85th International Atlantic Economic Conference

March 14 - 17, 2018 | London, United Kingdom

Does acquisition of mineral resources by firms in resource-importing countries reduce resource prices?

Friday, 16 March 2018: 10:30 AM
Keisaku Higashida, Ph.D. , Economics, Kwansei Gakuin University, Nishinomiya, Japan
Tamaki Morita, M.A. , Department of Policy Studies, Yamanashi Prefectural University, Kofu, Japan
Using a simple two-period model, this study initially theoretically examines how the acquisition of mines by firms in resource-importing countries affects resource prices. As government support in resource-importing countries encourages such acquisitions, we implicitly examine its influence on resource prices in present and future periods. Second, to verify the implications obtained from the theoretical analysis, we estimate the effect of resource acquisition policies on resource prices using a dynamic-panel model.

The pricing mechanism as well as the markets of oil or gas, previous metal, and minor metals are different, and the supplying/consuming countries’ bargain power also generates great discrepancy in these markets. However, what is prevalent in these markets is that the concentration of the upstream industry is higher than that of the downstream industry. Thus, this important feature is studied in the real world within a theoretical model.

The empirical portion of the study presents an econometric model that tests patterns of price changes obtained theoretically. Assuming that governments’ acquisition policy always encourages final goods' firms to acquire resources, we analyze how policy affects resource prices using dynamic panel analysis. Practically, we analyze the policy effects on crude oil prices in oil-importing countries. Dependent variables are calculated from spot prices of West Texas Intermediate (WTI) crude oil. We derived real WTI (WTI deflated by the U.S. consumer price index), applied purchasing power parity (PPP) to each country, and indexed the results to year 2000. We selected four explanatory variables, including one that represents governments’ natural resource strategy, per capita oil production, worldwide oil and oil product demand, and U.S. stocks of crude oil.

The main results of our theoretical analysis are as follows. An increase in acquisition of mines by intermediate/final goods producers may raise resource prices in either the first or second period. This result implies that resource consumption may decline in either period. Strategic behavior of a resource extraction firm, demand structures for final goods, and extraction costs primarily determine price changes. Using petroleum data, we find results consistent with the theoretical analysis