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January 1, 2012

Caught Short

Mounting resource scarcity will lead to economic dislocation and heightened geopolitical tensions in the coming decades.

We are entering a phase of growing global resource scarcity and dislocation. Population and economic growth, as well as greater resource demand in countries with mega-populations such as China and India, are major contributors. In addition, increased per-capita consumption, shifts in patterns of consumption, a growing global middle class and pressures arising from heightened geopolitical competition for resource control are all part of an emerging “perfect storm” for the management of resources—especially food, water and energy.

Together, these factors are contributing to projected long-term global shortages. The result: continued upward price pressures and the prospect of heightened geopolitical instability. For business, new strategies will be necessary to respond to the anticipated volatility.

 

SAME PLANET, DIFFERENT WORLD

 

The prospect of resource scarcity is substantially greater now than it has been in the past, when resources were cheaper and more plentiful. Global demand has increased significantly and there are profound questions about our ability to satisfy demand in the future.

The main sources of global demand growth are immutable:

  • Population: In October, the world's population surpassed 7 billion. According to the latest data from the United Nations, we are now en route to a population of 9.3 billion by 2050 and 10.1 billion by the end of the century. The good news is the rate of population growth is declining precipitously. The bad news is that many more people across the planet will be consuming resources at a greater rate per capita that might trigger resource dislocations and scarcities.
  • Developing Countries: When it comes to the size of their economies, a number of high-growth developing countries are catching up quickly to developed nations. The most prominent example of this rapid growth, of course, is China. Taken together, developing countries accounted for the majority of global output in 2008, the first time since the onset of the industrial revolution in the late part of the 18th century. This surge in growth has contributed to sharp increases in demand for resources.
  • Per Capita Consumption: It should come as no surprise that rapid increases in overall economic output have translated into a surging demand for resources at the individual level. You name the measure—daily consumption of energy, water or food—and its level has risen sharply in developing countries. U.N. data indicate, for example, that the global population rose nearly four-fold in the 20th century while water consumption ascended at a faster clip: seven-fold during the same period.
  • Consumption Patterns: The surge in the global middle class means a changing lifestyle that is significantly more resource-intensive. Newly affluent consumers in high-population countries like China and India are shifting their diets from grain to meat and replacing their bicycles with cars.
  • Global Output: The International Monetary Fund projected global growth in the 4% range for 2011, which reflects growth from developing countries that is pushing up aggregate global output. When recovery occurs in developed economies, pressure on resources will increase.

 

When it comes to global demand for resources, then, the evidence suggests that we could face a “2-2-2” proposition—that is, a doubling in global demand for food, water and energy out to the middle of the century. The operative question is whether we can expand supply to meet demand.

Let's start by looking at agriculture. After the remarkable—the miraculous—Green Revolution that drove rapid population growth and lifted the welfare of people around the world, we have plateaued. Valuable arable land is being taken offline by pollution, desertification and topsoil erosion. Water shortages are constraining the rate of increase.

Freshwater is the next critical resource. Today, some 880 million people do not have access to safe drinking water and a staggering 2.6 billion do not have adequate sanitation. The projections are even worse: The Organisation for Economic Co-operation and Development estimates as many as 4 billion people will be living in water-stressed countries by 2030. Countries in Northern Africa, the Middle East and some parts of Southeast Asia are expected to experience the worst water shortages, creating a dry belt across that area of the planet. Unfortunately, that dry belt corresponds with a number of high-population areas and regions where political tensions are already high.

Finally, energy. In my view, there are four big wild cards when we think about meeting the relentless increases in global energy demand. The first is geopolitical stability—or lack thereof. Events in Libya over the past year have underlined the potential for instability in energy-producing countries. The second and related wildcard is movement of energy. The world's fossil fuels must move through a small number of geographical chokepoints that are by definition vulnerable to disruption or uncertainty. Think of recent developments in Egypt and the issue of access to the Suez Canal by Iranian warships.

Third, there is the question of investment. The International Energy Agency has estimated some $26 trillion in energy infrastructure investment will be required to meet projected demand by 2030, and in light of the growing uncertainties surrounding energy, there are serious questions about whether such investment can be mobilized. The changing prospects for international and national regulation are the fourth and final major variable. These considerations on the supply side of global resources demonstrate that our capacity to meet demand is by no means assured.

Evidence is growing that dislocations in one resource could have a profound effect on the others. We know that water is essential to both agriculture and energy. Analysts estimate that agriculture uses 70% of the world's freshwater. According to the International Food Policy Research Institute, for example, 39% of current grain production is contingent on insecure water supply. Water is critical to energy as well—from hydropower production to the cooling of nuclear reactors to enabling hydraulic fracking. Similarly, energy is vital to agriculture in a number of ways ranging from fertilizers to transportation of produce to cooling. It factors into the price of desalination, pumping and filtration of water.

In a recent white paper on the resource nexus, the World Economic Forum asserted that “a number of these regional water bubbles are now bursting in parts of China, the Middle East, the southwestern [United States] and India.” It added: “More will follow.”

 

IMPLICATIONS FOR BUSINESS

 

The first is acknowledging a “new normal” when it comes to resources. We can no longer assume that the world has limitless resources. We can no longer rely on the old concept of “commodities”—that they are a given and can be taken for granted. And we can no longer think about one resource in isolation of others. A new paradigm is needed to provide an integrated approach to assessing the value of these resources.

Second, in order to balance supply and demand, the world must identify new ways to assign values to resources before the cascading dislocations become even more acute. The underlying market value of water, for example, is skewed by government subsidies and other public and private practices that distort our consumption patterns. Desperately needed is some dispassionate cost-benefit analysis to help head off what will otherwise be an unsustainable use of resources.

Finally, companies need to plan for higher levels of volatility and price pressures. Because these core resources are so fundamental to business operations, resource contingencies, planning for new opportunities and risk management need to be at the core of strategic planning.

 


 

Erik Peterson is managing director of A.T. Kearney's Global Business Policy Council and a senior advisor at the Center for Strategic and International Studies. Formerly, he served as director of research at Kissinger Associates.