Hotelling’s Theory

Hotelling’s theory, or Hotelling’s rule, posits that owners of non-renewable resources will only produce a supply of their basic commodity if it can yield more than available financial instruments, specifically U.S. Treasury or other similar interest-bearing securities. This theory assumes that markets are efficient and that the owners of the non-renewable resources are motivated by profit. Hotelling’s theory is used by economists to attempt to predict the price of oil and other nonrenewable resources, based on prevailing interest rates. Hotelling’s rule was named after American statistician Harold Hotelling.