Resource prices are rising and becoming more volatile. Without a resource revolution, we all face the prospect of damage to global growth, welfare, and the environment.
The English thinker Malthus argued in his famous Essay on the principle of population in 1798 that there was no longer sufficient land in the world to feed a rapidly growing world population, threatening poverty and famine. But an agro-industrial revolution soon transformed the economies of Europe and North America, and his fears proved unfounded.
In more recent years, the conventional wisdom has taken hold that market forces would always come to the rescue. Until ten years ago, this hope was largely fulfilled. During most of the 20th century, resource prices, whether they be food, water, energy or steel, declined despite strong growth in the world’s population and even stronger growth in GDP. This price fall was due to a combination of new low-cost sources of supply and technological innovation.
But in just the past ten years, demand from emerging markets, particularly in Asia, has erased all the prices declines of the previous 100. A number of factors are conspiring to create a risk that we might be entering a new era of high and volatile prices over the next two decades. Up to three billion people could join the middle class, boosting demand at a time when obtaining new resources could become more difficult and costly. The stress on the resource system is likely to be compounded by increasing links between resources that mean that price shocks in one can swiftly transmit to others. In addition, environmental deterioration, driven by higher consumption, is making the supply of resources—particularly food—more vulnerable.
Rethinking natural resource management
McKinsey experts discuss the challenges and opportunities of meeting demand for energy, materials and food, water, as 3 billion consumers are added to the middle class in the next 20 years.
A joint report by the McKinsey Global Institute and McKinsey’s Sustainability & Resource Productivity Practice shows that the resource challenge can be met through a combination of expanding their supply and a step change in the way they are extracted, converted, and used. Resource productivity improvements that use existing technology would satisfy nearly 30 percent of demand in 2030. Fifteen areas, from more energy-efficient buildings to improved irrigation, could deliver 75 percent of the potential for higher resource productivity.
Meeting the resource supply and productivity challenges will be far from easy—only 20 percent of the potential is readily achievable and 40 percent will be hard to capture. There are many barriers, including the fact that the capital needed each year to create a resource revolution will rise from roughly $2 trillion today to more than $3 trillion. However, the benefits could be as high as $3.7 trillion a year if carbon had a price of $30 per tonne and governments removed substantial resource subsidies and taxes. Even this would not be sufficient to prevent global warming and provide universal access to resources, which could cost in the region of another $350 billion a year.
Policy makers should consider action on three fronts. They should consider unwinding subsidies that keep prices artificially low and encourage inefficiency; ensure that enough capital is available and that they correct market failures associated with property rights and incentives, for instance; and bolster society’s resilience by creating safety nets to help very poor people deal with change and educating consumers and businesses to heed the reality of future resource constraints.
This new era presents opportunities and risks for business. Resource-related trends will shape the competitive dynamics of a range of sectors in the two decades ahead. Resource-intensive sectors are exposed to much higher risk of either increased resource prices and/or of restrictions on their licence to operate. These risks will be particularly acute in the fastest-growing markets where constraints on access to resources and accelerating environmental degradation are most acute. Resource-supplying companies may appear to be positioned for an era of windfall profits. However, they face an increasingly complex set of portfolio investment challenges, especially given a rapidly changing technology and regulatory landscape. In general, businesses will need to rethink how resources might shape profitability across their operations, produce new growth opportunities, and pose new challenges for risk management.
In the 20th century, governments and businesses didn’t have to worry about resource productivity; they were able to focus on capital and labor instead. Over the next 20 years, resources needs to be put at the heart of public policy and business strategy.