Friday, November 14, 2008

Higher lows

(I am posting early this week since I am leaving today for the Conference on Michigan's Future where I will be presenting.)

Back in February in a piece entitled "Do High Commodity Prices Speak for Themselves?" I wrote that the emerging spike in commodity prices would tell us less about resource depletion than prices during the inevitable bust. I observed:

The real price of commodities has been going down for more than a century. This is because the race between technology and resource exhaustion has been been won decisively by technology. Whether that will continue is now in question.

One indicator will be to see not what new highs are achieved in various commodities in the coming years, but whether a new floor is established that is significantly above previous historical real prices. In other words, higher lows will be more indicative of our situation than higher highs which are usually a very temporary phenomenon.

Well, the bust has arrived much sooner than I anticipated. So, now seems like a good time to evaluate. To be sure, commodities--which have already taken one of the worst drubbings ever--may have further to fall. But the glee with which their fall has been greeted may be obscuring what current prices are telling us.

Let's look at crude oil. At its peak this summer oil sold for $147.27 a barrel. As I write, crude for December delivery sits at $56.16. That's a decline of 62 percent. But it's a different story if we compare the current crude price with its previous bear market low. On December 10, 1998 crude oil on the New York Mercantile Exchange closed at $10.72 a barrel. Today, even after a precipitous fall in prices, oil remains 424 percent above the previous bear market low.

How about copper? It reached an all-time high on May 5 of $4.26 per pound. As I write, copper for December delivery sells for $1.65. That's a drop of 61 percent. In late 2001, however, copper prices were hovering around 60 cents per pound. That means that even the latest power dive in the price leaves copper 175 percent above its previous bear market lows.

Foodstuffs don't look all that much different. Sugar, for example, was hovering around 4 cents a pound in early 1999, but vaulted to 19.73 cents by February 2006. As I write, sugar for March delivery sits at 11.61 cents. That's a fall of 41 percent leaving sugar still 190 percent higher than its previous bear market low.

Of course, we may just be seeing a pause in the commodity bull market that began way back in late 1998. The average span for such bull markets in the past century has been about 17 years. On the other hand, if we go into a long economic slump, but commodity prices never return to their lows, we may chalk that up as another indication that depletion may be stealing the march on technology.

Of course, we can grow more sugar if we decide to expand our acreage or increase our inputs. (That's assuming that the fossil-fuel inputs will be readily available and that we have adequate water and fertile soil, both of which are being depleted by modern farm practices.) We cannot, however, grow more copper or more oil. We may figure out how to get leaner and leaner ores to yield copper. And, we may be able to get more difficult-to-extract deposits of petroleum to yield their oil. The key question is whether this will take a rising portion of society's total effort to do so. If it does, that may mean depletion has begun to overwhelm our technological prowess. And that could mean that we need to find other ways to meet our needs for minerals and energy.

Of course, we can deploy renewable sources of energy. And, we could fully recycle all key metals. But these steps would require practices and an infrastructure much different from what we currently have. And, the changes would have to be put in place long before we reached critical shortages in order to avoid large disruptions in our economic life.


Kevembuangga said...

the changes would have to be put in place long before we reached critical shortages in order to avoid large disruptions in our economic life.

Since there is no chance that any reasonable preventive measure will be taken the real question becomes: how bad the detrimental feedback loops will be and will they snuff out every technological capability?

Rice Farmer said...

Indeed, it's a critical situation. It's important to see that production and extraction are costing more money, which is in declining supply now. Take oil, for example. Since it costs more on average to develop oil fields than it did decades ago, crude prices must have a higher floor to send enough capital back to producers for new field development. Yet, if you visit oil industry sites, you'll find no shortage of articles pointing out that crude prices are already too low. Unless this trend reverses before too long, it will make the future oil supply crunch all the worse.

It would be interesting to see if such a situation holds for any other non-renewable resources such as metals.

y_blade said...

"And, the changes would have to be put in place long before we reached critical shortages in order to avoid large disruptions in our economic life."

In nature, an ecosystem will often collapses well before resource exhaustion is reached. A severe imbalance in a sufficiently complex system creates chaos, instability and collapse. One could argue that our global human system has become sufficiently complex to usher in such failure when an imbalance occurs. What if instead of using our energies, resources and time to extract every remaining possible resource that we, like a natural system, are simply, by design or neglect, allowed to collapse.

I do not wish to debate the horrific human impact such a global failure would have but only to consider that, like nature, a failed complex system leaves all the elemental resources intact to begin again.

A controlled collapse and relocalization of the populations around the globe, using local resources, and local energy production may actually deplete the elemental resources to begin a technologically advanced society again.

Maybe critical shortages and major economic disruptions give the future generations the best chance at survival and renewal.

PS Fairly new to the blog and am catching up on the posted readings. Thank you.