Hotelling’s Theory

Posted in Finance, Accounting and Economics Terms, Total Reads: 319
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Definition: Hotelling’s Theory

Hotelling’s Theory strives to explain the conditions for supply of non-renewable resources. According to this theory, the most economically viable means of existence in the business is one where the price of that resource, increases at the rate of interest. This is to say, that the owners of these resources, will only produce the products if it yields more than alternatives available in the market for them already.


This theory is widely used by the market to understand the prices of oil, gas and such non-renewable resources.


Implications of this theory would mean that if the prices of oil rise faster than the existing interest rate, the producers would be better off retaining the oil in the ground and not extracting until a point in future since it yields them higher profits than the market securities such as bonds and deposits.

 

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