No diamond-water paradox on 55 Cancri e

From Yahoo.com:

The alien planet, a so-called “super-Earth,” is called 55 Cancri e and was discovered in 2004 around a nearby star in our Milky Way galaxy. After estimating the planet’s mass and radius, and studying its host star’s composition, scientists now say the rocky world is composed mainly of carbon (in the form of diamond and graphite), as well as iron, silicon carbide, and potentially silicates.

At least a third of the planet’s mass is likely pure diamond. . . .

Previous studies of this planet suggested it might actually be covered with oozing “supercritical fluids” “” high-pressure liquid-like gases “” seeping out from its rocks. But this idea was based on the assumption that 55 Cancri e had a similar chemical makeup as Earth, Madhusudhan said. The new findings suggest the planet has no water at all.

Closer to home, there is a new diamond discovery on earth (also from Yahoo.com)

Call it the Soviet Union’s most valuable cold war secret. This past weekend, Russia declassified the existence of what could very well be the richest diamond field in existence, located in the depths of a 62-mile diameter asteroid crater known as Popigai Astroblem in Siberia.

The diamonds found in the Popigai Astroblem are known as “impact diamonds.” They’re created when a meteor strikes a graphite deposit, as happened there an estimated 35 million years ago. Impact diamonds are significantly harder than normal diamonds, and are best suited for industrial or scientific use.

Given that diamonds can sell for $2,000 per karat with unusually large diamonds going for as much as $20 million, a discovery of “trillions of karats” could value this hole in the quadrillions of dollars. Of course, a diamond discovery of this magnitude is almost sure to have a serious downward impact in the per-karat price should full-scale mining operations ever begin.

Here’s some advice; unless they are talking in terms of Zimbabwe money, your should be skeptical anytime you hear the phrase “worth a quadrillion dollars.”  That would make the mine worth more than all the wealth on planet Earth.  But it’s an interesting question for a grad economics exam; what’s the optimal rate of extraction?  I presume that if diamond demand depends on the expected rate of future extraction, it becomes one of those unsolvable game theory problems.

The fact that diamond prices haven’t already plunged makes me skeptical of the veracity of this story.

PS.  I wonder if the universe contains any planets made of cubic zirconia.


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28 Responses to “No diamond-water paradox on 55 Cancri e”

  1. Gravatar of Saturos Saturos
    11. October 2012 at 18:04

    But why is diamond cheaper than water? inquire the diamond-eating, water-allergic denizens of 55 Cancri e…

  2. Gravatar of JVM JVM
    11. October 2012 at 18:20

    Wikipedia says that “most modern industrial diamonds are produced synthetically, so the deposits at Popigai may not be profitable due to the remote location and difficulty of extraction.” It also says that they are considered unusable as gems.

  3. Gravatar of Cameron Cameron
    11. October 2012 at 18:50

    In fact, diamond prices should have plummeted a long time ago. My understanding is that DeBeers devotes much of its resources not to just extracting diamonds, but storing them. The few firms on earth that control the diamond supply have made one of the most abundant gems one of the most valued and cherished all because of price manipulation. I imagine a similar fate would befall this mine.

  4. Gravatar of Neal Neal
    11. October 2012 at 19:11

    I bet diamond markets have already priced in the existence of the mines. Remember Alchein and the H-bomb?

  5. Gravatar of Major_Freedom Major_Freedom
    11. October 2012 at 19:17

    Here’s some advice; unless they are talking in terms of Zimbabwe money, your should be skeptical anytime you hear the phrase “worth a quadrillion dollars.”

    You think that’s bad? Austrians have to hear statements like “there is not enough gold in the world to be used as money, because with a $1800 per ounce price, we would need more gold than what exists.”

    Or how about “We can’t have a general fall in wage rates, because then people wouldn’t be able to buy as much stuff.”

    99.9% of the time the problem is holding existing prices constant when they make arguments that imply changed prices.

    Blame Keynesians. They are the ones teaching this nonsense.

  6. Gravatar of To To
    12. October 2012 at 02:14

    “I wonder if the universe contains any planets made of cubic zirconia.”

    Highly unlikely. A pure carbon planet can occur because carbon is the main solid-forming element produced in the CNO cycle (slow burning, what we have in our sun), hence will be the main solid-forming element in low-metallicity systems. Zirconium, on the other hand, is produced in s- and r-process nucleosynthesis (massive stars and supernovae) together with lots of other junk.

    Sorry, couldn’t resist.

    Or how about “We can’t have a general fall in wage rates, because then people wouldn’t be able to buy as much stuff.”

    A general fall in wages will induce an increase in the share and real amount of debt payments, i.e. a transfer from debtors to creditors. Since the two groups have different propensities to spend their income (they wouldn’t be borrowers and savers in the first place otherwise, and the savers find it even more advantageous to save because of the deflation) what you get is a fall in (real) spending, hence lower output and increased unemployment (since the decrease in demand is faster than the fall in wages due to the debt wedge).

    Sorry, couldn’t resist.

  7. Gravatar of To To
    12. October 2012 at 02:15

    Duh, what am I doing replying to Major_Freedom anyway ?

  8. Gravatar of Tim Worstall Tim Worstall
    12. October 2012 at 03:53

    An introduction to the economics of diamond mining.

    Industrial diamonds can be and are (over 90% of the market) produced in labs at a price of 20 cents to 50 cents per carat.

    You really would not go mining for them. You could, sure, but it would be a great way to lose money.

    Yet there are indeed some natural diamonds that are industrial diamonds. Someone is obviously mining them even if it’s a great way to lose money.

    The answer being that you go mining for gemstone diamonds. That does make money. Any industrial diamonds you find along the way are sold to defray costs but you would never mine purely for those industrial diamonds.

    At which point my best guess is that Popigai will never be mined.

  9. Gravatar of StatsGuy StatsGuy
    12. October 2012 at 05:04

    ” I presume that if diamond demand depends on the expected rate of future extraction, it becomes one of those unsolvable game theory problems.”

    Depends on the response function, probably other technical factors (discount rate, mining cost, etc.). I think under some conditions you can get a stable equilibrium if the diamond industry is sufficiently concentrated. Also depends on whether diamond demand is driven purely by investment demand (which is a function expected future value), or there is some consumption demand (which could still be a function of rarity, but decoupled from discount rate). If it’s all investment demand, and discount rates are equal for investors/extractors, I think that’s hard.

    Here’s a better question: why are natural diamonds more valuable to begin with? Seriously? Hard question to answer.

  10. Gravatar of John John
    12. October 2012 at 05:44

    Since the price would rise with the interest rate of the owners of the massive diamond mine, as Harold Hotelling pointed out, wouldn’t the global demand for diamonds then determine the price and the interest rate determine the rate that the price increased?

  11. Gravatar of L L
    12. October 2012 at 05:54

    “it’s an interesting question for a grad economics exam; what’s the optimal rate of extraction?”

    Doesn’t Hotelling (1931), “The Economics of Exhaustible Resources” (Journal of Political Economy), give a reasonable answer?

  12. Gravatar of Major_Freedom Major_Freedom
    12. October 2012 at 06:02

    To:

    Or how about “We can’t have a general fall in wage rates, because then people wouldn’t be able to buy as much stuff.”

    A general fall in wages will induce an increase in the share and real amount of debt payments, i.e. a transfer from debtors to creditors. Since the two groups have different propensities to spend their income (they wouldn’t be borrowers and savers in the first place otherwise, and the savers find it even more advantageous to save because of the deflation) what you get is a fall in (real) spending, hence lower output and increased unemployment (since the decrease in demand is faster than the fall in wages due to the debt wedge).

    Oh I forgot, I also hear statements such as “We can’t have a general fall in nominal spending, because then people wouldn’t be able to buy as much stuff.”

    Duh, what am I doing replying to Major_Freedom anyway?

    You need a fix that only I can provide.

  13. Gravatar of ssumner ssumner
    12. October 2012 at 06:09

    Everyone, Why are industrial diamonds not considered valuable? Are they unattractive, and hence not useful for jewelry?

    And don’t just say they are cheap to produce; if they looked exactly like real diamonds then obviously people would buy them and pass them off as real diamonds.

  14. Gravatar of ssumner ssumner
    12. October 2012 at 06:30

    L, Did Hotelling address the game theory aspect of the problem? (It’s been 35 years since I read the paper, and I don’t recall.)

  15. Gravatar of Tim Worstall Tim Worstall
    12. October 2012 at 07:11

    “Everyone, Why are industrial diamonds not considered valuable? Are they unattractive, and hence not useful for jewelry?”

    Size mostly. Industrial diamonds are usually a fine powder. Indeed, they’re sold graded as powders. Mesh size or average particle size. You use them by glueing them to things (well, slightly more complicated that using Uhu but not all that much). They look very boring indeed. A greyish powder. A handful of quartz sand is visually a great deal more appealing.

    And that’s pretty much it. Size. Get to a quarter carat per piece (I Am Not A Jeweler so it might be some different number) or some such and they are no longer industrial diamonds but gemstone ones.

    Caveat: this isn’t 100% accurate. There can still be issues with flaws etc. But it’s good enough as a rough guide.

  16. Gravatar of ssumner ssumner
    12. October 2012 at 08:08

    Thanks Tim.

  17. Gravatar of Doug M Doug M
    12. October 2012 at 08:15

    Industrial diamonds are not pretty.

    However there are lab created gems that are indistiguisable from natural gems. “Ethical” labs put add an indicator so that the syntetics can be identified under black light. But, a lab gem sells for the fraction of the price of a natural gem. Buyers will say that just knowing it is a lab gem lowers its value.

    You may say that they are not behaving rationally, but it is what the market says nonetheless.

  18. Gravatar of Morgan Warstler Morgan Warstler
    12. October 2012 at 08:40

    Good buddy of mine is CEO of global leader in Industrial Diamond market.

    There’s a big difference between abrasives and the new grown perfect diamonds (gas or pressure).

    De Beers has actually done quite a bit of research around how to sell imperfection as the valuable thing as perfect diamonds become ubiquitous.

  19. Gravatar of L L
    12. October 2012 at 09:27

    Scott,

    No, Hotelling doesn’t address the game theory aspect of the problem, although I still think it gives a good framework for a reasonable answer.

    For all producers of a commodity, any time their expectation is for price rises below their (risk-adjusted) interest rate, there are incentives for all producers to cut production until the point where expected price rises are in-line with interest rates. If expected price rises are instead above interest rates then there are big incentives to produce more until expected prices are back in-line. You might get a bit of over- or under-shooting but overall the Hotelling price path as a price expectation should be a stable and reasonable expectation, even if in practice we observe price movements that are a lot more volatile (due to the combination of inelastic PED and PES for most commodities, which magnifies price movements for small shocks).

    This then would provide a basis for working out the likely reaction of other producers to starting production at a new mine, i.e. that once the mine is up and running, the incentive will be for other producers to restore the Hotelling path for prices.

    On an empirical point, I have to admit to knowing nothing about diamonds, but for some other commodities I’ve seen their price series act as random walks with drift, which would fit well with a Hotelling (or EMH, which is similar) type of price formation.

    I would be interested to hear whether you agree!

  20. Gravatar of Benny Lava Benny Lava
    12. October 2012 at 15:12

    Scott, you would be surprised at the history of diamonds and how they are a colorless hard lump of carbon (one of the most abundant substances on earth). And how people want them because of marketing. And how lab diamonds are cheaper and better looking than mined diamonds.

    http://www.businessinsider.com/history-of-de-beers-2011-12?op=1

  21. Gravatar of ssumner ssumner
    12. October 2012 at 18:19

    Doug and Benny, I’m surprised, I’d gladly buy artifical diamonds if they looked just as good and cost a fraction of the price. But maybe I’m the exception.

    L, Yes, I think the Hotelling model is a good starting point for most industries, whcih tend to be somewhat competitive. But the monopoly aspect is what interested me here.

  22. Gravatar of StatsGuy StatsGuy
    12. October 2012 at 18:51

    I don’t believe Hoteling solves it – among other things, game theory didn’t really exist until Nash.

    Hoteling just shows that under a fixed demand curve (where price is a function of supply), you can calculate an optimal extraction rate.

    I think Scott is asking what happens if the demand curve ITSELF is a function of the future extraction rate (which could be further complicated if the resource is not actually reasonably finite). That’s the difference between a shift of the curve, and movement along the curve. I believe solution (if it’s stable) depends on the response function which defines the shape of the curve as a function of the future extraction rate schedule. The question is whether there is a stable nash equilibrium such that if the producer knows the consumer’s full schedule of future contingent plans and vice versa, neither party has an incentive to change.

    My guess – and I don’t intend to solve this out – is you can get lots of answers depending on your setup, and one of the key factors is probably whether both the demand curve is _purely_ a function of future expected value, or just partly. My guess would be that if it’s purely a function of future expected value, then the price is a random walk – essentially, it’s a bubble.

  23. Gravatar of StatsGuy StatsGuy
    12. October 2012 at 18:59

    If natural diamonds are so much better (look nicer, etc.), then why bother certifying them? That should be unnecessary. Certification, like branding, is socially created value.

    BTW, socially created value is real – in 2004, there was an fMRI study taste testing Coke with and without blinding. Without blinding, taste preference was 3x greater. The fMRI showed that upon drinking, the areas of the brain stimulated were associated with memory, not merely pure taste.

    Then again, I don’t own any diamonds… Partly, because I have no idea what they’ll be worth in 20 years.

  24. Gravatar of ssumner ssumner
    13. October 2012 at 05:33

    I’d like to buy industrial diamond jewelry for low prices. Does anyone know where I can do so?

  25. Gravatar of To To
    13. October 2012 at 11:29

    Just googled this.

    Early speculation from years ago made the misimpression that colorless diamonds would be available by the truckload for merely dollars per carat. This however, is far from the truth. The man-made diamond industry is over fifty years old, and just recently has achieved gem-quality results in colored diamonds. The industry has a long way to go until white diamonds are readily available, and we predict capacity will only ever reach a small fraction of the mined diamond production in the foreseeable future.

    Very few synthetic white diamonds are available on the market. Those that are weigh less than one carat in nearly all cases. These colorless diamonds are very difficult to grow, with limited availability from any producer. Prices are normally comparable to a mined colorless diamond. If you see a product claiming it is a white lab diamond for significantly less than a mined diamond would cost, caveat emptor, as there is a strong possibility it may be a simulant. In fact, it can cost hundreds of dollars just to have one diamond cut and polished, much more than most simulants cost at retail.

  26. Gravatar of Benny Lava Benny Lava
    13. October 2012 at 14:16

    Scott, I believe that is an oxymoron. Industrial diamonds tend to be very small and have impurities than give them a displeasing color.

    http://www.premilgems.com/Products.asp

    Also I had a post on the nature of diamond values that seems to have disappeared. Oh well.

  27. Gravatar of Tim Worstall Tim Worstall
    14. October 2012 at 08:34

    “I’d like to buy industrial diamond jewelry for low prices. Does anyone know where I can do so?”

    You’ve an error there.

    Industrial diamond and gemstone diamond.

    Manufactured diamond and natural diamond.

    You can have industrial diamonds which are manufactured or natural.

    You can have gemstone ones that are manufactured or natural.

    Industrial gemstone is as much a misnomer as manufactured natural.

    Industrial diamonds just don’t look good, they don’t sparkle, nowt.

    Now, if you mean manufactured diamond jewlery that is available. But still not all that cheap yet for the larger carat sizes, as above.

  28. Gravatar of ssumner ssumner
    14. October 2012 at 13:19

    Tim, Thanks, I can see I was misinformed.

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