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There’s a widespread fear that the trend in commodity prices can only be up.
The state of the natural gas market, however, suggests a reversion to an older mean–of permanently falling prices in real terms.
The commodity bull case rests with a perception that there’s a limited amount of raw stuff. And the low-hanging fruit has been plucked. In other words, the most easily accessible commodities have been dug or pumped out of the ground and now the world’s left with lower grade, harder to extract stuff.
At the same time, emerging economies are developing insatiable appetites for the same goods that Westerners have enjoyed for generations. Indeed, commodity prices have been moving sharply higher during recent years. The Dow Jones UBS commodity price index is now 40% above where it was in 2000, albeit well down on the peaks hit during the first half of 2008. Throw in some near-term issues like worries about Iran and drought, and oil and food prices are likely to be pushed higher still.
Roughly speaking, commodity prices are the intersection between human aspiration and ingenuity. Commodity bulls figure aspiration is on the way up while ingenuity is bumping up against a technological ceiling.
And then there’s the natural gas market. Since hitting record highs at the start of 2005, natural gas futures prices have dropped some 90%.
They have been falling sharply since a second, slightly lower, peak during the 2008 commodities surge. Why? Because over the past couple of years there have been discoveries of vast pools of natural gas trapped in rock, while techniques to extract it have been refined.
This is important because, with mechanical or chemical adjustment, natural gas can often be substituted for other petrochemicals. In so far as mineral extraction or refinement is energy intensive–as aluminum is–cheap gas should lead to cheaper metals prices.
As an input into food production, it should also take some of the strain off rising food prices.
Most importantly, it shows that innovation and discovery can still dramatically turn around price trends in commodities as they have done for much of the past century.
As for those worried about rising consumption among the world’s poor, it’s worth remembering two things. As countries grow richer, after a certain point their populations stop expanding. Parents invest more into fewer children. And secondly, as people grow richer, their consumption preferences shift to services away from goods.
Sure, Westerners consume hugely more food and energy per capita than people in developed countries. But it need not be the case that these levels of Western consumption are a stable equilibrium. It could be that consumption falls due to changes in taste and preference as well as relative prices of goods.
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The Source is WSJ.com Europe’s home for rapid-fire analysis of the day’s big business and finance stories. It is edited by Lauren Mills, based in London.
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