Excerpt

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APPLICATION OF HOTELLING RULE FOR ANALYSING UTILISATION

PATTERN OF NON-RENEWABLE RESOURCES IN INDIA THROUGH

ABSTRACT: Hotteling Rule was evolved by Harold Hotteling as a result of analysis of non-renewable resource management, is a distinct theory which gives us clear idea of non renewable resource economics and provides a close insight into long run behaviour of price and supply in market for non renewable resources.

The paper deals with the application of Hotteling rule to Oil and Natural Gas Corporation (ONGC) to find the sustainability of the oil resources and analyse the reserve trend scenarios. ONGC is the only fullyintegrated petroleum company in India, operating along the entire hydrocarbon value chain. It also contributes to over 78% of India’s oil and gas production. The analysis was carried out taking 2000-01 as the base year till 2007-08 to find out the sustainability of the oil reserves of ONGC.

It is found that according to the baseline scenario, the resources would deplete in 3-4 years, but as every year new reserves are found, the resource is being sustainable since 2000. Thus Hotteling Rule is said to be indifferent for the firm and the firm is said to sustainable.

The paper also carries the assessment of the exhaustion rate of oil and natural gas in India considering 1990 as the base year. The exhaustion rate of the reserves is found to be 13 to 21 years until and unless there is a new reserve replacement.

Key words: Hotelling rule, Non-renewable resources, Oil and Natural Gas Corporation, Resource depletion,

Sustainability, Exhaustion rate, reserve replacement

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1. Introduction:

Hotelling rule was first evolved by Harold Hotelling as a result of analysis of non-renewable resource management, first published in the journal of Political Economy in 1931. A simple expression of the rule says that; “price of an Asset will rise at the rate of Interest Rate.” Energy and non renewable resources are assets, of which price rises over a period of time. Hotteling Rule is a theory through which we can define the net price and fluctuations in net price with time line. Price of resource will rise with the maximization of the rent in time of fully extraction of non renewable resource. This rent can be defined as Hotelling rent or scarcity rent which means maximum rent acquired while emptying or depleting the fixed stock.

1.1 Substitution of depleted resources by other sources

In terms of non renewable resource, supply is limited, therefore non renewable resource have scarcity value. Hotelling rule is a distinct theory which gives us clear idea of non renewable resource economics and provides a close insight into long run behaviour of price and supply in market for non renewable resources. The price of these non-renewable resources will vary in 2 conditions. Price will increase if the rate of return of the capital investment is larger than the capital depreciation rate. Price will remain constant when there is consistent production of resource.

1.2 Example of Hotelling Rule Application

One person own 50 barrel oil. Market price is 50 Rs/barrel. When he should sell this to get profit out of it? Consider rate of Interest 10% Æ Price today = P 0 Æ Price tomorrow = P 1 Æ Price after interest rate = 50 + 5 = 55 Æ If P 1 > 55, it is Non profitable so he should wait. Æ If P 1 < 55, Non profitable, he should sell it today. Æ According to Hotteling Rule, Equilibrium condition will be;

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P 0 = P 1

P 1 = P 0 (1 + r) = 50 (1+5) = 300

Price should rise at the rate of Interest.

Hotteling rule will also give future scenario of resource reserve and its sustainability over a period of time.

1.3 Concluding Remarks

x Hotteling rule provide a model of resource depletion which is the fundamental economic model useful to analyze issues related to utilization pattern of non renewable resources.

x According to this model, resource owner can look for to maximize the present value of net benefits from resource extraction. It also considers current demand trend for resource and constraints with respect to initial resource stock.

x The final outcome of Hotteling rule is scarcity rent = marginal revenue — marginal cost, increases at the rate of interest.

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