An Investment Model of Natural Resource Markets

Over the last decade there has been an increasing interest in natural resource economics. To some extent this can be ascribed to a general concern with the environment, but an important cause was the large price increases for resources in the early 1970s. The observed price jumps can be understood as a belated recognition of the scarcity of resources, but they can also be viewed as shortor medium-term phenomena arising from demand shocks and, in the case of petroleum, cartelization. In markets with slow supply responses, a jump in demand (or a drop in foreign supplies) would result in a sharp immediate price increase even in the absence of any long-term resource scarcity. The purpose of the present analysis is to try and assess the absolute and relative importance of these two potentially distinctive features of resource markets, depletability and slow supply adjustment. Most of the empirical analysis in the literature examines resource markets from the Hotelling (1939) asset market perspective by comparing observed price paths to the equilibrium price path. In its simplest form, the Hotelling model leads to the rule of equality between interest rates and rates of resource price growth. However, the seminal empirical study by Barnett and Morse (1963) was not supportive of the Hotelling rule, and later studies by Heal and Barrow (1980, 1981), Smith (1981) and Feige and Geweke (1979) have. provided only limited support. The current study provides an alternative approach to testing for depletability in a formulation that also allows for consideration of the inelasticity of supply in the short and intermediate term. We do this by concentrating upon the production side of the market and using an adjustment cost1 or investment model of resource production. The resulting model seems fairly successful in describing the behaviour of at least three of the metals considered, with evidence for both the adjustment cost hypothesis and for depletability. There is, however, also evidence for a technological progress effect that has in the past outweighed the depletability effect and can explain the failure of resource prices to follow the Hotelling path. Section I of the paper develops the adjustment cost model and Section II presents the empirical analysis. Section III considers the policy implications of the depletability and adjustment factors

Economics · Investment (military) · Microeconomics · Natural resource · Resource (disambiguation) · Scarcity · Supply and demand · Ecology · Global Energy and Sustainability Research · Natural Resources and Economic Development · Sustainable Development and Environmental Policy

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