Tuesday, 5 January 2010

Scarcity Bites – A Decade Too Soon!

The twin concepts of scarcity and plenty describe a complex relationship between what we have and what we need to have if we are to do everything that we want to do. In many respects, one aspect of the future that will enter into our consciousness in the very near future is that of scarcity. In simple terms, scarcity suggests that the supply of a resource is not sufficient to satisfy its demand. As the global population increases, and as that population has expectations of higher living standards, so the demand for resources will rise. However, as we start to feel the finite nature of our resource endowments, scarcities will start to emerge. This is the underpinning of much thinking on the issue of ‘Peak Oil’.

It is our contention that energy is not the only resource that will be scarce in the immediate future. We envisage scarcities of food, water, and a whole variety of minerals that are crucial to the operation of a modern economy. Our thinking so far has focussed on the 2020s as the decade in which scarcity starts to be felt (we call it ‘Scarcity Bites’), but recent events have drawn our attention to a much earlier manifestation.

A recent article in The Independent (see below for link), has drawn our attention to the case of the Rare Earth Elements (REEs), a group of 17 rare metals that are essential to the manufactures of the modern economy which are in a situation of scarcity (demand outstrips supply). The picture is further complicated by China being the main source of the REEs (it supplies over 95% of the world total of REEs) and following a policy of restricting their export. This conjures up some fascinating possibilities for the future.

The onset of scarcity is likely to lead to a large spike in the price of the scarce resource. In many respects this has already happened for REEs. The spike in price will have three important implications:

  1. Alternative sources of the scarce resource that have been abandoned as financially unviable will be reappraised, some of which will now be viable, and will then return into production.
  2. The high cost of the scarce resource will be sufficient to stimulate research into viable (i.e. less costly) substitutes for the scarce resource, some of which will be viable and help satisfy the demand for that resource.
  3. The high cost of the scarce resource will encourage users of the resource to be more parsimonious in their use of the resource. This will act to assist the conservation of the resource to elongate its supply.

As the demand and supply for the resource become tempered, the price will fall back from its previous high to a new, more stable, price. This is a standard analysis using Marshallian Time Periods.

The monopoly of production in China is a complicating factor. The production of the REEs has no value to China per se. Their importance lies in being a constituent part of a number of key manufactures. In many respects it matters little outside of China if the REEs are exported in mineral form or in the form of embodied manufactures. China has enriched itself on being the global source of cheap manufactures.

This only works as long as the manufactures are cheap. However, the embodied REEs, as a small constituent cost in the manufacturing process, can increase in price substantially before they have an impact on the overall price of the manufactures. For example, suppose that we have a good that uses REEs, costs £100 to manufacture, and the REEs represent 1% of the manufacturing cost. If the REEs were to treble in price, the manufactured cost would only rise to £102, a 2% increase in the cost of the manufacture after a 300% increase in the cost of the REEs.

Economic theory would suggest that we ought not to worry too much about the scarcity of REEs starting to bite. As a small component cost in the overall manufacturing cost, the increase in their prices is unlikely to have a major inflationary impact. It is likely to stimulate production elsewhere in the world (Australia and Greenland are two contenders), thus lessening the monopoly of China. Viable alternatives to REEs will become more attractive, and the relatively high cost ought to make us conserve the stocks that we already have. However, this is a case of scarcity becoming evident a decade sooner than we thought that it might. Either way, it should be an interesting case study for the onset of more serious scarcities (Food, Energy, Water) later in the century.

It appeals to that part of me that is a small boy with a beetle in a jam jar!

The issues covered in this post are dealt with at greater length in our forthcoming book “The Age Of Scarcity 2010-50”.

© The European Futures Observatory 2010

Rare Earth Elements: http://www.independent.co.uk/news/science/precious-metals-that-could-save-the-planet-1855394.html

China and REEs: http://www.independent.co.uk/news/world/asia/concern-as-china-clamps-down-on-rare-earth-exports-1855387.html

1 comment:

John Kurman said...

REEs are a bit of a problem, especially for US and European strategic military applications. However, let us not yet count out innovations in chemistry applications. The recent work on superatoms (clusters of atoms that mimic chemical behaviors of elements in the periodic table) might just find cheap alternive compounds to REEs.