(By Anthony Harrington via QFinance) It will have occurred to many consumers in the colder climates of
Northern Europe and North America that heating bills in particular, and
energy bills generally - including transport fuels - are increasing
considerably faster than average wage growth. There is a simple reason
for this, as is made clear in the McKinsey Global Institute (MGI)
Report, "
Resource Revolution: meeting the world's energy, materials, food and water needs".
What households are seeing in their monthly or
quarterly utility bills is a reflection of the fact that the beneficial
trend of ever cheaper commodity prices which held good all through the
20th Century, has now reversed. The MGI report presents a very detailed
analysis of past, present and probable future resource usage. As the
authors point out, the fact that resources became progressively cheaper
through the 20th century is in itself astonishing:
"Key prices (for resources) as measured by the MGI index fell by more
than half in real terms (through the 20th Century). This was astounding
given that the global population quadrupled in this era and global
economic output increased by approximately 20-fold, together resulting
in a jump in demand for different resources of between 600 and 2,000%."
What lay behind this continuing miracle of "more for less" despite the
huge rise in demand, which traditional economists would have expected to
drive prices dramatically upwards? According to MGI, the key was the
huge technological improvements in extraction techniques and the
continued discovery of low cost sources of supply. On top of these
improvements the 20th Century also benefited greatly from the fact that
the true cost of many resources was not factored in to the sales price.
Many costs were "externalized", which is to say, foisted off onto the
wider community or, as with global warming, onto the global community.
Even today, carbon emissions trading, which seeks to pull externalized
costs back onto company books, is really just beginning to get off the
ground on a global scale. Water is still regarded as a free commodity in
many countries despite the fact that water scarcity is looming larger
and larger as a problem, and many governments offer substantial
supplements to hold down energy prices as a way of placating citizens
who might otherwise take to the streets.
However, once emerging markets showed that they could turn in high
single digit growth year in and year out, their impact on global
resources began to be felt and prices started to climb. It is now clear
that the "free lunch" in terms of low cost commodities that had helped
to drive advanced market growth post World War II is virtually over. As
MGI notes, by the time another two decades have passed, around three
billion more middle-class consumers will be looking to improve their
lifestyles. India and China are growing at ten times the speed that the
UK saw through the Industrial Revolution and they are doing it on a
scale that is 200 times larger.
"Demand from the new middle classes will also trigger a dramatic
expansion in the global urban infrastructure, particularly in developing
economies. China could every year add floor space totaling 2.5 times
the entire residential and commercial square footage of the city of
Chicago. India could add floor space equal to another Chicago annually."
As the world "urbanizes" this "citification" will be at the expense of a
large number of hectares of arable land. The 3 billion new members of
the middle classes can be expected to expand their diet and demand more
meat at exactly the same time as the cities are spreading out over what
was good arable land. "New and expanding cities could displace up to 30
million hectares of the highest quality agricultural land by 2030 -
roughly 2% of the land currently under cultivation," the report's
authors say.
The raw resources needed to sustain that growth can't be met from
existing production facilities. For example, MGI reckons that the world
will see an 80% rise in the demand for steel in the period from 2010 to
2030. Already in the period between 2000 and 2012 there has been a 147%
increase in real commodity prices. Agriculture price increases, which
form a considerable part of that 147% rise, have pushed an additional 44
million people into poverty, according to the World Bank, the report
says. To meet the increase in demand for resources, the world is going
to have to invest at least $1 trillion more in what the report calls
"the resource system" each year.
However, MGI does not take a Malthusian view of our future. There is
every chance that the market will once again rise to meet the burgeoning
need, but for it to do so, the old industrial habit of externalizing
costs and not costing carbon and water properly is going to have to come
to an end. Pricing these costs in will have an inevitable impact on
commodity costs in the initial instance, but will lead to massive
efficiency gains. Faced with the real costs involved in their
activities, competition will force companies and producers to find
efficiencies and they will find them, MGI argues. In Part Two we look at
MGI's view of where efficiency savings might lie - and key to this, the
report argues, is a requirement to price carbon properly, which means a
carbon price of at least $30 per tonne.