Much ado about Hotelling: Beware the ides of Hubbert

Much economic literature analyzes the Hotelling principal. Little economic literature analyzes the Hubbert curve although much controversy surrounds it. This difference in emphasis by economists needs to be reconsidered critically, and towards that end, we attempt to look at both concepts simultaneously. We test whether a simple Hubbert curve model is a significant determinant of world oil price changes and whether one of the main determinants of the Hotelling principle-the discount rate-also affects world oil prices. An autoregressive distributed lag (ARDL) bound testing approach is used to examine the effects of a Hubbert index variable and a Hotelling discount rate variable on the world wide price of oil. Results show the discount rate, the most important Hotelling variable, has little effect on oil prices, but that the Hubbert curve model does show a large effect on oil prices. Oil is a non-renewable natural resource par excellence, yet the results suggest that the Hotelling principle is not an important determinant for oil prices, yet the Hubbert curve and the theory surrounding the Hubbert curve is an important determinant of oil prices.

► We question economists' emphasis on Hotelling and lack of emphasis on Hubbert. ► We model a Hotelling and a Hubbert oil price model to see which better explains price changes. ► We find the Hotelling model insignificant and the Hubbert model significant. ► We explain the world oil price history. ► We show peak oil is causing oil prices to rise.