Frontiers of usefulness: The economics of exhaustible resources

The influence of Harold Hotelling's work in the field of mineral economics is both unusual and outstanding. In the 66 years since its development, theory surrounding the economics of exhaustible resources has only been significantly researched since the early 1970s. At that time a wave of research into the economics of exhaustible resources arose from the threat of global resource scarcity and continued into the late 1990s. Current East Asian and global demand for natural resources as well as mineral and metal commodities, has stimulated interest in the optimal and sustainable exploitation of exhaustible resources to the point that the subject is worthy of review. Hotelling's theory and the assumptions that he made in establishing a model for the optimal exploitation of mineral resources at the industry level and at the level of the individual mine owner, are examined. He showed that the rate of increase in exhaustible resource prices should be equivalent to the market rate of interest and that in a market with rising prices the rate of extraction should be constant. In markets where demand is stable optimal exploitation requires that the rate of extraction should decline over time, while in a monopoly market he showed that the rate of extraction is retarded. in addition, the effects of cumulative production on costs and prices, the uncertainty associated with estimates of the resource stock, the impact of exploration and issues of intergenerational equity are examined. An analysis of the optimal price path, extraction costs and mineral rents at an industry level is presented as a model. An analysis of the rates of production and optimal benefits at the individual mine level including total, average and marginal costs on the optimal rate of production, is considered. Optimal extraction rates for a mine with a clearly defined concave positive cost equation vary according to the position on the marginal cost curve. The influence of discount rates and the size of the ore reserves on the rates of mineral extraction are also examined and could define the frontier of usefulness for the,economics of exhaustible resources'.