Tverberg: "The World Economy Seems To Be Seriously Ill..."

(4) Commodity Prices. If we have a supply problem with one kind of commodity, we likely have a supply problem with many kinds of commodities at the same time. The reason why this happens is because the prices of many types of commodities tend to move together, in response to general market conditions. This is why the US government talks about inflation in oil and food prices as a separate category of Consumer Price Inflation.

If prices for commodities are generally low, as they have been since 2014, this means that commodity investors have received low rates of return for several years. With low rates of return, producers of many commodities have cut back on reinvestment. With inadequate reinvestment, supply crunches are likely to occur across a broad spectrum of commodities simultaneously. A recent Wall Street Journal article says, Supply Crunch Looms in Commodities Markets. The article mentions copper, zinc, aluminum and nickel. Other articles talk about oil in a similar fashion.

The question becomes, “Can consumers bid up the prices of all of these minerals sufficiently, to encourage enough reinvestment to solve the world’s commodity supply problem?” Food prices would likely need to be bid up as well, because oil is used heavily in the production and transport of food.

It was possible to bid up commodity prices in the 1970s, because the economies of the United States, Europe, Japan, and the Soviet Union were all growing rapidly. Also, women were joining the labor force in large numbers. It was possible to bid up commodity prices in the in the 2002 to 2008 era, because China and other Asian nations were rapidly ramping up their demand for goods and services of all kinds.

Figure 10. China energy production by fuel plus its total energy consumption, based on BP Statistical Review of World Energy 2018 data. The difference between the production figures shown and the black line consumption total is imports.

Now we are facing a much different situation. China is in much worse shape than most people recognize because its coal supply seems to have passed peak production. This has happened because the cheap-to-extract coal is mostly depleted, making it unprofitable to increase coal production without significantly higher prices. Imported coal and natural gas are expensive options. China also has a serious debt problem.


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