by Sam Alston

You can probably be excused for failing to notice that commodity prices on the whole have been falling. The price of gold (19.5% fall over the year), wheat (20% fall), and oil (over 30% fall) on global markets have all dropped recently. This has left mainstream finance reporters rather excited. As with house prices rises, commodity price falls are apparently a fundamentally good thing.  However it’s worth considering what this commodity price movement actually means.

Lower commodity prices means lower production costs for net importers of commodities (much of the western world), thus supposedly lower prices. The continual rise in the price of things like energy and bread that we have seen in the past few years should abate.  Since it has been made clear over the last few years that society no longer guarantees the right to commodities needed to live (like food), a reduction in these prices would potentially be the best step to stop people starving.

Those of a more revolutionary bent, may be slightly disappointed. A high cost of living has helped to bring down dictatorial governments in places like Tunisia, helped prompt the occupy movement, and just last week promoted an uprising in Burkina Faso that saw the parliament burnt to the ground.

These revolutionaries can stop putting away their anonymous masks however; it is debatable privatised elite controlled mechanisms will lower prices. The places where prices are likely to go down, such as supermarket goods in the UK, are more a product of the power relations in the market with at best partial aid from global prices. However even assuming that we are likely to see fewer people starving in the West as a result of this, what is most concerning about this commodity price fall is the cause.

This commodity price fall was arguably predictable. Despite concerns over the much of the past forty years, notably embodied by limits to growth that we are running out of natural resources to exploit, there is still a notable commodities cycle. Prices rise with diminishing demand and reserves close, farms degrade etc. and this leads to a peak. Prices then come down as investment increases and big consumers switch their habits. This can be seen though the 1980s, 1970s, right though to today with the peak coming just after the financial crisis.

(Source: World Bank)

(Source: World Bank)

A fall in commodity prices adversely affects those who work for those who produce the commodities. This can mean some rise in poverty rates for countries were the main industry is producing goods for export to the global market. In places like Nigeria this may ironically exasperate civil conflict and may lead to a rise in poverty.  On a macroeconomic level commodity price falls put in peril redistributive polices dependent on rents derived from commodity export. Across Latin America, particularly, social safety nets and government service provision has been funded by redistribution of commodity booms. In the 1980s and 1990s these commodity price falls were used to promote a series of structural economic reforms that are probably still causing poverty today. Can countries such as Venezuela, Brazil, and Indonesia, already in fiscal trouble, manage to sustain a social safety net with declining oil revenue?

However, lower prices do reduce investment in new reserves meaning that the projects in national parks and areas such as the Arctic could be delayed, with fewer people displaced. As this article argues it is at least debatable if commodity development is beneficial to development[1]. The reduced prospects for profits could be aided by the fossil fuel divestment movement.

However even here the good news is tempered by bad. The reason for the fall in the price of oil has been largely a result of unconventional reserves entering the market and showering economic activity around the world. The stocks which are seeing the biggest fall as the oil price declined, are renewable energy technologies. Lower prices discourage investment in consumption control and discourages investment in alternatives. For decades a popular theory has been that investment in energy conservation and renewables would rise as we hit peak oil, and this would save us from climate change. Unconventional fuels, notably shale from the USA, may now be proving to be the final nail in the coffin of this theory.

This may be a small short term price decline with few long term repercussions; the fundamentals driving higher commodity prices may soon continue to rise.  However a fall in commodity prices is hardly an unalloyed good. Or we may need to question whether we can afford lower commodity prices, because the consequences may not be confined to our shopping basket.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.