See
Mistaking Peak Prices for "Peak Everything": Economic Super-cycles and Falling Commodity Prices. ByRonald Bailey of Reason.
"Plunging oil prices have been big news over the past year. Since
mid-summer 2014, the price for benchmark West Texas Intermediate (WTI)
crude has fallen from $105 to $48
per barrel. But it's not just the price of petroleum that has
plummeted. The prices of lots of other industrially important
commodities have also been dropping.
The International Monetary Fund Metals Price Index
soared to 250 points in March 2011 over its 2005 baseline of 100
points. By February 2015, the IMF Metals index had dropped to 137
points—a tumble of about 55 percent from its high. In other words,
commodity metal prices are now back to where they were in early 2006.
The IMF metals index covers copper, aluminum, iron ore, tin, nickel,
zinc, lead, and uranium. Similarly, the IMF price index for all
commodities—including fuel, food, beverages, and metals—topped 210
points above the 100 point 2005 baseline in March 2011 but has now sunk
to 121 points, a fall of about 57 percent. Again, it's about back to its
level in early 2006.
The steep run-up in commodity prices that occurred over the past
decade provoked numerous predictions that the world was about to run out
of all sorts of resources. And why not? Higher prices, after all, would
indicate that resources are becoming scarcer relative to demand. The
classic of the doomster genre is Peak Everything: Waking Up to a Century of Declines by Post Carbon Institute fellow Richard Heinberg. In 2010, Heinberg doubled down and asserted,
"The world is at, nearing, or past the points of peak production of a
number of critical nonrenewable resources—including oil, natural gas,
and coal, as well as many economically important minerals ranging from
antimony to zinc."
If everything was "peaking" when prices were going up; what does it
mean when they are coming down? This is where explanations based on the
theory of economic "super-cycles" might shed some light. Economists
Nikolai Kondratiev and Joseph Schumpeter noticed that since the late 18th
century the prices of most commodities tended to rise and fall in waves
lasting 40 to 60 years. However, the troughs of each successive price
wave tended to be lower than the last, indicating that the real prices
of commodities were falling over time. In general resources are becoming
ever more abundant, not scarcer.
According to Kondratiev and Schumpeter these "long cycles" in
commodity prices are driven by periods of rapid industrialization and
economic growth spurred by technological progress. In 1938, Schumpeter
identified three cycles: the first associated with the beginning of the
Industrial Revolution in the early 19th century; a second
characterized by "railroadization" and industrial expansion in Western
Europe and the United States; and third that based on "electrification"
and the internal combustion engine.
Another way to conceptualize the price upswings of past super-cycles
is that each occurred as new countries joined the global capitalist
enterprise system. This would include cycles associated with the
successive industrialization and economic expansion of Britain, followed
by the United States, then Germany and Japan, post-World War II
reconstruction, and lately the rise of China and India.
Commodity prices ramp up as economic growth speeds up in the early
part of each cycle. Incited by rising prices, entrepreneurs then work
hard to develop new supplies, increase resource use efficiencies, and
find substitutes. In essence, this process is technological progress. On
the downswing of the each super-cycle supplies catch up with demand and
prices begin falling.
Are we on the downward sloping side of the latest super-cycle? Very likely. In his 2014 working paper, "150 Years of Boom and Bust: What Drives Mineral Commodity Prices?,"
Dallas Federal Reserve Bank economist Martin Stuermer analyzed the real
price and production trends of four industrially important
metals—copper, tin, lead, and zinc—between 1840 and 2010.
Stuermer reports that "price surges caused by rapid industrialization
are a recurrent phenomenon throughout history." The most recent surge
in commodity prices, according to Stuermer, is due mostly to "large
demand shocks attributable to China in 2003 to 2007." The effects of
China's demand shock are now dissipating. Stuermer asserts that if
"there are no new positive demand shocks, the results [of this analysis]
suggest that current prices might further fall, as supply catches up
and prices return to their long-run trend." He adds, "Commodity
exporters should thus prepare for a further down swing of mineral
commodity prices." Ultimately, Stuermer expects that mineral commodity
prices will "return to their declining or stable trends in the long
run."
Stuermer's analysis bolsters the conclusions on super-cycles reached
by Northeastern University economist Bilge Erten and Columbia University
economist Jose Antonio Ocampo. In their 2012 super-cycle working paper,
Erten and Ocampo report evidence for four commodity super-cycles
between 1865 and 2009, each one lasting between 30 to 40 years. They
find that "for non-oil commodities, the mean of each super-cycle has a
tendency to be lower than that of the previous cycle." In other words,
the real prices of commodities have been undulating downward for more
than a century.
Erten and Ocampo also point out, "The magnitude of cumulative decline
during the downward trend is 47 percent for the non-fuel commodity
prices, with recent increases of around 8 percent far from compensating
for this long-term cumulative deterioration." The recent upswing phase
of the current super-cycle did not boost commodity prices to nearly what
they were a few cycles back.
However, Erten and Ocampo report that metals have been an
exception—the mean of the last cycle was higher than the preceding one.
Still, they note, "The contraction phase of this cycle has not even
begun yet, which can lower the mean of the whole cycle in the upcoming
years." It now appears that commodity prices were just reaching their
pinnacles when Erten and Ocampo were writing up their results back in
2011. Instead of peak resource production we are most likely now past
peak commodity prices—and heading lower for at least for the next ten to
fifteen years."
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