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Facing Up To The End Of Cheap Resources - Part II

 November 29, 2012 06:26 PM

By Anthony Harrington via QFinance

In Part One of my analysis of the McKinsey Global Institute (MGI) Report, "Resource Revolution: meeting the world's energy, materials, food and water needs", I gave a quick sketch of the resource problem as MGI sees it. Part 2 looks at some of the possible solutions MGI sees to the problem of meeting soaring demand for commodities, by which they mean everything from energy to minerals and agri products.

In fact, MGI argues that commodities have to be seen as an increasingly closely linked whole rather than as individual types:

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"The correlation between resource prices is now higher than at any point over the past century, and a number of factors are expected to drive a further increase. Local decision makers face increasingly complex trade-offs across energy, land, and water systems as industrial, urban, and agricultural users all compete for the same resources. The impact of this is that shortages and price changes in one resource can rapidly spread to other resources."

The other point, of course, is that you can only hammer the resource pool so much, before further attempts at boosting supply actually erode supply. As MGI notes, factors such as increased soil erosion, the excessive extraction of groundwater reserves and, for example, over-fishing, all have a dramatic impact on the related resources. This is one of the reasons why "sustainable production" needs to become even more of a focus as suppliers gear up to meet ever increasing demand. There are severe threats, MGI suggests, which could arise from disruptions to a number of what it calls "unpriced ecosystem services". These include things like coastal protection, watershed management and the development of renewable energy.

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To understand the pressures that we are going to see on resources in the period to 2030, you only have to look at the way average incomes are increasing in emerging countries at a speed that the world has never seen before. MGI has an excellent summary of this:

The pace of real per capita income growth has been increasing as the world economy develops and is happening on a different scale. For instance, the United Kingdom doubled real per capita GDP from $1,300 to $2,600 in PPP terms in 154 years with a population of less than ten million. The United States, starting 120 years later, achieved this feat in 53 years with a population of a little over ten million. In the 20th century, Japan doubled its real per capita income in 33 years with a population of around 50 million. Now China and India, whose combined population today is more than 2.5 billion, are doubling real per capita incomes every 12 and 16 years, respectively. This is about ten times the speed at which the United Kingdom achieved this transformation—and on around 200 times the scale.

To support growth on this scale requires a truly massive investment in resources and, as MGI notes, if this investment is to be done in a sustainable manner, without all kinds of externalized costs, it needs the worldwide implementation of a proper carbon pricing policy. This would help to ensure that resource prices capture the environmental cost of the impact of producing/extracting those resources. It also, obviously, needs mechanisms for generating capital for investment on the scale that is going to be required. Governments need to be prepared to address what MGI calls the "market failures associated with property rights, incentive issues and innovation". Public policy initiatives will also be critical, particularly in the area of raising awareness of the resource-related risks facing societies. And although MGI wants subsidies for agri commodities and energy withdrawn so that market pricing signals can come through clearly, it recognizes the huge social instability that would inevitably follow from allowing higher resource prices to flow through to the poorest in society without mitigation. So it does see the need for proper safety nets for the poorest - just not in the form of subsidized resource pricing, which encourages general waste and mismanagement of the under-priced resource across society. This is a thoughtful report that should be studied by business leaders across all sectors of the economy.



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