Short-term gyrations in commodity prices may do more damage than long-run trends
HUMANITY harbours a lingering fear that Thomas Malthus might just have been right. The dour reverend first warned in 1798 that population growth would lead to soaring resource prices, leaving workers destitute. Two centuries of growth later, the worry that the world’s natural resources are finite remains.
Paul Ehrlich, a biologist of Malthusian disposition, argued in “The Population Bomb”, a 1968 book, that rising populations would inevitably exhaust those resources, sending prices soaring and condemning people to hunger. That pitted him against economists who argued that rising prices should mitigate the squeeze by calling forth more supply.
In a famous 1980 wager Julian Simon, an economist, bet Mr Ehrlich that commodity prices would be lower a decade later. He won, as the effects of rising prices in the 1970s showed up in energy conservation and more oil exploration. But when exuberance returned to commodity markets in the 2000s, so did the old arguments. Jeremy Grantham, a money manager, wrote in 2011 that “price pressure and shortages of resources will be a permanent feature of our lives.”
In a new paper David Jacks, an economist at Simon Fraser University, assembles figures on inflation-adjusted prices for 30 commodities over 160 years. It turns out Mr Ehrlich was not entirely off the mark. Over the very long run commodity prices display a marked upward trend, having risen by 192% since 1950, and by 252% since 1900. But an upward trend has clearly not translated into global famine, and not all commodities are alike.
Long-run rises have been most pronounced for commodities that are “in the ground”, like minerals and natural gas. Energy commodities especially have boomed, soaring by roughly 300% since 1950. Prices of precious metals have also risen, as have industrial ingredients like iron ore. In contrast, prices for resources that can be grown have trended downwards (see chart). The inflation-adjusted prices of rice, corn and wheat are lower now than they were in 1950. Although the global population is 2.8 times above its 1950 level, world grain production is 3.6 times higher.
These long-run trends can be easy to miss, because medium-term wiggles known as “supercycles” can push prices off trend for a generation. Mr Jacks’s data suggest the typical supercycle, defined as a sustained move in the price of a commodity of at least 20% away from trend, lasts for no more than 40 years from beginning to end.
Such episodes tend to cluster in periods of rapid industrialisation and urbanisation. Economies in the midst of an industrial boom—like 1890s America, or China in the 2000s—are hungry for basic commodities such as oil, iron ore and beef. Supply is slower to respond. New oil wells or iron-ore mines cannot be developed overnight. Prices surge until supply catches up.
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