Grantham Is Wrong — We Are Not Headed For A Disaster Of Biblical Proportions

Last year, Henry Blodget posted part of an epic doomsday letter by legendary investor Jeremy Grantham arguing that, as he put it, “We’re Headed for a Disaster of Biblical Proportions”.

Now, nothing speaks to me like data. I’m a numbers person myself. So I appreciated the many graphs and long term data series Grantham’s argument are based on.

But I’ve also come to the conclusion that he’s wrong.

In doing the research that led to my new book, The Infinite Resource: The Power of Ideas on a Finite Planet, I pored over a huge wealth of data on energy, environment, and natural resources. What that data tells me is that we do indeed have very serious problems to tackle. But it also reveals that we have the resources to tackle them, if we’re sufficiently clever. Indeed, if we make the right decisions, we may very well be on the verge of an explosion in global wealth, coupled by a reduction in our depletion of the planet’s resources.

Here’s why:

Population Growth is Ending

Grantham starts his piece by invoking Malthus and commenting on the incredible growth of global population. And it’s true – population has bloomed. But that population explosion is almost over. Around the world, fertility rates are plummeting. In 1950, the average woman would have 5 children over the course of her life. Today a woman will have, on average, fewer than 2.5 children over the course of her life. 2.1 children is the magic ‘replacement rate’, below which population growth stops. We’re on track to get there in the next few decades.

And we’re not headed for a population of 10-12 billion. More likely, we’ll top out at around 9.5 billion. That’s still a hefty 35% growth of population from today. But, by contrast, since Malthus’s time we’ve grown the population by about 600%. Since just the 1960s we’ve grown it by 100%. Most of the planet’s population growth is behind us. Only a small fraction of it is ahead.

Affluence is the Driver

Grantham suggests that food supplies are what will limit population growth. But in reality, it’s the other way around. Where there’s poverty and hunger, there’s high population growth. As countries get richer their population growth drops. Women, in particular, armed with greater education and greater opportunities, tend to start having children later in life and have fewer of them in total. Wealth, not poverty, is the brake on population growth.

Plenty of Food

Speaking of food production, it’s true that food prices soared, and are still high. But we have the capability to grow much more food. This year we may see record wheat, rice, soy, and corn crops.

And most importantly, there’s a huge potential for further growth in global food output ahead. The FAO estimates that by 2050 we’ll need to grow 70% more food to feed the planet. But just bringing the planet up to the yield levels achieved in the US would double the amount of food the world grows, more than meeting that goal.

And of course, farm yields in the US keep rising, at a compound annual rate largely unchanged since the late 1940s. By the time we reach 2050, at this rate, US yields will be twice as high as are needed on a global basis to feed the world.

Growing Food Takes Less Energy

Grantham also mentions the immense use of fertilizer to achieve these yields. That’s absolutely true. Yet we’ve been able to do that because we’ve made the process of making fertilizer so much more energy efficient. The energy required to make a ton of nitrogen fertilizer has dropped by nearly a factor of ten since the process was invented.

The combination of lower energy cost for fertilizer and higher yield per acre means that the US actually uses less energy than at any other point in history for each calorie grown.

That’s in stark contrast to the idea that we’re “eating oil” or that we’ve been able to feed the world only because of heavy fossil fuel use. And on the horizon are ways to create fertilizer using wind power, without using any fossil fuels at all.

Even more exciting, on the horizon are biotech projects funded by the Gates Foundation and others that could boost wheat and rice yields by 50% and could create grains that can fertilize themselves from nitrogen in the air. Those technologies could boost yields dramatically, particularly in poor areas that can’t afford large amounts of fertilizer.

Tons of Energy Available

What about the world’s energy supplies? Energy, as the late economist Julian Simon said, is the ‘master resource’. With enough energy you can solve a tremendous number of other problems. The flip side is also true. Spikes in the price of oil cause recessions.

Fortunately, energy is available in huge quantities. The total amount of energy we use every year – from coal, oil, natural gas, hydro, nuclear, and everything else – is dwarfed by the amount of solar energy

hitting the planet each year. How dwarfed? The solar input is 5,000 times greater than the amount we use from all those sources, combined.

In fact, it would take only about 0.3% of the Earth’s land area to meet all of humanity’s energy needs through 2030 via solar power.

That’s a large chunk of land, but it’s also just 1/100th the amount of land we use to grow food, and 1/60th of the available land in the planet’s deserts. Doubters complain that solar power is too diffuse. Does that matter when there’s so much more land available than we need?

The real problems with solar power have been the cost of collecting it and the cost of storing it. But both are plunging.

Solar panel prices are at all-time lows, less than half the cost they were two years ago, and a quarter of the price they were in the mid-2000s. Solar prices are falling at an exponential rate, in a sort of minor version of Moore’s Law, the observation that the price of computing power falls by half every 18 months. Solar power’s price decline isn’t that steep – but it’s still extremely impressive. Over the last few decades the cost of solar power has been halved every 10 years. And lately it’s happening far faster – every two to three years.

The remarkable thing about this decline in this cost of solar power is that it’s been going on since the invention of solar cells in the 1950s – roughly 60 years now. If solar keeps dropping in price (even at its slower, long term pace) for another 10 years, we’ll have solar power as cheap as fossil fuels – but with available energy thousands of times greater. If the trend continues for another 20 years, or even 30 years, we’ll have solar power a half or a quarter the price of current fossil fuels – a resource that would boost economic growth worldwide. That’s a big if, but it does look as if we’ll at least achieve parity with fossil fuel prices in the next decade.

The cost of storage also needs to come down, but we’ve done it before, with lithium-ion batteries, where prices dropped by a factor of 10 between 1991 and 2005. In those same 15 years, the amount of energy that a given weight of battery could store roughly tripled.

Raw Materials

Grantham devotes the largest chunk of graphs to looking at the prices of commodities. He finds that commodity price spikes since the beginning of 2008 have lifted the cost of the GMO Commodities Price Index to all-time highs, erasing all the price declines that have happened over the last century.

Everyone agrees that prices have spiked since 2008. Grantham is right in diagnosing the cause of the spike – it’s being driven entirely by a rapid surge in demand as China and the rest of the developing world surge in wealth. The rise in commodity prices has almost exactly tracked the rise in demand.

But what’s interesting here – and counter to the idea that we’re running out of resources – is that global supply has surged as well. High prices have led (with some lag) to new investment.

Indeed, the surge in metals production is faster than any we’ve seen since 1950. Demand is making itself known through higher prices, and that, in turn, is driving up supply. There’s no signal in these umb ers that resources are anywhere near exhausted. And eventually, as new supply in development comes online and demand growth slows, supply will catch up, and prices will drop once more.

Not So Expensive

There’s one more problem with Grantham’s argument. Grantham argues that the commodities price spike in 2008 wiped out a century of price declines. But other long-running data sets don’t agree with that at all. By most estimates, even after the commodity price spike, commodities today are still incredibly cheap compared to their historical levels

Consider the Dow Jones-AIG Commodity Index, which shows that the price spike in 2008 actually brought prices only back to their levels in the early 1980s, and that overall, prices are still in long term decline.

Or consider the very long term price trend of The Economist’s industrial commodity index, continually maintained since 1871. The price series shows that the price spike of 2008 only took us back to prices seen 20 or 30 years ago. That’s roughly what the Dow Jones-AIG commodity index says as well. The long term price trend, according to both sets of data, is towards cheaper and cheaper prices. And the 2008 price spike doesn’t even look that  remarkable in the grand scheme of things. It’s certainly quite a bit smaller than the price spike of the 1970s, which the world recovered from.

This is hardly the stuff that disasters of biblical proportions are made of.

Real Problems, Real Solutions

None of this is to say that we don’t have problems. We do. The rise in the price of oil, food, and other commodities has had a tremendous negative impact on people around the world. We need to invest in research and development to boost crop yields, to speed the price decline and deployment of renewable energy, and more. Other problems that the market doesn’t even factor into its numbers also loom: Climate change, dwindling fresh water supplies, ocean overfishing, and deforestation, just to make a few. Those are very serious challenges. We shouldn’t trivialize them. We shouldn’t stand by and watch them happen without responding. But neither should we given in to fatalism. We’ve solved such problems in the past.

We’ve solved them, in every case, by innovating – by coming up with new solutions that grew the global pie of resources. In fact, we’ve done it again and again and again, from the dawn of humanity until today. And those times that societies have failed and collapsed, you can draw a connection directly to their failure to innovate.

I talk in greater length about all of these resource and environmental problems that we face, the things we did to overcome similar challenges in the past, and the course of action we need to embark on now to supercharge innovation in my new book: The Infinite Resource: The Power of Ideas on a Finite Planet.

In the end, our minds and their ability to create new ideas are the ultimate source of all human wealth. That’s a resource nearly without limit.

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