An Introduction to Economic Growth Theory and the Oil Market
The reliance of production and economic growth on natural resources, specifically oil, may result in a decline on economic growth due to resource constraints.
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An Introduction to Economic Growth Theory and the Oil Market
The reliance of production and economic growth on natural resources, specifically oil, may result in a decline on economic growth due to resource constraints. Malthus (1803) was one of the first who attempted to answer the question whether natural resources hinder or even limit economic growth. He concluded that an exponential increase in population cannot be sustained with a modest linear increase of food production. The finite agricultural production possibilities due to limited land availability would result in the starvation of the excess population. The scarce natural resource, land, leads to long-term economic stagnation. Shortly after Malthus described his theory the industrial revolution began. The industrialization helped western European countries to escape the Malthusian trap. In the pre-industrial era, the economy was based primarily on land and renewable resources, e.g. agricultural crops, wood, water, and wind. This changed dramatically with the industrial revolution. The economy is now based more heavily on exhaustible resources, initially coal and now oil. The finite nature of nonrenewable resources implies that an economy faces a trade-off between the present and the future. What effect the exhaustion of resources has on economic growth and welfare became relevant. Starting with Hotelling (1931) various economists studied the optimal extraction of exhaustible resources and the resulting limits to economic growth. According to the basic Hotelling rule, the extraction of nonrenewable resources is most socially and economically profitable when the price of the resource increases with the
M. Merz, Scarce Natural Resources, Recycling, Innovation and Growth, BestMasters, DOI 10.1007/978-3-658-12055-9_2, © Springer Fachmedien Wiesbaden 2016
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2 An Introduction to Economic Growth Theory and the Oil Market
rate of interest (no arbitrage condition). Overall social welfare requires that the consumption of resources in production today is balanced with the consumption of future production. This would result in the partial extraction of the resource over time. It, however, has been empirically proven that there are many other factors affecting the price of natural resources.2 A prominent example is crude oil. In the last century the real price of oil has fluctuated significantly.
P rice per Barrel (2013 Dollars)
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Fig. 2.1: Real Price of Oil, 1861-2015. Source: BP (2014) Statistical Review of World Energy, extended to 2015.
The basic Hotelling’s rule would suggest an increasing price behavior. The oil price, however, has been more dependent to political factors and to the market power of OPEC (Organization of the Petroleum Exporting Countries, the intergovernmental cartel that controls about 75% of the world’s crude oil supply) 2
Possible expansions of Hotelling’s rule are suggested by e.g. Krautkraemer (1998) and Gaudet (2007).
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