Hotelling's Theory


DEFINITION of 'Hotelling's Theory'

This theory proposes that owners of non-renewable resources will only produce a supply of their product if it will yield more than instruments available to them in the markets - specifically bonds and other interest-bearing securities. This theory assumes that markets are efficient and that the owners of the non-renewable resources are motivated by profit. Hotelling's theory is used by economists to attempt to predict the price of oil and other nonrenewable resources, based on prevailing interest rates.

BREAKING DOWN 'Hotelling's Theory'

The theory states that if oil prices do not rise at the prevailing interest rate, there would be no restrictions on supply. If, conversely, oil prices were expected to increase faster than interest rates, producers would be better off not bringing the oil out of the ground.

  1. Supply

    A fundamental economic concept that describes the total amount ...
  2. Demand

    An economic principle that describes a consumer's desire and ...
  3. Oil Sands

    Sand and rock material which contains crude bitumen (a heavy, ...
  4. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  5. Barrels Of Oil Equivalent Per Day ...

    A term that is used often in conjunction with the production ...
  6. Barrels Per Day - B/D

    A measure of oil output, represented by the number of barrels ...
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