Natural resource prices increased rapidly during the first decade of this century, mainly propelled by rapid increases in world GDP, especially of the US, China, Brazil, and other fast developing countries. These prices then stabilized and many declined due to the world recession brought on by the financial crisis in 2008.
Some examples illustrate the magnitude of the price movements. Nominal copper prices quadrupled from 2001, despite a sharp fall in 2008, peaked around 2010, and declined by about 25% since that peak. Oil prices increased from $20 a barrel in 2002 to more than $140 a barrel in 2008, and have been in the range $100-$120 since then. Natural gas prices in most of the world increased several fold since 2000, and have been flat for the past couple of years. At the same time, natural gas prices in the US have fallen by more than 2/3 since their peak a few years ago.
These higher prices encouraged companies and consumers to economize on resource use. In the short run, however, both the demand and supply of oil and many other natural resources are only mildly responsive to higher or lower prices.
The long run picture is very different, for then opportunities to substitute away from the resources rising most in price are much greater because users have more time to adjust. For example, more permanent higher prices of gasoline induce consumers eventually to shift toward smaller more fuel-efficient cars, and drive less with the cars they have. They carpool more, make greater use of public transportation, or even take jobs nearer their homes. Cars are smaller and more efficient in Europe and Japan than in the US in good part because gasoline prices have been much lower in US.
Longer run adjustments on the supply side are also much larger, and some of them are game-changers. Although the world stocks of natural resources in the ground cannot be augmented since they were created by millions of years of evolution on the earth, the cost of getting these stocks out of the ground vary enormously: from the cheap and easily accessible oil just below the surface in Saudi Arabia to the difficult to access resources very far below ocean surfaces. Higher prices of a natural resource encourage extraction of more costly deposits, which increases the supply of that resource.
High prices also encourage investments in technologies to lower the costs of accessing various deposits that make them worthwhile to develop commercially. The most important example in recent years is the improvement in fracking methods used to extract oil and natural gas hidden in shale rocks. Wildcatters in the United States, like the recently deceased George Mitchell, spent years and much money, sometimes assisted by government support, in developing fracking to the point where it became commercially viable at the oil and gas prices prevailing during recent decades.
The success of fracking has resulted in a huge increase in American oil and especially natural gas production that greatly increased the American supply of these fossil fuels to produce gasoline, substitute for coal in electric power plants, and for many other purposes. Due to this revolutionary technology, American oil imports are at their lowest level in more than a decade, and natural gas prices in the US are now a fraction of what they are in Europe, Japan, and other gas importing countries.
The price of oil in the US remains close to the world price since oil continues to be imported. American oil commands the world price because it competes against imported oil at that price. Natural gas prices differ greatly among regions of the world because these prices depend on whether pipelines and liquefied gas facilities allow gas to be imported or exported. As I mentioned earlier, the widespread use of fracking techniques in the US has produced a huge fall in the domestic price of gas in this country.
Of course, companies that extract natural gas from shale would like to export some of their production to other countries to take advantage of higher prices there. Since such exports would raise gas prices in the US and lower them in the recipient countries, domestic users of cheap natural gas have organized to oppose its export elsewhere. Restrictions on gas exports would be unwise because the value received from the higher prices in other countries would exceed the value created by the artificially induced increase in American industrial output. It is poor policy to encourage domestic American industry through costly and inefficient methods like export restrictions.