Commodities bull II: An oncoming train

I promised in a previous post, Commodities bull a bear for the environment, that I would discuss why no one, neither politicians nor corporations, can do anything in the short run to stop the current bull market in commodities.

To understand this it is useful to go back to the end of the last bull market and see why it ended. By the early '80s the prices of most basic commodities had crashed. The reason: high prices had led to vastly expanded exploration for and discovery of minerals and vastly expanded planting of food and fiber crops worldwide. These actions increased supply beyond what the market needed and led to surpluses. Hence, the prices of many commodities plummetted.

But the pain in the resource sector continued long after the top in prices was in. Since it takes up to a decade to find and develop a mine, for example, investments already in progress when the bull market ended continued. Of course, at the time, no one knew that the bull market had ended. People had been conditioned to believe that every pullback would be followed by even higher prices. (It was very much like what happened in technology stocks in the late '90s.) So, investment continued to flow into the resources sector causing a further increase in the supply of basic commodities.

Another example: While farmers' decisions about growing many crops can change from year to year depending on market conditions, some agricultural products require a multi-year commitment. Coffee trees take three or four years to bear fruit. That means a commitment to increase coffee plantings made at the top of the bull market might not have any effect until four years later when the new supply would enter an already glutted market.

In this way a bear market in commodities tends to feed on itself as continued hope for higher prices pushes up supply and plans made long ago come to fruition in a period when inventories of raw commodities are already swelling.

Eventually, after many years--sometimes a decade after the top--companies, investors and farmers lose heart. Gradually, they slow their search for minerals which have now become far less profitable in the wake of large surpluses. They may pull up unprofitable coffee trees and plant something else in hopes of making a better profit. In the end, a final wave of smart, productive people leave the resource sector: farmers retire and sell their land for development; even worse, many farmers simply lose their farms as the debt they built up while expanding crushes them; unprofitable mines close; mining geologists leave the field and few train to enter it; mining engineers find work elsewhere; marketing executives move away from the agricultural marketing, and so on. The best and the brightest MBAs have long since abandoned their jobs in the commodity futures pits and in the offices of grain merchants and bullion dealers and taken up residence on Wall Street to trade stocks and bonds.

What happens next? With fewer crops being grown and fewer minerals being found even as demand grows, shortages eventually appear. Prices rise, mildly at first, and then more swiftly as perceived shortages lead to the hoarding of materials essential to keep factories going. (In the past couple of years the entry of the Chinese into world commodity markets to get materials to expand their factories and keep them going has already created some parabolic moves in certain key commodity prices.)

With few new mines opening up and little exploration occurring, the next several years are marked by higher and higher prices for all things taken from beneath the earth. The booming mining industry now starts to look in earnest for new supplies at a furious rate. But, the long lag times between exploration and discovery and between discovery and development mean those supplies won't be forthcoming in any quantity for years. The same is true in the farm fields and orchards which are also expanding. Surplus stores of grain have been whittled down as demand has risen. Basic crop prices rise and farming becomes a superbly profitable line of work. Certain crops that require multi-year commitments such as coffee are planted again in hopes of reaping lucrative returns in an undersupplied market. And, there is a shortage of mining and oil drilling equipment and expertise. The now much-in-demand expertise departed long ago when times were bad. Profits rise; salaries inflate; investors pour money into new mines and resource-related industries; and the cycle begins its inexorable move toward a crest.

These dynamics are developing before our eyes. Because of the long lead times needed to develop new supply for many resources, nothing done today will have much effect on prices or supply for several years to come. Any proposed actions which are touted as providing quick results should be treated with skepticism. Actions such as opening public lands, sometimes protected lands, to private exploration will be done in the name of alleviating shortages; but this will often be done with an eye toward rewarding political contributors.

Sadly, such shortsighted moves will do nothing to address the profoundly serious resource issues we face in the areas of energy, water, soil and climate. When prices are low, few people worry about natural resources. When prices are high, all people want is to have more of what is scarce right away. To rely on the highs and the lows of the commodity cycle to guide us in making intelligent choices in the area of resources is the height of folly. We need a deeper and less financially driven context in which to consider critical natural resource issues.

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The promise: a hydrogen economy, the cost: more nuclear power

The main problem with producing hydrogen is that it takes more energy to extract it than you can get out of the resulting hydrogen. In other words, hydrogen is currently a net energy drain. That means it is NOT an energy source, but rather an energy carrier.

Still, if the difference between energy in and energy out in hydrogen production can be narrowed, the universe's lightest element might be useful as a non-polluting transportation fuel. This would require that energy used to produce it doesn't pollute more than the gasoline and diesel engines currently in use. Right now, since so much of the electricity that would be harnessed to make hydrogen is produced with coal and natural gas, it's doubtful we'd end up with less pollution as a result. (There is also the question of natural gas supply which is getting increasingly tight.)

The New York Times reports, however, that researchers have found a way to greatly reduce the energy input in producing hydrogen. The catch: They do it with nuclear power. The kind of reactor necessary is not in widespread use and many of them would have to be built in order to accomplish what the researchers envision.

Apart from all the problems inherent in the production of nuclear power--what to do with the radioactive waste, the risk of accident, the vulnerability to attack--the researchers make an assumption which may not turn out to be true, to wit: uranium is plentiful.

It's true that uranium fuel for nuclear reactors has been in oversupply since the early '80s when high uranium prices and concerns over future supplies led nuclear utilities to stockpile vast quantities of the fuel. Those huge stockpiles depressed the uranium market, severely curtailing exploration efforts and crippling the uranium mining sector.

But that has now suddenly changed. Uranium fuel recently doubled in price from $10 a pound to $20, and it looks like Canada, where great stores of uranium ore are thought to reside, appears to be in a uranium boom. That may mean more supply in the years to come, but even uranium is not an unlimited resource. Like oil, it will reach a peak in production sometime in this century and thereafter decline.

No one knows for sure how much uranium the new mining boom will uncover. But, the answer to that question would go a long way in determining whether nuclear power could help create a hydrogen-based economy.

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Farmers, golf course owners and Bush say 'yes' to ozone depletion

A widely used agricultural chemical which damages the ozone layer, the layer of the atmosphere that protects us from dangerous solar radiation, is supposed to be phased out in 2005 according to an international treaty signed by the United States in 1987 called the Montreal Protocol. But, the Bush administration is seeking what's called a "critical use" exemption to allow U. S. farmers, golf course owners and others to continue to use methyl bromide.

Here is what the The New York Times reported on the issue earlier this year. Here is what the the EPA has to say about the stuff. It's not pretty.

But, maybe good looking golf courses are worth the loss of the ozone layer, even if it means no one will be able to go out into the sun to play golf.

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Worse than PCBs

A flame retardant found in plastics used in computers, televisions, furniture and carpets has turned up in Lake Michigan and its concentrations are growing. PBDEs, or polybrominated diphenyl ethers, persist in the environment like their cousins, PCBs, or polychlorinated biphenyls. The PBDEs are also showing up in people. Many Europeans countries have already banned the chemicals.

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The people get it

During the recent election Colorado's voters mandated that 10 percent of the state's electricity must come from wind and solar sources by 2015. In its story The New York Times highlights the case of a Colorado State student who's already making that goal come true on his own campus. Such people will be the heroes of our energy future. And, the people of Colorado are showing that they are smarter than the utilities which opposed the referendum.

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"Flat-earth" thinking

The Bush administration remains one of the last bastions of "flat-earth" thinking when it comes to global warming. As The New York Times reports, a recent study of the Arctic concluded that vast changes are already underway in global climate due to global warming. The study elicited opposition from the Bush administration which said that only "voluntary measures" should be used to control greenhouse gasses, cited as the main contributor to the problem. In the Bush lexicon "voluntary" is a code word for "We aren't going to do anything."

The U. S. was one of eight nations with Artic territory that participated in the study which I mentioned in a previous post.

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Houston comes to Oregon

Ever since the U. S. Supreme Court decided in the 1920s that localities had to right to zone, they've been busy trying to plan development in a way that keeps incompatible uses such as a stamping plant and a residential neighborhood apart. But so-called property rights advocates say that development rules of any kind for environmental or planning reasons diminish their property values by restricting allowable uses.

Oregon property rights advocates now have a tool to fight back. A referendum passed by a 60/40 margin allows them to claim compensation for such restrictions or be relieved of those zoning and environmental rules that went into effect after the owners bought their land or, if the parcel is inherited, after their parents or grandparents bought it.

It seems unlikely that municipalities or the state will be able to pay the avalanche of claims. And so, Oregon, which has been known for its progressive land use laws and policies, could end up looking like Houston which has never had zoning.

Those who think this move represents freedom will soon find that what pops up next to them as a result won't make them feel free.

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How now mad cow

No one should be comforted by the finding that a suspected case of mad cow disease turned out to be a false positive as AP reported today. As I explained in a previous post the current testing regime in the U. S. targets only about seven-tenths of one percent of all cattle slaughtered and is VOLUNTARY!

So far, no one in the beef industry seems to be suffering pangs of conscience over this sham testing regimen. But, it's really only a matter of time before the disease will be shown to be much more widespread.

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Brazil and China to allow GMOs

The Economist reports (with apparent glee) that both Brazil and China are about the allow the planting of GMO crops. China's main project is GMO rice, manipulated to be more pesticide tolerant and disease resistant. Brazil's concern is soybeans. The GMO variety is being smuggled in and planted anyway. The article does point out that scientists on government boards pushing for approval have investments in GMO seed companies. How surprising is that?

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The results are in: Plastic 10, Zooplankton 1

There are 10 pounds of plastic particles in the Pacific Ocean for every pound of zooplankton, the microscopic creatures that are the basis of the ocean food chain, according the a recent study by a California oceanographer. The oceanographer sampled a region of the Pacific, a giant ocean whirlpool, which draws ocean garbage toward it. The ocean will break up one pound of plastic into a 100,000 small pieces over time, pieces which are ingested by marine life. One known bad effect: Plastic concentrates toxic pollutants at 1 million times the level of ocean water. That implies that the plastic diet of the ocean's fish is making them more toxic than ever.

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