In the past decade, our consumption of natural resources has gone up by so much that it is not even surprising to know that its still going up. Environmentalists predict that by 2020, we would have consumed roughly 80% of the world's natural resources. While the price of manufacturing goods have remained fairly stable, it is the commodity market that we should be looking out for. Commodities are marketable goods and services that are produced to satisfy wants and needs. More specifically, commodities are essential raw materials. The starting point of nearly everything we consume, comes from commodities. For example, coffee beans to...coffee, cotton to clothes and oil for energy.
*Commodities galore: Several examples of common commodities we humans consume to a large extent.
*Commodities galore: Several examples of common commodities we humans consume to a large extent.
Consumption of commodities vary from country by their development and economic performance. For example, China purchases 40% of the world's copper supplies, and its economy is performing considerably well despite the global recession. Harry Colvin of Longview Economics calculates that the four largest developing countries (Brazil, Russia, India and China) will consume 3.7 million more barrels of oil a day in 2012 than they did in 2008. In stark contrast, it was calculated that America and debt-stricken Europe would consume 1.5 million less barrels of oil a day, and both their economies are still performing quite badly.
If we are only talking about oil, then China should be the central focus point of our discussion. China consumes more oil than anywhere else in the world, and with economic growth still their main incentive, that figure will only continue to increase. One main reason for America and Europe's decreased and China's increased oil consumption is to do with politics. With oil supplies in the oceans declining at an increasing rate, countries had to turn towards middle eastern countries for their oil, its no wonder cities like Dubai and Abu Dhabi and Qatar got rich so quickly and be able to take over football clubs and ruin the game with overpowered signings! The thing with middle eastern countries in predominantly western countries are that they are usually associated with the common stereotypes for terrorists and nuclear weapons, especially Iran. Because America and Europe are so pedantic about this, they have tightened economic sanctions against Iran with the aim of forcing it to curb its nuclear ambitions. Meanwhile, China has continued to strengthen its links with the Islamic Republic. Iran’s oil, which generates around 80% of government revenues, is increasingly flowing towards refineries in China, which is now its biggest trading partner. Iran's oil is responsible for over 10% of China's oil consumption, which is very important to them.
*"Digging for black gold": Countries now look towards middle east countries for oil supplies
If we are only talking about oil, then China should be the central focus point of our discussion. China consumes more oil than anywhere else in the world, and with economic growth still their main incentive, that figure will only continue to increase. One main reason for America and Europe's decreased and China's increased oil consumption is to do with politics. With oil supplies in the oceans declining at an increasing rate, countries had to turn towards middle eastern countries for their oil, its no wonder cities like Dubai and Abu Dhabi and Qatar got rich so quickly and be able to take over football clubs and ruin the game with overpowered signings! The thing with middle eastern countries in predominantly western countries are that they are usually associated with the common stereotypes for terrorists and nuclear weapons, especially Iran. Because America and Europe are so pedantic about this, they have tightened economic sanctions against Iran with the aim of forcing it to curb its nuclear ambitions. Meanwhile, China has continued to strengthen its links with the Islamic Republic. Iran’s oil, which generates around 80% of government revenues, is increasingly flowing towards refineries in China, which is now its biggest trading partner. Iran's oil is responsible for over 10% of China's oil consumption, which is very important to them.
*"Digging for black gold": Countries now look towards middle east countries for oil supplies
However, in general, why have commodity prices kept increasing? There are several notable factors. The first factor, inevitably is population growth. The concept is very simple; with more people, the more resources we need to consume to meet the needs of everyone. Population is one of the largest factors for the increase in commodity prices not only qualitatively, but also quantitatively. Our current world population is 7.06 billion, and it is continually increasing by the second, with our net population growth predicted in the region of 60 million this year. Our next factor is economic development. Economic development should not be confused with economic growth. While economic growth means the increase in a country's total output, economic development takes many different factors into account, for example: increasing the people's freedom, improving standard of living and reducing poverty, providing the public with education and health care etc. The list goes on to until we reach the end of what we humans desire, of course which is unlimited wants. When economic development goes forward, we cannot go backwards, or rather we do not want it to go backwards, very much like technology. Once again, the concept is easy to grasp: once we live in better conditions for a long period of time, we do not want to go back to living in worse conditions. So if we use more natural resources to meet our needs, then we will continue to sustain that level of consumption of those resources. Then once economic development increases once more, we will use more resources again; the overall effect is demand pull inflation. Because economic development and economic growth are very much directly correlated, we can link them together. As a country experiences economic growth, it will induce inflation. The next factor is the consumers' price elasticity of demand towards commodities. Price elasticity of demand is the measure of the responsiveness of quantity demanded to the change in price. Because commodities are essential goods that we use for majority of the things we consume, our price elasticity of demand would be extremely close to perfectly inelastic. So if the prices increase in an attempt to curb our consumption, tough luck. Our demand may not even fall, in fact it could still increase since commodities are what they are, there are none if few substitutes. Also, the commodity industries are usually monopolized by large firms, or even ran by a collusive oligopoly (cartel) such as OPEC (Organization of Petrol Exporting Countries). Monopolies are characterized as price-setters, as they have nearly full control of the market. When they realize that our price elasticity of demand is so inelastic, they will make more profit by charging higher prices. Often, governments would have set price ceilings on commodities.
The last factor is undoubtedly the main one; global warming. The main factor of global warming is human development of course. Cars, air-conditioning, washing machines, hot water showers, all you can name. All of these have increased our energy consumption and carbon dioxide emissions. So how does this effect commodities? Well, we should realize that majority of commodities are agricultural products such as vegetables and wheat, and these require optimal growing conditions to give the greatest yield. Global warming can affect the yield in two ways: directly and indirectly. Directly is through temperature increase itself; the droughts and more extreme climates negatively affect the yield of crops. Indirect means is through the changing climate. The rising sea levels will increase the chances of flooding low-lying areas, warmer seas increase the chances of typhoons and hurricanes, and droughts and dry climate increase the chances of forest fires which destroys crops and desertification swallowing up grasslands. Supply side shocks have damaging effects to the supply of commodities, which causes cost push inflation. The persistent strength of commodity prices helps to explain why headline inflation rates have been stubbornly high in many countries, despite their struggling economies. With wages weak, the result has been a squeeze in real incomes.
*"The world is burning up": Global Warming is the biggest crisis that is befalling our world in the present. Can we stop it??"
The last factor is undoubtedly the main one; global warming. The main factor of global warming is human development of course. Cars, air-conditioning, washing machines, hot water showers, all you can name. All of these have increased our energy consumption and carbon dioxide emissions. So how does this effect commodities? Well, we should realize that majority of commodities are agricultural products such as vegetables and wheat, and these require optimal growing conditions to give the greatest yield. Global warming can affect the yield in two ways: directly and indirectly. Directly is through temperature increase itself; the droughts and more extreme climates negatively affect the yield of crops. Indirect means is through the changing climate. The rising sea levels will increase the chances of flooding low-lying areas, warmer seas increase the chances of typhoons and hurricanes, and droughts and dry climate increase the chances of forest fires which destroys crops and desertification swallowing up grasslands. Supply side shocks have damaging effects to the supply of commodities, which causes cost push inflation. The persistent strength of commodity prices helps to explain why headline inflation rates have been stubbornly high in many countries, despite their struggling economies. With wages weak, the result has been a squeeze in real incomes.
*"The world is burning up": Global Warming is the biggest crisis that is befalling our world in the present. Can we stop it??"
But hold on a minute, the implication of the analysis mentioned above is that commodity prices should continue to increase. However, it turns out that commodity prices have been falling sharply in July following from May—the S&P GSCI index dropped by 13% in May alone, the biggest monthly decline in two years. The average price of a gallon of petrol in America has fallen to $3.47 from almost $3.88 in early April. There are a two viable reasons for the uniform decrease. First, is that commodities have become investment-class. This would be the better reason as the price decrease may simply reflect the whims of speculators, who have little confidence in the market's future. The other worse reason is that the decrease in commodity prices may well be an indicator for the economic recession. Why? Well, if economic growth is very little or even shrinking, then the demand for commodities will contract, causing deflation. Of course, this is not a very reliable measure because prices were still very strong in the summer of 2008, after the Lehman Brothers bankruptcy. Actually, even China is not doing that well after it had cancelled a whole load of raw material import orders in spring. Those cancellations can be explained by strategic bargaining tactics rather than slumping demand, since China's oil and copper imports are still going strong with a 12% increase throughout the year. Also, weather forecasts have also predicted mild weather is leading to the expectation of bumper harvests in the northern hemisphere, agricultural product prices fell by 9.3% in May.
Commodity booms usually dissipate after the storm of high prices bring forth new supplies. People may be affected by the illusion that the fall in commodity prices may imply that we are using fewer resources. Actually some of it may be true, with many countries now putting in place new measures for sustainable development, technology to make our products more environmentally friendly and global projects to counteract global warming (E.g. GreenPeace org.). Of course, this is only considering the ideal case. Unfortunately, the ideal case may not necessarily work. All the factors that lead to inflation of commodity prices aforementioned besides the consumer will occur for a long time. And, it is going to take even longer before we are able to make our world a sustainable place to live in, since commodities have already became a fundamental part of our lives.
Commodity booms usually dissipate after the storm of high prices bring forth new supplies. People may be affected by the illusion that the fall in commodity prices may imply that we are using fewer resources. Actually some of it may be true, with many countries now putting in place new measures for sustainable development, technology to make our products more environmentally friendly and global projects to counteract global warming (E.g. GreenPeace org.). Of course, this is only considering the ideal case. Unfortunately, the ideal case may not necessarily work. All the factors that lead to inflation of commodity prices aforementioned besides the consumer will occur for a long time. And, it is going to take even longer before we are able to make our world a sustainable place to live in, since commodities have already became a fundamental part of our lives.
Our consumption of commodities can only go up. With the ruthless presence of global warming continuing to inch closer towards us at an increasing pace, we will only continue to consume more. So the final verdict: commodity prices will continue to go up. Unless we find a way to veer our way towards a new path of sustainable energy and resources, commodities may change from being a necessity to a luxury.
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