Oil is back above $90 a barrel. Copper and cotton have hit record highs. Wheat and corn prices are way up. Over all, world commodity prices have risen by a quarter in the past six months.

Why is this happening? Paul Krugman, writing in The New York Times, has an opinion on this important question.

Quite simply, we are beginning to see evidence of our finite world. Decades of largely debt-financed overconsumption in the mature OECD economies, over the backdrop of globalisation, have fostered a broad surge in the numbers of the global middle class in emerging economies from Brazil, to India and of course China. As Krugman puts it:

In particular, today, as in 2007-2008, the primary driving force behind rising commodity prices isn’t demand from the United States…. As more and more people in formerly poor nations are entering the global middle class, they’re beginning to drive cars and eat meat, placing growing pressure on world oil and food supplies.

And those supplies aren’t keeping pace. Conventional oil production has been flat for four years; in that sense, at least, peak oil has arrived. …

Also, over the past year, extreme weather — especially severe heat and drought in some important agricultural regions — played an important role in driving up food prices. And, yes, there’s every reason to believe that climate change is making such weather episodes more common.

It is heartening to see mainstream, Nobel prize-winning economists pick up the LTG problem and treat it to a public airing: as readers of this blog know, Limits to Growth is a topic frequently covered here. This link will show all past posts on Baobab 2050 about the subject. Of our past posts, the most relevant companions to Krugman’s article would probably be The Next Oil Shock?, Net Oil Exports Will Drop to Zero Long Before Oil Production Does and Russia Extends Grain Export Ban Into 2011; LTG Challenges Continue to Mount.

One point where I would disagree with Krugman is the “so what” of the resource constraint that he has identified. Krugman doesn’t seem to worry too much about it:

So what are the implications of the recent rise in commodity prices? It is, as I said, a sign that we’re living in a finite world, one in which resource constraints are becoming increasingly binding. This won’t bring an end to economic growth, let alone a descent into Mad Max-style collapse. It will require that we gradually change the way we live, adapting our economy and our lifestyles to the reality of more expensive resources.

The above reads more like a wish than a prognosis. The history of the birth, blooming and death of civilizations is ultimately a history of humanity’s tendency for overexploitation of natural resources, and that history is stacked firmly against our chances of smoothly navigating our way past the “increasingly binding resource constraints”. As we wrote in Russia Extends Grain Export Ban Into 2011; LTG Challenges Continue to Mount:

Why should overshoot and collapse be impossible for our modern civilisation, if overshoot and collapse proved impossible to avoid for dozens of historical civilizations? Indeed, Joseph Tainter has documented the overshoot and collapse of the Western Chou Empire, the Harappan Civilization, Mesopotamia, the Egyptian Old Kingdom, the Hittite Empire, the Minoan Civilization, the Mycenean Civilization, the Western Roman Empire, the Olmec, the Lowland Classic Maya, the Mesoamerican Highlanders, the CasasGrandes, the Chacoans, the Hohokam, the Eastern Woodlanders, the Huari and Tiahuanaco Empires, the Rapa Nui of Easter Island, the Kachin and the Ik, and the Norse tribes of Greenland.

Humanity can use more humility, more studying, more thinking and also less gullibility, and less flippant arrogance, in the face of these historical examples.

The world is trying to recover from a once-in-a-century balance sheet recession. Such recoveries are always prolonged, difficult and messy. Now, according to Krugman, this particular recovery has to also overcome increasingly binding resource constraints. How can consumer economies do this, when a rising price of commodities acts as a simultaneous massive tax on all sectors of the consumer economy? And how will producer economies create jobs, if consumer economies are discovering the beauty of a simpler and more frugal life? Indeed, as we wrote in The Next Oil Shock?:

The key insight is this: if we are at the cusp of global peak oil, meaning supply cannot rise in response to price, then it is likely that periods of excess oil supply capacity induced by episodes of falling demand will tend to become shorter and shallower, so there is little room to absorb the next episode of demand growth. This means that the interval between recessions induced by oil shocks will become shorter as the supply situation worsens. In the past the optimism/pessimism cycle was part of the business cycle, whereby pessimistic retrenchment led to saving and profits, which then led to optimistic investment and consumption and to the resumption of growth.

We accumulated a widespread, deeply entrenched bias to optimism thanks to 60 years of net economic expansion. But as the future episodes of recessions will be progressively longer than the shortening episodes of growth, total output per capita will ratchet down with each business cycle, unable to escape the constraint imposed by the falling crude oil net exports available to the oil importers. The existing bias to optimism will be under constant attack by this procession of recessions, slowly eroding consumers’ optimism and replacing it with hardening deflationary expectations.