Publications: Notes at the Margin

Hotelling [Inverted] (November 23, 2015)


Oil producers, in a way, have been prisoners of the Hotelling theory, which asserts that nonrenewable resources should be produced only if the price today exceeds the price offered for supply tomorrow by more than the discount rate multiplied by the current price. This principle has been widely cited by oil producers despite Adelman showing that it does not apply because oil is not an exhaustible resource. Today, however, the economic rule that applies is just the opposite: every producer should boost output until the marginal cost of production equals the price. Oil exporters need to recognize today that oil can no longer be considered a nonrenewable resource and that, because of this, Hotelling's concept is irrelevant.


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