27003 7523 284.0 1.4 6.7 1.111.1 19.33.9 52.7
Spain 6.6 1.4 43141 18973 445.3 0.3 16.40.612.4 22.05.9 37.1
Australia 5.5 11.2 20329 9739 483.9 1.0 11.40.99.1 26.26.7 40.8
Indonesia 5.4 9.3 228896 94948 4144.00.9 12.30.24.7 19.95.8 12.2
South Africa 5.0 6.1 44344 12301 287.5 3.3 13.90.87.6 24.65.0 37.2
Venezuela (2006) 3.1 8.2 26952 11225 429.1 0.7 12.00.49.4 23.38.1 36.9
Argentina 2.9 3.7 23405 9634 411.1 0.3 14.10.58.5 23.56.7 45.2
Pakistan 2.3 1.6 158782 42816 2743.00.1 13.70.75.8 14.85.7 16.1
United Arab Emirates (2000)2.3 7.6 4087 1779 447.9 2.3 11.01.019.1 17.47.1 34.2
Norway 2.1 10.7 4593 2289 503.3 1.5 11.60.76.9 18.46.6 50.9
Algeria (2004) 1.4 7.7 32100 7798 2420.71.7 10.91.012.4 17.25.6 30.5
Kuwait (1997) 1.2 6.1 2209 1218 552.0 0.7 6.6 0.710.9 16.23.4 59.7
Iraq (1997) 1.2 4.1 20700 4862 2319.50.6 4.5 0.64.5 18.65.6 46.0
Nigeria (1986) 1.1 6.5 98937 30776 3143.10.0 4.1 0.41.8 24.13.6 22.9
Libya (1973) 0.8 4.0 2249 531 2423.02.3 4.1 1.916.8 7.2 8.3 36.6
28 countries 366.2385.4404221118549344634.60.7 12.30.65.5 12.64.1 29.8
World 462.8460.16300000

Notes to Table 1. P and P+ is energy consumption and energy production in 2005 (1015 btu/year), respectively; Ntot is total population of the country (thousands of people), N is total number of working people (thousands of people); employment levels in different economic sectors are given as percentage of the total employment N, Food — agriculture, forestry and fishing, Mining — mining and quarrying, this sector includes production of raw materials and non-renewable energy, Manuf. — manufacturing, Electr. — electricity, gas and water supply, Constr. — construction, Trade — wholesale and retail trade, repair, hotels and restaurants, Transp. — transport, storage and communications, Other — other activities, including state employees, military forces and social sector. Numbers in the eight right columns sum up to 100%. Cumulative energy consumption and population of the 28 countries considered constitute 80% and 60% of the global totals, respectively. Countries are ranked in the order of decreasing energy consumption.
Data sources. Population size and employment rate data correspond to year 2005 unless a different year is stated in the first column (e.g., for China these data are for 2002), data are taken from the International Labor Office Bureau of Statistics (http://laborsta.ilo.org), yearly statistics, Tables 1A, 1B, 2B. In cases when population size data were missing at http://laborsta.ilo.org), they were taken from the U.S. Census Bureau (http://www.census.gov/ipc/www/idb/summaries.html). Energy production/consumption data for 2005 ware taken from the U.S. Energy Information Agency (http://www.eia.doe.gov), 1 btu (British Thermal Unit) = 1055 J.
Employment rates in the food production sector (Food) differ greatly for two groups of studied countries. The first group includes 17 countries with total population of 0.5 billion people mean employment rate in this sector is 4.4% (range 1.1-10.2%). In the second group of 11 countries (India, China, Brazil, Mexico, Indonesia, Iran, Pakistan, Algeria, Iraq, Nigeria, Libya) employment rate varies from 15% to 61% with a mean of 33%. According to the formulae of Section 3, in countries from the second group food is sold at cost price. In countries from the first group food is sold at market prices significantly exceeding the cost price. The difference between market and cost prices remains within the distributive network.


Privatization of the production process, which, as discussed in the previous section, contributes in some ways to the technological progress of the civilization, is widely practiced in the energy and raw materials sectors of economics. However, there are fundamental differences between energy and raw materials commodities and novel expensive goods of the civilization, Table 2. Consumption of energy and raw materials is saturated at their maximum market price. Market mechanisms that can lead to a radical fall in prices of novel goods when their output grows do not work for energy and raw materials. The main idea behind free market is the idea of maximum profit for the business owner. Let us imagine one oil well owner increases the output and sells his oil at a lower price. As far as market price of oil exceeds its cost price by dozens of times, see above, all the other oil well owners are also able to easily cut their oil prices by a similar amount without reducing the output. The excessive oil amounts produced by the first oil well owner will remain unclaimed and fall out from economics with zero price. This owner will suffer losses, he will have to give up the idea of increasing the output and will have to elevate oil price back to the maximum. This consideration proves that free market competition in the sphere of production of raw materials and energy, the civilization essentials, is impossible.

Within the free market, owners of oil wells, ore mines etc. effectively remain monopolists on a global scale irrespective of whether they form a single correlated system, or represent multiple independent parties, as well as irrespective of whether they are individual businessmen within one country or particular countries within the world economy.

Table 2. Novel products of technological progress (NPTP) versus energy and raw materials (ERM): Comparison of their standings within a market economy
No. NPTP   ERM
1 NPTP are needed to, and consumed by, a certain part of population.   ERM are necessary to, and consumed by, all people in the civilization.
2 Expansion of output makes the original maximum market price of NPTP fall towards their cost price. The demand is saturated at cost price and the NPTP become conventional goods.   The demand for ERM is always saturated at a maximum market price that the civilization can afford to pay up to the threshold of losing economic integrity.
3 Market competition of independent parties producing NPTP, which facilitates expansion of output, is possible.   Market competition of independent parties producing ERM is impossible. ERM output is of effectively monopolistic nature.
4 Maximum price is only stable until the output starts to increase.   Maximum price is always stable; demand saturated.
5 Total profit obtained from the moment of NPTP appearance in the market, when they are sold at maximum price, to the moment when the demand is saturated at cost price, is a finite sum of money (dimension $).   Profit from selling ERM under conditions of the demand saturated at a maximum price significantly exceeding cost price represents an infinite flux of money (dimension $/year).
6 The profit from selling NPTP is used to facilitate search of other NPTP, which contributes to the technological progress of the civilization and ensures economic growth even in a non-growing or shrinking population.   The profit from selling ERM is not used in the production process of the civilization. It is spent to support a growing part of the population, whose paid activities can take arbitrary forms (sports, religion, politics, terrorism, etc.).
7 The share of NPTP in the global consumer basket is negligible compared to the conventional goods.   Civilization spends over 10% of global annual gross domestic product to cope with the market prices of ERM that are elevated above the cost prices by dozens of times.
8 Privatization of the man-made output facilities (plants, factories) for producing NPTP does not violate fundamental physical laws.   Privatization of the natural sources for production of energy and raw materials (oil wells, ore mines) violates the fundamental physical law of conserved dimensions of measurable variables.

To cite this document:

Makarieva A.M., Gorshkov V.G., Li B.-L. (2010) Comprehending ecological and economic sustainability: Comparative analysis of stability principles in the biosphere and free market economy. Annals of the New York Academy of Sciences, 1195, E1-E18. Abstract. pdf doi:10.1111/j.1749-6632.2009.05400.x, first published as PNPI Preprint No. 2763.