Can Jeremy Grantham Profit From Ecological Mayhem?
Sitting in a Panera in Boston's financial district in early July with Jeremy Grantham, I suddenly found myself considering how I might safeguard my children's and notional grandchildren's future by somehow engineering the U.S. annexation of Morocco. Grantham, the founder and chief strategist of the asset-management firm GMO, was reading aloud from a rough draft of his next quarterly letter to investors, in which he ranks some long-term crises of resource limitation along a scale from "merely serious" to "dangerous."
Energy "will give us serious and sustained problems" over the next 50 years as we make the transition from hydrocarbons - oil, coal, gas - to solar, wind, nuclear and other sources, but we'll muddle through to a solution to Peak Oil and related challenges. Peak Everything Else will prove more intractable for humanity. Metals, for instance, "are entropy at work . . . from wonderful metal ores to scattered waste," and scarcity and higher prices "will slowly increase forever," but if we scrimp and recycle, we can make do for another century before tight constraint kicks in.
Agriculture is more worrisome. Local water shortages will cause "persistent irritation" - wars, famines. Of the three essential macro nutrient fertilizers, nitrogen is relatively plentiful and recoverable, but we're running out of potassium and phosphorus, finite mined resources that are "necessary for all life." Canada has large reserves of potash (the source of potassium), which is good news for Americans, but 50 to 75 percent of the known reserves of phosphate (the source of phosphorus) are located in Morocco and the western Sahara. Assuming a 2 percent annual increase in phosphorus consumption, Grantham believes the rest of the world's reserves won't last more than 50 years, so he expects "gamesmanship" from the phosphate-rich.
And he rates soil erosion as the biggest threat of all. The world's population could reach 10 billion within half a century - perhaps twice as many human beings as the planet's overtaxed resources can sustainably support, perhaps six times too many.
David Fuller's view I agree with much of what Jeremy Grantham says in this article but the Fullermoney view is more optimistic over the longer term.
By way of background, what we have called a commodity supercycle for nearly a decade and summarised as Supply Inelasticity Meets Rising Demand, is a serious problem in terms of commodity price inflation. We think supplies of most resources will remain tight in this decade, with only brief respite for industrial commodities when downturns in the business cycle occur, as we are currently seeing. Food is more dependent on the vagaries of weather, which currently remains far from benign.
The main driver of strength in commodity prices is now widely recognised as Asian-led GDP growth. Rising prosperity among large populations produces dramatic increases in demand for most commodities. However this situation has been aggravated by excessive fiat money creation, increasing investment interest in real assets.
Also, after approximately 30 years of falling resources prices in real (inflation-adjusted) terms and even nominal terms for a number of commodities, producers often lacked the confidence, capital, manpower and equipment to increase supplies in line with demand growth.
On energy, which remains the most important commodity sector in terms of GDP growth, we expect a difficult decade but are more optimistic than Jeremy Grantham appears to be thereafter. I was surprised that he did not mention shale gas and shale oil as they really are game changers.
You can already see this in the US where American technology has applied the technique of horizontal drilling for conventional oil, to vast shale properties of gas and oil which can now be tapped with fracking. Consequently, prices of gas and oil are lower in the US than in other energy-importing countries. America is moving towards energy independence which was believed to be an unobtainable goal only a few years ago.
At some point, perhaps in the first half of the next decade, most of the world's major economies should be producing from their own shale gas and shale oil reserves. As that happens, Fullermoney maintains that global energy costs will be lower in real terms than they are today, with the additional help of nuclear, solar, wind, biomass and other renewables. The world's two largest economies - USA and China - have the largest known combined reserves of shale properties.
Fullermoney is also more optimistic regarding the supplies of industrial metals. There are considerable known reserves to be developed and inevitably more to be discovered in many of the world's more remote and comparatively unexplored regions.
Technology is also increasing the rate at which industrial metal substitutes are developed. Consider plastics and carbon fibre; graphene, still in its labratory stages, has the potential to eventually become the most important manmade industrial material of all.
Here is Jeremy Grantham's last report, referred to in the article above.
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