Economics Of Non-renewable Resources Research Articles

Non-Renewable Resource Economics and Geological Constraints: a Review

In 1931, Harold Hotelling introduced the Hotelling rule—the fundamental theoretical principle of non-renewable resource economics. However, almost ninety years later, economists are still unable to establish a generalized, empirical validity for the rule. As concerns mineral resources, recent developments suggest that geological constraints may play a larger role in explaining why they would not follow the rule, than the traditional understanding. This paper reviews the evolving role geological constraints have played in the literature on non-renewable resource economics. It explores their evolution from the early days, where the focus was on the exhaustibility constraint as the main determinant of the evolution of price and output, to more recent years, with the realization that geological constraints can be a promising route to explain empirically accepted stylized facts.

A Hotelling model for the circular economy including recycling, substitution and waste accumulation

Non-renewable resources include a large variety of deposits that have been formed by geological processes over millions of years. Although extraction of such resources provides benefits as employment and economic revenues, it also contributes to negative environmental externalities and it increases resource scarcity. An important policy question is how to optimally extract non-renewable resource stocks over time while taking possible substitutes and recycling into account. The present paper adds to the literature by developing a generic numerical optimisation model that can be used to simulate non-renewable resource management regimes and the effects of different policy instruments deployed at different stages of the resource’s life cycle. By including recycling and substitution, the model extends the seminal cake-eating Hotelling model that dominates the non-renewable resource economics literature. In addition to being generically designed, the model can accommodate for non-competitive market settings, interacting policy instruments and environmental externalities at different stages of the material’s life cycle. The model’s possibilities are illustrated by means of a numerical simulation example for the extraction of sand.

On the Empirical Significance of the Hotelling Rule

AbstractThe Hotelling Rule—that price net of marginal cost must rise at the rate of interest in nonrenewable resource markets—forms the theoretical core of the economics of nonrenewable resources. ...

Teaching the Economics of Non-renewable Resources to Undergraduates

Harold Hotelling′s path-breaking article in 1931 used higher mathematics to explain the economics of non-renewable resources. In that article, Hotelling asserted that conventional static models were inadequate to illustrate his ideas, and presumably he would have extended that opinion to the many technical papers that his work spawned.The purpose of this paper is to show how to extend the conventional static model to enable instructors of economics to present to undergraduates at least some of the ideas of Hotelling and later research economists. By making such presentations, these introductory courses can make a great improvement in economic understanding at precisely the time in our history that energy policy in general, and oil dependence in particular, are front-page news.

Chapter 3: Uncertainty in economic models of optimal energy use

In the economics of non-renewable resources, the problem of eating the cake when its size is unknown constitutes an essential feature of uncertainty. Such a model was proposed by Gilbert (1979) and he obtained results that were both illuminating and suggestive. The problem of consuming an exhaustible resource when there is ignorance about its size is analytically equivalent to the more recent problem of CO2, that is generating fossil fuel emissions when the critical CO2 budget (where irreversibly the damage becomes infinite) is uncertain. It is also interesting to note that activities that reduce uncertainty, such as exploration in the former problem, correspond to the use of research in the latter. We will convert Gilbert’s model to the new problem context and show, in a social planning framework, that the treatment of uncertainty has significant impacts on policy choices regarding global CO2 emission limits. We will support such conclusions by a numerical treatment of an optimal control model on fossil fuel use where uncertainty is a major subject of sensitivity analysis.

Untested Hypotheses in Non-Renewable Resource Economics

The present paper reviews the literature on the empirical implications of the Hotelling rule and suggests directions for further research in this area.

On Gray’s Rule and the Stylized Facts of Non-Renewable Resources

The economics of non-renewable resources is composed of at least two branches. The better-known branch owes much to a famous paper by Harold Hotelling [1931], which most economists consider to be the first modern article in the field. Hotelling's main concern was with the unfolding of equilibrium through time in the market for a resource. Price at any instant of time was viewed as responding to the total resource stock available to society. As Robert Solow [1974] pointed out, this response was a consequence of the fact that the resource was an asset to society and would in equilibrium have the same rate of return (through capital gains) as other assets. Price would adjust in intertemporal equilibrium so that the divergence between price (or marginal revenue if the market had market power) and marginal cost of extraction would rise at the rate of interest through time. (This follows because, if extracted and sold, a unit of resource would yield the going rate of interest. Only if the value of the resource rose by a like amount would it be left in the ground.) This result has come to be known as Hotelling's r-per-cent rule. Frederick Peterson and Anthony Fisher [1977] have set out clearly the factors that are important to the Hotelling theory. These include the level of aggregate consumption, the level and rate of increase of price as

The Optimal Depletion and Exploration of a Nonrenewable Resource

IN SPITE OF ITS IMPORTANCE, the exploration process has not received much attention in the economics of nonrenewable resources. Among the researchers who investigated this problem, we might mention Arrow and Chang (1982), Deshmukh and Pliska (1980), Pindyck (1978, 1980), and Gilbert (1979, 1981). For earlier work on this subject, we might also mention Gaffney (1967) and Herfindahl (1974). Basically, an exploration program is a search for potential deposits whose sizes and locations are both uncertain. Furthermore, exploration technology exhibits a high degree of scale economies. Our paper represents an attempt to deal with these rather neglected aspects of the exploration process in a model of simultaneous extraction and exploration.

Extraction Costs and the Economics of Nonrenewable Resources

The study questions the fundamental assumption of the standard aggregate exploration-extraction model of nonrenewable resources that extraction costs and the level of reserves are inversely related. It also raises questions about the model's conclusions regarding exploration incentives and the valuation of reserves. An empirically tested disaggregate model is presented that suggests that exploration activity occurs from firms attempting to balance marginal extraction plus user costs at the intensive and extensive margins. Exploration is carried out until the marginal discovery cost of a deposit equals its present asset value and a U-shaped price path is indicated.

Classical foundations of the contemporary economic theory of non-renewable resources

There exists a formalized and well integrated neoclassical theory of the economics of non-renewable resources. While the classical economists did not deal with non-renewable resources as such, many of them did discuss the economics of the mining industry or of the mine. This paper reviews the theoretical aspects of the contemporary theory of the economics of non-renewable resources and contrasts them with the less formal treatment given by the classical economists. As well as affording a critical review of the classical literature this comparison indicates areas of the contemporary theory which need to be reassessed.

Economic Aspects of Exploration and Development of Mineral Resources: Viewpoint of Educator: ABSTRACT

Education in mineral economics is important to the practicing geologist in his professional career. Individuals who deal with the discovery, extraction, and use of mineral resources recognize that much of what they are able to accomplish relies on Because the economic factor has such tremendous leverage, there is always a compulsion to seek more education and understanding of economics. People who deal with mineral economics fall into 2 categories: (1) practitioners who are engaged in some economic activity and use economic data and analysis in making decisions related to their jobs, and (2) social scientists who are concerned only with economic concepts and tools. The practicing geologist, the exploration planners, and mineral company executives fall in the former category. Their need is for economic data and economic evaluation. There are 3 stages in the exploration and development process, each with its own peculiar needs for economic information and valuation. These are: (1) establishing an exploration plan with appropriate guidelines; (2) conducting the field investigation and appraising the data obtained; and (3) making a decision on how to proceed in light of the economic and geologic information on hand. The undergraduate in geology preparing for a career in mineral exploration has little time or need for much emphasis on traditional economics in his program. However, some university course work introducing him to the economics of nonrenewable resources, evaluation concepts and methodology, and commodity analysis is of value. Much of the geologist's economics education must be derived from experience, company training, post-graduate college courses, and the technical programs of his professional societies. The geologic societies should make their contribution through fostering the development of improved evaluation methodology, maintaining and advancing the analytic competence of their members, and keeping members informed of national goals and priorities in mineral resource development. End_of_Article - Last_Page 868------------