Non-Renewable Resource
A non-renewable resource is a natural resource that is available in a fixed quantity and that cannot be replenished on a human timescale. Non-renewable resources include fossil fuels, minerals, and metals, and their depletion raises issues of sustainability and of intergenerational equity.
Characteristics
Non-renewable resources are available in a finite quantity, and their extraction reduces the stock available for future use. The resource is therefore a form of natural capital that is depleted by use.
The resources differ in their abundance, in the cost of extraction, and in the environmental effects of their use. The reserves of a resource are the quantities that can be economically extracted at current prices and with current technology, and the reserves change with prices and with technology.
Optimal Depletion
The theory of optimal depletion analyses the rate at which a non-renewable resource should be extracted. The analysis is based on the principle that the resource should be extracted so that the present value of the marginal benefit is equal across time periods.
The Hotelling rule states that the price of the resource, net of the cost of extraction, should rise at a rate equal to the interest rate. The rule implies that the resource is extracted more slowly when the interest rate is low, and that the price rises over time as the resource becomes scarcer.
The rule is a benchmark, and its assumptions are restrictive. It assumes that the resource is owned by a single agent, that the market is competitive, and that the costs of extraction are known. When these assumptions are relaxed, the extraction path may differ.
Economic Issues
The depletion of non-renewable resources raises issues of sustainability. The use of the resource reduces the stock available for future generations, and the compensation for the depletion requires investment in other forms of capital.
The revenue from the extraction of a resource is a form of rent, which accrues to the owner. The taxation of the rent and the management of the revenue are central issues in resource-rich economies. The design of the fiscal regime affects the incentive to extract and the distribution of the benefits.
The extraction of resources also generates environmental externalities, including pollution and the degradation of the environment. The internalisation of these externalities is a central issue in the design of policy.
Policy
The policy issues concern the rate of extraction, the taxation of the resource, and the management of the revenue. The design of the fiscal regime must balance the objective of capturing the rent against the need to attract investment.
The management of the revenue raises questions of the use of the funds. The establishment of a sovereign wealth fund is one approach, in which the revenue is saved and invested for future generations. The approach is used in several resource-rich countries, and it is intended to convert the resource wealth into other forms of capital.
Resource Curse
The resource curse refers to the tendency of resource-rich countries to experience slower growth, weaker institutions, and more conflict than countries with fewer resources. The phenomenon has been documented across a range of countries and periods.
The explanations of the curse include the volatility of commodity prices, which complicates the management of the economy, and the appreciation of the exchange rate, which reduces the competitiveness of other sectors. The explanations also include the effect of resource revenue on the quality of institutions, since the revenue can weaken the accountability of the government.
The management of the revenue is central to the avoidance of the curse. The establishment of a sovereign wealth fund and the adoption of a fiscal rule can help to smooth the effect of the revenue and to preserve the wealth for future generations.
The Hotelling Rule
The Hotelling rule is the central result of the theory of exhaustible resources. The rule states that the price of the resource, net of the cost of extraction, should rise at a rate equal to the interest rate.
The rule implies that the resource is extracted more slowly when the interest rate is low, and that the price rises over time as the resource becomes scarcer. The rule also implies that the resource rent is the return to the owner of the resource, and that it should be taxed or saved for the future.
The rule has been extended to account for the exploration of new resources, for the improvement of the extraction technology, and for the presence of uncertainty. The extensions have refined the analysis and have improved the understanding of the extraction path.
Transition to Renewable Resources
The transition from non-renewable to renewable resources is a central challenge for the economy. The transition requires the development of renewable sources of energy and of the technologies that use them.
The transition raises issues of the pace and of the cost. A rapid transition may disrupt the economies that depend on the extraction of fossil fuels, while a slow transition may fail to address the environmental objectives.
The design of the policy must balance the objectives and must manage the distributional consequences. The instruments include the pricing of carbon, the support for research and development, and the assistance to the affected regions and workers.
Summary
Non-renewable resources are available in a fixed quantity, and their depletion raises issues of sustainability and of intergenerational equity. The Hotelling rule, the resource curse, and the transition to renewable resources are central to the analysis of the economics of exhaustible resources.