THE RELATIONSHIP BETWEEN SCARCITY OF NATURAL RESOURCES AND THEIR REAL PRICES

Year 2011, Volume: 3 Issue: 1, 173 - 185, 01.06.2011

Roland Toth Maria Fekete Farkas

Abstract

There has been a long running concern about resource depletion. Some argue this concern is
misplaced, while others consider it to be an urgent problem requiring immediate action.
Economists suggest that long term prices, adjusted for inflation (real prices), provide a useful and
effective indicator of resource scarcity. This study tests this hypothesis in consideration of the
accepted theory that traditional price deflators, such as the US consumer price index, overestimate
inflation-, and accordingly-, are likely to underestimate long term commodity prices.
To investigate the usefulness of real prices as an indicator of scarcity, a case study of two metals
considered to be expensive (platinum and rhodium) and two considered to be relatively
inexpensive (copper and lead) was used. Real long term price indices were constructed and
econometric analysis used to determine the direction and significance of long-term price trends
and whether real prices were correlated with other scarcity indicators such as the Reserves-toproduction
ratio.
The results show, when an appropriate adjustment is made to the deflator, long-run trends in real
metal prices are all upward, and there is a significant relationship between the real prices and
scarcity indicators, such as the reserves-to-production ratios, for platinum and rhodium, but not for
copper and lead. These findings suggest that real prices of platinum and rhodium are more affected
by their scarcity, while copper and lead prices are likely to be more dependent on other factors
such as high substitutability with other virgin and recycled materials.

Keywords

non-renewable resources, depletion, real price, inflation bias

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