Instead of disdaining fellow human beings as a cancer or a plague, as modern neo-Malthusians do, Naam rightly argues, “If we fix our economic system and invest in the human capital of the poor, then we should welcome every new person born as [a] source of betterment for our world and all of us on it.”
2
Is the World Running on Empty?
IN 2010, I WAS EXCITED TO VISIT the Great Plains Synfuels Plant near Beulah, North Dakota. Why? Because I have some small bit of personal history with it. Back in 1979, I was a low-level federal natural gas regulator and a peripheral member of the team that was guiding the plant’s initial development at the Department of Energy. I functioned as a petty Igor to President Jimmy Carter’s energy Dr. Frankenstein. I was eager to see up close what I helped in some minor way bring to life. Why was the plant built? Because we were in the midst of an “energy crisis,” since the world was running out of oil.
One proposed solution to the energy crisis was to turn America’s vast reserves of coal into methane. So Congress created the Synfuels Corporation, endowing it with $20 billion, with its goal being to eventually build as many as twenty-two enormous coal gasification plants, each one producing 300 million cubic feet of natural gas per day. Since coal gasification was an unproven technology in the United States, natural gas pipeline companies were reluctant to invest in it. The federal government rushed to the rescue with massive subsidies. To make a long story short, the oil crisis passed and the $2.1 billion plant was losing money. In 1988, the Department of Energy sold it to a local utility for 4 cents on the dollar, and even now it still barely makes a profit.
Besides its relevance to my personal history, the Great Plains Synfuels Plant stands as a very apt cautionary tale about massive energy projects promoted and financed by visionary presidents and their equally visionary helpmeets in Congress and in the federal energy bureaucracies. One other thing: Just imagine how much more massive US greenhouse gas emissions would now be if all twenty-two gigantic coal gasification plants had been built. A misguided effort to solve a spurious resource depletion crisis would have had the unintended side effect of making global warming considerably worse.
In 1972, The Limits to Growth, a report to the Club of Rome, was released with great fanfare at a conference at the Smithsonian Institution. In a front-page article, The New York Times hailed the report describing the collapse of civilization as “a grim inevitability if society continues its present dedication to growth and ‘progress.’” The study was based on a computer model developed by researchers at the Massachusetts Institute of Technology and designed “to investigate five major trends of global concern—accelerating industrial development, rapid population growth, widespread malnutrition, depletion of nonrenewable resources, and a deteriorating environment.” The goal was to use the model to explore the increasingly dire “predicament of mankind.” The researchers modestly acknowledged that their model was “like every other model, imperfect, oversimplified, and unfinished.”
Yet even with this caveat, the MIT researchers concluded, “If present growth trends in world population, industrialization, pollution, food production, and resource depletion continue unchanged, the limits to growth on this planet will be reached sometime within the next one hundred years.” With considerable understatement, they added, “The most probable result will be a rather sudden and uncontrollable decline in both population and industrial capacity.” In other words: a massive population crash in a starving, polluted, resource-depleted world.
Probably the most notorious projections from the MIT computer model involved the future of nonrenewable resources. The researchers warned: “Given present resource consumption rates and the projected increase in these rates, the great majority of currently nonrenewable resources will be extremely expensive 100 years from now.” To emphasize the point, they pointed out that the prices of “those resources with the shortest static reserve indices have already begun to increase.” For example, they noted that the price of mercury had increased 500 percent in the last twenty years and the price of lead was up 300 percent over the past thirty years. The advent of the “oil crises” of the 1970s lent great credibility to these projections.
The Club of Rome analysts were not alone in their fears of imminent resource depletion. In 1980, The Global 2000 Report to the President of the United States, issued by President Jimmy Carter’s Council on Environmental Quality, basically endorsed The Limits to Growth projections. “If present trends continue, the world in 2000 will be more crowded, more polluted, less stable ecologically, and more vulnerable to disruption than the world we live in now. Serious stresses involving population, resources, and environment are clearly visible ahead. Despite greater material output, the world’s people will be poorer in many ways than they are today,” began the report.
Peak Everything?
Let’s illustrate the temper of the time by recalling the legendary bet on the future prices of five commodity metals made back in 1980. That bet resonates powerfully in the ongoing fight between neo-Malthusian doomsters and cornucopian optimists. On one side, gambling that prices would spiral ever upward as a growing population used up the world’s resources, stood arch-doomster Paul Ehrlich and his two acolytes, John Holdren and John Harte. Holdren is now President Obama’s chief science adviser and Harte is a professor in the College of Natural Resources at the University of California at Berkeley.
On the other side of the bet stood University of Maryland doom-slaying economist and author of The Ultimate Resource Julian Simon. Ehrlich deeply disliked Simon, who argued that the global trend of economic data clearly showed that human ingenuity was continuously increasing the supplies and substitutes for natural resources and relentlessly lowering their prices. So the confident claque of doomsters challenged Simon to a bet on the future prices of five different metals.
In October 1980, Ehrlich and Simon drew up a futures contract obligating Simon to sell Ehrlich the same quantities that could be purchased for $1,000 of five metals (copper, chromium, nickel, tin, and tungsten) ten years later at inflation-adjusted 1980 prices. If the combined prices rose above $1,000, Simon would pay the difference. If they fell below $1,000, Ehrlich would pay Simon the difference. Ehrlich mailed Simon a check for $576.07 in October 1990. There was no note in the letter. The cornucopian Simon won.
As it happens, the dire predictions of the doomsters were seemingly being validated as the prices for a wide array of commodities including grain, oil, and various minerals soared in the early 1970s. But that changed almost as soon as the bet was laid. Most commodity prices started drifting downward over the next two decades.
By 1992, even the alarmist Worldwatch Institute admitted that “recent trends in price and availability suggest that for most minerals we are a long way from running out. Regular improvements in exploitative technology have allowed production of growing amounts at declining prices.” A 2005 report prepared for a meeting of the developing nation members of the Group of 77 nicely summarizes what happened to commodity prices. The report cited data from the United Nations Conference on Trade and Development indicating that “over the 24 years from 1977 to 2001, real prices declined for 41 out of 46 leading commodities.” The report further noted that according to the World Bank, “real commodity prices declined significantly from 1980 to 2002, with the World Bank’s index for commodity prices down 47 percent and metal and mineral prices down 35 percent.” The five commodities for which prices had increased or stayed flat were pepper, plywood, nonconiferous logs, tropical lumber, and zinc. The prices for staples such as wheat, corn, rice, cotton, wool, iron, aluminum, tungsten, tin, copper, and even crude oil were all steeply lower than they had been in the mid-1970s.
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 José 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 g
rowth 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.
The End of Doom Page 5