Price formation and price trends in exhaustible resource markets: Evidence and explanations

1. Price formation and price trends in exhaustible resource markets: Evidence and explanations By Marian Radetzki Professor of Economics Luleå University of Technology MarianCUTS 22 Sept 2011

2. Themes covered by paper(Themes also covered by talk) The long run price equilibrium: Why is it falling? The anatomy of resource booms ”Speculation” and resource prices: What do we know about the relationship? Monopolistic management of exhaustible resource markets National dependence on exhaustible resource production and trade: The Dutch Disease and the Resource Curse

3. Long run price determination Short run price determination P P S D2 D1 P3 S P2 P1 P2 D3 P1 D2 D1 Q1 Q3 Q1 Q2 Q2 Q Q

4. ”Developing Asia” dominates the growth of commodity demand Developing AsiaOECD Share of global BNP 24% 52% Assumed marginal raw materials intensity 2 1 With the same economicgrowth rates, both regions willcontributeequally to commodiydemand expansion. Buteconomicgrowth in DevAsia 2001-2010 was 5.3 times the growth rate in OECD. Conclusion: DevAsia’scontribution to global commoditydemand expansion wasfivetimes as high as that of the OECD. During the acutephase of the financialcrisis, 2008-2010, the OECD economiesexpanded by -0.1%/year; those in DevAsia by 8.1%/year. The crisis and stagnation in the OECD region has had an imperceptibleimpact on commoditydemand. That explainspricerecovery as aoon as it becameclear that DevAsiawouldremainunaffected by the crisis.

5. Commodity prices, monthly $ index, 2003=100 Markets with futures Markets without futures Source: IMF.