Thursday, May 8, 2008

Long-term commodities prices

Having mentioned elsewhere what seem to me the two possible takes on long-term commodity prices:
  • Prices go down because the increasing efficiency of production and consumption of basic materials outweighs the population and per capita GDP increases. This is the overall historical trend, even though it doesn't help to tell you how long the current increases can go on.
  • Prices going up for Malthusian reasons, or population and consumption overwhelming production.
... I would like to add a third option that has occurred to me that I don't yet know how to evaluate, namely:
  • Prices going up because the cost of commodities begins to reflect the social and environmental externalities that we have previously not included in their costs. So far, we have essentially taken out a giant loan from future generations to be able to ignore these costs. Someday it will cost real money to take better care of the planet, and that cost may be reflected directly in commodity prices. either via taxes or continuing supply constraints.
An editorial from Kenneth Rogoff speaks to this point:
... the price mechanism is a much better way to allocate natural resources than fighting wars, as the Western powers did in the last century.

The United States’ ill-considered, biofuels, subsidy programme, demonstrates how not to react.

Rather than acknowledge that high fuel prices are the best way to inspire energy conservation and innovation, the Bush administration has instituted huge subsidies to American farmers to grow grains for biofuel production. Never mind that this is inefficient in terms of water and land use.
Basically, I think that there is a possibility that we may stop letting the government subsidize these markets, and this could cause price increases.

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