In the twentieth century the west’s boundless determination to extract ripped apart the social, political and cultural fabric of whole countries. Today, a century’s worth of price decline has been wiped out in a single decade, without reducing unprecedented levels of demand.
I have already remarked, and it’s the starting point for the new edition of myState of the World Atlas (published this week), that the human population is seven times greater than it was 200 years ago but our use of resources is disproportionately greater still: we produce 50 times as much, using 60 times as much water and 75 times as much energy. Where is that all going – and perhaps more to the point, how long can it keep on going? A new report offers insights.
Global population is still growing. Click to see full size image
The resource issue is fundamental. How it is addressed will do much to shape the prospects for fairness and justice in the world system, the likelihood of peace or war, the possibilities of sustainable prosperity, and the kind of freedoms we can expect to enjoy. Resources Futures from the Chatham House think-tank in London sets out to explore the political economy of natural resources, covering agriculture, metals, energy and water.
Changing times
In the twentieth century the long term trend was that natural resources got cheaper, punctuated by occasional increases in the price of oil. And our growing economic well-being was, in essence, predicated on that downward trend in the price of the basics.
One reason prices fell was that resources were both extracted and used with greater efficiency. This was partly due to market-driven technological innovation but it was also down to the west’s boundless determination to extract. What needed to be done in order to keep the oil flowing and the mines working was done. The social, political and cultural fabric of whole countries was ripped apart in the course of it and people who lived on top of important supplies of critical resources were simply moved on. When naked force was needed it was used; when a profitable relationship between extractive companies and local elites sufficed, that was the preferred option. As direct control by the European colonial powers was rolled back, the US and its local allies took over.
Today, things are changing. Not only do the resource-hungry powerhouses of China and India offer new options for local elites, but also the relative technological pay-off is declining and environmental change is having an impact.
Looking back, a McKinsey report calmly summed things up in 2011:
“That benign era appears to have come to an end. The past ten years have wiped out all of the price declines that occurred in the previous century. As the resource landscape shifts, many are asking whether an era of sustained high resource prices and increased economic, social, and environmental risk is likely to emerge.”
Pause to note that: a century’s worth of price decline has been wiped out in a single decade. In economic terms, that is some shock to the system – on a par with the financial crash of 2008.
With demand continuing to grow, expanding the supply of some resources means that producers must operate in places that are more challenging and difficult – whether because of natural features (such as poor soil, increasingly extreme weather or low ore-grades) or political ones such as corruption and conflict. All these pressures push up prices but don’t depress demand.
The coming crunch
So where is this heading? The report’s chapter laying out some of the basic facts and figures of increasing resource consumption goes under the heading of “More, More and More.” Or, if you don’t want understatement, my version opens The State of the World Atlas: “This is the age of more, most and never before.”
The extra pressure on resources during the past decade is not just about China and India, but they are big players in this drama. Their economic growth – especially China’s – is the key factor that has added to the continued high levels of resource use by the USA, Japan, South Korea and the EU to raise global demand to new levels. But the scale of resource demand in countries such as Brazil, Indonesia and Turkey is also increasing. Projected acceleration in economic growth in some African and Middle Eastern countries will keep piling on the pressure.
The end of the era of cheap resources, then, is not reducing demand. The Chatham House report points out that the overall scale of demand for resources and the speed of its growth in the last decade are unprecedented (p.2) and there is no reason to expect this to change significantly: the combination of “expanding populations and rising incomes” equates to fast growth in demand for resources at least through to 2040.
The report focuses on the concentration of large scale resource extraction among relatively few players. China, the US, Australia, the EU, Brazil, Russia, India and Indonesia dominate the scene. Per resource, the concentration is even tighter: statistics on 19 key resources (including various crops, timber, fish and meat, various metals, fossil fuels and fertilizers) show that, for 15 of them, more than half of global output comes from just three or four producers (p.38).
Like growth in demand, the concentration of production shows no sign of changing any time soon. The International Energy Agency expects over 80% of the growth in oil production between now and 2035 to come from just six OPEC countries – Abu Dhabi, Iran, Iraq, Kuwait, Qatar and Saudi Arabia (p.42).
So – prices rise, demand rises and production stays concentrated.
Risks
One of the key problems is freshwater scarcity. The use of water increases while its supply remains pretty much constant.
On increasing use, consider this: annual consumption of meat per head of population in rich countries has risen from 56 kgs in 1990 to 94 in 2002; over the same period it has risen from 4 to 52 kgs in China and from 28 to 82 in Brazil. There are the benefits of development, right there in better nutrition.
Then look at this: producing a kilo of potatoes requires 500 litres of water; producing a kilo of beef needs 15,000 litres (p.13).
And the use of water in many places is disturbingly casual – absent-mindedly wasting or poisoning it. In China, all major river basins suffer from excessive pollution and 300 million people consequently lack access to safe drinking water (p.77). Current projections suggest that without decisive changes in the use and storage of water, some two-thirds of the world’s population will face shortages of clean water by 2025 and acute scarcity by 2050.
The report’s authors also focus on “the just-in-time global economy” (p.161). The drive for efficiency encourages low stock holdings, which in turn means that short-term fluctuations in prices are more important and that there is not much resilience in the system. Bluntly, the world is “only one two bad harvests away” from a renewed global food crisis (p.x).
But it is not only with food that local disruptions – whether due to extreme weather, political turmoil or industrial unrest – can rapidly translate into higher international prices. Price volatility increases risks all round – including the risk of governments being tempted and pressured into intervening in markets to protect consumers or producers or both, often with the sad effect of counter-productively increasing volatility.
Components of complexity
The issue of resources is one of today’s key political questions,; it contains some fiendish complexities. Addressing it will require long-term action based on clear analysis and consistent implementation.
One part of this is the interconnectedness of resource systems. As the report points out (p.4), this makes it important to enquire about unintended consequences when considering how to influence and regulate resource use and trade. The example the authors take is subsidies for biofuels, implicitly referencing the catastrophe in 2008. Rising food prices that year led to violent protests in over 30 countries. The green emphasis (by the EU among others) on expanding biofuel production had taken land out of food production and caused an estimated 30% of 2008′s food price increases. By one estimate, expanding biofuel production pushed 30 million people into poverty and threatened the livelihoods of almost 100 million.
Interconnectedness is also political and economic. Environmental pressures such as climate change or water pollution generate geopolitical challenges, either as a direct consequence or in the course of trying to develop international responses. Each potential solution will support some interests and threaten others. Win-win solutions will be genuinely hard to find. This, as the report notes, leads to current international efforts at resource management being shaped by zero-sum competition that makes them ultimately dysfunctional.
Pathways to sustainability
So what to do? The report rightly sees no choice but to cooperate. A single-minded, self-focused resource acquisition policy is ultimately not going to work because the world is too inter-linked and inter-dependent.
Cooperate, yes – but how and on what? The report suggests four pathways. All four are important. All four are necessary. I will list them in what I see as the order of ascending credibility.
1. New leadership is needed.
The proposal is “a new club of the world’s principal resource-producing and -consuming countries.” The report lists 30 possible members of this new international grouping with reasons for each one being there (p.154). One strength of the proposal is that it creates an institution to focus on the problem. Further, it includes the major producers and consumers so it’s representative but not UN-sized. The problem is that it means taking all the political problems and clashing interests within as well as between the 30 countries and giving them a forum to thrash around in. The club won’t lead unless an accepted leadership emerges within it. So this is the right direction – and everything the report says about the drawbacks of “policies that only tinker at the margins without fundamentally reshaping resource politics along the way” is also right – but to say this is the way to go does not tell us how we will manage to go that way. Nonetheless, it’s an item that the international diplomatic agenda has to prioritise.
2. Reinvigorate rule-based governance of resources.
The problem as the report acknowledges is that this “amounts to a comprehensive rewiring of the global economy” (p.151). Not hard to propose but take a look at the G-20 or the Eurozone’s serial summitry and tell me who the electrician is going to be. In the age of Doha, it is both easy to imagine that trade wars over resources could erupt (p.153) and hard to see the practical basis for legitimate global rule-making. But with all that cold water poured over the proposal, what could be interesting is to pursue rule-making in regional groupings. Rather than waiting for Doha or even a 30-strong global resource club to get its act together, kick off and kick on in regional organisations where agreement can be found. Build modestly at first, then more ambitiously, linking different regional systems.
3. Invest in sustainable production and resilience.
Nobody can read this report and think that’s a bad idea. It has more credibility than numbers 1 and 2 in the list because it can be done by individual governments, or even by local authorities (cities, states, provinces), and it can be developed commercially with enormous profits. A combination of government-established regulations and incentives would be beneficial and in some countries the politics of that are feasible now.
4. Reduce vulnerability to short-term shocks.
Like investing in sustainability and resilience, this can be done at national and local level. Its greater credibility derives from a rather unpleasant but inescapable thought; it is inevitable that, if policies do not otherwise change as set out by items 1-3 above, there will be sudden, sharp and devastating shocks. It will only take one such for the richest economies to shore up their protection against shocks – though the US is probably an exception to that self-interested rule if the Tea Party ever gets to power.
You could say it is the success of development over the past 20-30 years that has generated the problems analysed and addressed by Resource Futures; it is the combination of population growth, economic growth and rising expectations that has created an increase in demand for natural resources of all kinds that is apparently quite unresponsive to the pressure of increasing prices. This issue is actually a product of a degree of success in addressing profound economic and social problems. Now, is that a cause for some confidence about the prospects for ultimately finding, if not a solution, at least a better place than where we are today? Or…
Originally published by Open Democracy
By DAN SMITH
January 14 2012
In the twentieth century the west’s boundless determination to extract ripped apart the social, political and cultural fabric of whole countries. Today, a century’s worth of price decline has been wiped out in a single decade, without reducing unprecedented levels of demand.
I have already remarked, and it’s the starting point for the new edition of myState of the World Atlas (published this week), that the human population is seven times greater than it was 200 years ago but our use of resources is disproportionately greater still: we produce 50 times as much, using 60 times as much water and 75 times as much energy. Where is that all going – and perhaps more to the point, how long can it keep on going? A new report offers insights.
Global population is still growing. Click to see full size image
The resource issue is fundamental. How it is addressed will do much to shape the prospects for fairness and justice in the world system, the likelihood of peace or war, the possibilities of sustainable prosperity, and the kind of freedoms we can expect to enjoy. Resources Futures from the Chatham House think-tank in London sets out to explore the political economy of natural resources, covering agriculture, metals, energy and water.
Changing times
In the twentieth century the long term trend was that natural resources got cheaper, punctuated by occasional increases in the price of oil. And our growing economic well-being was, in essence, predicated on that downward trend in the price of the basics.
One reason prices fell was that resources were both extracted and used with greater efficiency. This was partly due to market-driven technological innovation but it was also down to the west’s boundless determination to extract. What needed to be done in order to keep the oil flowing and the mines working was done. The social, political and cultural fabric of whole countries was ripped apart in the course of it and people who lived on top of important supplies of critical resources were simply moved on. When naked force was needed it was used; when a profitable relationship between extractive companies and local elites sufficed, that was the preferred option. As direct control by the European colonial powers was rolled back, the US and its local allies took over.
Today, things are changing. Not only do the resource-hungry powerhouses of China and India offer new options for local elites, but also the relative technological pay-off is declining and environmental change is having an impact.
Looking back, a McKinsey report calmly summed things up in 2011:
“That benign era appears to have come to an end. The past ten years have wiped out all of the price declines that occurred in the previous century. As the resource landscape shifts, many are asking whether an era of sustained high resource prices and increased economic, social, and environmental risk is likely to emerge.”
Pause to note that: a century’s worth of price decline has been wiped out in a single decade. In economic terms, that is some shock to the system – on a par with the financial crash of 2008.
With demand continuing to grow, expanding the supply of some resources means that producers must operate in places that are more challenging and difficult – whether because of natural features (such as poor soil, increasingly extreme weather or low ore-grades) or political ones such as corruption and conflict. All these pressures push up prices but don’t depress demand.
The coming crunch
The extra pressure on resources during the past decade is not just about China and India, but they are big players in this drama. Their economic growth – especially China’s – is the key factor that has added to the continued high levels of resource use by the USA, Japan, South Korea and the EU to raise global demand to new levels. But the scale of resource demand in countries such as Brazil, Indonesia and Turkey is also increasing. Projected acceleration in economic growth in some African and Middle Eastern countries will keep piling on the pressure.
The end of the era of cheap resources, then, is not reducing demand. The Chatham House report points out that the overall scale of demand for resources and the speed of its growth in the last decade are unprecedented (p.2) and there is no reason to expect this to change significantly: the combination of “expanding populations and rising incomes” equates to fast growth in demand for resources at least through to 2040.
The report focuses on the concentration of large scale resource extraction among relatively few players. China, the US, Australia, the EU, Brazil, Russia, India and Indonesia dominate the scene. Per resource, the concentration is even tighter: statistics on 19 key resources (including various crops, timber, fish and meat, various metals, fossil fuels and fertilizers) show that, for 15 of them, more than half of global output comes from just three or four producers (p.38).
Like growth in demand, the concentration of production shows no sign of changing any time soon. The International Energy Agency expects over 80% of the growth in oil production between now and 2035 to come from just six OPEC countries – Abu Dhabi, Iran, Iraq, Kuwait, Qatar and Saudi Arabia (p.42).
So – prices rise, demand rises and production stays concentrated.
Risks
One of the key problems is freshwater scarcity. The use of water increases while its supply remains pretty much constant.
On increasing use, consider this: annual consumption of meat per head of population in rich countries has risen from 56 kgs in 1990 to 94 in 2002; over the same period it has risen from 4 to 52 kgs in China and from 28 to 82 in Brazil. There are the benefits of development, right there in better nutrition.
Then look at this: producing a kilo of potatoes requires 500 litres of water; producing a kilo of beef needs 15,000 litres (p.13).
And the use of water in many places is disturbingly casual – absent-mindedly wasting or poisoning it. In China, all major river basins suffer from excessive pollution and 300 million people consequently lack access to safe drinking water (p.77). Current projections suggest that without decisive changes in the use and storage of water, some two-thirds of the world’s population will face shortages of clean water by 2025 and acute scarcity by 2050.
The report’s authors also focus on “the just-in-time global economy” (p.161). The drive for efficiency encourages low stock holdings, which in turn means that short-term fluctuations in prices are more important and that there is not much resilience in the system. Bluntly, the world is “only one two bad harvests away” from a renewed global food crisis (p.x).
But it is not only with food that local disruptions – whether due to extreme weather, political turmoil or industrial unrest – can rapidly translate into higher international prices. Price volatility increases risks all round – including the risk of governments being tempted and pressured into intervening in markets to protect consumers or producers or both, often with the sad effect of counter-productively increasing volatility.
Components of complexity
The issue of resources is one of today’s key political questions,; it contains some fiendish complexities. Addressing it will require long-term action based on clear analysis and consistent implementation.
One part of this is the interconnectedness of resource systems. As the report points out (p.4), this makes it important to enquire about unintended consequences when considering how to influence and regulate resource use and trade. The example the authors take is subsidies for biofuels, implicitly referencing the catastrophe in 2008. Rising food prices that year led to violent protests in over 30 countries. The green emphasis (by the EU among others) on expanding biofuel production had taken land out of food production and caused an estimated 30% of 2008′s food price increases. By one estimate, expanding biofuel production pushed 30 million people into poverty and threatened the livelihoods of almost 100 million.
Interconnectedness is also political and economic. Environmental pressures such as climate change or water pollution generate geopolitical challenges, either as a direct consequence or in the course of trying to develop international responses. Each potential solution will support some interests and threaten others. Win-win solutions will be genuinely hard to find. This, as the report notes, leads to current international efforts at resource management being shaped by zero-sum competition that makes them ultimately dysfunctional.
Pathways to sustainability
So what to do? The report rightly sees no choice but to cooperate. A single-minded, self-focused resource acquisition policy is ultimately not going to work because the world is too inter-linked and inter-dependent.
Cooperate, yes – but how and on what? The report suggests four pathways. All four are important. All four are necessary. I will list them in what I see as the order of ascending credibility.
1. New leadership is needed.
The proposal is “a new club of the world’s principal resource-producing and -consuming countries.” The report lists 30 possible members of this new international grouping with reasons for each one being there (p.154). One strength of the proposal is that it creates an institution to focus on the problem. Further, it includes the major producers and consumers so it’s representative but not UN-sized. The problem is that it means taking all the political problems and clashing interests within as well as between the 30 countries and giving them a forum to thrash around in. The club won’t lead unless an accepted leadership emerges within it. So this is the right direction – and everything the report says about the drawbacks of “policies that only tinker at the margins without fundamentally reshaping resource politics along the way” is also right – but to say this is the way to go does not tell us how we will manage to go that way. Nonetheless, it’s an item that the international diplomatic agenda has to prioritise.
2. Reinvigorate rule-based governance of resources.
The problem as the report acknowledges is that this “amounts to a comprehensive rewiring of the global economy” (p.151). Not hard to propose but take a look at the G-20 or the Eurozone’s serial summitry and tell me who the electrician is going to be. In the age of Doha, it is both easy to imagine that trade wars over resources could erupt (p.153) and hard to see the practical basis for legitimate global rule-making. But with all that cold water poured over the proposal, what could be interesting is to pursue rule-making in regional groupings. Rather than waiting for Doha or even a 30-strong global resource club to get its act together, kick off and kick on in regional organisations where agreement can be found. Build modestly at first, then more ambitiously, linking different regional systems.
3. Invest in sustainable production and resilience.
Nobody can read this report and think that’s a bad idea. It has more credibility than numbers 1 and 2 in the list because it can be done by individual governments, or even by local authorities (cities, states, provinces), and it can be developed commercially with enormous profits. A combination of government-established regulations and incentives would be beneficial and in some countries the politics of that are feasible now.
4. Reduce vulnerability to short-term shocks.
Like investing in sustainability and resilience, this can be done at national and local level. Its greater credibility derives from a rather unpleasant but inescapable thought; it is inevitable that, if policies do not otherwise change as set out by items 1-3 above, there will be sudden, sharp and devastating shocks. It will only take one such for the richest economies to shore up their protection against shocks – though the US is probably an exception to that self-interested rule if the Tea Party ever gets to power.
You could say it is the success of development over the past 20-30 years that has generated the problems analysed and addressed by Resource Futures; it is the combination of population growth, economic growth and rising expectations that has created an increase in demand for natural resources of all kinds that is apparently quite unresponsive to the pressure of increasing prices. This issue is actually a product of a degree of success in addressing profound economic and social problems. Now, is that a cause for some confidence about the prospects for ultimately finding, if not a solution, at least a better place than where we are today? Or…
Originally published by Open Democracy