Time to Wake Up?

Read this:

• Jeremy Grantham, Time to wake up: days of abundant resources and falling prices are over forever, The Oil Drum, 29 April 2011. Original in PDF.

Jeremy Grantham is the chief investment officer of GMO Capital, a big investment firm. His essay is so readable that there’s no point in trying to outdo it. I’ll just include his summary, which you won’t find on The Oil Drum.

Also, this graph is worth staring at (click to expand):

Many claim that human ingenuity will always keep the price of resources dropping. That was true from 1900 to 2002, with average price decline of 1.2% per year in constant dollars. There were upward spikes for world wars… but the inflationary oil shock of the 1970s was something new: I remember the puzzled, upset mood in the US. But since 2002, according to Grantham, we’ve started seeing something even bigger.

If he’s right, this is very important. What do you think?

Personally I agree completely with his general point that exponential growth is always unsustainable in the long term. Even a civilization expanding through the universe at nearly the speed of light will only grow in a roughly cubic way. Exponential growth is ‘transient behavior’ that happens only near the beginning of a process. So to me, the really interesting question is the empirical one of whether we’re seeing, right now, the transition to a world where resources continue to become more expensive. If you think otherwise, you should convince us that this is a temporary glitch that will end when… something happens.

Summary of the Summary

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.


• Until about 1800, our species had no safety margin and lived, like other animals, up to the limit of the food supply, ebbing and flowing in population.

• From about 1800 on the use of hydrocarbons allowed for an explosion in energy use, in food supply, and, through the creation of surpluses, a dramatic increase in wealth and scientific progress.

• Since 1800, the population has surged from 800 million to 7 billion, on its way to an estimated 8 billion, at minimum.

• The rise in population, the ten-fold increase in wealth in developed countries, and the current explosive growth in developing countries have eaten rapidly into our finite resources of hydrocarbons and metals, fertilizer, available land, and water.

• Now, despite a massive increase in fertilizer use, the growth in crop yields per acre has declined from 3.5% in the 1960s to 1.2% today. There is little productive new land to bring on and, as people get richer, they eat more grain-intensive meat. Because the population continues to grow at over 1%, there is little safety margin.

• The problems of compounding growth in the face of finite resources are not easily understood by optimistic, short-term-oriented, and relatively innumerate humans (especially the political variety).

• The fact is that no compound growth is sustainable. If we maintain our desperate focus on growth, we will run out of everything and crash. We must substitute qualitative growth for quantitative growth.

• But Mrs. Market is helping, and right now she is sending us the Mother of all price signals. The prices of all important commodities except oil declined for 100 years until 2002, by an average of 70%. 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.

• Climate change is associated with weather instability, but the last year was exceptionally bad. Near term it will surely get less bad.

• Excellent long-term investment opportunities in resources and resource efficiency are compromised by the high chance of an improvement in weather next year and by the possibility that China may stumble.

• From now on, price pressure and shortages of resources will be a permanent feature of our lives. This will increasingly slow down the growth rate of the developed and developing world and put a severe burden on poor countries.

• We all need to develop serious resource plans, particularly energy policies. There is little time to waste.

74 Responses to Time to Wake Up?

  1. Robert Smart says:

    Energy is king, and it is hard to see how the transition from chemical to nuclear energy is going to be limiting in the medium term. In the short term things are bad and going to be worse because plans to switch away from fossil fuels are insanely unrealistic. Even were that not the case, the transition from fossil fuel to electrification of everything is a massive undertaking, and consumption for personal use has to go down a lot for a while to make it possible. In the long term population growth has to be limited to whatever rate of off-planet migration is possible, conceivably 0, and its very hard to see how population growth can be limited in a nice way. I guess the four horsemen of the apocalypse will be pressed into service. Note that Death rode a green horse, notwithstanding mistranslations to the contrary.

    Hydrocarbons, minerals and NPK fertilizer can be produced easily from commonly available stuff given cheap energy, and we will be a long way into the medium term before we are forced down to such low grade sources. The question is how bad the short term is going to be, because obviously there will little cheap fossil fuel to help us on the upslope.

    • John Baez says:

      Robert wrote:

      In the long term population growth has to be limited to whatever rate of off-planet migration is possible, conceivably 0, and its very hard to see how population growth can be limited in a nice way.

      I don’t have any kids, and take my word for it: it’s great!

      Of course if I were a farmer and needed someone to do the hard physical labor when I got old, I would not feel this way. But once countries go industrial or post-industrial, as long as there’s a halfway working system of socialized elder care the birth rate drops because:

      1) contraception becomes more easily available,

      2) more and more people decide that kids aren’t going to help them that much,


      3) they start noticing life can be more fun and even very fulfilling if you don’t have ’em.

      I can easily imagine the world making a transition to a situation where you practically need to pay people to have kids. They already effectively do this in some places! The main big question in my mind is whether the transition to negative population growth will happen soon enough to help us out with the various crunches we seem to be coming to.

      Some guesses:

      Population, Azimuth Project.

      • Robert Smart says:

        Human behaviour is complicated and this will affect population trends. Animal behaviour (ethology) is very relevant, since humans seem to have the flexibility to incorporate any reproductive behaviour seen in the mammal and bird world. This is a controversial view, since it includes some pretty “immoral” behaviours. For example in some pair bonding birds, females will leave the male to look after the babies, and run away with another male to start a 2nd family in a season. And we notice that is also a low frequency human behaviour.

        Humans also have behaviour not found among our relatives. One is the cultural overlay of reproductive behaviour. One doesn’t have to accept my controversial view on the provenance of those rules to acknowledge that they can change quite a lot over a generation or two.

      • Robert Smart says:

        People need to feel useful. Only a very few can be useful to the whole world. For the rest of us, being useful to our kids is mostly what keeps us going. I doubt if many parents think much about what their kids will do for them. Indeed I’ve always told my kids that since they didn’t ask to be brought into the world, and life is a mixture of good and bad, they don’t owe me anything. Actually what you want from your children is grandchildren, and you soon get the message that this will not be possible without a contribution of resources and support.

        I also think that humanity is a boom and bust species. A good guide to future action is to imagine that genes are intelligent and think what they would want. We’re going through a benign period, but we know that a population crash will come unless we reduce the population. What are our genes whispering in our ear? “Have lots of children while the going is good, some might be lucky enough to survive the crash.”

        • Phil Henshaw says:

          Robert, But there is also nothing but individual people who are useful to the whole world, all the time. We invent our own paths and raise children to do the same, either as competent or incompetent, curious or incurious. Out of that comes either a competent, imaginative and responsive world or not. Boom and bust is a kind of incompetent creativity that becomes unresponsive, isn’t it?

          Margaret Mead uses that observation in saying “Never doubt that a small group of thoughtful, committed citizens can change the world; indeed, it’s the only thing that ever has.” Great inventions generally come from small hot beds of creativity, that emerge from the common soil of young individuals out searching for their paths. They’re typically thrown together by happenstance, but using their own wits open doors for their whole environment, and become a great force.

          So if we were that kind of hot-bed of creativity would we finally discover the true equation for “boom and bust species”? That’d be useful. Would we study why it is that in some circumstances people seem incapable of avoiding it, but in others never fail to see what to do and so never get in trouble?

          To me, one of the things that kind of points to the misconceptions that would cause it are the fairly common statements that our learning deficits are caused by fate, rather than a lack of imagination.

        • Robert Smart says:

          Obviously it was wrong of me to portray only the extremes. From contributing to nieces/nephews (as Lizzie says she will do for Jane in “Pride and Prejudice”) and other family, to supporting a local or interest-group community, to contributing to a wider project to help the whole world (as Phil says), there is a continuous and multidimensional range of opportunities.

        • Phil Henshaw says:

          Robert, then what’s the true formula for boom and bust?? Why can’t we examine the necessary assumptions to see which ones are actually variables?

        • Robert Smart says:

          If a species is relatively solitary and defends a fixed amount of territory, whether or not that amount of territory is more than is needed, then that species will keep a relatively fixed population, and probably females won’t produce too many offspring except when territory becomes available. Similarly if birds all breed on a few remote islands and breeding spaces are limited then the population will be relatively fixed. Other species, including ours, will boom when things are good and crash when things are bad. I’m just doubting that humans are well designed to cooperate to limit resource use. On the contrary side humans have the amazing ability to form groups that exceed our ability to know all the individuals. So it doesn’t seem impossible that we could form a humanity-wide group to cooperate on saving the world.

        • John Baez says:

          Robert wrote:

          So it doesn’t seem impossible that we could form a humanity-wide group to cooperate on saving the world.


        • Robert Smart says:

          Human groups are very enemy-oriented. So personification of the problems is a relevant tactic. However emotion can lead us to error. For example the whale saving missions of the Sea Shepherd are inspiring, but probably not optimal at an ecosystem level.

        • Tim van Beek says:

          Have you read or heard about

          • Jared Diamond, Collapse.

          (which is also on our recommended reading list).

          Among other topics, Diamond writes at some length about the easter island and the catastrophic deforestation that happened there. He has a very interesting comparison of various Pacific islands, where humans failed to establish a thriving culture on some, while they did not have much trouble surviving on others.

        • Phil Henshaw says:

          Robert, you first observe that species that establish a niche avoid the “boom and bust cycle”. Part of the reason may be that it’s quite costly to come into conflict with other established species, so stable populations tend to develop where they are uniquely adapted to defend a niche, and not wast themselves pushing beyond.

          I like thinking of that as minnows sticking near the shadows and not venturing out in the open where the big fish are. That it takes real smarts for species to define their a niches like that appears to be one of the key facts of how living systems work that theorists have not yet recognized as a major source of their emergent system properties.

          That only hints at a solution to boom and bust, though. It doesn’t say what formula it is that people follow, over and over and over, that causes explosions of wealth that then collapse the environment they momentarily flourish in. Diamond as well as Joe Tainter describe a number of those without getting down to defining what the curse of exploding wealth is either.

          I think to really understand how to solve it we need to perceive the problem from the view of being trapped in its way of thinking. It’s so characteristic that after the crash people look back and simply *can’t believe* how the whole society seemed to become possessed by a kind of madness, right?

        • Robert Smart says:

          Important to understand that evolution isn’t survival of the fittest species, or the fittest individuals within a species, but of the fittest genes within a species. Genes have their own motivation, which creates but is distinct from the motivation of individuals. Genes are also highly amoral even though they create morality. Its a very interesting area. There are many popular books on the subject which all need to be read with care. I like Frans de Waal best, but don’t always agree with him.

        • Phil Henshaw says:

          Robert, But in this case it may be actual *human* motivation that takes precedence in economic behavior, rather than implied genetic motivation, right? ;-) The basic question about boom and bust, from hindsight, is “What WERE they thinking?!?!”.

          So, what do you think people are thinking as they drive their runs of great success to failure. In the “go go” phase, long before the “oh no” phase, what is it that people are saying “go” about?

          My approach is to poke around looking for answerable questions that might be “hidden in sight” or just surprising. When people are somehow tricking themselves it implies we are somehow dodging the answers we’re looking for, that might be found looking behind the stage props for the argument we weren’t aware of being there.

        • Robert Smart says:

          I didn’t mean to suggest that human motivations are independent of our genes’ motivations. Far from it. Once I thought of writing a self-help book titled “The key to happiness: respect your genes, but stand up to them”. Our genes push us to change with sadness and pain, and they push us to continue with happiness and pleasure. You can’t be happy unless you “convince” your genes that what you are doing will work for them. Things that genes like include: making children and increasing your status. Increasing your status is particularly good (in the primitive environment in which we evolved) since it improves the survival of ourselves and our family. However people with high status sometimes seem to not realise that we can’t all take that route.

          Genes have motivation with zero intelligence. Computers in 20 years will have intelligence with zero motivation. Motivation is orthogonal to intelligence. The way genes arise means that they have an apparent world-view that “the future will be like the past”. Overcoming this by the application of human intelligence is nontrivial.

        • Phil Henshaw says:

          Robert, How our thoughts are controlled by our genes is so hypothetical I don’t really see a way to pose answerable questions about it. Scenarios are on thing but for the boom and bust phenomenon I look elsewhere for answerable questions. Isn’t that the strength of science, spending the time to patiently look for answerable questions, that build on answerable questions?

          The boom and bust phenomenon appears to come with a great many examples to point to, that have a lot of similarities. I see them as great eruptions of wealth that end in collapsing the economic environment in which they thrived, for reasons that look foolish in hind sight. Isn’t that evidence of confusion?

          Perhaps we could figure out what confused belief system gives rise to them, and persistently keeps fooling people over and over. Discovering that might be something as important as the discoveries that Copernicus and Galileo made that revolutionized the Ptolemaic model?

        • Florifulgurator says:

          Robert said:

          The way genes arise means that they have an apparent world-view that “the future will be like the past”. Overcoming this by the application of human intelligence is nontrivial.

          Methinks it’s utterly trivial: Forget about the genes!

          Phil said:

          Perhaps we could figure out what confused belief system gives rise to them, and persistently keeps fooling people over and over. Discovering that might be something as important as the discoveries that Copernicus and Galileo made that revolutionized the Ptolemaic model?

          Buddha has revolutionized the self-centered world model.

        • Phil Henshaw says:

          Flori, the Buddha may have solved it for the way he posed the question, but does that solve our present problem. How would people today begin to perceive in foresight what kinds of wealth are becoming dangerous delusions? Wouldn’t you need some kind of model of how “true belief” becomes “false belief” without you doing anything, just by itself, that people could understand?

        • Florifulgurator says:

          Not clinging to things and self opens space for insight and action (or nonaction). As does B’s “law of the non-excluded middle” which relativizes true and false (belief), etc.

          Funny, indeed methinks B was a mind Copernicus. Alas he lays buried under a huge pile of superfluous (incl. supernatural) stuff.

        • Phil Henshaw says:

          Flori, That’s wonderful for relieving emotional tension, but we have a physical world problem. We have a whole global society pursuing a physical course of action sure to result in its permanent rapid decline.

          All signs are that we’re not actually suicidal, but actually confused by our misinformation, and caught in “the standard boom-bust trap” we have repeatedly taken to it’s natural demise over and over in history. We can’t get out of it without realizing that some belief(s) we trust implicitly were only valid in the circumstances of the past and no longer apply.

          The real problem, though, seems to be neither emotional nor practical. It seems to be simply that people see no reason to question cultural values they hold without question.

          So, if you say the Buddha’s method solves that, can you demonstrate it by pointing to how we are trapped by our trusted beliefs, and would need to question them in order to escape from using up everything on earth ever faster even as we collide with the limits of resource exhaustion?

          That’s one of the things we are demonstrably doing as a collective behavior, that is completely inconsistent with what we would ever do in our individual behavior.

        • Florifulgurator says:

          I wasn’t having emotional tension in mind – although the Buddha’s concept of dukkha embraces that. To get rid of dukkha, the Buddha recommends developing a clear mind. 5 points of his Noble Eightfold Path are just about this.

          Al Gore, Earth in the Balance, 1993:

          The more deeply I search for the roots of the global environmental crisis, the more I am convinced that it is an outer manifestation of an inner crisis that is, for lack of a better word, spiritual.

          So, there are indeed emotional forces behind our civilization’s clinging to the trusted beliefs of c20th wonderland. Most people can not seperate clear thinking from emotion. Another aspect is that it takes considerable stomach to look down the abyss – and Buddhism can help strengthen the mind. (Joanna Macy is a great contemporary example. Another, weird, example is the kamikaze pilots trained at Japanese Zen monasteries…)

          I wish I could point to convincing evidence that Buddhism can help us out of the trap. After all, a basic Buddhist concept is the doctrine of codependent co-arising, which renders it a truely ecologic philosophy. So, Buddhists are keenly aware of our ecologic “sins”. Here’s some meager evidence: A Buddhist Response to
          The Climate Emergency
          . Alas it’s c20th ecologic thinking and some aspirational prayers. They do not yet get the consequences for their following the Noble Eightfold Path: Not carbon negative, no Bodhisattva. Not carbon negative, no sangha…

          (’nuff said on that…)

        • Phil Henshaw says:

          Robert & Flori, How come, like Al Gore it seems too, when looking for the core problem we end up throwing up our hands (as I see it) and blaming spirits for everything? Isn’t that part of what is so impractical about human reasoning? I think giving in to that tendency to fall back on having faith in or laying blame on cosmic abstractions of our cultural beliefs is part of the problem. It’s a practical problem that is stumping us us, isn’t it?

          I’ve found so many good examples of how we fail to recognize what information we need to collect, for not asking the “dumb questions”. It makes that a rather good candidate for the deep flaw in our way of making models of nature. Take the example of my quite firm finding that businesses are only aware of nominally ~20% of the real energy impacts of business choices. It’s remarkably simple. They have not been counting the energy demand that results from paying for their operating services, but only examining supply chain fuel purchases.

          So the way business measures environmental impacts and development impacts differ by the same fivefold amount, is one of the curiosities. When businesses come into a community and expand the housing and commerce and infrastructure, etc. that’s all counted as a positive economic impact benefit of the development. Not single bit of that resulting energy use, accelerated resource depletion or CO2 or other environmental impacts are counted! The two impact measures don’t compare because of the “magic” of differently defining the categories, and no one asking the “dumb questions”.

          There are several ways to consider the “moral”, “cognitive” or “spiritual” failing that represents, but its still also a matter of not collecting the appropriate information, too. It’s still saying one thing and collecting information about another thing.

          We don’t seem to see the connection between money and the environment apparently because we overlook how we use money to make requests for environmental services. So we seem to have a whole society effectively ignoring all the impacts that we ask others to do for us. It’s nutty, but evidence this whole thing is new to us in some quite unexpected way too.

          Looking into how we make such broad conceptual errors doesn’t automatically resolve how we manage to do it, of course. Still it is a fairly sure way to bring up and study the problem isn’t it?

  2. Dennis J. Cavanaugh says:

    Due to businesses being dependent upon continued economic growth, and due to politicians ignoring the problem of uncontrolled human population growth, we will continue on the same path to a sudden collapse in Earth’s ability to provide the essential resources that are necessary, and then wars will waste the remaining resources while the human population collapses.

  3. Web Hub Tel says:

    Grantham spent some time relating how innumerate the smartest people were concerning exponential growth. What I find interesting is that the exponential property is not necessarily in the population increase but in the technological advances in finding and then exploiting oil. Grantham’s essay has been in discussion at TheOilDrum.com since yesterday and I always like to interject with what I consider a more valid model of resource exploitation. Oil discovery is the ultimate stochastic multiscale network problem in that the prospecting agents are dispersed over the globe with various skill levels, while searching for resources that have a similarly dispersed distribution in spatial terms. Try solving that problem as a puzzle!

  4. simplicio says:

    Is taking a ruler and drawing a line through the starting point of the price index graph through to the lowest point really a meaningful way to extrapolate the rate of decline over the time period? Kinda reminds me of some climate-change deniers attempts to make it look like the world is getting cooler by taking a particularly hot year a decade ago and a particularly cool year in the present and then just drawing a line between the two ontop of the intervening data.

    Eyeballing, it looks like prices were more or less constant through to ~1980, when they dropped sharply (perhaps because declining birthrates caused a drop in the need for new infrastructure projects in western countries) and then started to grow again after 2000, presumably as developing countries started to, well, develop.

    • John Baez says:

      Simplicio wrote:

      Is taking a ruler and drawing a line through the starting point of the price index graph through to the lowest point really a meaningful way to extrapolate the rate of decline over the time period?

      Heh — good question!

      Is that really all he did? Yeah, it looks like it!

      That wouldn’t mean his whole analysis is wrong, but it would make the figure of ‘1.2% decline in prices per year’ quite suspect.

    • DavidTweed says:

      Firstly, it’s not clear that the economist’s “constant dollars” is the appropriate measure: either the environmental “cost” of production/extraction or (in a given country) the proportion of a “typical” person/family income.

      The other thing is that there’s a sub-text that prices rise back to older levels exceptionally due to exceptional circumstances, but looking at that graph one has to ask if those exceptional circumstances are in fact “normal behaviour for humanity”. As such, the question is whether the new prices are rising outside the cone of general expectations?

    • Nathan Urban says:

      From a purely time series perspective, I think I agree with simplicio here. Take the cherry-picked line away and it looks like large fluctuations around a small trend up to 1980 or so, followed by a larger dip and rise back to previous levels.

      On the other hand, those fluctuations have real-world causes, and it’s worth thinking about whether something really different is happening now compared to the causes of past fluctuations. But I don’t find that graph by itself very compelling.

    • Phil Henshaw says:

      I think that’s the “exaggeration” of the trend that he is asking the reader to contemplate, and why he labels it with(?). My method for discovering trends that might reveal systemic changes of trend is fairly simple, to draw my tentative line through the middle of fluctuations, to keep the area above and below about equal over time.

      It’s remarkably effective when fluctuations are smaller scale events riding an underlying regular process. Here it’s not so clear from just the shapes in the curve which fluctuations are fundamental and which superimposed.

      From the totality of information, though, I think the general saddle shape and upsurge you get by threading the middle of the fluctuations, that anyone would expect to find for resource limits, does seem to be what’s visibly happening.

  5. John Baez says:

    So, here is another chart:

    It was apparently created by Barry B. Bannister of the financial firm Stifel Nicolaus.

    This seems to be another way of presenting Bannister’s data:

    How come Bannister is seeing a general long-term price rise in commodities instead of Grantham’s claimed decline? Is he not using constant dollars?

    As usual, charts without full explanations are very puzzling.

    • Nathan Urban says:

      The titles of the graphs imply Grantham’s graph is of commodity prices, but Bannister’s graphs are of (smoothed) commodity price growth (the time derivative?).

      • John Baez says:

        Right. Bannister’s graphs show annual commodity price changes ranging between -7% and 17% from 1900 to 2002, while Grantham claims an average -1.2% annual change during this time period. They could both be true even if they’re both using the same data, but it would be nice to know what data they’re using and subject it to a more thorough analysis.

    • streamfortyseven says:

      How about graphing commodity price vs. money supply? commodity price vs. prime rate/interest? Also bear in mind that these may be sales pitches by people selling options or commodity-based ETFs. Perhaps especially true in light of the 2015 and 2025 estimated figures.

    • Phil Henshaw says:

      The difference between the two charts is that one is a 10 year moving average and the other 5 year. You probably noticed they are log derivatives, not price indicies.

      Reading graphs of normal or log derivatives of jumpy data is often misleading. It doesn’t look like it, but the appropriate integral of each curve should reproduce the same irregular saddle shaped history curve of resource price declines now being followed now by progressive price rise again.

      Why the decline was slow and the rise is now fast would have to do with market dynamics, a series of escalating panics, essentially. What seems to be causing it is the shift from market prices being set by the costs of resource extraction to being set by the prices people are willing to pay for scarce resource quantities, priced as life necessity. Each big spike implicitly represents some group of people making a last ditch effort to maintain their prior level of resource use and failing to do so.

      For example, in the 2007 price war between ethanol resources and milk resources, milk was said to win, because people buying cheese and raising kids were more willing to pay the higher fare than those buying ethanol.

  6. Richard Lubbock says:

    How does this fit with Tylen Cowen’s theory of The Great Stagnation: The easy fruits have been harvested?

  7. Florifulgurator says:

    The talk about weather in the PDF summary sounds suspiciously like wishful thinking. But there’s none of this in the Oil Drum article, which sounds quite reasonable.

    But I’m not that optimistic regarding weather and agriculture.

    A glitch is his discussing “potash and potassium” (should be potash and phosphorous) and confusing the importance of these non-renewable resources with the importance of nitrogen (which is renewable in sapient agriculture). Peak phosphorous might be a decade or two away, but the price is already rising. Nitrogen fertilizer produced from fossil carbon will continue rising, too (even if it’s not needed technically in sapient agriculture).

    So, it seems more probable than not that food prices will stay high and rising. This is a good thing, as it leaves a little time to heed the warnings of four horsemen coming. (E.g., Egypt is not yet starving. But they are now better prepared after the peaceful revolution over high food prices.)

    Only by money can you make Homo S “Sapiens” accept facts. E.g. the fact that the planet is round (hence finite).

    • John F says:

      Mined phosphate is peaking already. But soylent brown (i.e. any dead organism) already has the approximate Redfield ratio, so phosphorus is recyclable.

    • Phil Henshaw says:

      Flori & John F, I think you’re assuming that the concert of parallel growth curves for food and fuel resource prices are each occurring for separate reasons rather than all occurring for the same reason.

      It does take a little effort of thinking about why systems distributed stresses, like all parts of a balloon taking an equal share of any added stress for the whole. Can you think of why the appearance of behaving like that would be the behavior of a world economy.

  8. Arrow says:

    But what exactly is that index pictured? If those are prices in constant dollars then it may simply show changes in purchasing power of constant dollars.

    To realistically asses whether resources are getting more expensive for humanity one would have to compare the average amount of work required to purchase them *world wide* (not in US, costs may rise in US due to demand from the rest of the world rising but that may simply be due to evening out of previous imbalances and not a proof that costs rise globally).

    Of course exponential growth is unsustainable, but human population is no longer growing exponentially anyway, at least according to http://en.wikipedia.org/wiki/World_population.

    • John Baez says:

      Arrow wrote:

      If those are prices in constant dollars then it may simply show changes in purchasing power of constant dollars.

      Well, ‘constant dollars’ aren’t supposed to have an overall change in purchasing power as time goes by—that’s the idea of them being ‘constant’. But of course some things get more expensive while other get cheaper, so one can only define constant dollars relative to a particular ‘basket of goods’… but when people stop buying VCRs and start buying DVD players, etc., the powers that be change this ‘basket of goods’… so the whole concept of ‘constant dollars’ makes me nervous in principle. But I haven’t studied the subject enough to know how nervous to be in practice.

      ‘Constant dollars’ are a bit like ‘absolute rest’. I know that in principle there’s no such thing as ‘absolute rest’: there’s only rest relative to something else. But I also know that in practice it can sometimes be harmless and even useful to act as if ‘absolute rest’ made sense. For example, when driving a car, I’ll feel no qualm in talking about its speed, when I should be talking about is speed relative to the road.

      But in physics, I have a good sense of when I can get away with this sort of simplification, and when I can’t. In economics, I don’t. If someone talks about the prices of commodities dropping over the last century, I don’t really how much sense that makes.

      To realistically asses whether resources are getting more expensive for humanity one would have to compare the average amount of work required to purchase them *world wide*…

      Right — but I don’t know how much difference that makes in practice, and I don’t know how the graphs shown above were made. So, I have to be pretty cautious.

      Still, looking at these graphs from 2000 to now, it seems clear that something big is going on! And unlike previous commodity price spikes, it’s not due to a war. (I don’t think so, anyway.)

      • Phil Henshaw says:

        To develop confidence reading in economic statistics takes finding ones that correspond to energy use, and then build from there. That really helps you get away from vague statistical arguments.

        There are certainly a wide variety of reasons to doubt that world GDP would correlate as very closely to world purchased energy use as it does. The fact is that when adjusted for purchasing power parity, the history of economic growth and economic energy use follow parallel growth curves that have been in quite constant relation to each other. It’s just as if you were comparing heat and light for some puddle of phosphorous catching fire in a petri dish! ;-)


        Then the trick I use, which is really golden, is to quite carefully only rely on questions about the subject the data can answer with confidence. As long as you can stick with questions that you can firmly answer, it’s just like physics, and, I think, actually then IS physics… as a productive way to apply physics principles to complex systems!

  9. John F says:

    Time for the scientists to invent something to save the world. Here’s $50K, go discover a new energy source.

  10. Thomas Larsson says:

    Australian television recently aired a program on peak oil, featuring our own Kjell Aleklett.

    Global oil extraction rate peaked in 2006. From 2004 production has been on a high plateau, which will not last much further. The decline will begin no later then 2014, and perhaps as early as 2011; KSA production in March was down 10% from February, despite the Saudi’s earlier promise to compensate for plummeting Libyan production (and despite the fact that March has 10% more days).

    What makes me worried is the consequence for agriculture. Modern food production and distribution requires some 7 – 10 calories of fossil fuel for each calory of food on the consumer’s table. Peak oil => peak food => peak people. This will not be pretty.

    Peak oil – soon at a gas station close to you.

  11. Giampiero Campa says:

    To me the really interesting question is not really “when” the paradigm change will happen, but rather how fast the transition itself will be.

    For example, how long will it take for the price of gas to reach 20 actualized dollars? will it take 30 years or 10? In the former case we have chances of adapting, in the latter there will probably be a lot of pain …

    By the way, i think that oil companies are indeed reaping a lot of profits by slowly and carefully raising the price of oil a little more that pure demand and supply would dictate (they can do that because the price of oil is still very elastic, that is people are not really buying less oil when price increases). In doing so they are actually doing us a favor, (even if it does not feel like it at the gas pump :).

    • John Baez says:

      Giampiero wrote:

      In doing so they are actually doing us a favor, (even if it does not feel like it at the gas pump :).

      So when those gas companies raise the prices, they should run ads with smiling children running through fields, and they should boast about how ‘green’ they are, “helping all our children by helping you conserve fossil fuels”.

      • Tim van Beek says:

        Does the free market work for gas prices in the USA? It does not in Germany: Usually, all companies raise the price a day before Easter by the same amount, for example (no one will stay at home because suddenly they have to pay 20% more for gas for the weekend). This just happened. And it will happen again on December 23rd.

        • John Baez says:

          I don’t know how well the free market works for gasoline in the USA. I drive very little, so I don’t pay much attention to short-term price fluctuations of the sort you mention (even when I’m living there). I do know that there are rather large differences in gasoline prices between states. I don’t understand that, but some of it is supposed to come from different regulations in different states. E.g., California gasoline produces less air pollution and is supposedly therefore more expensive.

          I’m sure other readers can provide more useful answers!

        • Tim van Beek says:

          There are large differences within Europe due to different petroleum taxes, which leads to “petroleum tourism”. BTW: Are taxes included in Grantham’s price graph?

          In Germany there is a national agency that is responsible for disclosing and sanctionizing price agreements like the one that happened before the synchronized price adjustment before the easter holidays: It is one of the great ideas of the founding fathers that never worked in practice. (It’s called the Bundeskartellamt.)

        • DavidTweed says:

          BTW, fitting in with my idee-fixe about asymmetry, here’s an article about how consumer behaviour affects gas prices asymmetrically.

    • DavidTweed says:

      I’ve seen arguments on the oil-drum that if you think it’s desirable and legitimate to use price to cause people to reduce driving, actually having a very volatile price actually works better than slow inexorable increases. The reasoning is that with slow increases it’s easy find ways to “pay” for each incremental increase, even if it’s something “bad” like expanding your credit card debt. In contrast, volatility gives people a strong signal they need to (because an individual month or two’s petrol costs are swingeing) make profound changes in how they structure their lives without taking out so much money they’re driven to bankruptcy.

    • Phil Henshaw says:

      It’s really the environment that determines whether price hikes will stick or not.

      If some rich investor corners a market to have monopoly control, there are no competing sources of supply to lower the price, and they can ratchet up the price until the customers they lose cut into their earnings.

      That’s the very same thing that happens when the “investor” cornering the market is the resource demand of the economy as a whole itself, and added supply can’t be obtained at the old price. If demand is increasing faster and supply expanding slower, fluctuations in price will stick, and steadily ratchet up till the people who control what supply there is start losing enough customers to lower their earnings.

  12. James Thompson says:

    I wonder if there are other factors at work here as well.

    One possibility is that the de-regulation (and hence huge growth) in the futures market for commodities is now artificially keeping prices up. This is of course a very serious issue for developing countries who now are at the mercy of investment vehicles for large banks rather than the usual supply-demand balance.

  13. Ewan Dawson says:

    I think the fundamental, obvious fact to take away from this is that exponential growth cannot continue indefinitely when resources are finite. Reminds me of a great series of math videos on YouTube on this subject: http://www.youtube.com/watch?v=F-QA2rkpBSY

  14. Phil Henshaw says:

    What I think is most telling is that this pattern of price escalation is for the whole spectrum of food and fuel resources. From a systems view that indicates emerging inelasticity elasticity of the world’s whole food and fuel resource exchange network in responding to increased demand. I discuss the circumstance and evidence in an article in press at New European Economy, (which I think I already mentioned or tried to a couple weeks ago), “A decisive moment for Investing in Sustainability”

    How most people would best understand it is that resource supplies for new users are now increasingly being taken from the supplies formerly available to old users, as the costs become prohibitive for them. That has real consequences in altering the whole social contract that economics is based on, for example.

    On can also understand it as an emerging natural response of the world’s resource markets as an emerging behavior of the world economy as a complex physical system guided by human learning and choices. What it displays is the world’s resource markets, in unison, becoming unable to respond to rising demand with equally rapid increases in new supply, and needing to raise prices to suppress demand instead.

    That implies that the practice of using increasing productivity to increase resource supplies has hit a natural limit, with the cost of obtaining new supplies exceeding their value to the whole system, as if the start of whole system bankruptcy having allowed declining net energy to result in a whole system EROI < 1. It's the dynamic model of the zero sum game, and approach to a true whole system point of zero returns, that I wrote about in The Oil Drum and got some vigorous discussion about at the time, in “Profiting from Scarcity”

    When demand exceeds supply, as a natural limit to growth, it profoundly alters the assumptions of the economic models that all the world’s institutional economic planning is based on. That’s the kind of signal saying “we need a new model” I’ve been trying to explain the advantages of having leading indicators for. There were definite leading indicators for this one, over 50 years ago, that I’ve been talking about explicitly for 30. For much longer lots more people have been talking about the quite valid reasons we should anticipate this kind of game changing limit to depleting our natural resources, of course, including Keynes and Malthus.

    We should worry about our expert communities having such remarkable learning deficits, and blinders, seeming to believe reality is their theory rather than what they observe.

  15. Giampiero Campa says:

    By the way here is Krugman weighing in on the article.

    He also states that it is not apparently due to the declining dollar.

    • John Baez says:

      Thanks for spotting that. It’s interesting, his claim that commodities account for only about 5% of the cost of living, with oil and gas being the major items, accounting for 3.8%.

      • Tim van Beek says:

        I don’t understand this number, could someone point me to an explanation of what “commodities” are and how the San Francisco Fed calculates the “costs of living”? One has to be very specific as to what kind of living standard in what region one is talking about, no?

        Is the gas or oil used for heating included in “commodities”? How about food? What is the basket of goods that one needs for a living in San Francisco anyway?

        • Phil Henshaw says:

          Tim, “Commodities” are the groupings of natural resources that are traded on the commodities markets, and are tracked by Index Mundi among others.
          There are 49 primary commodities and 8 indexes. It includes all minerals, fuels, basic food stocks etc. Nearly all have been displaying progressively rising prices for no apparent cause for a decade… and that new phenomenon is only now getting discussed. It seems to lots of people to represent a permanent new condition, likely to be intermittent but to never reverse, an “emergent property” of a resource poor economy.

          Cost of living is indeed a very localized statistic, but the inflation adjustments are done globally, with the international comparisons done either adjusted for their costs of living (Purchasing Power Parity) to factor out currency exchange rate fluctuations or not. Because the relationship between world GDP-PPP and world total primary energy sources TPES has been very consistent, I think the economists are actually successful at counting only “final” goods and services and correctly adjusting for inflation.

        • John Baez says:

          Phil wrote:

          “Commodities” are the groupings of natural resources that are traded on the commodities markets, and are tracked by Index Mundi among others. There are 49 primary commodities and 8 indexes

          Thanks! That’s a more practical answer than the theoretical (and vague) definition of commodities I quoted from Wikipedia… and more relevant to what Hogbin, Grantham, Bannister et al are talking about.

        • Tim van Beek says:

          Yes, thanks, that’s the answer I was looking for :-)

        • Phil Henshaw says:

          Thanks John. Knowing what the measures refer to does help! ;-) Part of why I pay close attention to that is I also want to know what the measures DON’T refer to as well as what they do. All measures are proxies for complex properties of systems that are often not well represented by the measure. Say you use a person’s ‘height’ as a proxy for their energy needs, just because the one piece of information may be available and a statistical association with energy needs has been shown… or something like that.

          With economic data that’s often a real problem, like when treating a business’s energy demand on the environment as the receipts for energy purchases you can trace to it. There’s may be some correlation, but using that measure get’s the totals all wrong.

      • John Baez says:

        Good question! I said that Krugman’s remark was interesting, not that I understood it.

        Wikipedia defines a “commodity” as:

        a good for which there is demand, but which is supplied without qualitative differentiation across a market. A commodity has full or partial fungibility; that is, the market treats it as equivalent or nearly so no matter who produces it. Examples are petroleum and copper. The price of copper is universal, and fluctuates daily based on global supply and demand. Stereo systems, on the other hand, have many aspects of product differentiation, such as the brand, the user interface, the perceived quality etc. And, the more valuable a stereo is perceived to be, the more it will cost.

        In contrast, one of the characteristics of a commodity good is that its price is determined as a function of its market as a whole. Well-established physical commodities have actively traded spot and derivative markets. Generally, these are basic resources and agricultural products such as iron ore, crude oil, coal, salt, sugar, coffee beans, soybeans, aluminium, copper, rice, wheat, gold, silver, palladium, and platinum. Soft commodities are goods that are grown, while hard commodities are the ones that are extracted through mining.

        There is another important class of energy commodities which includes electricity, gas, coal and oil. Electricity has the particular characteristic that it is either impossible or uneconomical to store, hence, electricity must be consumed as soon as it is produced.

        So, food that you buy at a grocery store or restaurant is not a commodity, but wheat bought at wholesale prices is a commodity.

        As for the “cost of living”, the two main quantities used in the US are the Consumer Price Index or CPI, and the Personal Consumption Price Expenditures Index or PCE.

        Krugman’s article points to a graph put out by the San Francisco Federal Reserve Bank.

        This graph cites “Hogbin 2008”. I believe they mean this:

        • Bart Hogbin, Commodity price movements and PCE inflation, Current Issues in Economics and Finance 14 (2008).

        I’ll quote the beginning, but we’d need to read more for details:

        From June 2006 through June 2008, crude petroleum prices increased at an average annual rate of 40 percent, while grain prices grew still faster, at a 62 percent rate. Subsequent months, however, saw a reversal of these trends, with both oil and grain prices falling by 20 percent (60 percent annualized).

        To what extent do such swings in the price of these commodities affect the price of the “final” goods bought by U.S. consumers? And how great an impact do the commodity price movements have on an overall measure of U.S. inflation such as the PCE (personal consumption expenditures) index?

        In this edition of Current Issues, we address these questions in two steps. First, we use data on inter-industry purchases and sales to assess the importance of grains—or more broadly, crops—and oil and natural gas in the production of a variety of personal consumption goods and services. Specifically, we compute the share of the cost of the final goods and services that is attributable to the output of the oil and farm industries. Second, we calculate the contribution that changes in the price of oil and grains make to PCE inflation, assuming that these changes are fully passed through along every stage in the production process. Although in this second step we focus on the impact of the June 2006-June 2008 commodity price increases on inflation, the effect of the declines in oil and grain prices that started in mid-2008 could be calculated in the same way and should be proportional.

        Our findings indicate that crops accounted for about 1.0 percent of the cost of total personal consumption expenditures in 2006, while oil and gas made up 2.8 percent. If we consider only core PCE—personal consumption expenditures excluding food and fuel—then the cost share of crops falls to 0.3 percent and the share of oil and gas declines to 1.4 percent.

        You’ll notice that Hogbin here says “2.8%” of total personal expenditures can be traced back to the price of oil and gas, while the graph put out by the San Francisco Fed says “3.8%”. I don’t know whether someone made a typo or whether they’re talking about different things.

        More importantly, what does Hogbin mean by this number 2.8%? How does he calculate it?

        I don’t know, but this passage gives some clues:

        Consumers do not pay commodity prices directly because they do not buy commodities, such as crude petroleum or wheat, directly. Instead, they buy goods that are produced using commodities as inputs. To what degree commodity price increases lead to consumption price increases depends significantly on the importance of the commodities for the production of goods. Moreover, when one considers the importance of particular inputs for the production of final goods, it is essential to take into account the entire supply chain.

        Consider gasoline and oil. For each dollar spent on gasoline in 2006, 40 cents paid for the output produced by oil refineries, 3 cents was attributable to the transportation of gasoline to the gas station, 34 cents was revenue for gasoline wholesalers, and the remaining 23 cents went to the owner of the gas station in the form of profits and to pay for expenses such as operation of the station. These figures might suggest that crude petroleum made up 40 percent of the price of gasoline in 2006. However, only 51 percent of refinery revenue that year reflected the cost of crude petroleum inputs; the remainder covered the refineries’ labor and equipment costs. The input share of crude oil in gasoline was therefore only about 21 percent.

        In addition to the oil inputs from the refineries that supply the gasoline, oil is used to produce the fuel needed to transport the gasoline as well as to produce other inputs used by the refineries and the wholesale, retail, and transportation sectors that contribute to the supply of gasoline. The oil needed for these other inputs makes up about 4.6 percent of the cost of gasoline. Therefore, the total input share of oil in gasoline for all stages of the supply chain is 25.6 percent.

        • Tim van Beek says:

          So the definition

          …a good for which there is demand, but which is supplied without qualitative differentiation across a market.

          should be supplemented with “a good at the base of the supply chain”, because gasoline (or water) isn’t a commodity, although it is supplied without qualitative differentiation :-)

          But then I’m still confused about how the number 3.8% or 2.8% is calculated, and I think that it is misleading anyway: According to Krugman, if a commodity good contributes to 1% of the cost of living, a price increase of 10% for this good would lead to a 0.1% increase of the cost of living. This is an approximation to the zeroth order, and I doubt that this is accurate enough. A price increase of 10% for oil, for example, will increase the costs of the whole supply chain for oil, and also almost every other supply chain, which will ultimately be charged to the end consumer. My educated guess is that in the current situation, such an increase would result in ca. 1% increase of the cost of living, an order of magnitude higher than what Krugman says.

        • John Baez says:

          Tim wrote:

          So the definition

          …a good for which there is demand, but which is supplied without qualitative differentiation across a market.

          should be supplemented with “a good at the base of the supply chain”, because gasoline (or water) isn’t a commodity, although it is supplied without qualitative
          differentiation :-)

          I’m not an expert, so I’m not sure if experts agree on precise definition of ‘commodity’, or whether they’d consider gasoline a commodity. Wikipedia suggest that they’d just argue about it:

          Commoditization (also called commodification) occurs as a goods or services market loses differentiation across its supply base, often by the diffusion of the intellectual capital necessary to acquire or produce it efficiently. As such, goods that formerly carried premium margins for market participants have become commodities, such as generic pharmaceuticals and silicon chips.

          There is a spectrum of commodification, rather than a binary distinction of “commodity versus differentiable product”. Few products have complete undifferentiability and hence fungibility; even electricity can be differentiated in the market based on its method of generation (e.g., fossil fuel, wind, solar). Many products’ degree of commodification depends on the buyer’s mentality and means. For example, milk, eggs, and notebook paper are considered by many customers as completely undifferentiable and fungible; lowest price is the only deciding factor in the purchasing choice. Other customers take into consideration other factors besides price, such as environmental sustainability and animal welfare. To these customers, distinctions such as organic-versus-not or cage-free-versus-not count toward differentiating brands of milk or eggs, and percentage of recycled content or forestry council certification count toward differentiating brands of notebook paper. Larger considerations can enter these equations, such as systemic socioeconomic unfairness (as poor people point out, “sure, it’s easy to buy the expensive food when you’ve got plenty of money”) and deception and authentication (e.g., a brand may greenwash its product and consumers lack practical ways to authenticate the claims).

          Tim wrote:

          A price increase of 10% for oil, for example, will increase the costs of the whole supply chain for oil, and also almost every other supply chain, which will ultimately be charged to the end consumer.

          If you read Hogbin’s article you’ll note he does try to take these effects—or at least some of these effects—into account. But I don’t know how well he does. Yes, my intuition agrees with yours that oil and gas prices going up 10% would create an overall increase of more than 10% × 2.8% = 0.28% in the cost of living. But he did try to analyze these things, so it might be worth taking a peek at his paper.

        • John F says:

          I think the obvious meaning is that they are overvalued due to investor’s speculation.

        • Phil Henshaw says:

          John F, Concluding that it’s speculators manipulating the markets presumes they have the markets cornered somehow. All it takes is some resource provider to under bid the market to bring about a correction. Are you saying there’s a global cartel, that has control of all the world’s commodities markets now, and that’s what is giving speculators control of the price?”

        • streamfortyseven says:

          People should also know that gasoline is a perishable commodity, lasting about six months before it becomes unusable due to free-radical oxidation and polymerization. Gasoline is made for two seasons, summer and winter; winter gas has butane mixed in to thin it out making it easier to start a cold engine. Refineries estimate gasoline demand before they start making their runs of summer and winter gasoline, and that may affect the price as well… references here:

          Old gasoline http://www.sterndrives.com/old_fuel.html

          Summer vs. winter gasoline

        • John F says:

          To Phil,
          yes, cartels. Primarily cartels of money, not cartels of the commodities per se. There is a small group that has all the relevant cash.

        • Phil Henshaw says:

          John F, You say:

          yes, cartels. Primarily cartels of money, not cartels of the commodities per se. There is a small group that has all the relevant cash.

          I think if that was so then the shapes of the curves would not be dominated by sharp spikes, but would just rise to a level chosen by the “cartel” the way OPEC used to operate. That the curves are so “spiky” says to me that the speculative traders are jumping in on the trading opportunities created by natural bottlenecks in supply, as increasing demand is not met by adequate increasing supply. The speculators then push prices to overshoot and collapse as the losers stop bidding.

          When demand exceeds supply new customers would bid the price up until they are rebuffed, or old customers follow suite only until they are squeezed out and denied what they need. The speculators see that happening and jump in, providing “the service” of speeding it up and taking much of the profit. I think each time a wave of bidders falls away and stops bidding, the price falls back down to the new floor level.

          That this bottleneck/speculation cycle has been raising the global floor level prices of such a wide spectrum of resources, higher and higher for ten years now, is what I think you need a theory for…

  16. Alpha Omega says:

    It’s true that the upper bound for economic growth in a single three dimensional universe is cubic in time, not exponential (assuming arbitrarily FTL travel is impossible). However, this does not imply that exponential growth must at this particular point in spacetime end, for two major reasons.

    The obvious one is that our solar system contains 12 orders of magnitude more power than our current global civilization consumes in the form of solar energy alone. There is enough matter and energy to support perhaps quadrillions of humans just in this solar system.

    More importantly, Moore’s Law of exponential increase in computational density will continue for some time, such that non-biological intelligence will soon exceed biological intelligence. This non-biological intelligence can be condensed into nanotechnological substrates which allow *trillions of trillions of trillions of trillions* of human level intellects to exist in a computronium sphere around the sun.

    When we near the point that solar resources are exhausted, robotic colonizers can be sent to other star systems and the process repeated. In this way, the entire accessible universe can be converted from unconscious atoms into sentient computronium. This expansion cannot ultimately proceed more than cubically in time, but for the next few centuries at least there is no fundamental reason why exponential or even hyper-exponential growth of intelligence density cannot continue. The idea is that this exponential “intelligence explosion” is a transitional period which allows humanity to rapidly transcend the limits of its current substrate, after which a more cosmically sustainable cubic growth rate can be converged upon.

    • John Baez says:

      Alpha Omega wrote:

      It’s true that the upper bound for economic growth in a single three dimensional universe is cubic in time, not exponential (assuming arbitrarily FTL travel is impossible). However, this does not imply that exponential growth must at this particular point in spacetime end, for two major reasons.

      Thanks. I hope nobody thought I was trying to use this ‘in principle’ argument to draw any conclusions about what’s happening now.

      I like your optimistic scenario but I think it’s quite possible that things will work out much worse for us. I’m trying to figure out ways to avoid some of the plausible bad scenarios.

  17. Phil Henshaw says:

    One of the more curious things about the phenomenon, an apparently pivotal event in earth history too, still does not have a name. It may be intermittent of course, but it certainly isn’t going away.

    Any suggestions?? I was thinking of either “resource bubble” or “planet change” (as opposed to ‘climate change’).

    My article on it as the apparent natural reaction of fearful resource markets to “peak everything” is out in print in New European Economy now. The online edition will be updated soon I understand.

    The easy way to see it as a natural phenomenon, I think, is as a self-preservation reaction, of the resource markets responding to a fear of running out of supply, seemingly all at once. That’s what is allowing speculative price increases to stick, serving to preserve supply for important users by shutting down less important users, like a plant allowing some leaves or branches to wilt in a drought.

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