The economic implications of recycling exhaustible natural resources: The case for crude oil

Regardless of whether the bulk of decision-making in an economy is done by a central unit or by decentralized smaller units, the government can act to propose guidelines to individual agents. This is of particular importance when the activities of the latter cause aggregative or social problems which are not directly acted upon by the smaller agents. The purpose of this paper is to set up a model by which a central authority can make choices in the presence of two pressing social problems, namely, a diminishing domestic supply of an exhaustible resource and the contamination of the environment through discharged waste materials.The model itself takes the form of an integer-linear programming problem which runs through discrete time to a finite horizon. Besides the traditional modes of “virgin” exploration and production and/or importation from abroad, society is also given the choice of recycling. Society will choose combinations of the above three to minimize the costs of satisfying fixed (projected) oil product demands in the future. The costs include those for increasing exploration for virgin refineries; for collection, refining and transportation for refineries and for the cost to society of discharges of waste-oil into the environment. The constraints include process flow restrictions, import quotas, capacity limits and discharge restrictions as well as fixed demands.An effort was made to keep the model as general as possible. Although no numerical solution is obtained in this paper, we feel that the policy implications of some presumed solution (possible through the use of a well-known algorithm for mixed variable problems) are worth examining. They revolve around the model itself, citing the potential attractiveness of recycling as the other two alternatives become increasingly expensive, and as development of alternatives to oil progresses at an alarmingly slow rate. Also mentioned are problems relating to the potential demands for recycled versus virgin oil products, balance-of-trade problems, and the mutability of social and economic institutions in the crisis of economic adjustment that much of the world is now facing.