What you should know about this study

This study uses data from the Natural Resource Stock Accounts. These accounts measure the value of natural resource assets (or stocks) in their natural state, for example, as reserves of metal ore in the ground, or accessible stands of timber in forests.

The approach taken to value resources is similar to that of valuing annuities—a resource’s value is equated to the stream of income that can be generated from extracting it over its useful lifetime.

The first step to estimating the stream of income involves calculating the current year’s income from extraction. Income, also known as resource rent, is equal to total revenue received from sales throughout the year minus all costs incurred during extraction. Costs include operating costs, like fuel and labour, as well as the capital costs, such as wear-and-tear on machinery. Income taxes, royalties¹ and other costs that are not directly due to the extraction process are not subtracted.

Next, for the sake of simplicity, it is assumed that the quantity extracted as well as the rent generated from extracting the resource will remain constant in each successive year until reserves are exhausted. A final step in valuation is to calculate the present value of this stream of income. Since any rent that will be received in the future is worth less than it would be if in hand today, all future rents must be discounted before being summed together.

Two limitations of this approach are the assumption that the quantity of extraction will remain constant over the life of a resource and the assumption that the difference between sales revenue and extraction costs will remain the same through time. Oftentimes, the price of a natural resource is more volatile than labour and capital costs. These limitations tend to be magnified during periods of extreme volatility in resource prices. Such was the case when record high prices were observed for much of 2008, followed by sharp price declines. Despite these limitations, this method has been widely used by other countries given the difficulty in accurately forecasting commodity prices. Current estimates are based on fourteen different resources for which data on reserves, revenues and extraction costs are available.

For more information please see Definitions, data sources and methods: Natural Resource Stock Accounts.

1. Because part of the income from extracting a resource goes to governments (e.g. taxes and royalties), taxes and fees paid by extractors are not subtracted as costs: this makes them implicitly part of the rent.

Price volatility of natural resources

Energy and metal prices tend to be more volatile than, for example, prices of consumer goods. To help minimize the impact of this volatility when placing a value on these sub-soil assets, natural resource economists tend to assess their value over the course of an entire year or even longer, rather than at one point in time.

While this approach helps analysts focus on longer term trends in resource values, it also makes the estimates less responsive to short-term changes in economic conditions.

The state of affairs in 2008 provides a good case in point. In 2008, prices of crude oil, natural gas and crude bitumen, were very strong through the first eight months of year, but then fell sharply as the global economic downturn took hold. Despite this rather abrupt change in prices, estimates of the value of energy resources were up sharply for the year overall—the strength of the pre-downturn price growth was more than enough to offset the declines that followed.