Prices in scarce commodity markets follow two distinct trends (Margaret Slade):
Hotelling effect:
long-term scarcity results in prices
that increase over time.
Innovation effect:
technological innovations reduce
exploration and extraction costs;
results in prices that decrease over time.
What does the evidence suggest?
Answer: Both trends are apparent in the data.
As a result, they follow the following price paths:
For Copper:
For Silver:
Petroleum, follows a similar path. As seen in the graph in Wolfe's post below, we are clearly on the later part of the trend.
Thanks to Michael Moore.
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3 comments:
i understand the empirical evidence. However, i don't understand the Hotelling Effect wouldn't swam in the long term. It shouldn't matter whether or not the tech is efficient. The supply/demand relationship should push the prices higher because of the limited quantites
It would actually do the opposite. As the backstop becomes more affordable, it becomes a substitute for the comparable natural resource.
For example, if a backstop like solar became cost effective, demand for petroleum would decrease, resulting in corresponding decrease in price.
We will never run out of crude oil.
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