Research Department Working Papers
Non-Renewable Resources, Extraction Technology and Endogenous Growth
No. 1506 (Revised August 2019)
Abstract: We document that global resource extraction has strongly increased with economic growth, while prices have exhibited stable trends for almost all major non-renewable resources from 1700 to 2018. Why have resources not become scarcer as suggested by standard economic theory? We develop a theory of extraction technology, geology and growth grounded in stylized facts. Rising resource demand incentivizes firms to invest in new technology to increase their economically extractable reserves. Prices remain constant because increasing returns from the geological distribution of resources offset diminishing returns in innovation. As a result, the aggregate growth rate depends partly on the geological distribution of resources. For example, a greater average concentration of a resource in the Earth's crust leads to more resource extraction, a lower price and a higher growth rate on the balanced growth path. Our paper provides economic and geologic microfoundations explaining why flat resource prices and increasing production are reasonable assumptions in economic models of climate change.