Towards Complete Balance Sheets in the National Accounts – the Case of subsoil assets

1. Towards Complete Balance Sheets in the National Accounts – the Case of subsoil assets Paul Schreyer, OECD Carl Obst, University of Melbourne Rome, September 2014

2. Outline Background Valuing stocks and theirdepletion A volume index of subsoilassets for Australia plus somethoughts on sustainability Conclusions

3. Background

4. Traditionally, much more effort to measure flows, in particular GDP, than to measure stocks • Flows are important but paintonlypart of the healthcardof an economy

5. Recent developments • Stiglitz Sen Fitoussi(2009) Commission makes a plea for more systematic measurement of wealth • The 2008 SNA foresees full balance sheets, including R&D assets • The System of Environmental-Economic Accounting 2012 Central Framework (SEEA) extends SNA asset base to broader set of environmental assets (e.g., international fish stocks)

6. Data situation • All OECD countries producemeasures of producedassets (though not always comparable) • Only a minority of countries featurescompleteSNA balance sheets(amongthem: Australia, France, Korea, Netherlands) • Single biggest gap: non-produced non-financialassets: methodological and data issues • Land (OECD/Eurostat Taskforce; Diewert and Shimizu) • Subsoilassets: this paper

7. Valuingsubsoilassets and theirdepletion

8. Valuation of subsoilassets Consistentwithvaluation of producedassets: marketprices Possible whenthere are representative, observable transactions (e.g. land - sometimes) Producedassets: observable transactions in new assets (investment) and estimates of retirement and depreciation are combined to yieldcurrent stock value at marketprices Subsoilassets: few if any transactions in assetsin the ground, only sales of extractedresources

9. Common approach: assetmarketequilibrium ptXt: price and quantity of assetin the ground resourcerent = income: price and quantity of assetextracted

10. Common approach: assetmarketequilibrium (2) Return to capital Value of opening minus closing stock= additions -depletion + revaluation Shifting by one period to obtainuser cost or resourcerentequation:

11. Common approach: assetmarketequilibrium (3) Typically: For producedassets, ptcanbeobserved and pstneeds to beestimated For non-producedassets, pstcanbeobserved and ptneedsto beestimated, unlessHotellingiscalled in.

12. Common approach: assetmarketequilibrium (4) Harold Hotelling (1931): rt= pt/pt-1-1 and St = -∆Xt(no additions) • =-pt∆Xt =pt :price of asset in the ground = unit resource rent • Widelyused but restrictive (one asset, no discoveries, constant marginal costs…) • Not supportedempirically • Potentiallymisleadingresultswhenvaluingdepletion

13. Thus, to value stocks and depletion, the price of the asset in the ground must beestimated NPV alwaysrequiressomeform of projection of extraction quantitiesand pricedeveloments ‘Impossibilitytheorem’ of valuing stocks justbased on observable transactions? Efforts should go intoimproving NPV estimates OECD has startedwork

14. Measuringdepletion, additions and revaluation Volume change in asset Revaluation Further decomposition of change in balance sheet values in user cost expression:

15. Volume index of subsoilassets

16. Volume index of subsoilassets • Severalsubsoilassetsi=1,2,… • Volume of subsoilassetsis non-decreasing if: Note: • ValuationwithaverageperiodpricesisNA-compatible and significant for result • Statement about weaksustainability

17. Subsoilassetscovered by the ABS Source: SEEA 2012 and Australian Bureau of Statistics (2012).

18. Volume index of mineral and energyresources, Australia

19. Contribution of different mineral and energy resources to volume indexPercentage points of average annual growth, 1989-2011, Australia

20. Volume index of mineral and energyresources, Australia • Upward trend • Not a priceeffectas revaluations are excluded • Onlypriceeffect in the sensethat: • Risingpricesmay have triggereddiscoveries, i.e. recognition of resources as being economically demonstrated (i.e. classified as proven plus probable resources) • Relative pricesmay have changed, giving more or lessweight to index components • Classicproperties of any volume index

21. Sustainability • Does an upwardtrending index for exhaustibleresourcesmakesense? • Driven by new discoveries and ‘economicappearance’ • Option: include all knowndeposits(currentlyonlycommerically exploitable deposits)? • New discoveries of sameassetor new assetmaystillhappen((sandoil, shale gas) • Relative prices and weightsmay shift • Marketvaluation of economically non-viable sources is not convincing • Meaningful: separate index of depletionand addition • Depletion-adjustedincome

22. The importance of index numberformulae

23. Conclusions

24. Importance of stocks not matched by data availabilityalthoughsomeworkisunderway Natural resource stocks shouldbevaluedsymmetrically to producedassetswith the price of the asset in the ground, not the unit resourcerent Resource rentsare the correct measure for income and the price of capital services fromnaturalresources Valuation of stocks, evennear-market, nearlyalwaysimpliesimputations and forward-lookingestimates Need to invest in the qualityof theseestimates

25. Physical monitoring of quantitiesasset-by-assetisimpractical Upwardtrendingmeasure of the stock of exhaustibleresourceiseconomicallymeaningful But not a sufficientmeasure of sustainability Needscomplementingwith information on other stocks to capture externalitiesfrom the use of subsoilassets

26. Thankyou!