At 15:50 12/09/2002 -0700, Steve Verdon wrote:
>--- Chris Perley <[log in to unmask]> wrote:
>[major snip--sorry the post was getting too big]
>
>
>> Chris Perley here.
>>
>> I think there is another assuption in Simons view on price rises;
>> that is,
>> that there is a more or less linear relationship between resource
>> depletion
>> and prices rising.  I don't think there is.  They may stay the sae
>> or even
>> decline as stocks decline, and then shoot up at soe critical point.
>
>Minor quibble, not a linear relationship but a proportional
>relationship, that is when the supply goes down, the price goes up
>and as the supply increases the supply goes down.
>
>The thing is that there are a number of factors here that influence
>the price.  Price is not just a function of supply alone.  There is
>also demand, as well as other factors as well.  For instance,
>expectations.  If you think you are going to run out next week you
>will behave differently than if you are going to run out two years
>from now.
>
>The markets though do try to account for these in terms of futures.
>
>

And there is quite a body of economic theory, starting with Hotelling in
the 1930s, that explains how the price should rise as the stock of a
non-renewable resource approaches depletion.

If I remember correctly, the price minus the extraction cost rises at the
prevailing discount rate in such a way that the price reaches the cost of
the renewable replacement for the non-renewable resource at the moment the
non-renewable resource is depleted. Of course, the basic theory relies upon
perfect information about resource stocks, the cost of extraction, the cost
of the renewable replacement, and the link between demand and price over
time. It can be generalized to cover imperfect information, and I published
a couple of papers on this generalization in the 1980s; if anyone is
interested I can give the full citations. There was a lot of interest in
the topic in the late 1970s and 1980s as researchers tried to work out
whether the oil price rises of the time were signals of impending depletion
or due solely to cartel action by OPEC. We came to the consensus that it
was cartel action.

Chris



Chris Hope, Judge Institute of Management,
University of Cambridge, Cambridge CB2 1AG, UK.
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