Monday, June 30, 2008

Seeing the Future (of Oil, Wheat, etc.)

Tyler Cowen at Marginal Revolution has an interesting post on Julian Simon, an economist who famously bet Paul Ehrlich that prices of metals would drop. His logic was, the most important resource we have is the human brain--the more brains we have the better everyone (on average) will do and brains can remedy any shortfall in any seemingly scarce resource. His heyday was during the last run-up in prices of oil and grains and other commodities in the 1970's, when he was a contrarian voice who seemed for 25 years to have been more right than wrong. But with today's prices, Tyler asks whether people can believe his thesis, at least enough to short oil, etc.

As you might expect, it gets lots of comments. (Also as you might expect, Simon's outlook is not popular among the Bill McKibben's of the world.) Anyone who is interested in the argument might also look at the study from Humboldt U. (Berlin) which basically argues that Simon was right (at least for food over the 1870-2000 period) but we face a changed environment. (It's nice to get a perspective from outside of the usual parties in the U.S.--we often are blind to our own biases.) An excerpt:
European Union agriculture has long stopped producing homogenous commodities. Rather it has become “boutique agriculture”. Farmers produce a wide range of goods which are characterised by differing production cost and sold for differing prices in the market place. Domestic consumers and those from abroad choose those qualities that best meet their individual preferences and income. It is likely that sustained higher market prices for agricultural products will act to slow down the growth in the demand for organic food. Moreover, the price of organic food relative to that of other food has declined in recent years, making organic food less profitable to produce.
And from the conclusion:
In this study the driving forces of changes in agricultural world market prices and their implications for European Union agriculture have been analysed for the time period 2003/05 -2013/15. The mega-trend of declining world market prices, which is sometimes referred to as the Agricultural Treadmill, has ended. Since the turn of the millennium, world market prices for agricultural goods have been increasing. This trend can be expected to continue for at least the time period analysed here. Not only will prices have a tendency to increase, but also fluctuations of agricultural world market prices are likely to be higher in the future than they have been in the past.

The reason for the positive trend in agricultural world market prices is that global demand growth outstrips the growth in global supply, and this trend will continue in the foreseeable future. Global demand for food will continue to grow at a fairly rapid pace mainly for two reasons. One is the continued growth in world population; the other is the sustained growth in per capita incomes in developing and newly industrialising countries, with a corresponding increase of per capita food consumption.

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