Commodity prices

Some of my readers are probably old enough to remember the famous 1980 bet that supply-side economist Julian Simon made with doomsaying Population Bomb author Paul Ehrlich about whether resources were becoming increasingly scarce or not.

Simon countered with “a public offer to stake US$10,000 … on my belief that the cost of non-government-controlled raw materials (including grain and oil) will not rise in the long run.

You could name your own terms: select any raw material you wanted – copper, tin, whatever – and select any date in the future, “any date more than a year away,” and Simon would bet that the commodity’s price on that date would be lower than what it was at the time of the wager.” … Ehrlich and his colleagues picked five metals that they thought would undergo big price rises: chromium, copper, nickel, tin, and tungsten.  … Between 1980 and 1990, the world’s population grew by more than 800 million, the largest increase in one decade in all of history. But by September 1990, without a single exception, the price of each of Ehrlich’s selected metals had fallen, and in some cases had dropped through the floor. Chrome, which had sold for $3.90 a pound in 1980, was down to $3.70 in 1990. Tin, which was $8.72 a pound in 1980, was down to $3.88 a decade later.

The Wikipedia article about the bet notes that a short-term rise in commodity prices is not inconsistent with Simon’s thinking:

The price of raw and other natural commodities such as oil, gold, and uranium have risen substantially in recent years, due to increased demand from China, India, and other industrializing countries. However, this short term price increase is not contrary to Simon’s cornucopian theory.

“More people, and increased income, cause resources to become more scarce in the short run. Heightened scarcity causes prices to rise. The higher prices present opportunity, and prompt inventors and entrepreneurs to search for solutions. Many fail in the search, at cost to themselves. But in a free society, solutions are eventually found. And in the long run the new developments leave us better off than if the problems had not arisen. That is, prices eventually become lower than before the increased scarcity occurred.”

The key assumption, of course, is: “But in a free society, solutions are eventually found. And in the long run the new developments leave us better off than if the problems had not arisen.” I’d be more comfortable with this claim if the cornucopians would provide more examples of where key industrial commodities became scarce and were then replaced by other materials or processes, leaving us better off.

Right now the short run seems to be piling on the bad news. Here are a couple of interesting charts. Bismuth and molybdenum seem to be getting scarcer. Will we be able to replace them?

The image “https://i0.wp.com/www.agorafinancial.com/afrude/wp-content/metalsindig.gif” cannot be displayed, because it contains errors.

The image “https://i0.wp.com/www.agorafinancial.com/afrude/wp-content/itmetal.gif” cannot be displayed, because it contains errors.

Rising food prices are also in the news. I like this chart because it is adjusted for inflation and takes a long view. We see some significant pain in the early 70s, followed by a drifting down to less than half of 1970 prices, and then a jump in the past two years. The recent spike represents a tripling in prices, but we can see that current prices aren’t way out of line with what was seen between 1975 and 1998. Still, the sudden jump is troubling; will it continue on at the current rate, or turn out to be just one more unusual spike in the graph?

The image “https://i0.wp.com/graphics8.nytimes.com/images/2008/02/13/business/20080213_WHEAT_GRAPHIC.jpg” cannot be displayed, because it contains errors.

Advertisements

3 thoughts on “Commodity prices

  1. High prices do not have to represent a shortage in the existence of the product- they can represent a created shortfall (think diamonds). I don’t know if this is true of Bismuth, but according to this: “The chief areas where it is mined are Bolivia, Peru’, Japan, Mexico and Canada, but only to the extent of 3.000 tonnes per year. There is no reliable estimate of how much bismuth is available to be mined, but it seems unlikely that there will ever be a shortage of this metal.”

    High prices can also represent a temporary shortage- we were really in no danger of running out of chain saws, but for a while they were in very high demand and very highly priced when everybody bought one to take it to New Orleans to help with hurricane damage.

    In the 70’s during the so-called energy crisis when gas was in short supply and high demand, the problem wasn’t the availability of gas, it was government regulation of prices creating a false shortage- gas stations weren’t allowed to charge enough to make a profit so there was no point in buying more gas at a loss.
    According to Wikipedia:
    Molybdenum is the 42nd-most-abundant element in the universe, and the 25th-most-abundant element in Earth’s oceans.

    But the US is one of the major sources, so maybe rising prices don’t reflect shortage of the molybdenum, but the weak and flaccid American dollar. And since it seems to be used in place of tungsten, presumably, if it gets too expensive, tungsten could be used in place of it?

    Wasn’t it a shortage of tin that lead to the iron age? And we used to light with whale oil, and once upon a time houses had to heat with coal, which was filthy (I have inherited some old books and things from my great-grandparents who lived in a coal-town some fifty years ago, and everything is still gritty and turns my hands grey).

    As for Ehrlich and Simon, I don’t know that Ehrlich was right about *anything* except that we do have more people, and it seems Simon has been vindicated time after time. In fact, Ehrich was not just wrong, he was *spectacularly* wrong about just about everything he said -except that we do have more people. So why would you prefer to believe the doom and gloom side?
    “Prices fell for the same Cornucopian reasons they had fallen in previous decades—entrepreneurship and continuing technological improvements. Prospectors found new lodes, such as the nickel mines around the world that ended a Canadian company’s near monopoly of the market. Thanks to computers, new machines and new chemical processes, there were more efficient ways to extract and refine the ores for chrome and the other metals.

    For many uses, the metals were replaced by cheaper materials, notably plastics, which became less expensive as the price of oil declined (even during this year’s crisis in the Persian Gulf, the real cost of oil remained lower than in 1980). Telephone calls went through satellites and fiber-optic lines instead of copper wires. Ceramics replaced tungsten in cutting tools. Cans were made of aluminum instead of tin, and Vogt’s fears about America going to war over tin remained unrealized. The most newsworthy event in the 1980’s concerning that metal was the collapse of the international tin cartel, which gave up trying to set prices in 1985 when the market became inundated with excess supplies. ”

    I’m sure we’re in a difficult time financially speaking, but I think the market will correct itself if not fiddled with too much, and things will be better again. And I am usually the pessimist in any conversation.

  2. DHM,

    So why would you prefer to believe the doom and gloom side?

    It’s not a matter of preference; at least I hope it isn’t. I only want to understand what I’m able to understand, and to be aware that I don’t understand what I don’t understand.

    For example, I’ve looked for awhile at what is going on with cheap energy, particularly oil. Most of what I read suggests that current sources of cheap energy are rapidly becoming scarce, at the same time that the Asian economies are just beginning to need it. Perhaps cheap energy will be with us forever, but it will have to come to us in a form I don’t yet understand. Given that many of the things we do depend on cheap energy, my own pessimism urges me to prepare for a life where it isn’t available. If I’m wrong, my preparations are wasted; if I’m right, my lack of preparation could make our life very difficult.

    I’m happy to be persuaded that I’m wrong, but I have to be persuaded, not just encouraged to put my faith in historical precedent, i.e. we’ve gotten pretty good at inventing our way out of such messes.

  3. Very interesting chart and I think I am going to borrow it for a blog on my own site. I would be most interesting in seeing a correlating chart showing what a farmers income has done over those same years adjusted for inflation, especially with out subsidies and big corporate farms included, but just the typical family farm operation.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s