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Natural resource boom: old issues, new circumstances.

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We live in a fast-paced, ever-evolving world. Consumers may believe they are paying a hefty price for that change every time they pull into a gas station and pay nearly $3 a gallon for fuel or find that escalating raw material prices have again hiked construction costs. Indeed, Montana consumers face most of the rising energy and commodity prices frustrating all Americans today, but these conditions also have some positive impacts on the state.

Montana's economic outlook has taken a decided turn for the better. As we reported in the 2006 Montana Economic Outlook Seminars and in the spring 2006 Montana Business Quarterly, the major reasons for the improved outlook are the energy booms (the current oil exploration frenzy and the prospects for better coal markets) and record high prices for commodities such as copper and zinc.

Both the energy boom and the high commodity prices are likely to be with us for a while because they are mostly caused by worldwide demand factors, rather than the short-term supply factors that caused oil spikes in the 1980s and 1990s. Countries such as China, India, and Taiwan are now the fastest-growing economies in the world. These economies differ from the United States and other developed nations because they are much more oriented toward manufacturing. For example, about 22 percent of the U.S. GDP is the production of goods and roughly 78 percent is the production of services. The Chinese economy is almost the mirror image: 66 percent in goods production and 33 percent in services. The rapid growth of these fast-growing economies and their attendant demand for commodities and energy has fueled the recent price boom.

As this is being written in early summer, certain commodity prices such as copper are continuously accelerating. These recent increases appear to be caused more by speculation and frenzy than by solid fundamentals. Therefore, there are likely to be sharp declines from the speculative highs and general price instability for a while. But when the dust has settled, commodity prices will be well above their 2000 levels, providing solid incentives for industry to expand supplies.

There are risks associated with these booms in energy and commodities. We could have another case of the "Asian flu," where countries in Southeast Asia underwent a variety of economic travails. Also, economic predictability is usually associated with political freedom and democracy. Despite progress in the last few decades, China is still far from the democratic norms of North America or Western Europe. Economic or political instability could lower economic growth, thus decreasing the demand for energy and commodities--and bringing the boom to a quick end.

The energy booms and high commodity prices will not only impact Montana's economy, but will also affect important political and public policy issues.

Montana's Mining Industry

A weathered gallows perched on a hill above Butte has often been used to symbolize mining in Montana. Improved labor-saving technologies combined with depressed metal prices have left Montana's mining industry to play a relatively minor role in the state's economy during the last several decades. But the resources have remained in place, and improved prices may once again rejuvenate the historic industry.

Unlike petroleum, there are no published data and maps of "proven reserves" or potential deposits for Montana's non-fuels metal industry (often called hard-rock mining). But a quick look through the data shows that the following have at one time or another been extracted in the state: copper, molybdenum, lead, zinc, palladium, platinum, gold, silver, nickel, chromate, and other metals. We will not spend much time discussing gold and silver because, even though their prices have also risen and (at least for silver) they may be important byproducts of other extractions, trends in these metals are often strongly influenced by speculation rather than by fundamentals.

Montana has three major metal mines currently in operation. The Stillwater Mine near Columbus is the largest operating mine in Montana. It employs roughly 500 miners and produced more than $185 million of palladium and platinum in 2003. The Montana Resources Mine in Butte reopened in the fall of 2003 and employs about 300 miners producing copper and molybdenum. The Troy Mine in Lincoln County employs about 100 miners and produces copper and silver.

There are several other significant mines in Montana The Montana Tunnels mine north of Boulder has been producing gold, silver, lead, and zinc. It may close in 2006 because of safety concerns. The Golden Sunlight Mine in Jefferson County is the largest gold mine in the state.

We have no idea which mining projects are most likely to materialize or where they will be located. The best we can do is suggest that continued high prices for commodities ties will almost certainly lead to some industry supply response, somewhere. History is probably the best guide, and the traditional mining districts in central and western Montana are the most likely to see future activity.

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Regulatory and Siting Issues

Until now, the increased energy and commodity-related activity has required only a minimum of regulatory action. The new oil wells were mostly drilled on private land, and increased copper and zinc production was accomplished by reopening existing mines in Butte and Troy. Further increases are probably going to require new facilities, and these in turn will probably trigger increased regulatory action.

The Montana Major Facilities Siting Act is administered by the state Department of Environmental Quality and governs the location and design of most large energy producing, converting, and transportation facilities in Montana. New electrical generation facilities, new transmission lines, and perhaps new coal conversion plants would require approval under this legislation.

The DEQ Web site lists a number of transmission line and other projects that have been routinely approved in the last decade or so. But none of these projects were of the scale and scope of the Colstrip generating plants and the 500 kv transmission lines proposed in the late 1970s and 1980s. These proposals generated an almost decade-long series of contested, rancorous, and divisive hearings before a variety of state and federal agencies. Would new proposals for generation facilities and their associated distribution systems produce a similar response?

Many of the undeveloped copper, zinc, and other metal deposits lie under federal, state, or tribal lands. Development of these resources would probably trigger complex regulatory processes. An example is the proposed Rock Creek Mine in western Montana. This mine went through a permit-granting process before the U.S. Forest Service. It received a permit, but is now stalled because of a state District Court ruling. Similarly, western Montana newspapers routinely carry stories of proposed activities on federal land which are approved, appealed, disapproved, appealed, adjudicated, and so forth.

We are not concerned with the merits or characteristics of specific projects, and we are not attacking or defending the role of regulation. Worldwide market conditions are going to generate situations where legal, regulatory, and siting issues will once again come into play. We are concerned that our institutions, which were developed in the environment of the 1980s and 1990s, may not be appropriate for today's world situation.

What should be changed? There are two important features for siting regulation. First there must be clear criteria for approval--i.e., "do a, b, and c and your mine will be approved." Second, there must be a tight timetable for decision making. Can regulation work? We must only look north to Alberta, where very large coal sands energy projects have received permits after a rigorous but timely review process.

Electric Energy Issues

The Northern Tier States are facing electricity shortages. The Federal Reserve Bank of Minneapolis estimates that Minnesota, Wisconsin, and Michigan may experience shortages as early as 2008. The Northwest Power Planning Council is projecting shortages in Northwestern states sometime between 2009 and 2015.

The reason for the projected shortages is that these states are running out of generating capacity. There has been little construction of new electric generating plants during the past few decades. The last major electric generation building boom was in the 1980s; Colstrip 3 and 4 were among the projects completed at that time. There were numerous discussions and slogans floating around in the 1980s concerning energy conservation and similar topics. But much of the discussion--and concern, perhaps--disappeared as electrical demand growth slowed and supplies appeared adequate. Now they are likely to reappear, as we enter an energy supply-demand period similar to the late 1970s and early 1980s. We can expect to hear about:

* Conversion vs. increased supply. Increased conversion of electricity will reduce the number of new electrical generating plants needed to meet demand.

* Renewable energy sources, such as wind and solar. New renewable sources may be part of innovative programs. For example, computer technology may now allow wind generation to be combined with a mine-mouth coal-fired plant into a single integrated project.

* Should the new electric generating plants be located at the mine mouth and ship their electricity via transmission lines? Or should the coal be shipped to Seattle or the Midwest and converted there into electricity? In the 1970s and 1980s, there appeared to be significant improvement in transmission technology just on the horizon. These advances may not have materialized.

* If mine-mouth generation is the preferred option, where should the transmission lines be placed Montana's geography is important. The new generating plants are likely to be built in the eastern part of the state. Transmission lines to the Seattle-Portland area (a logical market) must pass over the Continental Divide, where most of the land is owned by the federal government or tribal governments. There are only a few transportation corridors available, and they are already filled to capacity.

Energy shortages and high commodity prices are probably going to be with us for a while. They may, in fact, be among the major characteristics that will distinguish the current decade from the 1980s and 1990s. Consumers are certainly going to feel the difference, both in terms of what they buy and how much they have left over for other purchases. But here in Montana, increasing energy demands and commodity prices have the potential to rejuvenate historic mining activities. Now may be the time to re-evaluate our regulatory processes to see if they are consistent with the new worldwide conditions.

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Paul Polzin is director of the Bureau of Business and Economic Research at The University of Montana-Missoula.
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Comment:Natural resource boom: old issues, new circumstances.
Author:Polzin, Paul E.
Publication:Montana Business Quarterly
Geographic Code:1U8MT
Date:Jun 22, 2006
Words:1728
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