Saturday, February 12, 2011

Growing Food Demand - Is Malthus back?

THOMAS Malthus hasn't had a very good press over the last couple of centuries, often being cited as a classic example of the dangers of extrapolation. The British vicar's theory was that population growth was exponential but agricultural growth was arithmetic, so that any sharp rise in population would lead to starvation and thus be self-correcting. But he published his theories just as the British economy was escaping the old constraints, thanks to the agricultural and industrial revolutions, a process that quickly spread to the rest of Europe and North America.

Although Malthus-type theories have occasionally been revived (the limits to growth report, produced by the Club of Rome in the early 1970s), the dominant thesis in the late 20th century was that the market would always solve the problem; high prices would encourage producers to find new sources of supply.

Barclays Capital has a chapter on commodities in its epic research note, the Equity-Gilt study, which concludes that

"Malthus may turn out to be right, but with broader implications than he may have imagined adding that"

"We are depleting the global stock of natural resources, i.e commodities in the broadest sense of that term, at an accelerating pace, with the rise in per capita commodity consumption vastly accelerated by rising prosperity in the developing economies."

Were Chinese oil consumption to reach US per capita levels, its demand would rise ninefold, while Indian consumption would have to go up 23-fold. That would push global oil demand up to 260 million barrels per day, compared with just under 90m barrels a day at present. Clearly, that's not going to happen. But along the way, some combination of much higher prices, a setback to developing nation growth or a switch to alternative fuel sources might be needed; all of which could be very disruptive.

The key factor is that US demand is no longer crucial for setting the global price of all commodities. For example, China's share of global copper demand is double that of the US. In 2010, global oil consumption increased by 2.9 million barrels a day; 85% of that increase came from non-OECD countries. A fall in US demand thus does not automatically lead to a fall in price. In effect, this is a supply shock for developed economies and a supply shock is always negative. It also creates policy dilemmas as the UK is discovering, with the Bank of England torn between dealing with above-target inflation and falling fourth quarter output.

Part of the problem is that new sources of supply are more expensive to develop. (I've written about this before here and here.) One more statistic from the study is striking; the global energy industry needs to invest $33 trillion between now and 2035 to replace old sources of supply and to meet incremental demand. The Economist

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