Article Review: Natural Resource Economics under the Rule of Hotelling
In 1931, Harold Hotelling published an economic paper titled ‘The economics of exhaustible resources’ in the Journal of Political Economy. This paper would later go on to shape a whole new field of economics, the economics of natural resources (Gaudet, 2007). Though at the time not taken seriously because economists were more concerned with other much pressing economic issues such as the Great Depression, the paper laid both a theoretical and empirical framework for the functioning of natural resource markets and how to solve pertinent issues in this market (Gaudet, 2007). This framework later became the Hotelling rule. Seventy-five years later, another natural resources economist employs the same rule to examine how the natural resource markets have evolved regarding their extraction costs, market structure, the durability of resources and most importantly the rate of return of holding such resources (Gaudet, 2007). This essay, therefore, presents a review of an article that analyzes the dynamics of the natural resources market.
Gaudet (2007) begins by expounding on the significance of Hotelling’s paper and rule in the field of natural economics. Gaudet (2007) asserts that natural resources stocks held at one location i.e. in situ are physical assets and like any other physical assets their rate of return have to encourage their owners to continue holding onto them or to divest somewhere else. One of the factors that are common in the natural resource market e.g. the oil markets is the rapid fluctuations of prices. In his article, Gaudet (2007) tries to find out how the Hotelling rule can be used to eliminate the historical behavior of the flow of prices of resources especially exhaustible resources. This analysis will be very important to investors in the natural resources market because its findings will present a framework they can use to predict the future prices of resources and capitalize on their rates of return.
The dominant type of data that was used during the research and compiling of the article is secondary data. The article largely borrows from existent literature in the field of natural resource economics to make bold assertions about the state of natural resources markets. For example, Gaudet (2007) examines how Salant (1976) viewed the oil market as and oligopolistic market due to the presence of one dominant cartel i.e. OPEC. He also examines what other scholars in the field think of how durability and uncertainty of natural resources determine the prices of raw materials and eventually the rate of returns of resources.
Gaudet (2007) concludes his article by stating that natural resources have the similar market equilibrium conditions like other assets, and the only difference is that natural resources such as fisheries and forests yield a dividend in the form natural growth. The exploitation of such resources also brings about the issue of externalities and thus the net rate of returns have to incorporate the damages costs that are as a result of their exploitation. Gaudet (2007) asserts that the application of the Hotelling’s rule in the resource markets should be done simultaneously with the application of the concept of social optimality to reap the highest rate of return.
In conclusion, the article was superbly written with author prioritizing on simplicity and understandability of the reader. Gaudet (2007) captures and presents new ideas to the reader of the article in a manner that will not impede comprehension. He introduces general economic concepts e.g. market structure to a somewhat new field of economics (natural resource economics) and makes them appear that they have been part and parcel of the field from the onset. It is in this light that I would like to thank Gaudet (2007) for the brilliant piece that is his article. It was paradigm-shifting, educative and very entertaining.
Reference
Gaudet, G. (2007). Natural resource economics under the rule of Hotelling. Canadian Journal of Economics/Revue Canadienne D ‘économique, 40(4), 1033-1059. http://dx.doi.org/10.1111/j.1365-2966.2007.00441.x
