Why Do Rising Commodity Prices Intensify International Tensions?

One of my first experiences of shortages leading to belligerent behaviour was during my childhood. When the Suez Crisis broke out in 1956, everyone in Switzerland, including my mother, stocked up on food and other necessities from grocery shops, fearing that a closure of the Suez Canal would lead to serious shortages.

I witnessed housewives fighting like hyenas over whatever they could find on the shelves of stores. Another childhood experience relates to boarding the train that carries skiers from Wengen to the Kleine Scheidegg during the Christmas holidays. (Some trains then go on to the famous Jungfrau Joch through the Eiger — well-known among accomplished climbers for its North Face.)

Since between Christmas and New Year the demand by skiers for seats on the Wengen– Kleine Scheidegg train vastly exceeded the available number of seats, as soon as the train pulled into the station the skiers would engage in real fights, using their fists and skipoles, in an attempt to board the train first and secure a seat.

Simply put, when markets are glutted and over-supplied, no one is going to fight in order to satisfy his demand. Conversely, when markets are characterised by acute shortages, people will fight and go to war in order to secure their required supplies, particularly when the shortages that might arise or that have already arisen threaten the physical and economic survival of the groups or countries involved. This pattern can be observed throughout history.

In primitive societies, if there was a shortage of women the members of one tribe would attack another tribe and kill the men, in order to secure the women. And even in more advanced societies (for example, the Easter Islands), shortages of resources — in particular, food — led to cannibalism. (Incidentally, Easter Island — a worthwhile place to visit — is a good example of the fact that natural resources can run out. A more recent example is the island of Nauru.)

Rising commodity prices are a manifestation of shortages. So, when commodity prices rise and shortages threaten to undermine economic development and growth, countries that require a steady or increasing supply of resources from foreign sources do tend to become more belligerent. An interruption of supplies could cause enormous damage to such a nation’s economy, society, and military prowess. But it’s not only the commodity-importing nations that become more belligerent when shortages drive prices higher.

The commodity producers themselves find they are in a sweet spot and become more aggressive in their relationship with their clients — the resource-importing nations.

So, whereas we have seen that in the 1980s the balance of power in the world began to shift towards the industrialised nations as commodity prices fell, today it would appear that the balance of power has already shifted back to the resource producers — especially the oil producers.

This shift of power to the resource producers is particularly pronounced when new countries and regions become involved in the “trade network”, as Kondratieff observed, because the demand from the traditional sources is, as a result of the entry of new countries into the global economy, gradually displaced by the incremental demand of nontraditional and new sources.

In this respect, I should mention that 1994 marked a milestone in economic history and geopolitical trends in as far as China became, for the first time in modern times, a net importer of crude oil.

In a situation characterised by shortages and rising commodity prices, the producers of resources tend to play out the established buyers of their resources against their new clients (China, India), who, in order to satisfy their growing domestic demand, bid very aggressively for those resources that are in short supply. But there is another reason for the shift of power towards the resource producers when shortages emerge. Money!

Suddenly, the governments’ coffers of the resource producers swell because prior trade deficits caused by falling commodity prices are, in an environment of rising prices, replaced by robust trade and current surpluses, which allow the resource producers to become geopolitically more active and to build their military capabilities (for example, Hugo Chavez, Amadi- Nejad, and Vladimir Putin).

In this regard, it is interesting to note that for the first time in recent history, even Latin America has a trade and current account surplus with the United States. Remarkably, the US now has a trade deficit with every region of the world.

Good Investing, 

Marc Faber
-Taken from Marc Faber’s Gloom, Boom and Doom Report.

Editor’s Note: Since 1973, Dr. Marc Faber has lived in Hong Kong. In June 1990, Dr. Faber stepped down from his position as Managing Director at Drexel Burnham Lambert (HK) Ltd. And he set up his own business, MARC FABER LIMITED, which acts as an investment advisor and fund manager.

Dr. Faber publishes a widely read monthly investment newsletter The Gloom, Boom & Doom Report which highlights unusual investment opportunities, and is the author of several books including TOMORROW'S GOLD – Asia's Age of Discovery first published in 2002.

Dr. Faber is also a regular contributor to several leading financial publications around the world and a well-known speaker at investment seminars. He is associated with a variety of funds and is a member of the Board of Directors of numerous companies.

Dr. Faber was born in Zurich, Switzerland. To learn more about The Gloom, Boom and Doom Report, click here.