Hotelling’s Theory & Australian Resource Economics: 2025 Insights

Why do oil, gas, and minerals become more expensive over time? Hotelling’s Theory, a classic economic model, has new relevance in 2025 as Australia faces energy transition, resource scarcity, and climate-driven policy changes.

Understanding Hotelling’s Theory in Today’s Context

First proposed by Harold Hotelling in 1931, Hotelling’s Theory describes how the price of non-renewable resources—like coal, oil, and critical minerals—should increase over time as those resources are depleted. The theory says that rational resource owners will only extract and sell their resources if the price they receive today is at least as much as they could expect in the future, accounting for interest rates and scarcity.

In 2025, this theory is more than just academic. As Australia moves toward a net-zero economy, policymakers and investors are grappling with:

• Rising demand for critical minerals (lithium, nickel, rare earths) driven by the global energy transition

• Volatile fossil fuel prices amid shifting international markets and new carbon pricing policies

• New government incentives for renewable energy and emissions reduction

Hotelling’s logic helps explain why Australian resource companies are rethinking extraction rates and pricing strategies in light of future scarcity and policy shifts.

Real-World Applications in Australian Energy and Mining

Let’s see how Hotelling’s insights play out in the real world:

1. Critical Minerals & Battery Supply Chains

With the 2025 surge in electric vehicle (EV) production and battery manufacturing, Australia’s lithium and rare earths sectors are booming. According to Hotelling’s Theory, as these finite resources become harder to find, prices should rise—unless new technology or large new discoveries intervene.

For example, the Federal Government’s 2025 Critical Minerals Strategy highlights the need to pace extraction, invest in downstream processing, and avoid flooding the market—ensuring long-term value for Australian producers.

2. Fossil Fuels in a Decarbonising World

Australia’s coal and LNG sectors are at a crossroads. Hotelling’s framework predicts that if investors expect future carbon taxes or bans, they might accelerate extraction now (“use it or lose it”), potentially depressing short-term prices and speeding up the decline of legacy industries. This is playing out as several major coal projects face new regulatory hurdles and financing challenges in 2025.

3. Investment, Super Funds & Resource Valuation

Institutional investors—especially superannuation funds—are increasingly factoring Hotelling-style scarcity and future policy risk into their resource portfolios. Companies with long reserve lives and credible transition plans are commanding premium valuations. Meanwhile, stranded asset risks are front-of-mind as Australia’s largest funds, like AustralianSuper and Cbus, set stricter decarbonisation targets for 2030 and beyond.

Policy, Technology and Market Forces: What’s Changing in 2025?

Several developments in 2025 are reshaping how Hotelling’s Theory plays out in Australia:

• New Carbon Pricing Mechanisms: The expansion of Australia’s Safeguard Mechanism and higher carbon credits are altering the economics of fossil fuel extraction.

• Technology Breakthroughs: Advances in battery recycling and alternative materials could disrupt Hotelling’s predicted price paths for some minerals.

• Export Market Shifts: Major trading partners like Japan and South Korea are imposing stricter emissions rules on imports, affecting Australian resource demand and pricing strategies.

• Resource Rent Tax Reviews: Ongoing debates about tax settings for super-profits in mining reflect the tension between government revenue needs and investor certainty.

Hotelling’s Theory provides a powerful lens for understanding these trends—but it’s not a crystal ball. Real-world prices are buffeted by technology, geopolitics, and policy shocks that the original model never imagined.

What It Means for Australian Investors and Policymakers

For investors, Hotelling’s Theory underscores the importance of:

• Analysing reserve life, extraction costs, and future policy risks

• Factoring in technological disruption and substitution risk

• Supporting resource companies with credible, forward-looking transition plans

For policymakers, it’s a reminder to:

• Balance short-term export revenue with long-term resource value

• Design policy that encourages responsible extraction and value-adding industries

• Support worker transition and regional diversification as legacy industries wind down