We have already seen that the theory of exhaustible resource markets tells us that the price of energy in the form of oil will grow at the real rate of interest. To see why this second prediction must be expected to hold, suppose that the owners of oil expected it not to. The locus labeled SEP 0 in the top panel of Figure A.15-6 depicts the stock exhaustion path corresponding to an initial stock of So, with an initial price of P 0 . Note in the top panel that at t 1 there are S 1 units of oil remaining. This means they will end up having to hold onto an asset namely, what's left of their oil whose price doesn't grow, and no investor wants to do that.
Individual owners can avoid that outcome by selling their oil right now.
The theory of exhaustible resource markets discussed above implicitly assumes that investors know how much oil remains in the ground at any moment. In practice, however, no one is really sure. Similarly, we don't know exactly how much solar energy will cost once we run out of oil, for that depends on technological developments that are difficult to foretell. In place of known values of oil reserves and known values of the prices of alternative energy sources, the market must rely on estimates. These estimates are often highly imprecise, and always subject to revision as we acquire new information.