Limits on the Extraction of Fossil Fuels

Abstract

In this chapter, we present a study of non-renewable resources and their optimal extraction as it was proposed by Hotelling (1931) together with the predictions of their price movements over time. We contrast Hotelling’s predictions with the actual price movements. While Hotelling mostly assumes competitive markets, we use a monopolistic market structure. Empirical facts are replicated by presenting numerical solutions of the dynamic paths for the extraction of resources, price movements, and their impact on the environment and sustainable growth. Most importantly, we detect U-shaped patterns and monotonically increasing trends in resource prices in later periods; these are associated with a decline in discoveries and availability of reserves.