Hotelling rule
Topic: Environment and Sustainable Development · NCERT: Beyond NCERT
Meaning
The Hotelling rule (Harold Hotelling, 1931) describes the best way to use up a non-renewable resource over time. It says the net price should rise at the rate of interest. Net price means the market price minus the extraction cost. The logic is simple: oil left in the ground is an asset. The owner will keep it there only if its value grows as fast as money kept in a bank would.
Example
An oil-field owner can pump oil today, sell it and put the profit in the bank. Or the owner can leave the oil underground for next year. If the net price of oil is rising more slowly than the interest rate, extracting now is better. If it is rising faster, waiting pays. Extraction reaches balance only when the net price rises exactly at the rate of interest.
Don't confuse with
- Reserves-to-production life: this only counts how many years the reserves will last at today's output. It says nothing about how fast a resource should be extracted or how its price should move.
Related concepts
- Environment
- Biotic and abiotic components
- Functions of the environment
- Renewable resources
- Non-renewable resources
- Reserves-to-production life
- Carrying capacity
- Absorptive capacity
- Environmental crisis
- Supply-demand reversal of environmental resources