April 21, 2008
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
How you answer this question depends largely on what you believe is
driving the rise in resource prices. Broadly speaking, there are three
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
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
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
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