The End of Doom (7 page)

The downward drift in commodity prices did not continue. The last decade has seen sharp increases in the prices of grains, metals, and crude oil. As an April 2012 International Monetary Fund report noted, “By the end of 2011, average prices for energy and base metals in real terms were three times as high as just a decade ago, approaching or surpassing their record levels over the past four decades. Food and raw material prices also rose markedly, although they remain well below the highs reached in the 1970s.” The International Monetary Fund's food price index has dropped from its 2011 high of 192 points to 147 points in February 2015, a fall of about 25 percent. Was this rapid run-up in prices a sign that the limits to growth were now upon us? Certainly many ideological environmentalists have interpreted the price spikes that way.

Peak Commodity Super-Cycle?

“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,” warned prominent environmentalist Richard Heinberg in his 2010 article “Beyond the Limits to Growth.” Heinberg had earlier made plain his collapsist beliefs in his 2007 book
Peak Everything: Waking Up to a Century of Declines.
In 2012, Michael Klare, Hampshire College political scientist and defense correspondent for
The Nation,
piled on in his book
The Race for What's Left: The Global Scramble for the World's Last Resources.
“Government and corporate officials recognize that existing reserves are being depleted at a terrifying pace and will be largely exhausted in the not-too-distant future,” declared Klare. In the wake of the recent hike in grain prices, long-time prophet of impending famine Lester Brown once again in 2012 declared, “The world is in transition from an era of food abundance to one of scarcity.”

Don't Heinberg, Klare, Brown, and other depletionists have a point? Isn't the increase in prices a signal of emerging scarcity? Resource optimist Simon would have badly lost his bet with Ehrlich and his associates had it run between 2003 and 2013. Simon would have owed the depletionists $2,658 (in 2013 dollars). In other words, the price of the basket of five metals had increased by nearly 270 percent. So is the end really nigh this time? Most likely not.

In the 1950s, economists Raul Prebisch and Hans Singer made the seminal observation that commodity prices had been falling for many decades relative to the prices of manufactured goods. As Singer put it, “It is a matter of historical fact that ever since the [eighteen] seventies the trend of prices has been heavily against sellers of food and raw materials and in favor of the sellers of manufactured articles.” The recent upsurges in commodity prices appear to contradict this trend.

“Once—maybe twice—in every generation, the global economy witnesses a protracted and widespread commodity boom. And in each boom, the common perception is that the world is quickly running out of key materials,” observes David Jacks, an economist at Simon Fraser University. We are now in just such a situation. Jacks studies the phenomenon of economic “super-cycles,” in which commodity prices rise and fall over periods lasting between thirty and forty years. In 2013, Jacks analyzed the price trends for thirty different commodities during the past 160 years. He finds that fifteen of the thirty commodities he tracked over the past 160 years are in the midst of super-cycles that started in the mid-1990s. In other words, the expansionary phase of the current super-cycle has run nearly twenty years so far.

Jacks also frames a useful distinction between “commodities to be grown” and “commodities in the ground.” The astonishing fact is that as world population since 1850 grew sixfold and the world's economy expanded more than hundredfold, Jacks found that the prices of commodities that are grown—grains, cotton, wool, and so forth—have generally been falling. On the other hand, commodities that come out of ground—oil, tin, iron, chromium and so forth—have remained flat or have been slowly rising.

Price is determined by supply
and demand
. Between 2002 and 2007, global economic growth was the strongest and longest lasting since the 1970s. The huge boom in the prices for all sorts of resources in the current super-cycle have been chiefly generated by rising demand in fast-growing emerging economies in countries like China and India.

In their 2012 study “Super-Cycles of Commodity Prices Since the Mid-Nineteenth Century,” economists Bilge Erten and Jos
é
Antonio Ocampo, from Northeastern University and Columbia University, respectively, confirm that the recent price increases in commodities are the result of a super-cycle upswing. Parsing real price data for nonfuel commodities such as food and metals from 1865 to 2009, they find evidence of four past super-cycles ranging in length between thirty and forty years. The cycles they identify ran from 1894 to 1932, peaking in 1917; from 1932 to 1971, peaking in 1951; from 1971 to 1999, peaking in 1973; and the post-2000 episode, which is ongoing. The increases in commodity prices during these cycles are driven largely by increases in demand arising from strong periods of industrialization and urbanization such as those experienced by Great Britain, Germany, and the United States in the nineteenth century, Japan in the twentieth century, and China and other emerging economies at the beginning of the twenty-first century.

The super-cycles are driven by periods of accelerating economic growth that boosts demand for commodities, thus pushing up their prices. Rising commodity prices in turn encourage the development of more supplies and the invention of resource-conserving technologies. As economic growth slows down during the second part of a super-cycle, the real prices of the now copiously supplied commodities fall. In fact, the researchers find that the prices for nonoil commodities do not generally recover to their preboom averages. Before the recent fourth super-cycle upsurge, nonfuel commodity prices had fallen by a cumulative 47 percent over the past hundred years.

The Economist
magazine has developed a widely cited commodities index that tracks the real prices of an extensive variety of mineral and agricultural goods. “Since 1871, the
Economist
industrial commodity-price index has sunk to roughly half its value in real terms, seeing annual average compound growth of –0.5 percent per year over the ensuing 140 years,” pointed out Council on Foreign Relations energy adjunct fellow Blake Clayton in 2013. He added, “Even after the boom years of the 2000s—in 2008, for instance, as commodity indexes soared, the
Economist
index never climbed more than halfway above where it stood 163 years earlier, in real terms.”

Figuring out when a super-cycle has topped or bottomed out is a fraught exercise. Nevertheless, many researchers believe that the current super-cycle in commodity prices has peaked and will soon move into its downward phase. By February 2015 the International Monetary Fund's commodity index has fallen by about 57 percent from its July 2008 peak. If the past is any guide, commodity prices could well fall to levels even lower than the price nadir of the 1990s as the expansionary phase of the current super-cycle begins to fade.

In the meantime, let's take a look at some specific depletionist predictions.

Peak Oil

Predictions of imminent catastrophic depletion are almost as old as the oil industry. An 1855 advertisement for Kier's Rock Oil, a patent medicine whose key ingredient was the petroleum bubbling up from salt wells near Pittsburgh, urged customers to buy soon before “this wonderful product is depleted from Nature's laboratory.” The ad appeared four years before Pennsylvania's first oil well was drilled. In 1919, David White of the US Geological Survey (USGS) predicted that world oil production would peak in nine years. And in 1943 the Standard Oil geologist Wallace Pratt calculated that the world would ultimately produce 600 billion barrels of oil. (In fact, more than 1 trillion barrels of oil had been pumped by 2006.)

In his 1971 Sierra Club book
Energy: A Crisis in Power,
John Holdren declared that “it is fair to conclude that under almost any assumptions, the supplies of crude petroleum and natural gas are severely limited. The bulk of energy likely to flow from these sources may have been tapped within the lifetime of many of the present population.” This sounds very much like the later prognostications of “peak oil” prophets.

In 1972,
The Limits to Growth
estimated known global oil reserves at 455 billion barrels. The report projected that, assuming consumption remained flat, all known oil reserves would be entirely consumed in just thirty-one years. With exponential growth in consumption, it added, all the known oil reserves would be consumed in twenty years. These dour predictions seemed plausible after the Arab oil crisis of 1973 quadrupled prices from $3 to $12 per barrel (from $16 to $63 in 2014 dollars) and when the Iranian oil crisis more than doubled oil prices from $14 per barrel in 1978 to $35 per barrel by 1981 (from $74 to $185 in 2014 dollars). In July 2008, the price of oil surged to $147 per barrel ($160 in 2014 dollars).

In response, the US federal government imposed price controls on oil and gas in the 1970s and established fuel economy standards to encourage the sale of more efficient automobiles. The sense of doom did not dissolve. In 1979 Energy Secretary James Schlesinger proclaimed, “The energy future is bleak and is likely to grow bleaker in the decade ahead.”
The Global 2000
warned, “By 2000 nearly 1,000 billion barrels of the world's total original petroleum resource of approximately 2,000 billion barrels will have been consumed.” The report predicted that the price of oil would rise by 50 percent, reaching $100 per barrel by 2000. In fact, by 2000, the average price of oil in real dollars had fallen by two-thirds of its price in 1980 (at its low point in 1998, the price of petroleum in real terms was under a fifth of its 1980 price).

Historically, on the basis of annual average real prices, 1980 and 1981 were the two years with the highest oil prices, at $106 and $92 per barrel (in 2014 dollars). As the next two decades saw the price of crude bumpily descend from its 1980 high, fears of imminent depletion of oil provoking a permanent economic crisis abated. That changed when the price of petroleum began its dramatic rise in the early 2000s. As a consequence, 2013 now ranks third, with a real price averaging just under $92 per barrel. Not too surprisingly, the rapid ascent in the price of oil again excited predictions of its imminent depletion and ensuing disaster.

For example, in 2006 Princeton geologist Ken Deffeyes was warning that the imminent peak of global oil production would result in “war, famine, pestilence and death.” Deffeyes, author of 2001's
Hubbert's Peak: The Impending World Oil Shortage
and 2005's
Beyond Oil: The View from Hubbert's Peak,
had already predicted that the peak of global oil production would occur on Thanksgiving 2005.

Deffeyes was far from alone. Houston investment banker Matthew Simmons stated in his 2005 book
Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy
that the Saudi Arabians were lying about the size of their petroleum reserves, claiming that they are really running on empty. In September 2005 Simmons announced that “we could be looking at $10-a-gallon gas this winter.” The price of gasoline in December 2005 was about $2.25 per gallon.

In a 2005 bet consciously modeled on the Simon-Ehrlich bet,
New York Times
columnist John Tierney and peak oil proponent Matthew Simmons wagered $5,000 on whether the price of oil in 2010 would average above $200 per barrel. When the bet was made, the price was $65 per barrel. When the bet was settled on January 1, 2011, the price of oil had increased to a 2010 average of $71 per barrel.

Colin Campbell, a former petroleum geologist who founded the Association for the Study of Peak Oil and Gas, had warned way back in 2002 that we were headed for peak oil production, and that this would lead to “war, starvation, economic recession, possibly even the extinction of homo sapiens.” In his 2004 book
Out of Gas: The End of the Age of Oil,
the Caltech physicist David Goodstein wrote that the peak of world production was imminent and that “we can, all too easily, envision a dying civilization, the landscape littered with the rusting hulks of SUVs.” Jim Motavalli, then editor of the environmentalist magazine
E,
wrote in the January/February 2006 issue: “It is impossible to escape the conclusion that we're steaming full speed ahead into a train wreck of monumental proportions.”

And James Schlesinger, the country's first secretary of energy, declared in the Winter 2005–06 issue of the neoconservative foreign policy journal
The National Interest
that “a growing consensus accepts that the peak is not that far off.” He added, “The inability readily to expand the supply of oil, given rising demand, will in the future impose a severe economic shock.” A 2007 report by the German think tank Energy Watch Group (EWG) concluded that the world had reached the peak of oil production in 2006 and that supplies would fall from about 81 million barrels per day to just 39 million by 2030. “The world is at the beginning of a structural change of its economic system. This change will be triggered by declining fossil fuel supplies and will influence almost all aspects of our daily life,” declared EWG founder J
ö
rg Schindler. This fast onset of oil supply shortfalls, warns the EWG report, could trigger the “meltdown of society.” As the price of petroleum ascended in July 2008 to $147 per barrel, an analysis released by the investment firm Goldman Sachs suggested that oil prices might soar to $200 per barrel. That did not happen. In fact, by the end of 2008, the price of oil had fallen to $34 per barrel.

Most of the petro-doomsters base their forecasts on the work of the geologist M. King Hubbert, who correctly predicted in 1956 that US domestic oil production in the lower forty-eight states would peak around 1970. In fact, US production did reach 9.6 million barrels per day in 1970 and then began declining. In 1969, Hubbert predicted that world oil production would peak around 2000.