3E Intelligence

When one follows the international news scene closely, it looks like there are two different worlds being reported about: one where the housing and credit crisis is being played out against a background of inflation fears and worries about a global economic slowdown; the other where spectacularly rising energy and commodity prices underline the energy/climate challenge and confirm the beginning of a new era of world-wide resource scarcity. There are very few commentators or political and economic experts who are able to connect the two worlds and paint a realistic picture of their historical importance.

One of them, who does manage to connect the two crises, is Tim Bond in the Financial Times of today. In an article called “Twin shocks of finance and resources facing global economy“, the head of asset allocation strategy of Barclays Capital manages to link the credit crisis with the new depletion reality. Here are a few extracts of his interesting article (with my highlighting):

The global economy is facing twin shocks. Natural resource markets are delivering a supply shock of 1970s dimensions, while the financial system is delivering a shock comparable to the bank and thrift crises of the 1988-1993 period. The magnitude of each shock is very different. The financial markets require a recapitalisation of the banking system, with estimates ranging from $300bn to $1,000bn.

By contrast, prospective capital requirements in the resource markets dwarf the current needs of the banking system. According to the International Energy Agency, the global energy sector alone needs a real $22,000bn over the next two decades to meet the anticipated rise in primary energy demand. There is also the unavoidable necessity to reduce the CO 2 intensity of energy production, a good 80 per cent of which is derived from the dirtiest of fossil fuels. While an accurate quantification of the size of the required green energy investment is not possible, it is likely to be of a similar scale to the expansion of energy supply”.

The broad story is of depletion. Most of the easily obtainable resource deposits have already been exploited and most usable agricultural land is already in production. Natural resource discoveries, where they continue to occur, tend to be of a lower quality and are more costly to extract. Meanwhile, the dwindling supply of unutilised land faces competing demands from biodiversity, biofuels and food production.

Predictably, the scale of response to each of these crises is in inverse proportion to their respective magnitude. In the US, the credit crunch has elicited an instantaneous fiscal package to the tune of $168bn, or 1.2 per cent of nominal GDP. In contrast, the latest annual budget appropriation for renewable energy spending is just $1.72bn – 0.01 per cent of GDP.”

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