Saturday, April 19, 2014
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The Silver Lining in High Commodity Prices

Cambridge – Today’s soaring commodity prices scream a fundamental truth of modern life that many politicians, particularly in the West, don’t want us to hear: the world’s natural resources are finite, and, as billions of people in Asia and elsewhere escape poverty, Western consumers will have to share them. Here is another truth: the price mechanism is a much better way to allocate natural resources than fighting wars, as the Western powers did in the last century.

The United States’ ill-considered bio-fuels subsidy program demonstrates how not to react. Rather than acknowledge that high fuel prices are the best way to inspire energy conservation and innovation, the Bush administration has instituted huge subsidies to American farmers to grow grains for bio-fuel production. Never mind that this is hugely inefficient in terms of water and land usage. 

Moreover, even under the most optimistic scenario, the US and the world will still be relying mainly on conventional fossil fuels until the hydrocarbon era comes to an end (which few of us will live to see). Last but not least, diverting vast tracts of agricultural land into fuel production has contributed to a doubling of prices for wheat and other grains. With food riots in dozens of countries, isn’t it time to admit that the whole idea was a giant, if well-intentioned, mistake?

Another wrong turn is the proposal recently embraced by two American presidential candidates to temporarily scrap taxes on gasoline. As laudable as it may be to help low-income drivers deal with soaring fuel costs, this is not the way to do it. The gas tax should be raised , not lowered. The sad fact is that by keeping oil prices high, OPEC is doing far more for environmental conservation than Western politicians who seek to prolong the era of ecologically unsustainable Western consumerism.

Of course, it is not just oil prices that are high, but all commodity prices, from metals to food to lumber. Prices for many commodities have doubled over the past couple of years.  Oil prices have risen almost 400% in the last five years. The proximate cause is a global economic boom that has been stronger, longer, and more broad-based than any in modern history.

Asia has led the way, but the past five years have been the best Latin American and Africa have enjoyed in decades. Broad-based commodity shortages often begin to emerge at the end of long global expansions, and in this respect, the present boom is no different.

Some politicians also complain about speculators who, more and more, are trading commodities on complex and growing markets that allow them to bet on whether, say, future demand from emerging markets is likely to outstrip growth in future supply. But why is this a bad thing? If “speculators” are bidding up today’s commodity prices because they realize that future generations are going to want commodities, too, isn’t that a healthy development? High prices for commodities today mean more supply for future generations, while at the same time creating an incentive to develop new ways to conserve on consumption. Again, high prices are helping in ways that Western politicians seem afraid to contemplate.

Admittedly, the global commodity price boom has had profound, albeit enormously complex and uncertain, effects on poverty. While surging commodity prices are helping poor farmers and poor resource-rich countries, they are a catastrophe for the urban poor, some of whom spend 50% or more of their income on food.

One element of the solution is to compensate the very poor for the higher cost of survival.   Over the longer term, more money for fertilizer, and other aid to promote self-sufficiency, is also essential. The World Bank, the United Nations, and even the Bush administration have moved to help, albeit in small measure relative to the scale of the problem. Of course, it should be noted that if economic reform in resource-rich Africa had been proceeding at the same pace as in Asia, the era of soaring commodity prices might have been postponed for another century.

For now, though, instead of whining about high commodity prices, governments should be shielding only their very poorest citizens, and letting the price spikes serve as a wake-up call for the rest of us. The end to Western consumerism is not yet at hand, but high commodity prices are a clear warning that big adjustments will be needed as Asia and other emerging nations begin to consume a larger share of the global pie. 

True, when today’s global economic boom ends, as it inevitably will, commodity prices will plummet, easily 25%, quite possibly 50% or more. Western politicians will cheer, and many pundits will express relief that less money will be flowing to undemocratic countries in the developing world.

But today’s era of high commodity prices is not just a bad dream that should be forgotten when it ends. High prices send a real message about scarcity in a globalizing world. Those who ignore it, especially by blocking market forces, are making a tragic mistake.

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