Some resources are nonrenewable or exhaustible, meaning there is a fixed stock of them available. Economic factors determine what portion of such resources will be used at a given time.
If a company has the ability to extract a natural resource from the
ground, one might think that it would immediately take the entire supply of the resource and sell it. That would give the company capital that could be used to generate interest in the future.
There would be an opportunity cost to not extracting the resources now; the company would be sacrificing some revenues. However, if the price of the natural resource is expected to rise in the future, the company may be better off leaving it in the ground. Then, it could sell the
resource later at a greater price.
If the price is expected to rise 1% by next year, and the interest rate is 5%, the company is better off selling the product now. That way, it can accumulate capital from selling the resource, invest it at 5%, and earn a return of 5% rather than 1%.
This leads to the determining factor in the rate of extraction. The current level of the interest rate and the expected future price increases will together decide how much of a nonrenewable
resource will be extracted.
If the interest rate is greater than the expected price rise, firms will want to take more out of the ground and sell it to receive the interest from the revenues. Eventually, by putting more of the resource on the market, the price will decrease.
If the interest rate is less than the expected price rise, the company will want to keep the resource in the ground for future use. Not selling the resource will make it more scarce and its price will rise.
In either case, the price will continue changing until the last unit of a resource that a firm sells earns as much in interest as it would have had it been left in the ground and sold later at a higher price. In other words, the rate of extraction should be just enough so that the resource's price rises at the same rate as the interest rate.