Welcome to the shortage era
Those over thirty may probably remember the peak oil scare from the early 2000s. That was the time when analysts and experts of all sorts worried that the planet’s oil will end before we were ready to live without it. It was this scare, by the way, that gave a solid push to renewable energy. Then, it wasn’t so much about emissions. It was about security of energy supply.
Now, nobody is worried that oil will end because, per petroleum engineers, extraction technology never stops evolving, which means that the supply of recoverable oil is virtually limitless. In other words, if oil is needed, the industry will come up with technology to extract it.
Right now, however, an oil supply shortage may well be looming on the horizon. It will likely be short-lived unless the UAE really refuses to work with OPEC+ until the bloc acquiesces to its demand for an adjustment of the baseline from which it needs to curb output. But an oil shortage appears to be the last thing we should worry about.
CNBC carried an article in March this year that was essentially a warning about a much more serious shortage: the shortage of sand. Sand is one of the most used commodities, CNBC’s Sam Meredith noted in the article, thanks to its versatility. Windows and laptop screens are just a couple of examples. Roads, bridges and even high-speed trains are a few more. And then there’s concrete, which heavily features sand.
Urbanisation is the big culprit behind the sand shortage, Forbes’ Laurie Winkless wrote back in 2019. And we can’t just dig up the Sahara because its’ sand is not yhe right kind for concrete. So we’re turning to the ocean.
“In recent years, the demand for sand has grown so dramatically, that suppliers have been looking elsewhere – namely, to beaches and the seafloor,” Winkless wrote. “The use of marine sand adds another step in the concrete-making process. Its salt must be removed, to avoid any risk of metal corrosion in the final structure. That comes with a cost, but the sand market is so crazy that apparently, it’s still worth it.”
Now, on the one hand, a sand shortage would make it easier to decarbonize cement production, which is one of the biggest industrial emitters globally. After all, if there’s no sand to make concrete, why make cement? yet this is not a serious argument, of course, because it would be a challenge, to say the least, to curb urbanisation. Yet the sand shortage is serious. It is already causing concrete—pardon the pun—problems. In India, a big housing project recently run into problems because of a sand shortage.
“Is it time for panicking? Well, that will certainly not help, but it is time to take a look and change our perception about sand,” a UN Environmental Programme climate scientist told CNBC’s Meredith for his March article. Indeed it may be time to change some perceptions including the one about sand because the virtually limitless supply argument does not hold true for this commodity.
Last month, the Wall Street Journal reported that the U.S. West risked blackouts this summer because of grave droughts that reduced hydropower output. Indeed, not much later, media began reporting that California was once again on the brink of blackouts because of insufficient power. So far these have been avoided thanks to Californians’ conscientiousness in responding to CAISO’s calls for power conservation but just how long can this continue?
In mid-June, CNBC’s Meredith cited a note from Barclays that identified water as “the most important environmental concern” for the staples sector. This sector includes a wide variety of products ranging from food and drinks to tobacco and hygiene products, most (except tobacco) essential for our life.
Water scarcity used to be in the headlines about twenty years ago before it was displaced by carbon emissions. Yet water scarcity is a much bigger—and more pressing—problem than emissions. This problem is not being addressed, it appears, beyond blaming it on anthropogenic climate change. The blame game, however, does not solve any problems.
“Water scarcity has become a global crisis, one that will only worsen as the planet continues to heat up. Despite how crucial water is to business, and to life itself, the risks that come with not having enough of it have often been overlooked by investors, who’ve tended to focus more on carbon,” CJ Clouse wrote in an article for GreenBiz earlier this month.
She then went on to note that this is changing as these same investors begin to see the effects of water scarcity on agricultural regions. These effects eventually hit bottom lines and investors don’t like things that affect bottom lines negatively. They might want to start paying even more attention to water: according to the Barclays analysts, the average impact of water scarcity on a given staples company’s EBITDA is three times as high as the impact of carbon emissions.
It seems the question now is whether water could become as good a clickbait as emissions because there is little that can be done to bring the water back. What could be done is perhaps start working on reducing water waste—an undertaking that will likely be as monstrously difficult as it sounds. Agriculture, according to the World Bank, accounts for 70% of all freshwater withdrawals globally. According to the UN Food and Agriculture Organization, up to 60% of this is wasted because of inefficiencies.
Demand for water, however, is on the rise, as the world’s human population continues to increase. This means we definitely need to change our attitude to water unless we want it to become prohibitively expensive in regions that need it the most. By the way, Barclays has estimated that the true cost of water is between three and five times higher than what businesses currently pay for it.
According to the World Bank, agricultural production will need to expand by 70% by 2050 to feed a population that would top 10 billion by the same year. But water demand from other sectors will also continue to grow, so, the WB said, 25 to 40% of the world’s water will need “to be re-allocated from lower to higher productivity and employment activities, particularly in water stressed regions.”
“Water scarcity is really important because when it runs out you have really serious problems and because of its low price, it is one of those classic externality risks,” S&P Global Ratings’ director of sustainable finance, Beth Burks, told CNBC’s Meredith. “It needs to be managed very carefully and thoughtfully and you don’t always have that natural pricing signal that helps us conserve it,” she added.
…are made from copper. Historically, the basic metal has been enjoying regular supply and demand cycles driven by seasonal factors mostly as well as China’s economic growth plans. Now, copper is in for what could potentially be a massive deficit because of the energy transition push.
A recent BloombergNEF forecast said demand for copper, lithium and nickel for the production of batteries will surge by 400% by 2030, driven by electric vehicles. But the battery is by far not the only place where copper is used in an EV. According to the Copper Alliance, while internal combustion engine cars use between 18 and 49 pounds of copper, hybrid cars use as much as 85 pounds. But that’s not all because plug-in hybrids use as much as 132 pounds of copper. And that’s not all, either, because battery electric vehicles, the ones everyone is betting on for the green revolution, use 183 pounds of copper.
Now, copper is an abundant metal and unlike lithium it is not that concentrated in a couple of places on the planet. But the last ten years have seen investments in new copper production slow down. Now, the post-pandemic economic recovery has added to demand for copper, which is used in thousands of things from electronics and wiring to house construction. As a result, inventories of the metal have dwindled to the lowest in 15 years, “implying that stocks cover just 3.3 weeks of demand,” according to a Bank of America note from April.
Investments in new production are bound to stage a return but the problem with mining projects is that they are very different from drilling a shale oil well. That could take a couple of months. Mines take a while longer than that to begin producing at commercial rates.
“A number of producers in this market has grown extremely conservative over the past decade. This has really caused underinvestment to kind of percolate through the supply chain, and obviously now that’s creating problems,” Reid I’Anson, a commodity analyst from Kpler, told CNBC last month.
The problems will persist, too, because demand for copper will only continue to increase. With it, the prices of everything from houses to EVs will increase because of the tight supply. This will in turn affect EV uptake and homebuying, to mention just a couple of examples. A copper shortage would also affect wind power capacity expansion—wind turbines use massive amounts of copper for their motors and the cables that connect them to the grid. And a slower EV uptake and wind farm expansion will in all likelihood compromise the targets of the Paris Agreement or at least make them that much more expensive.
Sand, water, and copper are perhaps the most serious shortages the world is facing now but they are not the only ones. The chaos that the pandemic wrought on global supply chains is still disrupting industries across the globe. The semiconductor shortage has been hogging headlines for months now, with the outlook still grim. But there is also a rubber shortage, as if the others were not enough.
“We are using tires more and more,” Stefano Savi, director of the Global Platform for Sustainable Natural Rubber, told CNBC earlier this month (CNBC seems to have a specialty in shortage coverage). “The amount of mileage that we’re going to do as a global population is definitely bound to increase, and that’s why the demand for rubber is really continuing to increase.”
If you think about it, you could say this for virtually every raw material or food staple. The world’s human population is growing. This means we will be consuming more and more of everything. At the same time, parts of this “everything” that are finite are dwindling, to a great extent precisely because of our previous—and current—consumption. Compared to these shortages, the world’s emission problem does not seem as critical as headlines would have us believe. Unfortunately, unlike the emissions problem, the raw material shortage problem would be a lot more challenging one to solve.