Econ Geek Question

[threeonefour]

[ QUOTE ]
this is a real life problem. not an argument about the correct answer to an econ quiz. I got into an argument about why a particular company was sucking the exhaust pipe.

[/ QUOTE ]

my argument is valid whether or not you are talking about a quiz or a real company.

the simple truth is that it matters why prices vary. it also matters what they vary relative to.

From 1980 to 1995 (i am fudging these numbers but this is definitely true for a long period in the late 20th century) the price of gasoline rose. but the price of gasoline relative to other goods actually dropped. so the nominal price of gas rose, but in reality gas was cheaper. when gas was 2$ a gallon in 2001 or so, it was actually cheaper than it was in the eighties, in real terms.

also, to repeat my above post, if the the price is rising at a rate faster than the interest rate, then you probably shouldn't be taking it out of the ground. you ever wonder why lumber companies cut trees down when they do? or why wine companies age their wines for x years before they sell it? as long as prices is rising faster than the interest rate you are making money by holding out.

[manpower]

I'm not really sure what answer you're looking for, and I think you should just go ahead and post your side to the argument you've had, but I'll point out something that no one has bothered to say yet:

Non-repleneshing natural resources, namely oil, are limited and will eventually run out. This is important because if you assume a]that oil will continue to increase in value and b]that the company has a pretty good idea exactly how much oil they have in their specific field. It's possible (though by no means certain) that it will be a good idea for them to NOT invest.

Here's an example of when the above would be true. If an investment affects only production capacity (not efficiency or cost of extraction). It is not in the company's best interest to boost production when the time-value of a large expenditure on say, a new drilling platform, would be less profitable than an alternative investment, namely, leaving the oil in the ground until it's worth $200 a barrel and investing the money in t-bonds until then.