Which Straw Breaks the Camel's Back?

The following is a guest post by Dr. Saif K. Lalani.  Nothing in this commentary is to be construed as advice - economic, financial, or otherwise.  I would tell you to seek the council of a qualified investment professional if believed that there was such a thing for the issues that confront us.  I do not, and so will not.  While I am precluded from making specific recommendations and predictions, Dr. Lalani is under no such restriction.  Accordingly, I have left his article as is and have not redacted or censored it in anyway.  At the end of the day, Saif and I merely enjoy the Web for what it is:  A place for people without a shred of policy influence to shout into the wind...  

That disclosure aside, I give you Dr. Saif K. Lalani

“The Club of Rome”...Which straw breaks the camel's back?

“The Club of Rome raised considerable public attention with its report “Limits to Growth”, which has sold 30 million copies in more than 30 translations, making it the best selling environmental book in world history. Kevin J. Krizek and Joe Power’s article: "A Planner's Guide to Sustainable Development" (Planning Advisory Service Report # 467, American Planning Assoc.) mentions this source and his author as stating that Paul Ehrlich's predictions in his 1968 book, "The Population Bomb" will come true within a century. Published in 1972 and presented for the first time at the ISC's annual Management Symposium in St. Gallen, Switzerland, it predicted that economic growth could not continue indefinitely because of the limited availability of natural resources, particularly oil.”

From Wikipedia.org

We are now 1-4 years away from the system breaking down due to limits on natural resources. But which resource will it be?

(Drum roll for the contenders...)

Oil: Coming in at number 1 for obvious reasons. Nothing else has been mentioned more frequently in the press than this high-flying commodity. Conventional world oil production has peaked. Total liquids production has peaked, or will peak within a year or so. Regardless of production, the export market will continue to contract rapidly. Rising consumption in Russia, Saudi Arabia, Iran and Mexico, combined with falling production virtually everywhere of importance will raise prices past $200 within 2 years. High prices are not the problem though. Our economic system will break-down rather rapidly if oil shortages appear.

Coal: In my opinion, Coal is slightly more likely than oil to bring the system down. Here the effects of the export-land model (courtesy Jeffery Brown) are even more pronounced. China consumes more than 2.5 billion short tons of coal per year. It recently turned into a net importer (2008 projected). The world export market is tiny and is less than 12% of the world coal production. China's coal consumption is rising at a 12-15% compounded annual rate. China's coal production growth rate is slowing dramatically and is projected to rise less than 5% this year. Putting these numbers together means that China will swallow all of the worlds exports in 2-4 years. Unless coal production can be ramped up dramatically elsewhere IT IS LIGHT’S OUT EVERYWHERE.

Natural Gas: This commodity is unlikely to bring down the system, as there is still some slack in this market. That said, if coal brings down the first domino then competition for LNG could reach unprecedented levels. That in turn would raise Natural Gas prices around the world. Natural Gas could also be the first domino if, heaven forbid, we have a bad hurricane season in the United States. Back in 2005 there was enough slack in the system. That coupled with an extraordinarily mild winter, prevented Natural Gas from being the straw that broke the camel's back.

Uranium: Although uranium prices remain depressed, I remain bullish on its long term prospects. Within 3 years Uranium prices will, at the least, rise past $250 a pound, in my humble opinion. Once again, it is unlikely to be the first domino to fall but an oil, natural gas or coal crisis could make countries start hoarding uranium. The Uranium market is at the mercy of a large amount of non-mine supply. Russia has shown reluctance to part with it and if a worldwide energy crisis is triggered expect the worst from them regarding honoring and extending uranium supply contracts. Of all the commodities, uranium supply has the longest lead time which would make things a lot worse even if below ground resources are present.


Silver: Silver's diverse set of uses make the system particularly vulnerable to its unavailability. Although silver mine production lags world consumption, a silver crisis is likely to be triggered in a US dollar collapse scenario rather than as a pure supply side situation. Flight into physical precious metal by even 1% of US households would cause marked silver shortages. Say goodbye to all electronics, photo-voltaic cells, windmills, new nuclear plants, etc... There is no viable substitution for silver.

Corn, Soybeans, Wheat and Rice: I have previously written about the bullish prospects for corn. The longer-term fundamentals for soybeans, wheat and rice are no less bullish. Rough rice, the least spoken about among the four, has seen the greatest price increases of the 4 major grains in the last 6 months. Our current food stocks are the lowest ever in terms of days supply. When shortages of food appear and hoarding starts does the economic system survive?

The stage is now set for an epic battle between the Club of Rome and the conventional economists. Will the Club be proven right? Or will the hero of Conventional economists, Adam Smith, come with his 2-sided light saber of supply and demand and defeat the Club?

We will find out soon enough."

Dr. Saif K. Lalani