The economics of scarcity

Jim Jubak provides an in-depth analysis of why prices are skyrocketing on food, oil and about anything else you can name. It’s called scarcity economics, he says.

However, a better name might be Peak Product economics,, based on things like Peak Oil, Peak Copper and Peak Natural Gas. Or “Peak Economics” for short.

Jubak does note that some of his “scarcity economics” is based on Peak Product economics, like Peak Copper:

Scarcity markets aren't created overnight. Potential buyers need to be bloodied by repeated experience on both the supply and demand side. Consumers of copper know that for each of the past six years, the copper industry has failed to deliver projected increases in supply.

In 2008 and 2009, according to UBS AG, the industry will fall short again. The bank projects production a shortfall of 800,000 metric tons over those two years.

But, it’s not just oil or certain metals. It’s fertilizers that may be Peaking, too, and, surprisingly, not because of the expected arrival of Peak Natural Gas in 25 years or so.

You can see scarcity economics at work in today's fertilizer market, for example. Potash of Saskatchewan produces potash and nitrogen fertilizers. But with the world short 1.2 million metric tons of potash in 2008 and desperate for nitrogen fertilizer, Potash is seeing its already high margins soar to astounding heights. In announcing its first-quarter earnings, the company projected that margins in 2008 will be roughly 3.5 times as high as in 2007.

Think that’s insane? As long as scarcity economics rules the fertilizer market, there’s a good chance Potash will get its price, and other fertilizer makers will go along for the ride. The global scarcity has made high-cost, government-subsidized producers in India the price setters in the market: If you’ve got to have supply, you'll pay any price, right? That price and not Potash’s production costs are now setting the market price.

Supply contracts for potash for the second half of 2008 are up for negotiation in Japan and India. Japan paid just $120 a ton for potash in its contract for the first half of 2008. China recently signed a long-term contract for $576 a ton. That was a $456-per-ton price jump. And even with that increase, the Chinese didn’t get all the potash they wanted. The country is now looking at a shortfall that some experts peg as high as 40 percent, just when China is trying to increase food production to cut inflation in domestic food prices.

Did you just hear the sound of rice, corn and wheat prices soaring even higher?

As for Peak Oil, he notes what I’ve blogged elsewhere, that Russian production is slipping and Mexican production is slumping.

Fasten your seat belts for America’s sled ride downhill.