Commodity Predictions: The Future Is Uncertain

Brian Durrant - Thu 05 Jul, 2007

Predicting the future is a notoriously precarious business, particularly if the time frame exceeds five years. What I find fascinating about futurology is that it gives an insight into the way people think about the future. In particular the predictions are heavily reliant on the recent past. Now despite these predictions being wide of the mark, the idea of resource depletion and general global catastrophe still have a magical grip on intellectuals. The availability and future price of commodities is highly uncertain. We can be sure that there will be new technologies that will prolong the life of scarce commodities, but we do not know what they will be...

In 1967 the prestigious Hudson Institute issued a report that had drawn on historic trends in innovation to suggest changes which would “almost certainly” occur before the end of the 20^th Century. The authors got a lot of things right. They predicted the general use of automation in management and production. They anticipated universal real time credit. They thought we would have fax machines and communication would be transformed by pagers. These futurologists correctly sensed that information technology would be important, but what they did not anticipate was miniaturisation, or that processing would become so cheap that we would have personal computers rather than a terminal linked to a central mega computer.

But once the authors ventured out of the field of electronics, very few innovations they anticipated have occurred. In the realm of transport they talked of personal flying platforms and enjoying inter-planetary travel. These projections may seem wide of the mark now, but at the time of the forecasts we were two years away from putting a man on the moon. So a simple extrapolation of recent advances in space travel in the mid-1960s would make their projections perfectly feasible. But this is the problem of projecting the future by drawing a line between two points.

In reality developments in transport have been modest. In 1939, you would cross the Atlantic in an ocean liner. Thirty years on you could do so in six hours on a jumbo jet. But thirty years on again the service on offer is essentially the same. What futurologists tend to do is reflect the times they live in. Interestingly the mid-1960’s was characterised by low commodity prices and strong economic growth, so the future was viewed in a positive light with fears of resource depletion not high on the agenda. The authors talked of controlling the weather, lighting cities with artificial moons, dreams could be pre-programmed and there would be undersea colonies to mine the oceans.

One of the benefits of this report is that it did not harangue us to change our lifestyles to save the planet. Since the Hudson report futurology has never been the same, bad news and scare stories capture our attention more than science fiction. And one long standing worry, the exhaustion of the earth’s natural resources, has come back to the fore more than once.

People have been worrying about the depletion of natural resources since antiquity. In 1865, the distinguished economist British Stanley Jevons published an exhaustive study of the coal industry. It was an exemplary exercise and Chancellor Gladstone devoted much of his budget speech praising it. Jevons had concluded that Britain would be unable to meet its future needs for coal. At the time the UK consumed 80m tonnes a year, which was a higher share of global energy consumption than the US today. Jevons projected that the UK’s coal needs would grow to 500m tonnes by 1911 and could, on unchanged policies, reach 2.5 m tonnes by 1961.

Britain’s demand for coal did in fact reach a peak of 300m in 1913 but by 1961 it was 200m just a tenth of his estimate. Jevons dismissed the idea that electricity might meet the needs of industry, while he did not consider the possibility that petroleum could be obtained from any source other than coal.

Clearly it is absurd to criticise Jevons because he did not predict the future correctly. He could have anticipated the internal combustion engine only by inventing it. How was he to know that the deserts of the Middle East vast oil reserves? A justified criticism of Jevons is not that he did not know things he could not have, but he did not recognise the limits of his knowledge and made recommendations with unwarranted confidence. But the voices of the wise who do know the limitations of their knowledge are often drowned out by the ignorant who do not.

More recently in 1972 a best-selling book called the Limits of Growth by the Club of Rome picked up on the this old worry. Amongst its many predictions gold would run out by 1981, silver and mercury in 1985 and zinc in 1990. The problem was the way we lived our lives. If things carried on as they were with industrialisation accelerating and exponential population growth , malnutrition would be widespread, non-renewable resources would be depleted and the environment would deteriorate. In order to avoid catastrophe we had to limit family sizes to two children per family and governments should take the lead and no longer target economic growth in the traditional sense, but opt for a growth path that was “sustainable”.

Now despite these predictions being wide of the mark, the idea of resource depletion and general global catastrophe still have a magical grip on intellectuals. In 1980 the management economist Julian Simon was so frustrated with the incessant claims that the earth would run out of oil, food and raw materials, that he challenged the established beliefs with a wager. Famously he bet Prof. Paul Ehrlich (author of "The Population Bomb") and two other environmentalists from Stanford that any $1000 shopping basket of raw materials of their choosing would be less expensive by 1990. Ehrlich gleefully accepted the challenge stating that “the lure of easy money can be irresistible”. The environmentalists staked their bets on chromium, copper, nickel, tin and tungsten. The loser was to pay the winner the difference. In 1990 Ehrlich sent Simon a check for $576.01.

The truth is that it was an unfair bet because the economist knew how markets work. 1980 was a year when commodities spiked sharply higher notably silver, gold, platinum, crude oil and even sugar. High prices elicit two responses. First consumers cut back on purchases of these commodities for example by using more fuel efficient cars, while there is a greater incentive to recycle expensive materials. Consumers also find substitutes. In 1978, internal political problems in Zaire limited the price of cobalt by 30%, causing the price to sky rocket. But industrial users adapted so that ceramic magnets replaced cobalt alloy magnets and similarly cobalt-based paints were substituted with manganese-based paints.

The price of cobalt soon came back down.

Second there is a producer response. High prices give producers an incentive to extract resources more effectively and to seek out new deposits. The oil and gas in the North Sea would never have been exploited if oil prices had remained low for the last 30 years. Moreover known reserves of a commodity is not a fixed measure. In 1950 it was estimated that we had enough copper to last 42 years in other words we would run out of it by 1992. Now according to latest figures copper supplies will last 61 years. This is despite the fact that copper consumption has quintupled since 1950.

So high prices restrict demand and increase supply, leading to lower prices and vice versa. The price mechanism is the best way to value scarce resources. High prices ration scarce resources. It is interesting that the Club of Rome paid scant attention to the workings of markets in its assessment of global resource depletion.

But so much for the past, what is the current state of play regarding resource depletion? The table below is taken from a study at the University of Augsburg which estimates how long a natural resource will last if we consume at today’s rate.

Commodity	Uses	Years to exhaustion
Aluminium	Transport, electrical, consumer durables	1027
Antimony	Drugs, flame retardants	30
Chromium	Chrome plating, paint	143
Copper	Wire, coins, plumbing	61
Gold	Jewellery, dental	45
Indium	LCDs	13
Lead	Lead pipes, batteries	42
Nickel	Batteries, turbine blades	90
Phosphorous	Fertiliser	345
Platinum	Jewellery, catalysts, fuel cells for cars	360
Silver	Jewellery, catalytic convertors	29
Tantalum	Cellphones, camera lens	116
Tin	Cans, solder	40
Uranium	Weapons, power stations	59
Zinc	Galvanising	46

Source: New Scientist

To some these figures are quite alarming. So much so that an OECD working group will be convened this month to come up with some answers. But why should a talking shop do any better in rationing scarce resources than a free market? The markets have already anticipated the impending scarcity of indium, which is being used for making LCDs for flat-screen TVs. In January 2003 the metal sold for around $60 per kilogram, by August 2006, the price had shot up to over $1,000 per kilogram. The mere instance of indium’s price going up so precipitously will prolong the time span before supplies are exhausted. At sky high prices there is more incentive to extract the metal more efficiently, to search for more supplies and to find alternative cheaper substitutes. The ancient world was worried about running out of zinc and copper and nothing has changed.

The more sensible approach is not to peer into crystal balls, there is nothing to see but an extrapolation of the past events. The availability and future price of commodities is highly uncertain. We can be sure that there will be new technologies that will prolong the life of scarce commodities, but we do not know what they will be. We should acknowledge unresolvable uncertainty and allow markets to play their part in rationing scarce resources.

Regards

Brian Durrant
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