Tyler Cowen on Resource Prices

Even a Libertarian thinks resource prices may rise:

How robust are Julian Simon's predictions?

Not the ones about population, the ones about falling real resource prices.
Here is a simple model: it is easier to transfer technologies of resource extraction than it is to transfer most other technologies.  In other words, Nigeria has low TFP but still their oil rigs work pretty well.
If that's true, when the wealthiest economies are opening up a commanding lead in terms of living standards, real resource prices should be falling.  Nigeria can supply a lot of oil without demanding very much.
When most of the growth is catch-up growth, the poor countries demand more resources but supply technologies are not racing so quickly ahead.  Real resource prices are more likely to rise.
There is a long history of falling real resource prices, but is this simply reflecting the fact that the last three hundred years don't offer many periods of catch-up growth?  Now, an era catch-up growth seems to be upon us.  So why should we be so confident that Simon's predictions will continue to hold?
One doesn't need to be a Malthusian to think resource prices will rise.  In fact, it's quite the opposite.

This is somewhat related to the thesis of my dissertation: For a long while perhaps the greatest uncertainty with resource prices had to do with supply, either physically or in its distribution.  Today it seems a lot of the uncertainty is demand driven, stemming from uncertainty about growth in South America, Asia and possibly (hopefully) Africa.  When demand uncertainty is greater than supply uncertainty, natural resource prices are likely to be positive beta assets.  By this I mean prices will rise most following good news, like more growth in the catch up countries than expected.  This is quite the opposite of past price spikes, which were linked to bad news about supply, say an embargo or war in the Middle East, which had made resources negative beta assets.

According to Hotelling's rule, to a first approximation, prices of nonrenewable resources should go up at the rate of interest. So, now with likely positive betas and higher risk-adjusted rates of return needed for resource investments, prices are likely to go up a lot more.  When resource prices had negative betas, that risk-adjusted interest rate may have been close to zero.  Today it's looking quite positive--yet another reason resource prices are likely to rise.

Why Julian Simon was so convinced of ever decreasing prices, I do not know.  It just doesn't fall out of the basic economics.  I'm not even sure it follows from blind optimism.


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