The Hotelling Theorem and the Future Price of Crude OilGuest Post
The Hotelling Theorem and the Future Price of Crude Oil by Dr. Brad Cornell
Despite the avalanche of reports and prognostications regarding the future of crude oil prices, there is virtually no mention of the starting point on which all scholarly research on the subject is based – the Hotelling theorem. Though the derivation can be daunting, the conclusion of the Hotelling theorem is straightforward. The theorem states that, irrespective of the current spot price, the price of crude oil should be expected to rise at the rate of interest (adjusted for risk). The intuition underlying the theorem is simple. If . . .
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