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    Nonrenewable Asset: Implications

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    Ajeet_1991
    Harold Hotelling proposed a theory in 1931 that suggests owners of nonrenewable resources like oil will only produce amounts that yield more value than other financial investments, assuming profit motivation and efficient markets. The theory predicts resource prices will rise at prevailing interest rates, otherwise there would be no supply restrictions. As oil reserves diminish and scarcity concerns grow, Hotelling's theory may provide insight into future oil prices, though it remains unclear if prices will actually rise at interest rates. The theory is worth additional review as part of forecasting models seeking to predict oil's definitive future price.

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    Nonrenewable Asset: Implications

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    Ajeet_1991
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    Harold Hotelling proposed a theory in 1931 that suggests owners of nonrenewable resources like oil will only produce amounts that yield more value than other financial investments, assuming profit motivation and efficient markets. The theory predicts resource prices will rise at prevailing interest rates, otherwise there would be no supply restrictions. As oil reserves diminish and scarcity concerns grow, Hotelling's theory may provide insight into future oil prices, though it remains unclear if prices will actually rise at interest rates. The theory is worth additional review as part of forecasting models seeking to predict oil's definitive future price.

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    Harold Hotelling proposed a theory in 1931 that suggests owners of nonrenewable resources like oil will only produce amounts that yield more value than other financial investments, assuming profit motivation and efficient markets. The theory predicts resource prices will rise at prevailing interest rates, otherwise there would be no supply restrictions. As oil reserves diminish and scarcity concerns grow, Hotelling's theory may provide insight into future oil prices, though it remains unclear if prices will actually rise at interest rates. The theory is worth additional review as part of forecasting models seeking to predict oil's definitive future price.

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    12 views1 page

    Nonrenewable Asset: Implications

    Uploaded by

    Ajeet_1991
    Harold Hotelling proposed a theory in 1931 that suggests owners of nonrenewable resources like oil will only produce amounts that yield more value than other financial investments, assuming profit motivation and efficient markets. The theory predicts resource prices will rise at prevailing interest rates, otherwise there would be no supply restrictions. As oil reserves diminish and scarcity concerns grow, Hotelling's theory may provide insight into future oil prices, though it remains unclear if prices will actually rise at interest rates. The theory is worth additional review as part of forecasting models seeking to predict oil's definitive future price.

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    Exhaustible Resources - cannot be used again, such as oil,plastic Oil is an incredibly important commodity, and investors are continually

    looking for methods to forecast the future price of this nonrenewable resources. In 1931, Harold Hotelling wrote a paper titled "The Economics of Exhaustible Resources" that suggests that the deposits of exhaustible resources should be viewed as an asset, just like any other income-producing investment. There is a systematic way to forecast their future prices. As the world's supply of oil diminishes, supporters of the theory suggest that there is increasing rationale in evaluating Hotelling's insights into future oil prices.
    A theory proposed by Harold Hotelling stating that owners of nonrenewable resources will only produce that amount, if it will yield more value than other financial instruments available on the market, such as bonds. This assumes such owners are only motivated by profit and that markets are efficient. The theory is used by economists to predict the price of nonrenewable resources like oil, based on prevailing interest rates.

    The theory states that if oil prices do not rise at the prevailing interest rate, there would be no restrictions on supply. If, conversely, oil prices were expected to increase faster than interest rates, producers would be better off not bringing the oil out of the ground.

    Implications It is clear that oil reserves should be considered an asset and that their value and the decision to extract them must consider competitive investments. Whether they will increase at the prevailing interest rate is yet to be seen. There is, however, an indication that as the market continues to concern itself with the scarcity of oil, the Hotelling theory may provide investors with insight into future oil prices. Regardless of what camp one is in, the theory is worth additional review and worth being part of a set of analytical models as the market continues to search for the definitive forecast of future oil prices.

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