The rising economic importance of energy and commodities
Meeting demand for resources
Energy supply and demand is likely to represent the biggest challenge of the 21st century. More than any other issue, it is at the mercy of global economics, geopolitics, war, fiscal policy, and the battle between growth and sustainability. Beyond financial services, energy is probably the most global of industries and the industry with the broadest impact on others. All of these factors result in an uncertain and changeable future.
Oil may be at the center of these challenges, but it is, of course, not the only resource. Global demand is driving us into a long-term transition away from oil toward natural gas, coal and other alternatives, including nuclear power — despite the political minefields. China’s formidable growth also drives demand for other basic commodities; it accounts for 27% of the world consumption of steel, and almost half of the world consumption of cement.26
As the global population continues to grow, demand for natural capital resources (such as water, fertile land and clean air) will also become more important, economically and geopolitically. Meeting the world’s growing food needs (demand is predicted to rise by 50% by 202027) is just one of these challenges — with wide-reaching impacts. For instance, a third of all the milk produced worldwide is now being transported to China to keep pace with its rapidly growing demand (at a rate of 25% a year28) with significant impacts on supply and prices across the globe. Meeting the world’s freshwater demands will be just as challenging: by 2025, the combined population of the countries likely to face water stress or scarcity will be nearing three billion.29
The politics of oil
In the short term, it is oil that has the most wide-reaching implications. Demand for oil is likely to remain strong with the emerging economies leading the growth. In fact, if governments around the world stick with their current policies, the world’s energy needs are likely to be over 50% higher in 2030 than today, with oil making up 32% of total demand.30 As pressure on supply increases, geopolitical factors take on greater significance and resource nationalism increases. It is little coincidence that questions of Arctic sovereignty came to a head at the same time as oil prices were ascending. A further cause for concern is that the five day war in August 2008 between Russia and Georgia forced BP to shut down a pipeline exporting oil from Azerbaijan to the Black Sea — and there is an increasing tendency toward countries shutting the door to big oil to cultivate their home-grown companies. Geopolitical maneuverings like this have the potential to cause huge disruption to supply, yet little can be done to mitigate the risk.
Dealing with volatility
The fluctuating prices of commodities represent another challenge with wide-ranging impacts — again with oil at the center. Any commodity fluctuating so wildly in such a short period (from US$70 a barrel to US$145 and back in the 12 months from October 2007 to 200831) would have an impact. The fact that oil is so widely required, by industry and consumers alike, makes this impact all the more important, hindering businesses’ and governments’ ability to plan. Indeed, Mexico’s oil income stabilization fund has hedged the country’s entire oil output for 2009 to manage the risk associated with this volatility.32
Both rising and falling prices have impacts. Rising prices put pressure on developed and emerging economies — with some industries’ profitability (or even ability to exist) fundamentally challenged, as evidenced by the collapse of numerous airlines in 2008. Supply chain economics also comes to the fore; significant rises in the cost of transporting goods can override other factors, making it cheaper overall to produce goods locally, even at a higher unit price. However, low oil prices are not a solve-all solution and can impact plans to diversify supply. Some projects to find more oil (requiring long-term planning and investment) may no longer be worth doing: prices below US$90 challenge the economics of projects in the Canadian oil sands; prices below US$70 challenge those of offshore projects in Angola.33
Considering the alternatives
Freeing the world from its dependency on traditional energy sources would help counter many of these issues — as well as solve some environmental ones — but this will not be an instant solution. The current contribution of renewable energy sources is relatively low (representing 3.4% of global power generation),34 and the speed of a transition from a global economy based on fossil fuels to one based on alternative energy is likely to be slow in the absence of a major technological breakthrough. Uncertainty over government subsidies and regulation could hamper efforts further.
However, the future remains promising. Global investment in renewable energy surged to US$148 billion in 200735, and there are some significant success stories: wind power, for instance, is growing at 30% per annum globally, already provides 20% of Denmark’s electricity needs36 and is likely to provide up to 15% of the US electricity needs by 2020.37 The role of new energy technologies (cleantech) is expected to be critical. The financial crisis and fluctuating price of oil will put pressure on the economics of cleantech and its high capital costs in the short term. However, the necessary and fundamental shift away from oil will drive more corporate, private and government capital and foster innovation to ensure cleantech’s increasing contribution to overall global energy production in the next decades.
The drive for efficiency
Of course, the most effective way to reduce demand for energy is to use less of it — a strategy that also results in reduced costs. The impacts of energy efficiency are most obvious in heavy industry; for instance, the steel industry accounts for 10% and 27% of total electricity and coal consumed respectively in India, so any efficiencies made there would be substantial.38 However, the cost reduction impact can be seen across all types of business — it is estimated that up to 80% of the US$10 billion annual energy bill for commercial food service in the US, for example, could be saved by using more efficient equipment.39 As global recession drives industry to cut costs wherever possible, the scale of the savings possible will encourage businesses to act. It should also drive investment in new technologies that promote and enable efficiencies, a significant part of the cleantech agenda.
Global megatrends 2009
26 New Waves in Globalization and Competitiveness, IMD; June 2008.
27 Global Trends 2025, National Intelligence Council; Oct 2008.
28 China’s new appetite for milk forces price rise in Germany, The Guardian; Aug 2007.
29 Freshwater, Christine McMichael; Nov 2008. Based on projection from Population Action International.
30 The Race for Energy, Knowledge at Wharton; Sept 2008.
31 Based on data from thisismoney.co.uk.
32 Mexico hedges almost all of its oil exports for the coming year, Financial Times; Nov 2008.
33 Crude Profits, CFO Europe Magazine; Oct 2008.
34 Renewables 2007 – Global Status Report, REN21; Feb 2008.
35 Global trends in sustainable energy investment 2008, UNEP,
SEFI and New Energy Finance; July 2008.
36 Energy Statistics 2007, Danish Energy Agency; Oct 2008.
37 Special Report on Energy, The Economist; June 2008.
38 Indian Steel Industry – Facts & a peep into the future, Bharat
Book Bureau; June 2007.
39 Shaping Restaurants to Be Models of Efficiency, NY Times;
May 2006.
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