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http://www.nytimes.com/2008/04/21/opinion/21krugman.html

April 21, 2008

Op-Ed Columnist

Running Out of Planet to Exploit

By PAUL KRUGMAN

Nine years ago The Economist ran a big story on 
oil, which was then selling for $10 a barrel. The 
magazine warned that this might not last. 
Instead, it suggested, oil might well fall to $5 
a barrel.

In any case, The Economist asserted, the world 
faced "the prospect of cheap, plentiful oil for 
the foreseeable future."

Last week, oil hit $117.

It's not just oil that has defied the complacency 
of a few years back. Food prices have also 
soared, as have the prices of basic metals. And 
the global surge in commodity prices is reviving 
a question we haven't heard much since the 1970s: 
Will limited supplies of natural resources pose 
an obstacle to future world economic growth?

How you answer this question depends largely on 
what you believe is driving the rise in resource 
prices. Broadly speaking, there are three 
competing views.

The first is that it's mainly speculation - that 
investors, looking for high returns at a time of 
low interest rates, have piled into commodity 
futures, driving up prices. On this view, someday 
soon the bubble will burst and high resource 
prices will go the way of Pets.com.

The second view is that soaring resource prices 
do, in fact, have a basis in fundamentals - 
especially rapidly growing demand from newly 
meat-eating, car-driving Chinese - but that given 
time we'll drill more wells, plant more acres, 
and increased supply will push prices right back 
down again.

The third view is that the era of cheap resources 
is over for good - that we're running out of oil, 
running out of land to expand food production and 
generally running out of planet to exploit.

I find myself somewhere between the second and third views.

There are some very smart people - not least, 
George Soros - who believe that we're in a 
commodities bubble (although Mr. Soros says that 
the bubble is still in its "growth phase"). My 
problem with this view, however, is this: Where 
are the inventories?

Normally, speculation drives up commodity prices 
by promoting hoarding. Yet there's no sign of 
resource hoarding in the data: inventories of 
food and metals are at or near historic lows, 
while oil inventories are only normal.

The best argument for the second view, that the 
resource crunch is real but temporary, is the 
strong resemblance between what we're seeing now 
and the resource crisis of the 1970s.

What Americans mostly remember about the 1970s 
are soaring oil prices and lines at gas stations. 
But there was also a severe global food crisis, 
which caused a lot of pain at the supermarket 
checkout line - I remember 1974 as the year of 
Hamburger Helper - and, much more important, 
helped cause devastating famines in poorer 
countries.

In retrospect, the commodity boom of 1972-75 was 
probably the result of rapid world economic 
growth that outpaced supplies, combined with the 
effects of bad weather and Middle Eastern 
conflict. Eventually, the bad luck came to an 
end, new land was placed under cultivation, new 
sources of oil were found in the Gulf of Mexico 
and the North Sea, and resources got cheap again.

But this time may be different: concerns about 
what happens when an ever-growing world economy 
pushes up against the limits of a finite planet 
ring truer now than they did in the 1970s.

For one thing, I don't expect growth in China to 
slow sharply anytime soon. That's a big contrast 
with what happened in the 1970s, when growth in 
Japan and Europe, the emerging economies of the 
time, downshifted - and thereby took a lot of 
pressure off the world's resources.

Meanwhile, resources are getting harder to find. 
Big oil discoveries, in particular, have become 
few and far between, and in the last few years 
oil production from new sources has been barely 
enough to offset declining production from 
established sources.

And the bad weather hitting agricultural 
production this time is starting to look more 
fundamental and permanent than El Niņo and La 
Niņa, which disrupted crops 35 years ago. 
Australia, in particular, is now in the 10th year 
of a drought that looks more and more like a 
long-term manifestation of climate change.

Suppose that we really are running up against global limits. What does it mean?

Even if it turns out that we're really at or near 
peak world oil production, that doesn't mean that 
one day we'll say, "Oh my God! We just ran out of 
oil!" and watch civilization collapse into "Mad 
Max" anarchy.

But rich countries will face steady pressure on 
their economies from rising resource prices, 
making it harder to raise their standard of 
living. And some poor countries will find 
themselves living dangerously close to the edge - 
or over it.

Don't look now, but the good times may have just stopped rolling.