In late March and early April, as average U.S. gasoline prices climbed above $3.80 per gal., headlines warned that soaring prices could imperil President Obama’s chance of re-election. But just two months later, after average prices dropped by 30 cents per gal., what once seemed a deal breaker for the election is no longer considered an issue. This narrow focus on short-term fluctuations in the price of a single commodity blinds us to one of the biggest threats to the world’s economic progress and political stability in the decades to come: resource scarcity.
Although gas prices, along with prices across the commodity complex, are currently trending downward, the fundamental imbalance between constrained supply and skyrocketing demand continues to point to higher prices in the long term. A recent IMF analysis, for example, suggests that the price of oil could more than double over the next decade, ascending to $180 per barrel by 2022. While this trend is worrying, hundreds of millions of people around the world are already suffering the effects of resource scarcity, as people in places like India and African nations struggle to gain access to potable water. A February report from the National Intelligence Council warns that water shortages will likely lead to political disruptions and many more violent wars in strategically important regions over the next decade.
(MORE: The Resource Miracle)
As an economist and author, I have traveled to every continent over the past year, and the one common issue that every country I visited — from the richest to the poorest — is facing is the coming shortages of a wide range of key commodities. Dealing with this reality requires us to look past a myopic focus on individual commodities or short-term prices and understand the fundamental, long-term drivers of supply-and-demand imbalances.
Put simply, the world’s dwindling supplies of arable land, fresh water, energy and minerals — essential for the production of food and appliances such as mobile phones, cars, televisions and washing machines — cannot meet rising global demand.
Commodity demand is being driven by three primary factors: the rising world population, expected to grow from roughly 7 billion today to 9 billion by 2050; increasing global wealth, with an estimated 3 billion people expected to join the ranks of the middle class by 2030; and a marked trend toward urbanization. On the last point, demographers predict that the number of urban dwellers will rise from 3 billion today to 5 billion by 2030, and each of them will demand better quality foodstuffs and modern conveniences that will accelerate the draw on the world’s resources.
On the supply side, however, arable land, potable water, energy and minerals are finite, scarce and rapidly depleting. Take land — the earth contains approximately 13 billion hectares (32 billion acres) of land, or an area about 16 times the size of the United States. Of that, just 11% (1.4 billion hectares, or 3.5 billion acres) is arable and thus suitable to grow crops. The other 89% — including mountains and deserts — is prohibitively harder to exploit and farm. With the world’s population exploding, many more people will be looking to live and grow food on smaller patches of land.
Then there is water. Although the earth is 70% water, less than 1% is easily accessible fresh water that can be used for the sustenance of life, such as for drinking and sanitation. Meanwhile, by consuming about 85 million barrels of oil a day, we are living off oil discoveries that date as far back as the 1950s. Moreover, environmental concerns about fracking and shale gas could limit their promise so that such alternatives do not offer a real reprieve to global energy woes.
Finally, the global supply of minerals like copper is undermined by a decline in quality, a shrinking number of discoveries and increased vulnerability to political interventions. Increasingly, companies have to go much farther afield, into more difficult terrain and riskier geopolitical environments, in order to secure these minerals.
The widening imbalance between rising resource demand and falling commodity supplies means that commodity prices are likely to continue to rise substantially and thus hurt living standards. Plus, the risks of wars and conflicts will increase exponentially. Already there are 25 raging wars around the world that have their origins in disputes over access to scarce resources, and there will likely be many more.
Although traded-commodity prices have declined considerably in recent weeks, one fundamental fact remains: growing demand is far exceeding our finite supplies, pointing to severe commodity headwinds in the years to come. These risks remain particularly high because an explicit global framework that defines and manages competing resource interests and explores strategies for cooperation does not exist. As part of this multilateral framework, both demand-side and supply-side interventions could help curb consumption. On the demand side, higher taxes on consumption could curb commodity demand, but such policies are likely to be politically unpalatable. A better approach is to offer incentives that reward behaviors like conserving energy, seeking efficiency and recycling metal. Supply-side policies like subsidies could alter the supply-demand equilibrium by encouraging greater investment in R&D and exploration into alternatives. Such interventions are critical, as we must move beyond our present approach of “every nation for itself.”