Not Climate Change: Resource Depletion Is The Real Problem

A detailed essay on Jeremy Gratham, a money manager that thinks we have entered into a paradigm shift in the prices of basic commodities, like oil, metals, chemicals, and food. And water. Prices are going to go up, and never come down.

Carlo Rotella, Can Jeremy Grantham Profit From Ecological Mayhem?

Sitting in a Panera in Boston’s financial district in early July with Jeremy Grantham, I suddenly found myself considering how I might safeguard my children’s and notional grandchildren’s future by somehow engineering the U.S. annexation of Morocco. Grantham, the founder and chief strategist of the asset-management firm GMO, was reading aloud from a rough draft of his next quarterly letter to investors, in which he ranks some long-term crises of resource limitation along a scale from “merely serious” to “dangerous.”

Energy “will give us serious and sustained problems” over the next 50 years as we make the transition from hydrocarbons — oil, coal, gas — to solar, wind, nuclear and other sources, but we’ll muddle through to a solution to Peak Oil and related challenges. Peak Everything Else will prove more intractable for humanity. Metals, for instance, “are entropy at work … from wonderful metal ores to scattered waste,” and scarcity and higher prices “will slowly increase forever,” but if we scrimp and recycle, we can make do for another century before tight constraint kicks in.

Agriculture is more worrisome. Local water shortages will cause “persistent irritation” — wars, famines. Of the three essential macro nutrient fertilizers, nitrogen is relatively plentiful and recoverable, but we’re running out of potassium and phosphorus, finite mined resources that are “necessary for all life.” Canada has large reserves of potash (the source of potassium), which is good news for Americans, but 50 to 75 percent of the known reserves of phosphate (the source of phosphorus) are located in Morocco and the western Sahara. Assuming a 2 percent annual increase in phosphorus consumption, Grantham believes the rest of the world’s reserves won’t last more than 50 years, so he expects “gamesmanship” from the phosphate-rich.

And he rates soil erosion as the biggest threat of all. The world’s population could reach 10 billion within half a century — perhaps twice as many human beings as the planet’s overtaxed resources can sustainably support, perhaps six times too many.

[…]

Grantham, the public face of a company that manages more than $100 billion in assets, the very embodiment of a high-finance insider in blue blazer and yellow tie, has serious doubts about capitalism’s ability to address the biggest problems facing humanity. When he reminds us that modern capitalism isn’t equipped to handle long-range problems or tragedies of the commons (situations like overfishing or global warming, in which acting rationally in your own self-interest only deepens the harm to all), when he urges us to outgrow our touching faith in the efficiency of markets and boundless human ingenuity, and especially when he says that a wise investor can prosper in the coming hard times, his bad news and its silver lining come with a built-in answer to the skeptical question that Americans traditionally pose to egghead Cassandras: If you’re so smart, how come you’re not rich?

[…]

In his April letter, “Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever,” he argued that “we are in the midst of one of the giant inflection points in economic history.” The market is “sending us the Mother of all price signals,” warning us that “if we maintain our desperate focus on growth, we will run out of everything and crash.”

The letter is 19 pages long and dense with figures, but here’s the short version: “The prices of all important commodities except oil declined for 100 years until 2002, by an average of 70 percent. From 2002 until now, this entire decline was erased by a bigger price surge than occurred during World War II. Statistically, most commodities are now so far away from their former downward trend that it makes it very probable that the old trend has changed — that there is in fact a Paradigm Shift — perhaps the most important economic event since the Industrial Revolution.”

When prices go up and stay up, it’s not a bubble. Prices may always revert to the mean, but the mean can change; that’s a paradigm shift. As Grantham tells it, oil went first. For a century it steadily returned to about $16 a barrel in today’s currency, then in 1974 the mean shifted to about $35, and Grantham believes it has recently doubled again. Metals and nearly everything else — coal, corn, palm oil, soybeans, sugar, cotton — appear to be following suit. “From now on, price pressure and shortages of resources will be a permanent feature of our lives,” he argues. “The world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value. We all need to adjust our behavior to this new environment. It would help if we did it quickly.”

Grantham is taking the Malthusian side in an ongoing debate about growth and commodity prices­. The argument often circles back to the bet made in 1980 between the biologist Paul Ehrlich, who foretold catastrophic scarcity caused by overpopulation, and the economist Julian Simon, who argued that any short-term increase in resource prices caused by population growth will stimulate inventors and entrepreneurs to find new ways to exploit those resources, lowering prices in the long run. The two men picked five commodities and wagered on whether their prices, taken as an indicator of scarcity, would be higher or lower in 1990. Simon won, 5-0, even though the world’s population grew by 800 million during that decade.

Malthusians have been trying to live down that defeat ever since, but, as Grantham points out in his July letter, if we extend the original bet past its arbitrary 10-year limit to the present day, Ehrlich wins the five-commodity bet 4-1, and he wins big if the bet is further extended to all important commodities. Grantham concludes that the longer-run story of the bet “proves, in fact, both that man is mortal and must make short-term bets, and, more importantly, that Ehrlich’s argument was right (so far).” That final parenthesis, a nod to uncertainty, leaves open the remote possibility that the apparent paradigm shift might still turn out to be just a bubble in commodity prices.

[…]

Grantham doesn’t dwell on the potential for disaster on an unimaginable scale, but it looms behind his measured language. The world’s population is seven billion and counting. “Whether the stable population will be 1.5 billion or 5 billion,” he said to me, “the question is: How do we get there?”

The sad answer is in the same old ways: war, famine, disease, and drought.

But his ju jitsu may be helpful: to characterize the issues involved as ‘resource depletion’, and to avoid the incendiary ‘climate change’ or ‘global warming’. It actually is a broader set of problems. Phosphorus scarcity is not a climate change issue, per se, and soil erosion can be caused by simple overgrazing ever if things aren’t getting hotter and drier.

I intend to look into his foundation, Grantham Foundation for the Protection of the Environment, and see what they are up to.