Raw but not Simple: Commodities, Consumers, and the EnvironmentPublished: July 15, 2010 in Knowledge@Emory
In the wake of the BP oil disaster, U.S. dependence on fossil fuels and its implications are once again at the fore. But understanding the link between key commodities, consumers, and the impact on the environment isn’t easy. Financial journalist Kevin Morrison rises to the challenge with his book Living in a Material World: The Commodity Connection, breaking down a difficult subject and providing an exhaustive account of the market and its implications for consumers across the globe. It is the growing international need for commodities that is driving price increases in oil, copper, and grain, with the rising cost of these raw materials adding to the price tags for food, electricity, gasoline, and consumer goods. Morrison’s book is a must read for understanding just how volatile the commodities markets can be given the geopolitical forces at work, governmental oversight and regulation, the trading markets, resource limits, and worldwide demand.
Morrison spends considerable time outlining the major country players, devoting lengthy portions of the text to the U.S., the BRIC nations, and the Middle East. In a particularly compelling section, the author offers a close look at China, where electricity in the vast majority of homes, he writes, is generated by coal-fired power stations. Interestingly, China’s coal reserves, some of the largest in the world, were enough to satisfy the country’s needs until 2007. But coal is a dirty fuel source, Morrison notes, and he is keenly interested in the energy industry’s impact on the environment.
China has initiated one of the world’s largest power network expansion projects, continuing the search for coal outside its borders. But it is the thirst for oil that is moving the Chinese to tap oil sources from Sudan and Iran, “changing the world geopolitical landscape.” The market for base metals, especially copper, is also growing as a result of demand in China and beyond, Morrison says. Copper serves as a conductor and transformer of electricity, for wiring in cars and planes, as a material to create mobile phones and laptops, and for clean energy solutions in wind farms and hybrid cars. Even the increasing demand for meat in the developed and developing world is transforming the global landscape and agricultural markets. It is Morrison’s ability to pull these various elements together and establish the links that makes this a wonderful, though heavy, read.
The author presents a thorough discussion of greenhouse emissions, noting that coal accounts for “one-quarter of the world’s carbon dioxide emissions.” The number is set to increase given the rise in the number of coal plants in China and India and throughout the developing world, he tells us. While it would be easy to push all of the blame on China, India, or construction throughout the rest of the developing world, Morrison wisely avoids that. He tells us that “thousands of factories around China are making goods in facilities which are actually owned by foreign companies, or producing goods under contract for foreign companies and brands.” Estimates indicate that “more than a quarter of China’s energy is used in the production of goods for export.” Even though China is now the largest greenhouse gas emitter, “the average Chinese citizen emits less pollution than the average American or European.”
The Solution: Renewable Fuels?
So, what is the solution to the energy and pollution dilemma? Morrison makes it clear that it’s not ethanol, at least for now. The author examines the convergence of the energy and agricultural sectors, with the need for alternative fuel sources driving biofuel production from a variety of grains and oilseeds, including corn. But U.S. ethanol policy has had an unintended impact: hiking the price of corn and placing poor countries in peril. Morrison runs through the technology and the rise of ethanol and offers an additional argument against it: the market’s overdependence on government subsidies to stay alive.
The author tells us that not all of the evolving energy technologies will result in a successful product or the market latching on to it. He details the storage problems with solar power, for instance. And he raises the example of India, now the “fourth largest producer of electricity from wind in the world.” But even with the growth in wind and other renewable energies, “collectively they still equate to about the same portion of the global energy pie as they did in the early 1970s.”
Morrison is critical of previous U.S. government regulations to curb emissions, and he provides good detail on the evolution of air pollution controls in the U.S. He mentions the push toward carbon energy trading and American investment flowing to R&D on cleaner renewable, fossil, and nuclear energy solutions. The book offers specifics on venture capital investment into low-carbon technology, including wind, solar and biofuel efforts, estimated at about $74 billion in 2007. But Morrison tells us that, for now, the U.S. remains hooked on oil, dependent on sometimes unpredictable and unstable outside sources for 60 percent of its energy needs.
The Rise of Commodity Trading
Part of the energy industry’s volatility lies in its growing importance in the capital markets. Commodity markets have gone from “bit player in the financial world to the main stage,” and Morrison outlines the history of these markets on the major U.S. exchanges. From hedge funds to pension funds and individual investors, everyone is interested in the hot commodities market and the investment vehicles designed around it, including ETFs and commodity indices. But it has been electronic trading technology that has truly altered the market, facilitating the changes and the money flow into the commodities sector.
Morrison couldn’t avoid mentioning the issue of speculation in crude oil, gasoline, and natural gas markets. And he goes into detail on the failure of energy merchant Enron and the hedge fund Amaranth Advisors. He admits that the market is certainly chasing the “supply and demand trends for natural resources,” helping to drive the rise in commodity prices. But the author lets traders off the hook for the most part, noting that speculators were less to blame for rising prices than governmental forces. He notes, “With so much of the world’s resources controlled by government-owned bodies, or funded through subsidies, there are limits to a truly free and open market in commodity pricing.” This is a sobering message, and according to the author, one that politicians worldwide must ultimately handle.