Liam Dann had a very good piece in the Herald the other day about rising commodity prices. Despite insipid growth, prices of food and oil, the fuels of our civilisation are through the roof. The underlying meaning of those high prices is we’re having to devote more of our resources to feeding and fueling ourselves, leaving less for anything else.
“Given the world is only firing on one hemisphere right now the strength of commodity markets is staggering and just a bit terrifying.”
Unfortunately, most policymakers and economists seem more staggered than terrified. The neoclassical economic model doesn’t understand that there are limits to growth, so they have no explanation for why prices are rising. Their tendency is to dismiss we’re seeing an aberration, another speculative bubble, not a situation where supply has reached its limits and unsatisfied is forcing prices up.
Dann shows that a slew of commodities are giving the same message. There’s not enough to go around. There are too many mouths and not enough bread:
“Take rubber, which can seem pretty obscure to us – as a tradeable commodity at least.
India – the fourth biggest producer – looks set to drop the import tariffs on rubber imports next year because it can’t met domestic demand for car tyres.
Prices for raw rubber are at record highs after rain interrupted the season for collecting the stuff (from trees).
As we’ve seen with oil, and as Dann mentions with rice below, relatively small supply disruptions are causing huge price increases. This is all a function of a system strained to capacity. There is no spare productive capacity anywhere to be found for rubber, rice, oil, or many other commodities, so it only takes a small event to create a short-fall, which is ‘solved’ by a price spike that destroys demand.
There are also fresh stats about gold out of China this week. It is no secret that it is a hot commodity at US$1390 per ounce, up 27 per cent in the past year.
The latest stats show China imported five times as much gold in the first 10 months of 2010 as it did in all of 2009. That’s about 209 tonnes, which is a lot when you consider that domestically China is the world’s largest producer of gold.
Analysts were surprised by the size of the leap and pinned it on high inflation prompting investors to hold. Cotton was probably considered a sunset industry in the 1970s when polyester suits were all the rage. But it is another old-world product making a big comeback. Prices have surged 67 per cent in 2010.
US exporters say they can’t get it out of the country fast enough and of course the demand is all out of China where textile factories are still expanding.
One of the scariest commodity stories this week was, somewhat predictably, about oil.
As pump prices in New Zealand creep back towards $2 a litre a report from independent oil economist Mamdouh G. Salameh this week predicted that this year’s projected supply shortfall of almost 5 million barrels is likely to widen to 9.2 million by 2015.
That’ll mean new record highs – topping the last peak in July 2008. But, Salameh says, the gap between supply and demand is likely to be too big to reconcile with even higher prices.
His best-case scenario is shortages curtailing economic growth. His worst-case scenario is conflict and potentially war.
It’s not a coincidence that all the commodities are displaying the features of peak production at the same time: on top of their own constraints, they’re all powered by oil.
It doesn’t get any better when you look at food commodities. Rice, which Bloomberg casually describes as “the staple food of more than three billion people”, is tipped to triple in price over the next 18 months after flooding in key production regions like Thailand restricted supply.
That would take it back above levels last seen during the 2008 spike in food prices.
In 2008 food commodities prices blew out to scary levels because Eastern and Western economies were growing at unprecedented rates.
That crisis, which had people protesting in the streets of Europe and Asia, is easily forgotten. It was overshadowed and resolved – in the short term at least – by collapse in demand in the West after the financial meltdown.”
It still blows my mind that few economists see the link between those events. We experienced the largest food and oil price spikes in history in late 2007 to mid 2008 and that was followed immediately by a global financial crash precipitated by Americans with high fuel-use dependent lifestyles in the exurbs who stopped being able to pay their sub-prime mortgages. In fact, most of the developed economies were in recession before the financial crisis exploded in the second half of 2008. I’m an ardent believer that it was oil going over $100 a barrel and staying there that caused recession, and the sub-prime crisis was just one of the mechanisms by which that shock was transmitted through the economy.
Fortunately, more and more analysis is waking up to the fact that the financial crisis was just the proximate cause of the Great Recession, the underlying reason was resources constraints. And they haven’t gone away.
The underlying problems were never resolved. What will happen to prices if and when US and European economies return to the kind of economic growth their populations have come to expect?
What we see bubbling just below the surface of all the news about sovereign debt are even more serious and structural problems in the global economy.
With oil predicted to top $100 a barrel again next year and other commodities (whose production is dependent on oil) also due to skyrocket. 2011 could be a repeat of 2008. Except this time the world’s economies and governments are in far weaker shape – it’ll take only the slightest push to knock over their supposed recoveries.
If this is the new normal then the question will have to become how we divide the wealth we have. The elite already has its answer: the Great Recession has seen wealth concentrated even further in the hands of the few. If we let them, they’ll pull the same stunt again and again.