The Policy Institute, based in Helena, Montana, blends authoritative research and hands-on political engagement to create public policy based on economic justice, fair taxation, corporate accountability and environmental responsibility.

The Commodity Bubble Collapse

By Thomas Power, Ph.D.

Former Chair, Economics Department, The University of Montana
Board Member, The Policy Institute
Montana Public Radio Commentary | October 27, 2008

As the Bush Administration’s time in office quickly winds down, it is frantically working to embed its controversial natural resource and environmental policies in long lasting federal regulations. One dramatic example is the effort to open up the land around the Grand Canyon to uranium mining.

This effort is partly tied to the Bush Administration’s enthusiasm for nuclear energy as the most practical “low-carbon,” “clean” energy source. It is also tied to mining companies’ interest in renewed uranium mining because the market price of uranium rose from $10 a pound in mid-2003 to $140 per pound in mid-2007. That 14 fold increase in price understandably spiked the interest of international mining companies.

The fly up in uranium prices brought a new uranium rush to many areas across the Western United States. 815 new claims were filed in the Grand Canyon area alone. In New Mexico the mining industry has proposed developing 15 new mines and three new uranium mills to process the ore into fuel. A $70 billion economic bonanza has been promised to New Mexico if it will just get on with the uranium permitting.

The run up in uranium prices was just one part of an overall explosion of commodity prices. The price of oil, natural gas, iron and steel, copper, gold, corn, soybeans, you name it, all rose to spectacular levels. We were told that these price increases were all due to increasing demand in China and India. As those countries tried to live and consume like we do, an almost unfathomable level of demand for just about everything was being created. A permanent era of scarcity and high commodity prices was upon us, or so the “experts” told us.

Then, mysteriously for those with short memories, commodity prices began to decline. Uranium prices began tumbling in mid-2007, long before the current financial crisis began choking off economic growth around the world. By the beginning of 2008 uranium prices were half what they had been six months earlier. Today they are a third of their peak levels and still plunging.

Of course the same thing happened with oil prices as they tumbled from close to $150 a barrel to $65 in less than four months and natural gas prices fell from $13 per million BTUs to $7 during the same time period.

Some will blame this all on the collapsing world economy. But those making the excuses are the same people who told us that the Chinese economy was going to grow at double digit rates indefinitely into the future, creating permanently high and rising commodity prices. Not so strangely, those were also the people who told us that housing prices would continue to rise forever and a decade ago were assuring us that dot.com stock prices would rise indefinitely at double digit rates. These high paid financial consultants were consistently wrong, but that, apparently, did not affect their high pay.

All one has to do is look back over the history of commodity prices or housing prices or stock prices to see that they are strongly cyclical and, at times, highly volatile. They always have been and will continue to be so in the future.

Uranium prices, when adjusted for inflation, were as high in July of 1976 as they were in June of 2007. By 1984, however, uranium prices had fallen by 80 percent. More recently, it has taken only about a year for a similar plunge. Since the 1970s we have also been through several oil price cycles. And this is hardly the first time that new housing starts have plummeted and housing values have declined.

When prices are high and rising, even the most sophisticated among us gets drawn into the mob psychology of irrational exuberance, believing and acting as if the rising prices will go on forever and we will all get rich. Then the worm turns and we panic and sink into a collective gloom that prolongs the collapse. Part of this is unavoidable in a market economy because of lags in information, the time it takes to build new homes and factories, and the inertia of expectations. We tend to overshoot, retrench, and overshoot again.

But much of the current volatility has been tied to a change in business and personal culture and values that has become enshrined in our abandonment of public regulation. Once we were careful and cautious, saving before we spent, balancing our investment portfolios, comfortable with long term investments that paid off modestly for many years into the future. Now we borrow at incredibly high interest rates to pay for our consumption. We look for quick gains by gambling in financial securities rather then investing in actual productive capacity. A 5 percent return is for chumps. We want a 10 or 15 or 20 percent return. Instead of living in a house and improving it slowly over time, we buy houses only to “flip” them to make a quick return. We want something for nothing and we want it quickly. That is also what our businesses and financial institutions have been chasing. Our government, of course, through deregulation has been encouraging that speculative, short-term, casino mentality.

It is not clear that the current financial meltdown and all of the hundreds of billions of dollars of government bailouts will actually sober us up and get us out of the casino. The dot-com collapsed did not do that. Even the housing market collapse did not do it. We just rushed out and shifted our money to speculating on commodities. We are still looking for the next big thing and the next big payoff that will make us rich quickly. The last time we went through this, it took a 10 year depression and a World War to sober us up and get us back on a more disciplined and productive path. Hopefully that is not the only medicine that will work.