I've been downright giddy lately. You see, since I started teaching environmental economics I've always taught the non-renewable resource model developed by Harold Hotelling in 1931. The model is a piece of mathematical beauty that makes it great for the classroom. It is elegant and its logic appears to be irrefutable. The logic is simple enough: if prices weren't going up, the owners of the resource would be better off extracting it all really fast and putting their money in the bank. So it must be that resource owners expect prices to go up. Unfortunately, if you look at the path of prices between 1900 and 2005, it's been a bumpy ride, but mostly in the downward direction.
Now of course the simple model doesn't hold up in the complex world where political forces and uncertainty prevail. But I think it is fair to say that many if not most natural resource economists are a bit frustrated that the economic forces behind Hotelling's model seem to be perpetually swamped by the other forces that are out there in the world.
And then oil hit $60 per barrel and there's no end in sight. The New York Times Magazine's cover article last Sunday was entitled The Breaking Point and was all about the increasing speculation that prices are finally going up and up and up.
Now I've seen no one in the popular press cite Hotelling's 1931 masterpiece and, again, the factors affecting prices are complex. But there is some evidence that at last long-term force of economics is finally driving the price process for oil. At last my class will not giggle when I close the proof and proclaim that resource prices will tend to go up.
Or will they? There are skeptics out there who believe that this is a bubble that, like all others, will pop soon leaving me once again with a hollow theoretical model without empirical reality. John Tierney, in his opinion piece in this morning's New York Times proclaims himself to be a disciple of Julian Simon, and has literally bet that prices will go down (or at least won't go way up). Simon was the godhead of the Cornucopian school of thought and famously bet that a collection of resource prices would go down thanks to human ingenuity instead of up due to scarcity. Simon won the bet and Ehrlich, a infamous doomsayer, paid up a $576.07 settlement in 1990.
Tierney offers to take all comers: "show me the money," he boasts. But despite my faith in Hotelling, I'm not putting my money where my math is.
