What Are Limited Resources in Economics?

Coal Mine Canyon image by HannaSigel from Fotolia.com

As modern oil prices continue to rise and energy companies are more readily searching for alternative fuel, the economics of non renewable resources has come to the forefront of public concern. Non renewable resources represent a broad class of natural substances that cannot be replenished, or replenish so slowly that doing so would be unfeasible. Non renewable resources power large industries within the global economy.

Types of Non Renewable resource

The non renewable resources most familiar to the public are the coal, oil and natural gas used for fuel. All three of these substances form naturally over millions of years and under high amounts of pressure from the decomposition of organic matter. Uranium is also a non renewable resource.

Economists often debate over which metals or minerals can be classified as non-renewable. Many, such as tin, can be recycled over and over again and thus not expendable. Other metals however, particularly the rare earth metals used in modern technology, are so rare and essential to electronic components that even their recycling won't be able to keep up with demand.

Hotelling's rule

In 1931, Harold Hotelling defined the economics of non renewable resources and their management. Hotelling postulated that even if a non renewable resource were to be managed with perfect efficiency, the price of the resource would be ever increasing. Thus, to maximize the resources value over the period of available extraction, the percentage price increase over any period of time should equal the real interest rate.

Despite Hotelling's supposition that non renewable resource prices must constantly increase, this has not always been observed in practice. Some factors found to affect the price of commodities are the ability to substitute them for other resources and the long term behaviour of real interest rates.

Hartwick's rule

Hartwick's rule is used to address the problem of decreasing real equity caused by the use of consumable, non-renewable resources. As society consumes resources, its value decreases. To offset this decrease, and thus ensure that future generations have equal or better net equity, Hartwick's rule is used to calculate the amount of capitol investment needed to offset the losses from consumption. For example, an economy like Saudi Arabia that has been largely built on oil exports losses value with every barrel exported. To offset these losses, the Saudi Arabian economy invests in infrastructure and diversifying interests. The added value gained from these investments counteracts the losses from oil exports.

SocioEconomics of Non Renewable Resources

In practice, fear and politics play a large role in the price of non renewable resources. Oil prices are an example of this trend. The oil reserves in the Niger Delta have led to violent clashes between the government and various militia groups.The conflicts have significantly limited exports out of the area and affected global fuel prices.

As of early 2011, speculation has led to rising oil prices following the Egyptian protests against President Hosni Mubarak. As concern grows over the political and economic stability of the region, economists and speculators worry access to the Suez Canal, a major shipping channel, will be limited or cut-off entirely.