Energy and Natural Resources Economics

Natural resources are "gifts of nature," but their value depends on human effort, knowledge, culture, and ingenuity, and on the circum stances in which people have access to the resources. 

As with other markets, incentives matter in resource markets. Both the quantity demanded of a resource, and the quantity supplied, depend on the resource price. Substitutes can be found everywhere. Both the demand and the supply curves will be more elastic when buyers and sellers have more time in which to respond to a price change.

Information about the future availability of a natural resource is costly, and proved reserves of a mineral resource are equivalent to an inventory. It is not desirable to discover and verify an oil field or a mineral deposit too far in advance of when it will be used.

Resource values are determined at the margin, rather than by the average usefulness or average cost of the resource. When a resource is worth more at the margin in one use than in another, gains from trade are possible.

The opportunity cost of a resource is its relevant cost. Non-marketed resources, and projects involving those resources, are difficult to evaluate. Benefit-cost analysis is a process to conduct project evaluation.

The Organization of Petroleum Exporting Countries was formed in 1960, and appeared to have control of the world oil market in the 1970s. But, economists are now uncertain as to how much of the large price increases were brought about by the cartel's manipulations of supply and price, and how much was the result of normal market forces supply and price, and how much was the result of normal market forces in the presence of wars and other disturbances in oil producing regions. United States energy policy has frequently strengthened the demand for OPEC oil.

Recent history shows us that energy markets react like other markets to changes in price. Responses are stronger over time. Profits in the oil industry are approximately the same as profits elsewhere in the economy, and like other profit levels, they fluctuate.

Minerals in general have not been rising in cost over the past several decades, even though we continue to use more of them from a fixed physical stock available from nature. The availability of substitutes and the development of new technologies have protected humankind from any lasting shortages.

In a market setting, the existence of secure, transferable property rights is a key to proper conservation and wise use of natural resources, as with all other goods and services.