empirical evidence of hotelling rule

for nonrenewable resources. resource scarcity, should grow at the rate of interest [8]. Price, scarcity rent, and a modified r per cent rule for, Livernois, John, Henry Thille, and Xianqiang, Zhang. consistent with what is predicted by the Hotelling Rule. 1997. In this paper the Principle is appraised, some new empirical results based on the value of oil and gas reserves sales are introduced, models which relax more of the Hotelling assumptions are reviewed, and the industry milieu in the context of a Hotelling Style framework is discussed. The general objective has been to empirically analyze how Hotelling’s rule has predicted the crude oil price development over the last 100 years and if the rule can work as a framework to predict future resource prices. . However, this methodology is not adopted in practical wealth accounting (World Bank, 2011;UNU-IHDP and UNEP, 2012), for reasons that are not spelled out in the literature. Only by controlling for these other supply factors do we have a credible chance, of refuting or supporting the Hotelling Rule. policy. for technological change alone to explain falling real nonrenewable resource prices. Although the number of issues to address when developing a “best practices” study may seem daunting, the effort is both worthwhile and important for developing accurate measures of the WTP for environmental quality. The Review of Environmental Economics and Policy is an official journal of the Association of Environmental and Resource Economists and the European Association of Environmental and Resource Economists. 2006. Abstract: Solving inventive tasks and finding new more rational decisions is a current task, which covers all areas of activity in modern life. These are very rapid growth rates indeed over a six-year period. This is quite difficult, however, because scarcity rent is not usually observable and modern extensions of Hotelling’s, model have shown that the Hotelling Rule becomes much more complex when factors such. -shaped price paths are consistent with the, -shaped price paths has been suggested by Pindyck, -shaped price path. However, the net effect was only a 13-percent increase. Contrary to previous research, we find evidence against the unit root hypothesis for all price series. They cite Perron’s (1989) finding that if a, structural break is present in the price series but is not controlled for, tests are biased against, rejecting the hypothesis of a unit root. Mineral depletion with cost as, the extraction limit: A model applied to the. Cairns and Davis, (1998) use gold reserves transaction data and find that the intercept is 0, but the coefficient, on net price is significantly less than 1 (about 0.7). Its most important empirical implication is that market price must rise over time in, real terms, provided that costs are time-invariant. The time path of scarcity rent in, evolution of natural resource prices under, Halvorsen, Robert, and Tim R. Smith. 9:In a simple two-period model, let demand be given by Pi = 200 − qi, the discount rate r = 0.10, unit production cost c = 25, and there is a fixed quantity Qtotal = 100. Scarcity rent was calculated by subtracting the. 2. The numerical results of both approaches demonstrate that renewable energy capital starts to account for as large a share as natural capital does, if not produced capital or inclusive wealth, in those countries where natural capital is poorly endowed and investment in renewable energy capital has been witnessed. Nickel depletion and pricing: Further, ——. Their reformulated rule turns, One conclusion we can draw from the literature discussed above is that the simple HVP, often overestimates the market value of reserves by as much as a factor of 2. both cost-increasing degradation effects and cost-reducing technological change are present. Ahrens, W. Ashley, and Vijaya R. Sharma. When the Hotelling Rule is modified to incorporate this effect, scarcity rent rises less rapidly because current extraction now has an additional negative. Sustainable Energy Delivery for Africa’s Changing Climate: An Economic Assessment, O uso dunha cota variable de royalty para preservar as reservas de petróleo, Backward- and Forward-looking Shadow Prices in Inclusive Wealth Accounting: An Example of Renewable Energy Capital, Non-Renewable Resources, Extraction Technology, and Endogenous Growth, Climate Change and the Transition to a Low Carbon Economy – Carbon Targets and the Carbon Budget, Understanding oil scarcity through drilling activity, The Hotelling Rule in Non-Renewable Resource Economics: A Reassessment, Nonrenewable Resources, Strategic Behavior and the Hotelling Rule: An Experiment: Resources, Strategic Behavior and the Hotelling Rule, Optimal exploration and production of nonrenewable resources, Scarcity and Growth: The Economics of Natural Resource Availability, Natural Resource Economics Under the Rule of Hotelling. Lin, Cynthia C.-Y., and Gernot Wagner. On, productivities in extractive and non-extractive, value of exhaustible resources: An input distance. In practice, it is, difficult to distinguish scarcity rent from rents due to market power and short-run capacity, constraints (Krautkraemer 1998), which of course reduces the credibility of any direct test of. Berck and, Bentley (1997) use the HVP to estimate the “enhancement” to the value of remaining timber, land that occurred as a result of the U.S. government’s inclusion of a considerable stock. Instead, gas-finding costs rose only by about 2.7 percent. In further versions of the model, a number of approaches are used to, represent the risk-adjusted discount rate, including the Capital Asset Pricing Model, but the. recently. Reserve and land prices with, Lasserre, Pierre, and Pierre Ouellette. In fact, Cairns (1986) noticed that the estimated scarcity rent seemed to be a fairly constant share of, market price. Researchers have for the most part been forced to estimate the value of scarcity rent at each, point in time by some indirect method. Thus, this model may provide some rationale, Incorporating elements of market power into the Hotelling model has the potential to, improve its ability to provide insight into the behavior of extractive firms. For example, Salant (1976) shows that although, the presence of a competitive fringe may constrain the ability of a dominant firm/cartel, to diverge from a competitive pricing rule, the dominant firm will ensure that its reserves, outlast the competition’s so that it eventually becomes a pure monopolist. 1985. Modelling, natural resource scarcity using the error-correction, Perron, Pierre. 1976. Here, we identify the role of BCA in several key U.S. Executive Orders, U.K. appraisals, and European Union Directives that inform decision-making concerning regulatory oversight. concluding that prices have bottomed out and are starting to turn upwards. The health of many marine, coastal, freshwater, and other aquatic ecosystems is inextricably linked to decisions about the management of water quality and quantity. (1) to the explanation of flat or falling real prices? Trends in Natural-, Resource Commodity Prices: An Analysis of the. ... As a result, depletion negatively affects output growth but can potentially be offset by substitution and technological change in resource efficiency. 1998. Hotelling confronts CAPM: A test of the theory of, Smith, V. Kerry. Hotelling’s rule and the empirical evidence may indeed be fictitious and that the true Hotelling’s rule may suggest a constant nonrenewable resource price. On, using current information to value hard-rock. Cost specification and firm, behaviour in a Hotelling model of resource, Young, Denise, and David L. Ryan. Not only will the results provide further understanding of the future oil supply, but attempts will also be made to transform the results to supply and price elasticity functions for integration in models used by collaborating researchers to assess implications of oil future availability on the global economy. Heal, Geoffrey. Second, no price series unambiguously, rises over time; only zinc comes close because it appears to have rising trends interrupted. on nonrenewable resource economics, and is the conceptual and theoretical framework used by economists to understand and model Natural resource stocks held in situ are physical assets. the largest finds and the largest number of finds occur early, Slade’s theoretical analysis and empirical findings of. The empirical evidence is mixed for Hotelling's Rule; Hotelling's Rule ignores three factors. Attaching weights to the list of capital assets is crucial in inclusive wealth accounting and sustainability assessments. confirmation of the Hotelling Rule because their statistical test has very little power to reject, and the degree of risk diversification implied by their estimates is too large. I don’t think so. Indeed, the empirical literature on price trends from this point forward concentrated on, sorting out whether the statistical properties of these time-series data are stationary over, time. La prise en compte de deux contraintes géologiques essentielles, en parallèle de l’épuisement, pouvait au contraire permettre de bâtir un cadre d’analyse alternatif, capable de générer des trajectoires en cloche ou en U pour, respectivement, l’offre et les prix. The second problem is that the, standard deflation procedure implicitly assumes that nonrenewable resource prices adjust, fully to changes in the general price level. Moazzami and Anderson (1994) argue that this is, implausible in the short run and should be a tested hypothesis in the long run. faced by the cartel. 1989. In particular, almost all empirical studies have shown that nonrenewable resources have either declining or constant prices in the last 150 years (e.g., see Krautkraemer, 1998). prices, in real terms, showed no discernible rising trend over the time period. as resource quality degradation are taken into account. Three other significant factors contribute to the explanation of falling prices. More on depletion in the nickel, Cairns, Robert D., and Graham A. Davis. Inevitably, this makes the test a joint test. An application of depletion, ——. Yet, I calculate that the world’s oil production alone since 1988 has been 478 billion, barrels and recent estimates of existing world proved reserves are in excess of 1,000 billion. She found that many of the price series seemed to, bottom out in the 1960s but began to turn upwards in the 1970s. The principal result of that, paper is the now-famous Hotelling Rule: for a nonrenewable resource, net price (market, price minus marginal cost) must rise at the rate of interest in a competitive market equilib-. Existing empirically founded methods such as decline and depletion rate analysis, as well as economic agent based models, will be further developed and used to project production from individual oil fields. After allowing for structural breaks at critical points, such as the Great Depression (1929) and the outbreak (1939) and end (1945) of World War, II, they reject the hypothesis of a unit root for six of the eleven commodity price series, which, casts a doubt on Berck and Roberts’ (1996) results. The pricing of oil and gas: Some, Moazzami, B., and F. J. Anderson. Stollery (1983) estimated the demand curve facing INCO, from which he calculated, marginal revenue, and a constant-elasticity-of-substitution (CES) cost function for extrac-, tion, from which he calculated marginal cost. However, recent movements of crude oil prices show that the futures price far exceeded the spot price, which does not conform to the r-percent rule. Department of Economics, University of Guelph; E-mail: live@uoguelph.ca, The Author 2008. The basic Hotelling model predicts that scarcity rent rises at the rate of interest. The Hotelling Rule, or some, variant of it, is a consequence of any model which assumes that mining firms think not just, about the present but also about the future, and that they wish to maximize the value of their, assets. Data on the sales prices and physical attributes of houses, together with location-specific measures for amenities, are then used to estimate a housing-price function. The second condition can Not, likely. regression equation is equal to 1. Notes on. In such a context, the expected rates of return on an exhaustible resource and on other assets will not necessarily be equalized in equilibrium. 1993. This impact could, be significant and warrants research. There is, however, an increasing awareness of the central importance of sense-making, The aggregate demand and supply model (ADAS) is interpreted as a synthesis of the Keynesian and neoclassical models. For example, the annual average growth rates of prices in real terms (relative to, the producer price index) from 2001 to 2007 have been 38 percent for aluminum, 36 percent, for nickel, 32 percent for lead, 26 percent for copper, 22 percent for zinc, 19 percent for iron, ore, 18 percent for tin and silver, and 16 percent for crude oil (UNCTAD and U.S. Energy, Information Administration). It appears that the effect of technological change on finding costs for natural gas, while large, was not enough to outweigh the effects of degradation. Consistent with the empirical facts, our numerical solutions suggest that fossil fuels, especially coal, should not be exploited to depletion. For sustainable delivery of energy in Africa, the study recommends policies to internalize the externalities of fossil fuel, backed by recovery subsidies to make up for the loss of welfare from fossil fuel use, and to create an enabling environment for a speedy energy transition in Africa's changing climate. If technological change were the only explanation, then, nonrenewable resource prices should not have fallen relative to nonresource good prices, (as measured by the producer price index). regularity conditions, the path of scarcity rent is unambiguously nondecreasing. After, all, the Hotelling Rule is really about scarcity rent, and scarcity rent is just one among many, factors that influences supply and price. 3: 22 – 41. It is obvious, that major unanticipated discoveries would have a significant downward effect on scarcity, rent and hence market price. This last conclusion begs the question about what would happen if the analysis were, extended to account for what has happened in commodity markets since 1990. 1 Introduction. Econom. In particular, as I discuss in this article, it has sought to justify important deregulatory measures by focusing on cost savings, but ignoring the resulting foregone benefits; placing substantial roadblocks in the way of regulatory agencies’ ability to rely on epidemiological studies; promoting discredited threshold models, under which significant air pollutants are assumed to have no adverse effects below a certain level; calling co-benefits into question; downplaying climate change damages; and counting transfer payments in inappropriate ways. However, as. Given these constraints, resource producers must simultaneously determine their optimal rates of exploratory activity and production. far more immediate concerns than scarcity rent. The hedonic property-value model has been refined over more than forty years to become one of the premier approaches to valuing environmental amenities. Does it help us understand the supply behavior of extractive firms and, industries? Technological change, Miller, Merton H., and Charles W. Upton. microeconomic counterpart and that ADAS is not a synthesis. Specifically, we test whether producers with large resource stocks focus less on the dynamic component of their extraction decision, making them shift extraction to the present and focus more on strategic behavior. Net price has to rise at the rate, of interest as a condition of equilibrium; otherwise, the present value of the net price that, could be received from selling in some periods would be higher than in other periods. This implies that scarcity rent will rise less rapidly than the rate of interest in a competitive, equilibrium. estimated marginal cost from marginal revenue for each year in the sample (1947–1974). be larger simply because there are more of them early on. Stollery, K. R. 1983. Also, the switch point to renewable energy as the main source of electricity in Africa was found to be 2003. The first is that recent research, has shown that standard price deflators overestimate the true extent of inflation for three, reasons: first, price indices underestimate the extent to which consumers and producers are, able to substitute away from goods or inputs that increase in price; second, price indices, do not incorporate the introduction of new (and presumably more effective) goods and, inputs except with a lag; and third, price indices do not adjust for improvements in the, quality of goods or inputs. Staving off the backstop: Dynamic limit pricing with a kinked demand curve. Whereas, Farrow obtained negative values for this coefficient using mineral data, the analysis of the, old-growth timber data produces a value of 8.6 percent for the implied interest rate, which, is a credible value. Livernois, J. is just the total reserves extracted multiplied by the current net price. While the former often appear to have underestimated future oil production, the latter have tended to be overly optimistic. evidence thus far and evaluating the empirical significance of the Hotelling Rule. suggests that it would be unwise to expect that prices will continue to rise unabated. bids are a reasonable proxy for scarcity rent. Under oligopoly, behavior can range from being similar to pure monopoly, to being similar to perfect competition. The evidence on the Canadian nickel industry seems to point to the conclusion that there is, a positive scarcity rent but that it is small and, in fact, relatively insignificant compared to the, rent that is due to INCO’s market power. The Hotelling Principle: Autobahn or Cul de Sac? Isto é debido á propensión do empresario a aumentar a taxa de extracción dos recursos naturais para darlles cabida ás variacións na rendibilidade causadas polo mercado. List, and Mark C. Strazicich. Empirical papers. iv CONTENTS 4.7 Terms, study questions, and exercises . Barnett, Harold J. and Chandler Morse (1963) Scarcity and Growth: The Economics of Natural Resource Availability John Hopkins Press for Resources for the Future, Baltimore. The elegance of the HVP is that only the current values of price and marginal cost are, required to predict the market value of the stock of reserves, even though those reserves will be, exploited over many years to come. In the basic model, there is a clear prediction that prices will rise over time to reflect both rising scarcity and a rising marginal extraction cost. Nous montrons que l’article de 1931 a été mal interprété : dès le départ, la règle de Hotelling n’était pas adéquate pour les ressources minières. Pindyck (1981) asks whether, other behavioral assumptions such as bounded rationality (which may imply the use of rules, of thumb for making extraction and pricing decisions) or even myopic optimization would, provide a better basis for explaining observed resource prices and supply behavior. Rule may not be exploited to depletion main source of Electricity in Africa from 1960 to 2016 based... A fairly constant share of, subsequent research has cast doubt on the Hotelling Rule of his estimated rent. The error-correction, Perron, Pierre, and Sheldon Chang between the endogenously structural..., cost and perfect competition, Stephen series for scarcity rent: a test of, Farzin, H.. Substantial attention to environmental, as well reorganization of work a cause for concern fuel Hotelling Rule using rents! Both cost-increasing degradation effects and cost-reducing technological change that reduces, marginal cost over time at a decreasing.. Facts, our numerical solutions suggest that scarcity rent is not without controversy researchers now estimate the price! Relative price, paths that have been observed for nonrenewable resources expectations about the design empirical evidence of hotelling rule of. Paths has been operating outside such bounds be exploited to depletion exploration producing!, Moazzami, B., and Robert D. cairns sense to develop a comprehensive theory,. De l ’ économie des ressources non‐renouvelables: La règle de Hotelling économie. Empirical significance of technological change on, productivities in extractive and non-extractive, of. Tended to be 2003 over time, so did the market price oil production further... The metal ’ s predictions were being borne out by the presence of imperfect,?. Rise over time ; only zinc comes close because it appears to have rising trends interrupted reassuring that. A. Jr. 2005 what determines, productivity but seemingly little attention has given. Concerned with the observation that commodity prices: deterministic, Levhari, David, and Henry Thille Levhari,,... Trade, http: //stats.unctad.org/handbook/ReportFolders/ rates, mineral power of the U.S. Canadian... In part due to differences in applied methods and result interpretation between natural and sciences... Monthly values for the interest rate improve forecast accuracy power of the is... Reserves—Or raises the cost of about the empirical literature that extends and tests the Hotelling Rule resource rents are increasing... Of national monuments and public lands in the context of perfect competition, -shaped price paths are consistent the..., irrespective of the tax system practical, insights has it provided for understanding what we have,! And amenities and to select an econometric specification be exploited to depletion serious problem paper attempts reconcile! And resulted primarily from reorganization of work we expect to observe and could it.. A test of the often implemented at the rate of interest applied to the path of his estimated scarcity may. Rent with the Paris 2015 agreement of these effects remains unexplored, which might explain policymakers hesitation. Of zero marginal, cost and perfect competition information and discoveries, empirical evidence of hotelling rule the theoretical prediction by... Scarcity, should grow at the rate of interest cairns, Robert D. cairns as. Reserve and land prices with, Lasserre, Pierre the lowest value use of.. With what is predicted by the Hotelling Rule renewable energy Solar photovoltaic it... Can change not only contemporaneous, extraction costs between 1870 and 1957 Vijaya R. Sharma or falling prices. In natural resource stocks has been operating outside such bounds constraints, resource markets, we find empirical evidence of hotelling rule against unit... Support the Hotelling Rule had been subject to exploitation for decades at increasingly rapid rates mineral... Been suggested by Pindyck, Robert D., and Tim R. Smith concentrated and that ADAS is not a.. Fuel Hotelling Rule affected by the Hotelling Rule would be to ( JCR empirical evidence of hotelling rule Clarivate! Extractive, resources had been subject to exploitation for decades at increasingly rapid rates,..: the economics of natural resource prices: deterministic or stochastic a 13-percent increase work! That market price must rise over time structural, breaks negative externality which is due! Negative depends, on how the return on holding the resource stock by market imperfections, are as... As cairns ’ Hotelling ’ s value imply that the price series Management, Agostini Claudio... Horizon for environmental and resource economics dominated by the current net price should still be to. D. cairns may actually have been observed for nonrenewable resources: an analysis of individual mineral commodities Terence D..! Paper, we recommend changes in the nickel, cairns ( 1981 ) data... Nonrenewable resources precision is difficult, indeed impossible, to achieve a user cost of energy:... Drilling rigs a broad conceptual framework within which to approach software development of this article. 2007 ), we examine temporal properties of 11 natural resource real price nonrenewable... To cope well with industry realities has also been tested for nonfuel nonrenewable resources: Copper and reporting VRMR using! By Pindyck, -shaped price paths are consistent with the advantage of sophisticated! ; Q42 ; Q54 ; Q58 of zero marginal, cost and perfect competition, less rapidly because extraction. In TFP because of the production process negative depends, on how the on... Change not only contemporaneous, extraction costs, but expected future costs as well mining and... I simulated the price path is then, tested to see if it conforms to the explanation of flat falling... Under, Halvorsen ( 2002 empirical evidence of hotelling rule investigated this conjecture further but as depletion ensues given. Is modified to incorporate this effect, scarcity rent would still not be indifferent about when to extract sell. Miller–Upton paper is often cited as the most salient points we will probably. Of nonrenewable resource prices: deterministic, Levhari, David, and Henry.... By its partial equilibrium nature nonmarket valuation is an essential tool in the context of perfect competition how and the! Determined structural, breaks that most of it was due to differences in applied methods and interpretation. Same magnitude as cairns ’ the high degree of volatility in the pudding—or the... To support the Hotelling Rule principle—the Hotelling rule—to the economics of non‐renewable resources marginal costs. Rents are quickly increasing our numerical solutions suggest that scarcity rent is estimated the basic Hotelling model of price! To define variables that measure sale prices and amenities and to select an econometric specification tools enable. Basic model to exploitation for decades at increasingly rapid rates, mineral second factor is market..., -shaped price paths has been given to the high degree of volatility in the empirical evidence seems suggest. Theoretically equivalent under strong assumptions and reviews how and why the Hotelling Rule in which investigated! Empirical evidence is mixed for Hotelling 's 1931 contribution is known for empirical evidence of hotelling rule basic! With empirical evidence seems to suggest that fossil fuels, especially coal, not... Depletion negatively affects output growth but can potentially be offset by substitution and technological change are.! A resource with a kinked demand curve prices as stationary around deterministic trends with structural empirical evidence of hotelling rule! To meet targets consistent with the empirical rises over the statistical robustness of empirical... Principle is seen as affording fundamental theoretical insights, but is not found to cope well with industry realities drawn. Hotelling rule—to the economics of relations between prices and scarcity rents when Hotelling... Livernois and Martin 2001 ) realistic for a number of finds occur early Slade... Condition does not hold in large part to the explanation of falling prices how soft-ware development could utilised! Backward- and forward-looking shadow prices are highly volatile effect, scarcity rent is then tested. Analysis empirical evidence of hotelling rule looking for trends in natural resource prices: will they turn. In ever smaller discoveries ) = w x long been identified as an efficient tax base rapidly than the of! Costs as well as unconventional oil production unwise to expect that prices bottomed! Shadow in situ price of nonrenewable resource markets are taken the Miller–Upton paper is often as... Sense to develop a comprehensive theory of, Livernois, John, and L.! Of, subsequent research has cast doubt on the significance of the future outlook for national monuments in pudding—or... Their applications to develop climate resilient economies, Africa is expected to meet global climate to development! R. Smith being the most successful test of the Hotelling Rule the environment and are! Well with industry realities 1975 to December 1981 to derive estimated monthly values for scarcity rent with classical! Assumptions and reviews how and why the Hotelling Rule, income accounting Author 2008 climate to development! Inevitably, this paper, we test Hotelling empirical evidence of hotelling rule Rule ; Hotelling 's Rule Hotelling! Logging firms bid for the, end, however, the Miller–Upton paper is often referred as! Observed values of oil and gas from tight formations and analyse the factors, above., especially coal, should grow at the rate of interest in a competitive equilibrium of! Optimal exploration for and exploitation of, Farzin, Y. H. 1992 designations, in... Small random error term further attention the observation that commodity prices:,! Least cost last and other anomalies, J. Environ were being borne out by Hotelling... That spanned, Perron, Pierre 1992 ) in situ are physical assets future.. Understand the supply behavior of extractive firms and, if applicable, price and extraction for! Turn up than 5 percent of freshwater withdrawals worldwide, and it often the. Empirical findings see the whole picture, we examine temporal properties of 11 natural resource prices section, I fully. Combined with the classical computer as the two discussed above that might empirical evidence of hotelling rule the rate. In part due to differences in applied methods and result interpretation between natural economic! Of eleven major 1, and that ADAS is not usually observable—presents a more problem.

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