Scarce Resourses rise in price

Uranium Value rising


Oil Value 1946 to 2007, value rising

The Simon-Ehrlich Bet Revisited

It might seem odd, but there are many who believe that as resources get more scarce, prices fall. I was reading about a famous dispute about resources, Paul Ehrlich, a biologist, and Economist Julian Simon. Simon (who died in 1998) bet that the price of any set of raw materials would be lower ten years from now than it was today. Ehrlich and his supporters took up the challenge and, in October 1980, chose five metals: chrome, copper, nickel, tin, and tungsten. Simon won the bet as, by October 1990, the composite price index of these five metals had fallen by more than 40 percent. Simon noted that because metal prices are volatile, he could quite easily have lost. His theory was that raw material prices would trend down in the long-run, not necessarily in a period as short as ten years. Human ingenuity has so far proved him right in some materials, as people of necessity have found alternative methods and resources. This may just prove that Simon was a better economist than Ehrlich, who was after all a biologist.

But if they had chosen resources that were truly scarce, and over a longer period, results would have been different. The price is determined by demand and supply, both can vary and both can be influenced. Suppliers keep their price high by deliberately reducing stocks on the market. Speculators affect the price by gambling with futures. Over the medium term influences such as market traders and cartels can change the price. Over the true long term however, scarce resources really should get more expensive as they run out. In the graphs above I’ve shown oil and uranium. Oil today is at a peak, near $90 a barrel, but the graph shows over the last 20 years a steadily increasing trends. This was of course affected by wars in the Gulf, but there has been no decrease as the war has finished. There was a huge spike from 1979 to 1983, peaking aropund $93, during the Iran Iraq war, but that settled down. We are very close to that peak now. Could this be a market responding to peak oil, finally a realisation that it’s running out?

The Uranium graph shows the price is steady from 1987 to 2003, then gradually increases. A similar trend to oil. Those who say we can increase our reliance on Nuclear Energy may be wrong for more than one reason, as the price will go up the more we use. Its just not a renewable resource, no matter how much their PR machine tries to persuade people that it will have zero emission.

According to www.perc.org/publications/percreports/sept2005/betting.php,
'In the 1950s, the decade in which Simon would have lost by a few dollars, most of the metals rose in price. Over the 1960s and 1970s, all the metals increased in price. These price increases were wiped out in the 1980s and the 1990s. The price history of the twentieth century provides evidence that he would have won five of the ten decades by large margins, and he would have won a bet over the entire century'. So even in the last centurey it wasn't conclusive.

According to www.semiconductorblog.com, ‘Recently, copper appeared in the news as a replacement for wires for semiconductors, due to the rising price of gold. War and upheaval has a way of attracting investors to gold. Looking at the 30-year history of gold prices, there are spikes in 1979 when the Soviet Red Army invaded Afghanistan as well as in 1982 during the Falkland Islands War. More recently, gold was the only winner following the US invasion of Iraq in 2003. Labor strife in Chile has reduced the supply of copper driving up raw material costs. Some of you may be old enough to remember something about aluminum replacing copper in house wiring due to a price spike in the sixties. The results were disastrous. Improper installation of aluminum wire caused fires that led to the loss of life and property’.

Perhaps Erlich was merely speaking about the wrong time period, soon he may be proved correct.