"Images of a Shrinking and Damaged Planet" and High Commodity Prices

Includes: DBC, DPU, GCS
by: Mark Thoma

Robert Shiller says when it comes to commodity prices, images that portray the earth as small and vulnerable matter: 

Seeing is believing, by Robert Shiller, Project Syndicate: Could the television image we’ve all seen of the Greenland ice cap crumbling into the ocean because of global warming somehow - indirectly and psychologically — be partly responsible for high oil and other commodity prices? The usual explanation ... focuses on explosive growth in emerging countries, China and India in particular... But psychology also matters in speculative markets, and perhaps that image of the Greenland ice disappearing makes it seem all too plausible that everything else- land, water, even fresh air - is running out too.

Let’s take a case study, the last generalised boom-bust cycle in commodity prices, which caused these prices generally to rise (more or less) from some time in the 1960’s until the 1980’s, and then generally to fall until the mid-1990’s. ...

The conventional “fundamental” explanation for that cycle relates it to ...[t]he 1973-1974 oil crisis... [and the] 1979-1981 oil crisis... The drop in oil prices after the mid-1980’s is said to be due to the collapse of the OPEC oil cartel. But ... these events don’t really explain why prices of other commodities followed that of oil.

Maybe more important than those wars in the 1970’s was that people throughout the world got worried about running out of things. This was the time of the “great population scare,” which transformed thinking worldwide, no doubt contributing to higher commodity prices while the fear lasted.

There seemed to be some basis for this scare. The rate of increase in the world’s population rose from 1.8 per cent in 1951 to 2.1 per cent in 1971. But those were just dry statistics. Images likely mattered more. ...

The first photograph of the earth from space came as part of the Apollo project in November 1967. One of the Apollo astronauts, James B. Irwin ... said of his view of the earth, “It was so far away... a little ball in the blackness of space. That does something to your soul... We saw how fragile our planet is...”... That image of the earth from space had a profound psychological effect, and we all saw it. Maybe that image was at least part of the reason why people became so worried in the 1970’s about population running ahead of resources.

The Club of Rome’s monumental book The Limits to Growth came out in 1972, with a picture of the earth on its cover. The book, written by a team of scientists, predicted disastrous shortages and mass starvation due to population pressure. Despite scientific critics of the Club of Rome’s methods, the public was ready to believe the dire forecast.

The great population scare led to various birth-control efforts around the world, notably to the “one-child policy” instituted in China in 1979. Partly due to such efforts, as well as to a change in family values, the rate of growth of the world’s population, began a long decline, to 1.1 per cent in 2005. That gradual decline led to gradual loss of concern about limits to growth. Commodity prices fell, too.

Today, we remain mostly unconcerned about global population growth. But, in the last ten years or so, we have become concerned about something else: rapid world economic growth. While it may seem that no image in the last decade was so dramatic as the first photo of the earth from space, think again.

Try searching YouTube, for example, on Greenland ice. More generally... The ability to communicate via email to everyone in the world creates a sense of the world’s smallness relative to the abundance of people in it.

We have seen photographs of hurricane and typhoon activity due to global warming, affecting people in Louisiana or Myanmar. We have seen devastation from the 2004 Indian Ocean tsunami, interpreted as a sign of crowding at the coasts.

The North Pole turned into a lake for the first time in 2000. We see aerial photos of the Aral Sea drying up. We practically can’t buy caviar from the Caspian Sea any more. The European Space Agency announced in September 2007 that satellite photos showed that the Northwest Passage appeared clear of ice for shipping for the first time ever, and that the Northeast Passage is almost clear.

With so many vivid images of a shrinking and damaged planet, is it really any wonder that human psychology is ripe for high commodity prices?

If this is the reason for high commodity prices, wouldn't we see evidence of hoarding? When there are appears to be more people at the party than there is food, how do people respond when they realize there won't be enough to go around? You can eat as early as possible so as to be sure to get your share, and that would increase the demand for food early in the party as everyone pursues the same strategy (driving up price if it is a market). And, if it is storable, you can stuff food in your pockets (or hide it somewhere else) so you'll be sure to have some later if you want it then. This also increases demand early in the party. It's the latter effect - storage for later - that seems to be missing from data on inventories.

Update: See Free Exchange for more.

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