[cube]

I've got this economic theory that I've been flirting with. Anyways it states that when a commodity first gets discovered, it's price is very high because there's a lack of experience on how to extract it in the most efficient way. As time passes the price of the commodity drops because the technology and methods of extraction improves. But eventually the commodity will become expensive because it has been over-exploited and there's a shortage of it.

here's an example in 3 easy steps: the whaling industry

1) Back in the renaissance times in Europe, whale meat was a prohibitively expensive delicacy. Only royalty could afford it.

2) But as time went on, the whalers got better at their craft. The peak of the industry was in the 1800's. The ships got bigger and harpoons were now shot from canons instead of thrown by hand, making it much easier to hunt the whales. Basically the technology got better. At this time whale meat was so dirt cheap it became associated with the poor.

3) But the whalers became a victim of their own success. They killed so many whales that there's now a shortage, ensuring a high price. Whale meat is now a delicacy.

What do you think? Am I on to something here or am I just blowing hot air out of my ass?

I can think of many other examples but then again I can also think of 1 commodity that doesn't follow this generalized rule.

[Texas_T]

Aluminum would be another good example of the first two parts of the trend - at the turn of the 20th cntury, it was considered a precious metal. Then on to WWII and its use in aircraft construction......nowadays used for throwaway soda cans.

Refining of aluiminum is very energy intensive, so as we move into a peak oil scenario and all forms of energy go up in price, aluminum could become more scarce and expensive.

[cube]

hmm good point I didn't think of aluminum. With time it will move onto "step 3" of the trend. I've noticed there's a "doom and gloom" clause to my theory. In the long term, the fate of a commodity price is to eventually end up being expensive due to a shortage because of over-exploitation. If that's the case then the ultimate fate of humanity is to live in a world where practically all commodities are expensive. That would ensure economic stagnation. Economic growth depends on commodities being cheap IMHO.

[gt1370a]

This is partially right. You've basically described the supply side, but didn't account much for demand. For example, initially when a commodity is discovered the price is low, because there is no demand for it since no one knows what to do with it. If it is useful, and demand increases, the price will increase.

What happens with all commodities as they become expensive is:
1) Supply can go up - this happened with your whale meat example at first, but it doesn't look like supply can be significantly increased for oil, not in the next 5-10 years anyway (beyond that some miraculous discovery could change things if demand still exists).

2) Demand can go down - but what the economists won't tell you is that demand destruction for something like oil (or water or food) can be painful. Recession, unemployment, homelessness, starvation, conflict. But it's the market at work.

OR
3) Alternatives can become available. This is why "the stone age didn't end because we ran out of stone," and it's why we didn't run out of wood or coal. A combination of alternatives and reduced demand could produce a soft landing, but it will only happen if it's profitable.

I guess I'm kind of a doomer because I don't see supply catching up, don't see any promising alternatives that can be scaled up quickly enough and be profitable, so I think demand destruction is what we will be living with until everything levels off at or below a sustainable level. Of course the poorest will experience it first, for example the whole country of Zimbabwe right now, and even the poor in the US may have to choose between eating and staying warm this winter if it's a cold one.

[MrBill]

usually in marketing & strategy we refer to it as the 'S' curve

at the gently sloping lower left hand you have your new technology and its take-up by early adopters

as acceptance becomes more widespread and new applications are developed you have the steeper phase of mass adoption

towards the end the trend levels off at market saturation at which time the technology is already widely dispersed and only a small minority have not switched to it from alternatives and firms are chasing diminishing returns

of course during the levelling off phase if production becomes more efficient than you might have a reduction in price that can stimulate new demand or secondary demand

the S curve is pretty standard in management sciences if you check-out Harvard Business Review, McKinsey Quarterly or even Fast Company

[grabby]

$this->bbcode_second_pass_quote('cube', 'I')'ve got this economic theory ...What do you think? Am I on to something here?

I can think of many other examples but then again I can also think of 1 commodity that doesn't follow this generalized rule.

[bobcousins]

$this->bbcode_second_pass_quote('cube', 'A')nyways it states that when a commodity first gets discovered, it's price is very high because there's a lack of experience on how to extract it in the most efficient way. As time passes the price of the commodity drops because the technology and methods of extraction improves.

[MrBill]

Good point BobCousins.

As well when it comes to mines & minerals most if not all the easy finds have already been made. Not likely to find another Klondike goldrush as huge deposits of surface gold have already been exploited fully. Therefore, as far as local production goes, this is not just impractical, but in many cases impossible. Could lead to regional shortages of critical materials if transport becomes too expensive.

But for a nail the war was lost

[cube]

$this->bbcode_second_pass_quote('grabby', '.')..
That is a whale of a theory. Sounds right, similar to REDWOOD.
try and buy some now, it used to be cheaper than pine.
...

[spot5050]

$this->bbcode_second_pass_quote('cube', 'I')'ve got this economic theory that I've been flirting with. Anyways it states that when a commodity first gets discovered, it's price is very high because there's a lack of experience on how to extract it in the most efficient way. As time passes the price of the commodity drops because the technology and methods of extraction improves. But eventually the commodity will become expensive because it has been over-exploited and there's a shortage of it.

here's an example in 3 easy steps: the whaling industry

1) Back in the renaissance times in Europe, whale meat was a prohibitively expensive delicacy. Only royalty could afford it.

2) But as time went on, the whalers got better at their craft. The peak of the industry was in the 1800's. The ships got bigger and harpoons were now shot from canons instead of thrown by hand, making it much easier to hunt the whales. Basically the technology got better. At this time whale meat was so dirt cheap it became associated with the poor.

3) But the whalers became a victim of their own success. They killed so many whales that there's now a shortage, ensuring a high price. Whale meat is now a delicacy.

What do you think? Am I on to something here or am I just blowing hot air out of my ass?

I can think of many other examples but then again I can also think of 1 commodity that doesn't follow this generalized rule.

[truecougarblue]

I've also been looking for a historical parallel that could really show us what oil may do.

I had thought of whale oil but then found this:

1910 - 1919 171860
1920 - 1929 199858
1930 - 1939 392394
1940 - 1949 231081 (WWII)
1950 - 1959 503192
1960 - 1969 584613

Those are the whale kill totals by decade for 1910-1970 when an international ban went into effect. As you can see the limit in supply was due to regulation, not natural limits.

Oil should act differently unless governments ban it's use by private citizens.

[truecougarblue]

After having said that, I may have thought of another more relevant comparison for peak oil.

Namely, Manhattan real estate, I wasn't able to find a long term chart, and vacant lots in Manhattan probably got scarce in the 1800s. It would be interesting to take a look at what happened to prices when the supply of vacant land began to dwindle.

For that matter, shouldn't you be able to prove hubbarts peak by figuring out at what point manhattan was 1/2 utilized? The fact that people and businesses could move further away could be compared to current alternate sources of energy.

I'll do some more searches...

[FoxV]

well the theory seems fair enough, so how about some numbers.

Can you create a "typical" function to predict the commodity prices.

Lets say you input factors such as
Mass of natural occuring resource
Historic production rate
Historic consumption rate
Historic price

you get an output that would predict price over X years.

Such a formula could be very usefull to have around. However once peak oil, die-off and the fiat economy collapse, the model will become useless as these issue are pretty much unique to us in all of human history

[pup55]

L. David Roper

This prof from Va Tech has done some work on this issue. In the paper on metals depletion, he applies hubbert-like analysis to a couple of dozen minerals and metals to try to get some understanding about the decline rate of an increasingly scarce resource. Most of this work was done in the disco era, but as such it is about 30 years ahead of its time.

The data is out there to predict production levels and pricing behavior of your favorite scarce natural resource.

[cube]

$this->bbcode_second_pass_quote('pup55', '[')url=http://arts.bev.net/RoperLDavid/minerals/minerals.htm]L. David Roper[/url]Most of this work was done in the disco era, but as such it is about 30 years ahead of its time.

The data is out there to predict production levels and pricing behavior of your favorite scarce natural resource.

[truecougarblue]

I'm not sure you can use standard commodity models to compare with oil. The only ones that would truly compare would be other fossil fuels like coal, gas, etc. Copper, Aluminum, iron etc. can be recycled, while fuels cannot.

I found a quote for the total cost to build central park in the 1860s , $8 million. Another quote set the land valuation at $400 million in 1996. That still works out to 3-4% increase over 130 years. I haven't been able to find info on prices in the ensuing decades after the park was built. The 1860s do seem to be the right years though, because William Jennings Bryant pushed for the park because the island was about half way full, and he wanted to ensure preservation of open space.

[spot5050]

$this->bbcode_second_pass_quote('cube', 'I')'ve got this economic theory that I've been flirting with. Anyways it states that when a commodity first gets discovered, it's price is very high because there's a lack of experience on how to extract it in the most efficient way. As time passes the price of the commodity drops because the technology and methods of extraction improves. But eventually the commodity will become expensive because it has been over-exploited and there's a shortage of it.

here's an example in 3 easy steps: the whaling industry

1) Back in the renaissance times in Europe, whale meat was a prohibitively expensive delicacy. Only royalty could afford it.

2) But as time went on, the whalers got better at their craft. The peak of the industry was in the 1800's. The ships got bigger and harpoons were now shot from canons instead of thrown by hand, making it much easier to hunt the whales. Basically the technology got better. At this time whale meat was so dirt cheap it became associated with the poor.

3) But the whalers became a victim of their own success. They killed so many whales that there's now a shortage, ensuring a high price. Whale meat is now a delicacy.

What do you think? Am I on to something here or am I just blowing hot air out of my ass?

I can think of many other examples but then again I can also think of 1 commodity that doesn't follow this generalized rule.