Origins and basic logic
Oil or ore in the ground, once extracted, is gone for good. Lewis Gray (1914) pointed out that extracting such a resource carries a cost beyond production cost: the forgone opportunity to use it later. Harold Hotelling (1931) formalized this as a problem of dynamic optimization. A resource owner can either extract a unit today, sell it and invest the proceeds at the rate of interest, or leave it in the ground and sell it later. For the two options to yield the same return in a competitive equilibrium, the net price, or scarcity rent, must rise at the rate of interest. Because this has the same structure as an arbitrage condition in asset markets, it treats resources in the ground as a capital asset. The argument rests directly on the idea of present value and discounting.
Intergenerational equity and extensions
The oil shocks of the 1970s revived interest in Hotelling's paper. In his Ely Lecture, Solow (1974) examined the link between exhaustible resources and sustainable consumption, while Dasgupta and Heal (1974, 1979) analyzed the conditions under which reproducible capital can substitute for resources in production. Hartwick (1977) proposed what became known as Hartwick's rule: if all rents from a resource are invested in reproducible capital, consumption per head can be held constant. Pindyck (1978) incorporated exploration that adds to reserves, and later work modified the rule to allow for falling extraction costs, technical change, market power and uncertainty. In these extensions the net price may rise more slowly than the interest rate or even fall for a time.
Empirical tests and assessment
Contrary to the rule's prediction, the real prices of many commodities showed no clear upward trend over the twentieth century. Slade (1982) proposed a U-shaped path in which prices first fall and later rise, while Miller and Upton (1985) found that the market values of oil and gas producers were explained to a considerable degree by the Hotelling valuation principle. Krautkraemer (1998) and Livernois (2009) concluded that technical progress, new discoveries and measurement problems make simple price tests difficult. Gaudet (2007) argued that the underlying arbitrage condition, rather than the price prediction itself, remains the core framework of resource economics. The principle also connects to discussions of resource-dependent economies such as Dutch disease.
FAQ
- What is Hotelling's rule in simple terms?
- Because leaving a finite resource in the ground is itself a form of investment, its scarcity value must rise at the interest rate for owners to be indifferent between extracting now and extracting later.
- Why have real resource prices not followed the rule?
- Many economists attribute this to new discoveries, better extraction technology, falling costs, market structure and uncertainty, which have offset the rise in scarcity rent.
Sources reviewed: 2026-10-26
References
- Hotelling, H. (1931). The economics of exhaustible resources. Journal of Political Economy, 39(2), 137–175.
- Gray, L. C. (1914). Rent under the assumption of exhaustibility. Quarterly Journal of Economics, 28(3), 466–489.
- Solow, R. M. (1974). The economics of resources or the resources of economics. American Economic Review, 64(2), 1–14.
- Dasgupta, P., & Heal, G. (1974). The optimal depletion of exhaustible resources. Review of Economic Studies, 41, 3–28.
- Dasgupta, P., & Heal, G. (1979). Economic Theory and Exhaustible Resources. Cambridge: Cambridge University Press.
- Hartwick, J. M. (1977). Intergenerational equity and the investing of rents from exhaustible resources. American Economic Review, 67(5), 972–974.
- Pindyck, R. S. (1978). The optimal exploration and production of nonrenewable resources. Journal of Political Economy, 86(5), 841–861.
- Devarajan, S., & Fisher, A. C. (1981). Hotelling's “Economics of exhaustible resources”: Fifty years later. Journal of Economic Literature, 19(1), 65–73.
- Miller, M. H., & Upton, C. W. (1985). A test of the Hotelling valuation principle. Journal of Political Economy, 93(1), 1–25.
- Slade, M. E. (1982). Trends in natural-resource commodity prices: An analysis of the time domain. Journal of Environmental Economics and Management, 9(2), 122–137.
- Krautkraemer, J. A. (1998). Nonrenewable resource scarcity. Journal of Economic Literature, 36(4), 2065–2107.
- Gaudet, G. (2007). Natural resource economics under the rule of Hotelling. Canadian Journal of Economics, 40(4), 1033–1059.
- Livernois, J. (2009). On the empirical significance of the Hotelling rule. Review of Environmental Economics and Policy, 3(1), 22–41.