Resource rent explained

In economics, rent is a surplus value after all costs and normal returns have been accounted for, i.e. the difference between the price at which an output from a resource can be sold and its respective extraction and production costs, including normal return.^[1] This concept is usually termed economic rent but when referring to rent in natural resources such as coastal space or minerals, it is commonly called resource rent. It can also be conceptualised as abnormal or supernormal profit.

In practice, identifying and measuring (or collecting) resource rent is not straightforward. At any point in time, rent depends on the availability of information, market conditions, technology and the system of property rights used to govern access to and management of resources.

Categories of rent

Rent can be categorised into different kinds depending on how it is created. In general one can distinguish three different kinds of rent, which can also occur together: differential, scarcity, and entrepreneurial rent.^[1]

• Differential rent (also called quality or Ricardian rent) arises because of differences in the quality of similar goods or inputs (e.g. production sites). Consider two companies that extract coal of identical quality. The market price of coal is $50/t. Company X operates at a production site where it is very easy to extract coal. Its costs (including normal returns) amount to $20/t. Company Y operates at a site where it is relatively difficult to extract coal. Its costs (including normal returns) amount to $30/t. Company X will ‘create’ more resource rent because of the more accessible resource.
• Scarcity rent The marginal opportunity cost imposed on future generations by extracting one more unit of a resource today. Scarcity rent is one of two costs the extraction of a finite resource imposes on society. The other is marginal extraction cost--the opportunity cost of resources employed in the extraction activity. Scarcity rent is the cost of "using up" a finite resource because benefits of the extracted resource are unavailable to future generations. Efficiency is achieved when the resource price--the benefit society is willing to pay for the resource today--is equal to the sum of marginal extraction cost and scarcity rent.
• Entrepreneurial rent (also called quasi-rent or Schumpeterian rent) can accrue due to entrepreneurial skills or managerial investments. A company may invest in advertising, training of employees, and so forth. These investments can result in a higher price (brand) or lower costs (better technology). Consider the “production” of rock lobster where the costs to produce one rock lobster (i.e. paying for labour, the nets, and the like, and including normal profit) amount to $3. Assume the rock lobster is sold for $5 on the market. Resource rent here amounts to $2. However, assume the fisher has managed to decrease the costs for catching rock lobster from $3 to $2. This could be due to his/her entrepreneurial skills and more efficient use of labour and capital. Resource rent increases from $2 to $3.

Payment of royalties

A landowner who holds oil or mineral rights to his property may transfer those rights under a license to another party.^[2] In exchange for allowing another party to extract resources, the landowner receives either a resource rent or a "license fee" based on the value of the resources sold.^{[3] [4]} When the government owns the resource, the transaction often must comply with statutory and regulatory requirements.

The calculation of the value of oil and gas royalties involves estimating future revenues based on recent production trends.^{[5] [6]} A common method is to take the average monthly income for the last three months and use that as a basis for forecasting.^{[7] [8]}

In the United States, simple ownership of mineral rights is possible, and royalty payments to individuals are quite common.^{[9] [10]} Local taxing authorities may levy a severance tax on non-renewable natural resources extracted or withdrawn within their authority. The federal government receives royalties for mining on federal lands, which is managed by the Bureau of Ocean Energy Management, Regulation and Enforcement, formerly the Minerals Management Service.

An example from Canada's northern territories is the federal rules on royalties for oil in border lands.^{[11] [12] [13]} The royalty rate begins at 1% of gross sales for the first 18 months of commercial production and increases by 1% every 18 months up to a maximum of 5% until initial costs are recovered, after which the royalty rate is set at 5% of gross sales or 30% of net sales. Thus, the risks and profits are shared between the Government of Canada (as the owner of the resources) and the oil developer. This attractive royalty rate is designed to incentivize oil and gas exploration in Canada's remote frontier areas, where costs and risks are higher than elsewhere.

See also

• Hotelling's rule
• Resource economics

References

1. Scherzer, J. and Sinner, Jim, Resource Rent: Have you paid any lately?, Ecologic Research Report No.8, December 2006
2. Web site: Oil, Gas, and Mineral Rights in Real Estate Transactions. 2024-10-02. www.getlegal.com.
3. Web site: What are Mineral Rights and How Do They Work: Different Types of Ownerships and Trading. 2024-10-02. www.pheasantenergy.com.
4. Web site: What You Should Know About Mineral And Surface Rights On Your Land. 2024-10-02. hallhall.com.
5. Web site: How do you value oil and gas royalties?. 2024-10-02. namso-gen.co.
6. Web site: Oil and Gas Royalty Payments. 2024-10-02. texasroyaltybrokers.com.
7. Web site: How to Calculate an Oil and Gas Royalty. 2024-10-02. info.courthousedirect.com.
8. Web site: Mineral Rights Value. 2024-10-02. www.mineralwise.com.
9. Web site: Mineral Rights: What They Are And What We Need To Know About Them. 2024-10-02. cupertinotimes.com.
10. Web site: Understanding Mineral Rights and the Impact on the Value of Your Property. 2024-10-02. www.jdsupra.com.
11. Web site: Who has the right to develop Canada’s oil and natural gas resources?. 2024-10-02. www.capp.ca.
12. Web site: Can You Inherit Mineral Rights In Canada?. 2024-10-02. ontario-bakery.com.
13. Web site: Mineral Rights. 2024-10-02. www.saskatchewan.ca.