Currently there is a vast reserve of about 700 million metric tons of copper in storage.
Well, in what you might call "active storage", that is, in the form of every finished product ever made of copper. All those wires, electrical components, pipes, pots, coins (er, the 20 microns near the surface anyway), and so forth.
That's over 30 times current annual production and at least theoretically able to be mobilized by scrapping the lowest-valued of these uses and recycled into whatever today's highest-valued use happens to be. Use of copper scrap accounts for something like 1/5 to 1/4 of the global refined copper supply, so it's not negligible.
Non-consumed commodities which are recyclable at market-competitive costs add just another little wrinkle to the Hotelling story, but that wrinkle doesn't detract from that model's fundamental correctness.
Let’s add another wrinkle. Locating ore deposits is expensive, it costs resources to find resources. According to your numbers, we have 30 years of copper reserves. Finding more than that makes little economic sense. When finding more copper does make sense, we’ll spend the resources needed to find it.
An interesting bit of trivia is that 2/3rds of all production and almost all the big deposits known are in the "New World" - North and South America and Australia.
"I feel bad throwing away a little copper wire after some DIY home project."
1) I visited every primary copper smelter in the United States when I was working for Research Triangle Institute (now RTI, International) in the early 1990s. One smelter gave me (and all their visitors) a "micro cathode". It was a piece of actual 99+ percent pure copper in the shape of the cathodes that the smelter itself made. It might have weighed as much as *1 pound*. I kept it in my office desk for years. Eventually, I might have put it in my home recycling bin. But I *might* have thrown it out, because of worry that such a small and heavy object could harm the recycling sorting machines.
2) Recycling sorting machines are improving all the time. They're now far, far better than humans sorting most recycling items. A lot of that is due to improved visual recognition equipment and software. I can easily imagine a time, maybe a decade or two in the future, where that tiny bit of wire you throw would get identified and pulled out of the garbage stream. I can even imagine the possibility of future landfill mining that would recover those little pieces of wire you threw out.
Copper is unlikely to be in short supply for several decades at least, possibly never
From the copper alliance (which appears to be most of the copper mining/smelting industry)
"Global copper reserves are estimated at 870 million tonnes (United States Geological Survey [USGS], 2020), and annual copper demand is 28 million tonnes. Current copper resources are estimated to exceed 5,000 million tonnes (USGS, 2014 & 2017)."
Reserves are usually ore bodies that people expect to be exploitable at roughly current prices in the relatively near future (a decade plus). In the case of copper, in 2020 the world had about 30 years of reserves and a couple of centuries of resources at current annual usage levels. Even if new copper usage doubles we're looking at 15 years of reserves and a century of resources. We are not going to run short of copper any time soon, and possibly never.
There are two reasons why never is plausible
One thing to recall is that the developed world switched from lead to copper water/gas pipes about a century ago and is now switching away from copper to plastic PE/PEX. That means there are thousands (millions probably) of tons of copper pipes that can be recycled into wiring. That's another decade plus of easily exploitable supply.
Secondly the goal is to get electrical current and signals from A to B. Copper is just the currently best/cheapest means of doing so. Development of room temp superconductors, aluminum? alloys or any number of other things I don't know about may end up producing a better (cheaper) way to transfer electricity. We've got a good century to figure this out.
Hoteling’s argument is categorically different from those of Malthus and Simon. The former was addressing prices in the short term (ten years or less), the latter two were arguing whether, in the very long term, natural resources are economically finite.
Any Simon-Ehrlich style bet is necessarily made in the short run - that is, within the lifetimes of the bettors - and Hoteling’s insights rule. Over the long run, hundreds of years, my money is on Simon. Unfortunately, I won’t be there to collect.
Especially if you did a parlay and put it all on "unlimited immigration" also - since that turned out to be the practical effect of the PR around that wager.
Well, there was long ago a period when people talked about population, and were allowed to talk about population. You might not have been alive then. This was in connection with resources for human use, of course, but in the context of environmentalism - which was then concerned with the environment, not people - having not been undermined and turned into a humanist movement. (Just. Another. Humanist. Movement.) Paul Ehrlich as I understand, was an earnest if naive biologist who was concerned about ecology, wildlife, species diversity, that sort of thing. He got into this stupid bet which he of course lost (mostly ;-)) with his opposite number Julian Simon (if Simon's remembered for anything else, that will be for someone else to supply). And somehow or other, that bet has been used to discredit environmentalism ever since. As though it spoke to any of the concerns of environmentalists! It's been something to behold, the cynicism around it. And as for the population angle - well, in the 70s, polls generally showed that people were concerned about population - in America. They were concerned about other places too - but in general, in America, they had obviously limited their family sizes, and they did not wish to see the place become more crowded. Wilderness areas were being designated on federal land because that's what Americans wanted. People had begun to talk about sprawl (another term that has vanished from the discourse). There was much less radicalism then around these things, oddly. Conservation was conservatism in its purest, humblest form. Anyway, folks were distinctly not asking for the fertility they chose for themselves, to be replaced by the fertility of others.
And yet, that is the opportunity the GOP exploited: the left presently decided it was racist to even use the word "population" and the GOP was only too happy to co-opt this racialism to open the border and let the illegals stream in.
There is no way to underestimate the significance of that ridiculous bet, in terms of making us all stupider.
Someone should launch a prize for something new along those lines - come up with some stunt that will contain little or no information, make little or no sense, that will yet be invoked ceaselessly as a guide to unrelated action.
So love the bet, and love the open border. They are forever twinned.
So ok... I am still not sure how you are making the connection between that bet and unlimited immigration.
However, the bet was very good because of the important aspect of environmentalism (at least that environmentalists adopted at the time) that we were running out of all these natural resources and our population was going to collapse into Mad Max style chaos because we were over consuming. I was around, I remember having that drilled into my head all through school, despite the fact that there were not huge famines in India or China and we didn't run out of oil in the 70's or 80's or 90's...
So I think it is unfair to claim that environmentalists didn't deserve a bit of discrediting on that count. They made many claims about how there would not be enough stuff to go around in 10 years time and were wrong, every time. Not only wrong, but things did in fact get cheaper as Simon predicted. People were concerned, but were wrong to be in these cases, and the doom sayers were wrong in their predictions.
Much like they were consistently wrong about how global cooling was going to kill everyone, then how global warming was going to kill everyone. Disaster is always 10-20 years away, yet never seems to arrive. Bets are great for tracking that.
But that’s just it. Actual environmentalists were concerned *with the natural environment*. Even after I’ve restated it, you are still arguing with something other than me. So thoroughly did it poison the idea of preservation.
See the takeover of the Sierra Club, late 90s, for the connection made plain.
ETA: if your takeaway from that bet is “no limits” - then you are an ideal futurist and I doubt we could have an intelligible conversation.
Garrett Hardin, who revived the idea of The Tragedy of the Commons, and gave it it's present catchy name, was an environmentalist and lefty and major writer against population increase. He was a big deal for a while. Eventually, he realized that immigration also increased population and came to largely oppose it. He stopped being a big deal.
Beautiful blog post. I don't have much to add except a short anecdote and to say "I agree with Arnold."
My anecdote, inspired by Arnold's statement that "I have no comparative advantage in assessing these prospects." One of the projects I worked on in 2012 was a low-latency laser-and-RF communication link between Chicago and New York to give futures traders a comparative advantage in "knowing" a few fractions of a second sooner the relative prices of various commodities. Why the use laser and RF? Laser at 1064nm wavelength doesn't transmit through fog, but it does rain. RF transmits through fog, but not rain. Anyway, I think it's interesting to note the lengths that future traders will go to gain even fractions of a second sooner information about prices.
Scott, Years ago I read about this sort of thing in the IEEE Spectrum. In your opinion, is there any value to this rapid transmission of information? I. E. do the people doing it make more money?
I don’t think it ever got built. I proposed the idea to the Seasteading Institute around the same time. Were there floating cities on the ocean (that moved from place to place) this might be one way to setup a communication link. But Elon probably has a superior technology with his satellites.
Call up JPMorgan or Goldman and their metals desk can give you an 8 year forward price for copper (LME or Comex?).
LME has futures curves going out into 2027. OTC market exists beyond that (illiquid).
You hit on the right note to incorporate financing costs. You could borrow money for eight years, buy copper today and store it. If you could instead buy copper on an eight year forward basis from a dealer today for a price reflecting less than that all-in cost and none of the hassle you would do that. Normal markets will be in contango to reflect carry and storage costs (though speculative pressures and near-term supply/demand usually overwhelm theoretical contango). One year futures “should” be closer to 5 pct above spot prices (but you see that they aren’t). That could mean people are bearish about copper in the future and/or that producers are selling futures/forwards to hedge future production. Could also mean that spot market is tight. In a frictionless world, producer selling into the forward markets would be reflected in spot markets (which should be discounted by contango). But if a buyer needs copper today for a project, buying it on a forward basis doesn’t help (unless they borrow it from someone storing copper today and hedge repayment with a futures purchase), so the price curve can invert when near term demand exceeds supply (yet future price prospects are weak)
Anyway, Commodity forward curves are arbitrage-able in theory (which means it is the SPOT price that should reflect all current knowledge of supply and demand while futures reflect storage and financing) but in practice there are limits on financing, capital, storage and positions (Volcker rule). Cooper is also impacted by Chinese exchange controls as in the past it has been used as a vehicle to get access dollars as well as a store of value.
While spot/futures prices may be the fairest predictors of future market conditions we have, they aren’t very good predictors, and near term activity overwhelms distant concerns. Hedge funds might make 10 year bets with Buffett but they don’t make 10 year bets in markets. They look out a quarter or two. Miners have the longest horizon but their shareholders and CEOs are also very focused on a few quarters ahead in addition to wanting to secure long term supplies. I take zero comfort about the long term future of the world from current market prices. Todays prices certainly mean people aren’t panicking about the future now, but market narratives and psychology change frequently. There is always time to panic later.
If Henderson is predicting shortages he should be loading the boats with long positions. If he isn’t, talk is cheap and a small side bet is irrelevant. The PICK ETF is worth a look if he doesn’t like futures markets, though it turns out that mining stocks don’t always track commodities so well.
“because copper is an essential component in electricity transmission. The goal to “electrify everything” is going to make copper expensive...
The Hotelling-Kling argument is that regardless of whether Malthus or Simon is correct, the futures price of copper already reflects this.”
Or the futures price of copper reflects the reality, that everything will not/cannot be electrified because that is not the intention of Net Zero - the intention being to reduce our energy use and return us to pre-industrial activity. Furthermore, investors/soeculators understand, that it would be impossible to increase the rate and volume of copper ore extraction within the ‘electrify everything’ time scale, ie 2050.
"t would be impossible to increase the rate and volume of copper ore extraction within the ‘electrify everything’ time scale, ie 2050."
No. More like "Can't be done without radical expansion of nuclear power".
The reason is one can use aluminum, which is cheaper and produced in larger amounts (mostly in China, using cheap dirty coal burned in a cheap dirty way, but put that aside for now). In fact, almost all bulk overhead transmission is done with aluminum.
High capacity lines can be built for roughly something like $1-10M per Megawatt per mile depending on where you are in the world. Now if you wanted to replace global fossil primary energy use with something like 10-20 terawatts, then yes you are going to need at least half a trillion spent on extra aluminum each year, and total global production is currently something like $140 Billion, so that's quite the expensive ramp up.
But the good news is that there are practically unlimited supplies of bauxite in the world, most of the cost of aluminum is the electricity needed to smelt it. Doing this to lower CO2 emissions but with Chinese coal would be ... counterproductive. But you could do it with a sufficiently large complex of breeder reactors and reprocessing units, which you are going to need anyway just to generate all that extra juice.
We already have the technology and material resources to do it, it's a question of choice.
Here's my sermon for today. David Henderson asks an important question: "Why are so many people so pessimistic?" His quick response: "The reasons are too numerous to examine at length. But one is that people watch and read the news. A saying I read recently is: “If you don’t read the news, you’ll be uninformed; if you do read the news, you’ll be misinformed.”
Why are so many people so pessimistic? Hayek would probably say that being pessimistic is advantageous. The people that exist today, exist because they were pessimistic. Pessimistic people have survived.
How can it be that pessimistic people have survived when problem solving requires positive thinking?
Once again Adam Smith has a good answer. Here's an excerpt from page 105 of Bob Luddy's book The Thales Way, "Perhaps the most famous passage in the work states, 'It is not from the benevolence of the butcher, the brewer, or the baker that we expect to eat our dinner, but from their regard to their own interest.' Essentially, Adam Smith explained the positive nature of self-interest. We develop our own talents to earn a living, but in the process we serve others."
We can think of the invisible hand as invisible positive thinking. The invisible hand is “a positive nature of self-interest.” The invisible hand makes up the "difference" between our pessimistic thinking and the requirement to solve problems in our natural quest to survive.
So pessimistic people survive, but are they happy? Do they thrive? The truth is that really pessimistic are no longer with us. They died off. The other truth is that really optimistic people are no longer with us. They died off too. We're more optimistic than those that died off, but we’re not too optimistic. Evolution has “found” the right balance in us.
One habit that has certainly helped (surviving) humans out compete humans that have died off is gratitude. Gratitude is one of the fundamental features of Christian prayer. Christianity is the most popular religion and "the founding religion" of America. Praying to Jesus Christ, and emulating Christs tends to promote a more positive attitude, especially true for believers. Not as true for the unbelieving.
Here's another excerpt from The Thales Way (page 136).
"Gratitude
Alice von Hildebrand once observed that 'Gratitude is required
for happiness.' The optimist can take every difficult situation and make it into a positive one with the simple ingredient of gratitude. A bad day at school? At least you were given a chance to attend to- day. A difficult paper topic? This will be a challenge that will help prepare you for the future. Thales staff and students are cheerful because they can remember with profound gratitude the opportunities a quality education will afford their future.'
My take away from this is that grateful people are more likely to be positive people, and positive people are more likely to be attractive people. Would you rather marry Debbie Downer or someone with a somewhat positive attitude?
Having a positive attitude is a critical first step in survival, and I would argue that the successful entrepreneur and the virtuous leader tend to have a healthy positive attitude. Looking over the Top 15 Outcomes of a Thales student, I would argue that many of these outcomes can be thought of as requiring a positive attitude.
- Unfailing Integrity compels a person to follow a strong code of ethics with honesty in all situations.
- A Virtuous Leader with Well-Developed Judgment combines thinking skills and traits such as humility, generosity, and courage.
- Self-Reliance creates confidence to depend on one's own powers and resources to meet all of one's needs.
- A Truth Seeker searches for the correct, right, or accurate explanation of reality, following the scientific method.
- A Critical Thinker discerns the truth of a statement or observation through questioning and examination.
- A Continuous Learner takes lessons from all aspects of life and work, learns from mistakes, and adapts to change.
- Competent Technical Skills allow individuals to join modern technological industries and navigate modern life.
- Astute Problem Solving leads one to identify the solutions to a problem, evaluate likely outcomes, assess risk, and choose correctly.
- A Cooperative and Contributive Team Member knows how to collaborate to achieve successful results.
- A Strong Work Ethic links perseverance, reliability, and honesty.
- Dreams and Aspirations to Change the World help us remember that directed efforts bring us closer to our goals.
- Traditional American Values and Entrepreneurialism drive a leader to build and sustain a thriving economy.
- Well-Developed People & Communication Skills promote effective sharing with a clear message.
- Gratitude acknowledges the gifts one has been given and the contributions of others.
- A Healthy Mind, Body and Spirit offer the freedom to operate at an optimal level and achieve a higher sense of fulfillment.
There is something disturbing about the worship of that old bet. It should have a Godwin's Law-type fallacy attached by now. ("How quickly a conversation about the environment is thwarted by reference to an irrelevant old commodity-price bet between a couple of dudes.")
What of other kinds of abundance and scarcity?
A way to get a sense of this - really the only way, perhaps, if you are not unusually perceptive - is to travel to say Tucson. Drive south of town and marvel at the Sierrita copper mine. I don't know whether it is even a particuarly large mine - but it is the largest man-made thing I've ever seen outside of an impoundment. Then drive into Madera Canyon to go birdwatching - esp. hummingbird watching - or batwatching, if that's your thing - on the federal land of the Coronado National Forest. And think about all that will be lost if the people who are confident the Simon-Ehrlich bet tells them all they need to know about the Earth, and the future, get to duplicate that mine in the Santa Ritas.
Aluminum can and is substituted for copper in transmission lines. Al was used for home wiring for a while, but now is no longer popular. I've heard different stories as to why. Plastic pipes can be substituted for copper pipes in plumbing (more in waste lines than in supply lines).
In colonial times (if I'm allowed to use the word colonial with out begging forgiveness) laws were enacted to keep people from burning down homes to get the iron nails. Today, thieves break into vacant houses to steal the copper wires and pipes. This reflects the high price of copper.
US could safely substitute into aluminum for many ordinary uses tomorrow if regulators, fire professionals, and building code folks would allow it. There is a kind of long-term complicated entrenched war between the aluminum people, the copper people, the safety people, the regulating people, the construction people, the environmentalists, and the electricity people, and I just invented a new fun board game for Bryan Caplan.
During a copper price spike, US builders attempted replacement with aluminum in the late 60s and early 70s and there were a number of issues. One was with the kind of alloy used which was not as reliable or durable, and in particular aluminum wiring has more of a corrosion issue. That's generally been fixed (at higher cost) and those new better alloys are in use as "Aluminum Building Wiring" in some other countries.
Another issue is that Aluminum is like Lithium is that reduced forms are much more pyrophoric than copper and more likely to spontaneously ignite or even explode when something goes wrong and there is overheating or there is a short or they got cut, exposed to oxygen, heat, and sparks, which is good description of residential electrical systems.
This is a problem has also been solved (with some trade-offs) though some fire professionals insist that an exception is the case of posing a risk of exacerbating existing fires by becoming a secondary fire that is hard to prevent from spreading immediately through all the aluminum wiring in a structure. It helps to respond to fires if the spread is slow enough to evacuate people from the unburnt areas, and to contain and stop the fire before it takes out the whole structure. Having built-in, instantly exploding, firecracker fuses permeating every wall sounds like it could make that a lot worse.
But, again, that seems to be a solved problem, or solved tolerably enough. If it wasn't a solved problem, the FAA would never allow aluminum to be used as aircraft wire and bus bars. I think I remember reading that the super big Airbus A380 used a lot of aluminum wiring to cut down on weight. If it's good enough for an Airbus, it's probably good enough for a house, but I don't know enough to risk my life in the cross-fire of that giant war.
An aspect of these "bets" is to distinguish things that are produced and sold in markets with few if any externalities like copper from things where externalities are important like fossil fuels. If we maintain the hypothesis of continuation of more or less of capitalism, then a bet on lower prices of no-externality "things" compared to wages is pretty sure. How the pricing or not of externalities will go is much more uncertain.
"Copper mining has a devastating impact on the environment. The sheer size of a copper mining operation is enough to consider harmful; however, copper mining also affects environmental and human health.
Deforestation & Land Degradation
Depending on where the ore is located, copper mining can severely damage the environment through deforestation. To pursue an open-pit mining operation, copper miners must remove trees and dig a pit to access it.
Open-pit mines are massive. They can be nearly a mile in diameter and several thousand feet deep. Their size means miners must remove significant amounts of forest, home to thousands of wildlife species.
The sloping nature of an open-pit mine also eliminates topsoil and can cause more rapid soil erosion.
Water Pollution
Often, the water surrounding a copper mine can quickly become polluted, appearing a reddish colour from having been contaminated by copper acid. Contaminated water can severely impact groundwater aquifers, fish, wildlife, and farmland.
Part of the reason water around a copper mine is so contaminated is the effort that goes into waste removal. 99 tonnes of waste material must be removed for every 1 tonne of extracted copper. That number simply isn’t sustainable and makes it difficult to manage waste.
Human Health Risk
Excavating boulders from deep underground can be harmful. As these rocks are removed and exposed to the atmosphere for the first time, they can transmit radioactive substances and damaging chemicals which can affect the soil surrounding the mine.
Copper mining also releases toxic chemicals that pollute the air. This air pollution can harm people’s skin, eyes, and lungs, making breathing difficult. While some copper is essential for human health, an excess can be fatal."
Please explain why the Future's price is being discounted to the Spot price as opposed to the Spot price setting the Future's price (using no-arbitrage constraints)?
The Theory of Storage from the CFA website: Futures price = Spot price + direct storage costs (e.g., rent, insurance) - convenience yield.
The Spot price here is the one of the variables that determine the Future's price, not Vice Versa. This makes sense. Would mining companies base production on today's needs .... or on unknowable demand 8 years out?
It seems to me you're overlooking one factor: not all demand can be arbitraged by speculation. If it currently costs $3.74 to produce a pound of copper, no amount of speculation will make it available today for $2, assuming the suppliers are aware of their cost of production. You, I, the producers, and the speculators may all believe that the cost of production in 8 years will be $2 per pound. A speculator would therefore be willing to buy or sell 2032 copper for $2 per pound. But he couldn't sell 2024 copper for $2, because he couldn't procure it for $2.
Apparently there isn't a current market for 2032 copper - if there were, it would be interesting to see what prices would look like. I expect the main reason that commodity futures don't look out that far is that it would be too hard for traders to put up assets to "cover" their positions. Or at least that regulators have determined that traders can't put up those assets.
I think that what would happen if the futures price were known to be $2 is that the spot price would drop below that, and costly copper mines would shut down until the marginal cost of production reaches the spot price. That may sound counterintuitive, but starting with an assumption that copper futures will be $2 is going to confound intuition in any case.
But there is demand for copper for current use. If the spot price drops to $2, there will necessarily be a decrease in supply, leaving unfilled demand. Why wouldn't the spot price be immediately bid up to the level needed to induce enough supply to meet demand?
Because of storage, current supply and demand is linked to future supply and demand. You can't just start by saying, "assume a $4 spot price and $2 futures price" and tell a coherent story. I don't know what else to say.
If current builders want copper wire to build buildings today, the future price is irrelevant. Unless there's sufficient copper in storage today to meet demand for the next eight years, how can storage and arbitrage overcome today's $4 cost of production?
We will not see a copper price of $4 today and also see today a $2 futures price for copper for delivery years from now. That is what I am trying to get across. You seem to want to say "It can happen, and that shows that you are wrong." I am saying "it cannot happen." I think the argument has gotten stale.
I'm not even sure what the argument is. We all agree that the price of something relative to, say, wages, indicates the scarcity of that thing relative to wages, right?
So what Julian Simon was saying was that the *long term* prices of virtually all commodities (copper, steel, aluminum, etc.) is headed downward. I recall him writing that the *long term* real price of any *basket* of commodities going down was just about the surest bet in the world.
A way to resolve whether Julian Simon is correct, or Paul Ehrlich (standing in for Malthus) is correct, is to place a bet on the "Long Bets" website, predicting the whether the prices of some basket of commodities would be higher or lower in the year, say, 2100.
I've made just that sort of prediction for economic growth in the 21st century, comparing my prediction of a world per-capita GDP in 2100 of $10,000,000 to Robert Lucas, Jr.'s prediction of $94,000, both in year 2000. (Robert Lucas Jr. was obviously pretty good for an amateur, but he should have left his predictions of long-term economic growth to folks who have read and appreciated Julian Simon and Ray Kurzweil. ;-))
Needless to say, if my prediction of $10,000,000 (again in year 2000 dollars) per-capita gross world product is even an order of magnitude within the true actual value, a basket of commodities is virtually certain to go down in price relative to wages! :-)
P.S. Your prediction for wages in the year 2100 is presumably even higher. The world needs to get cracking, and start behaving like we both know it will! ;-)
I think I understand your argument a little better. But, if speculators believe the Simonian argument that prices will drop in real terms due to better technology, or discovery of better sources, why could they not bid the future price down? If I understand the Hotelling argument, they would also bid current spot prices down, as anyone with copper in storage tried to unload it in anticipation of lower future prices. If there were infinite copper in storage, I can see this. But, if copper in storage is much lower than current demand, users will have to go back to current production, which is constrained by cost of production. If Handle is correct, and annual production is something like 20 million tons, and the St Louis Fed (https://fred.stlouisfed.org/series/M05F0AUSM601NNBR) says current inventory is on the order of 100,000 tons, current price must have a lower bound set by production cost.
Or are you arguing that no one would bid a future price significantly lower than current spot price? I thought you were explicitly allowing for that possibility. Is $2 too low to consider realistic? Would $3.20 be more plausible? It seems to me that, if the Simonian argument were generally accepted, and if there were liquid markets looking out 8 or 10 years, some price lower than the current price would emerge. Discounting inflation, of course.
Important caveat: you write "The spot-futures link means that all of the information about the copper market is contained in the futures price." That isn't quite true, rather it is all of the information available about the copper market, along with some misinformation and guesses. So the prices don't include things people don't know about natural reality ("Huh, aluminum mixed with cat spit is really good at conducting. Who knew?") or what crazy things humans might do ("Huh... who'd have thought congress would pass a 60% tax on copper?" or "Who'd have thought we'd be at 8% inflation for so long... why have people been acting like we will be back at 2% tomorrow?")
Hotelling makes sense for really short term stuff, maybe 5 years max, but things change a lot in that time as it is, and so uncertainty increases exponentially over time. Simon and Malthus take a longer view, where natural fundamentals dominate and only the general direction is predictable.
In other words, rational expectations are great, but rationality includes things like "I have no idea about a lot of stuff, so I only have a rough guess" and not "The collective is omniscient."
The collective is not omniscient, but the market price represents the guesses weighted by confidence. If you're confident about your knowledge, feel free to put your money where your mouth is, and, move the price accordingly.
You seem to misunderstand the point, which is that over longer time spans there is vastly more uncertainty, so any confidence in guesses needs to drop sharply. Within a few years, sure, the market prices are pretty good predictors, but over the longer term about the only thing you can rely on is the general trend of "stuff gets cheaper," and even that is not a sure thing.
Currently there is a vast reserve of about 700 million metric tons of copper in storage.
Well, in what you might call "active storage", that is, in the form of every finished product ever made of copper. All those wires, electrical components, pipes, pots, coins (er, the 20 microns near the surface anyway), and so forth.
That's over 30 times current annual production and at least theoretically able to be mobilized by scrapping the lowest-valued of these uses and recycled into whatever today's highest-valued use happens to be. Use of copper scrap accounts for something like 1/5 to 1/4 of the global refined copper supply, so it's not negligible.
Non-consumed commodities which are recyclable at market-competitive costs add just another little wrinkle to the Hotelling story, but that wrinkle doesn't detract from that model's fundamental correctness.
Let’s add another wrinkle. Locating ore deposits is expensive, it costs resources to find resources. According to your numbers, we have 30 years of copper reserves. Finding more than that makes little economic sense. When finding more copper does make sense, we’ll spend the resources needed to find it.
An interesting bit of trivia is that 2/3rds of all production and almost all the big deposits known are in the "New World" - North and South America and Australia.
I feel bad throwing away a little copper wire after some DIY home project.
"I feel bad throwing away a little copper wire after some DIY home project."
1) I visited every primary copper smelter in the United States when I was working for Research Triangle Institute (now RTI, International) in the early 1990s. One smelter gave me (and all their visitors) a "micro cathode". It was a piece of actual 99+ percent pure copper in the shape of the cathodes that the smelter itself made. It might have weighed as much as *1 pound*. I kept it in my office desk for years. Eventually, I might have put it in my home recycling bin. But I *might* have thrown it out, because of worry that such a small and heavy object could harm the recycling sorting machines.
2) Recycling sorting machines are improving all the time. They're now far, far better than humans sorting most recycling items. A lot of that is due to improved visual recognition equipment and software. I can easily imagine a time, maybe a decade or two in the future, where that tiny bit of wire you throw would get identified and pulled out of the garbage stream. I can even imagine the possibility of future landfill mining that would recover those little pieces of wire you threw out.
:-)
Copper is unlikely to be in short supply for several decades at least, possibly never
From the copper alliance (which appears to be most of the copper mining/smelting industry)
"Global copper reserves are estimated at 870 million tonnes (United States Geological Survey [USGS], 2020), and annual copper demand is 28 million tonnes. Current copper resources are estimated to exceed 5,000 million tonnes (USGS, 2014 & 2017)."
See https://copperalliance.org/sustainable-copper/about-copper/cu-demand-long-term-availability/
Reserves are usually ore bodies that people expect to be exploitable at roughly current prices in the relatively near future (a decade plus). In the case of copper, in 2020 the world had about 30 years of reserves and a couple of centuries of resources at current annual usage levels. Even if new copper usage doubles we're looking at 15 years of reserves and a century of resources. We are not going to run short of copper any time soon, and possibly never.
There are two reasons why never is plausible
One thing to recall is that the developed world switched from lead to copper water/gas pipes about a century ago and is now switching away from copper to plastic PE/PEX. That means there are thousands (millions probably) of tons of copper pipes that can be recycled into wiring. That's another decade plus of easily exploitable supply.
Secondly the goal is to get electrical current and signals from A to B. Copper is just the currently best/cheapest means of doing so. Development of room temp superconductors, aluminum? alloys or any number of other things I don't know about may end up producing a better (cheaper) way to transfer electricity. We've got a good century to figure this out.
Hoteling’s argument is categorically different from those of Malthus and Simon. The former was addressing prices in the short term (ten years or less), the latter two were arguing whether, in the very long term, natural resources are economically finite.
Any Simon-Ehrlich style bet is necessarily made in the short run - that is, within the lifetimes of the bettors - and Hoteling’s insights rule. Over the long run, hundreds of years, my money is on Simon. Unfortunately, I won’t be there to collect.
Even during Simon's life time putting money on Simon was a good move.
Especially if you did a parlay and put it all on "unlimited immigration" also - since that turned out to be the practical effect of the PR around that wager.
Sorry, I don't think I understand what you mean by parlay in this context, or what you mean about the PR aspect. I am not quite following.
Well, there was long ago a period when people talked about population, and were allowed to talk about population. You might not have been alive then. This was in connection with resources for human use, of course, but in the context of environmentalism - which was then concerned with the environment, not people - having not been undermined and turned into a humanist movement. (Just. Another. Humanist. Movement.) Paul Ehrlich as I understand, was an earnest if naive biologist who was concerned about ecology, wildlife, species diversity, that sort of thing. He got into this stupid bet which he of course lost (mostly ;-)) with his opposite number Julian Simon (if Simon's remembered for anything else, that will be for someone else to supply). And somehow or other, that bet has been used to discredit environmentalism ever since. As though it spoke to any of the concerns of environmentalists! It's been something to behold, the cynicism around it. And as for the population angle - well, in the 70s, polls generally showed that people were concerned about population - in America. They were concerned about other places too - but in general, in America, they had obviously limited their family sizes, and they did not wish to see the place become more crowded. Wilderness areas were being designated on federal land because that's what Americans wanted. People had begun to talk about sprawl (another term that has vanished from the discourse). There was much less radicalism then around these things, oddly. Conservation was conservatism in its purest, humblest form. Anyway, folks were distinctly not asking for the fertility they chose for themselves, to be replaced by the fertility of others.
And yet, that is the opportunity the GOP exploited: the left presently decided it was racist to even use the word "population" and the GOP was only too happy to co-opt this racialism to open the border and let the illegals stream in.
There is no way to underestimate the significance of that ridiculous bet, in terms of making us all stupider.
Someone should launch a prize for something new along those lines - come up with some stunt that will contain little or no information, make little or no sense, that will yet be invoked ceaselessly as a guide to unrelated action.
So love the bet, and love the open border. They are forever twinned.
So ok... I am still not sure how you are making the connection between that bet and unlimited immigration.
However, the bet was very good because of the important aspect of environmentalism (at least that environmentalists adopted at the time) that we were running out of all these natural resources and our population was going to collapse into Mad Max style chaos because we were over consuming. I was around, I remember having that drilled into my head all through school, despite the fact that there were not huge famines in India or China and we didn't run out of oil in the 70's or 80's or 90's...
So I think it is unfair to claim that environmentalists didn't deserve a bit of discrediting on that count. They made many claims about how there would not be enough stuff to go around in 10 years time and were wrong, every time. Not only wrong, but things did in fact get cheaper as Simon predicted. People were concerned, but were wrong to be in these cases, and the doom sayers were wrong in their predictions.
Much like they were consistently wrong about how global cooling was going to kill everyone, then how global warming was going to kill everyone. Disaster is always 10-20 years away, yet never seems to arrive. Bets are great for tracking that.
But that’s just it. Actual environmentalists were concerned *with the natural environment*. Even after I’ve restated it, you are still arguing with something other than me. So thoroughly did it poison the idea of preservation.
See the takeover of the Sierra Club, late 90s, for the connection made plain.
ETA: if your takeaway from that bet is “no limits” - then you are an ideal futurist and I doubt we could have an intelligible conversation.
Garrett Hardin, who revived the idea of The Tragedy of the Commons, and gave it it's present catchy name, was an environmentalist and lefty and major writer against population increase. He was a big deal for a while. Eventually, he realized that immigration also increased population and came to largely oppose it. He stopped being a big deal.
Beautiful blog post. I don't have much to add except a short anecdote and to say "I agree with Arnold."
My anecdote, inspired by Arnold's statement that "I have no comparative advantage in assessing these prospects." One of the projects I worked on in 2012 was a low-latency laser-and-RF communication link between Chicago and New York to give futures traders a comparative advantage in "knowing" a few fractions of a second sooner the relative prices of various commodities. Why the use laser and RF? Laser at 1064nm wavelength doesn't transmit through fog, but it does rain. RF transmits through fog, but not rain. Anyway, I think it's interesting to note the lengths that future traders will go to gain even fractions of a second sooner information about prices.
https://www.extremetech.com/extreme/176551-new-laser-network-between-nyse-and-nasdaq-will-allow-high-frequency-traders-to-make-even-more-money
Scott, Years ago I read about this sort of thing in the IEEE Spectrum. In your opinion, is there any value to this rapid transmission of information? I. E. do the people doing it make more money?
I don’t think it ever got built. I proposed the idea to the Seasteading Institute around the same time. Were there floating cities on the ocean (that moved from place to place) this might be one way to setup a communication link. But Elon probably has a superior technology with his satellites.
Call up JPMorgan or Goldman and their metals desk can give you an 8 year forward price for copper (LME or Comex?).
LME has futures curves going out into 2027. OTC market exists beyond that (illiquid).
You hit on the right note to incorporate financing costs. You could borrow money for eight years, buy copper today and store it. If you could instead buy copper on an eight year forward basis from a dealer today for a price reflecting less than that all-in cost and none of the hassle you would do that. Normal markets will be in contango to reflect carry and storage costs (though speculative pressures and near-term supply/demand usually overwhelm theoretical contango). One year futures “should” be closer to 5 pct above spot prices (but you see that they aren’t). That could mean people are bearish about copper in the future and/or that producers are selling futures/forwards to hedge future production. Could also mean that spot market is tight. In a frictionless world, producer selling into the forward markets would be reflected in spot markets (which should be discounted by contango). But if a buyer needs copper today for a project, buying it on a forward basis doesn’t help (unless they borrow it from someone storing copper today and hedge repayment with a futures purchase), so the price curve can invert when near term demand exceeds supply (yet future price prospects are weak)
Anyway, Commodity forward curves are arbitrage-able in theory (which means it is the SPOT price that should reflect all current knowledge of supply and demand while futures reflect storage and financing) but in practice there are limits on financing, capital, storage and positions (Volcker rule). Cooper is also impacted by Chinese exchange controls as in the past it has been used as a vehicle to get access dollars as well as a store of value.
While spot/futures prices may be the fairest predictors of future market conditions we have, they aren’t very good predictors, and near term activity overwhelms distant concerns. Hedge funds might make 10 year bets with Buffett but they don’t make 10 year bets in markets. They look out a quarter or two. Miners have the longest horizon but their shareholders and CEOs are also very focused on a few quarters ahead in addition to wanting to secure long term supplies. I take zero comfort about the long term future of the world from current market prices. Todays prices certainly mean people aren’t panicking about the future now, but market narratives and psychology change frequently. There is always time to panic later.
If Henderson is predicting shortages he should be loading the boats with long positions. If he isn’t, talk is cheap and a small side bet is irrelevant. The PICK ETF is worth a look if he doesn’t like futures markets, though it turns out that mining stocks don’t always track commodities so well.
“because copper is an essential component in electricity transmission. The goal to “electrify everything” is going to make copper expensive...
The Hotelling-Kling argument is that regardless of whether Malthus or Simon is correct, the futures price of copper already reflects this.”
Or the futures price of copper reflects the reality, that everything will not/cannot be electrified because that is not the intention of Net Zero - the intention being to reduce our energy use and return us to pre-industrial activity. Furthermore, investors/soeculators understand, that it would be impossible to increase the rate and volume of copper ore extraction within the ‘electrify everything’ time scale, ie 2050.
"t would be impossible to increase the rate and volume of copper ore extraction within the ‘electrify everything’ time scale, ie 2050."
No. More like "Can't be done without radical expansion of nuclear power".
The reason is one can use aluminum, which is cheaper and produced in larger amounts (mostly in China, using cheap dirty coal burned in a cheap dirty way, but put that aside for now). In fact, almost all bulk overhead transmission is done with aluminum.
High capacity lines can be built for roughly something like $1-10M per Megawatt per mile depending on where you are in the world. Now if you wanted to replace global fossil primary energy use with something like 10-20 terawatts, then yes you are going to need at least half a trillion spent on extra aluminum each year, and total global production is currently something like $140 Billion, so that's quite the expensive ramp up.
But the good news is that there are practically unlimited supplies of bauxite in the world, most of the cost of aluminum is the electricity needed to smelt it. Doing this to lower CO2 emissions but with Chinese coal would be ... counterproductive. But you could do it with a sufficiently large complex of breeder reactors and reprocessing units, which you are going to need anyway just to generate all that extra juice.
We already have the technology and material resources to do it, it's a question of choice.
Futures markets for commodities are not strictly expected future values. You need to take into account stock out risk and storage capacity risk.
Here's my sermon for today. David Henderson asks an important question: "Why are so many people so pessimistic?" His quick response: "The reasons are too numerous to examine at length. But one is that people watch and read the news. A saying I read recently is: “If you don’t read the news, you’ll be uninformed; if you do read the news, you’ll be misinformed.”
Why are so many people so pessimistic? Hayek would probably say that being pessimistic is advantageous. The people that exist today, exist because they were pessimistic. Pessimistic people have survived.
How can it be that pessimistic people have survived when problem solving requires positive thinking?
Once again Adam Smith has a good answer. Here's an excerpt from page 105 of Bob Luddy's book The Thales Way, "Perhaps the most famous passage in the work states, 'It is not from the benevolence of the butcher, the brewer, or the baker that we expect to eat our dinner, but from their regard to their own interest.' Essentially, Adam Smith explained the positive nature of self-interest. We develop our own talents to earn a living, but in the process we serve others."
We can think of the invisible hand as invisible positive thinking. The invisible hand is “a positive nature of self-interest.” The invisible hand makes up the "difference" between our pessimistic thinking and the requirement to solve problems in our natural quest to survive.
So pessimistic people survive, but are they happy? Do they thrive? The truth is that really pessimistic are no longer with us. They died off. The other truth is that really optimistic people are no longer with us. They died off too. We're more optimistic than those that died off, but we’re not too optimistic. Evolution has “found” the right balance in us.
One habit that has certainly helped (surviving) humans out compete humans that have died off is gratitude. Gratitude is one of the fundamental features of Christian prayer. Christianity is the most popular religion and "the founding religion" of America. Praying to Jesus Christ, and emulating Christs tends to promote a more positive attitude, especially true for believers. Not as true for the unbelieving.
Here's another excerpt from The Thales Way (page 136).
"Gratitude
Alice von Hildebrand once observed that 'Gratitude is required
for happiness.' The optimist can take every difficult situation and make it into a positive one with the simple ingredient of gratitude. A bad day at school? At least you were given a chance to attend to- day. A difficult paper topic? This will be a challenge that will help prepare you for the future. Thales staff and students are cheerful because they can remember with profound gratitude the opportunities a quality education will afford their future.'
My take away from this is that grateful people are more likely to be positive people, and positive people are more likely to be attractive people. Would you rather marry Debbie Downer or someone with a somewhat positive attitude?
Having a positive attitude is a critical first step in survival, and I would argue that the successful entrepreneur and the virtuous leader tend to have a healthy positive attitude. Looking over the Top 15 Outcomes of a Thales student, I would argue that many of these outcomes can be thought of as requiring a positive attitude.
- Unfailing Integrity compels a person to follow a strong code of ethics with honesty in all situations.
- A Virtuous Leader with Well-Developed Judgment combines thinking skills and traits such as humility, generosity, and courage.
- Self-Reliance creates confidence to depend on one's own powers and resources to meet all of one's needs.
- A Truth Seeker searches for the correct, right, or accurate explanation of reality, following the scientific method.
- A Critical Thinker discerns the truth of a statement or observation through questioning and examination.
- A Continuous Learner takes lessons from all aspects of life and work, learns from mistakes, and adapts to change.
- Competent Technical Skills allow individuals to join modern technological industries and navigate modern life.
- Astute Problem Solving leads one to identify the solutions to a problem, evaluate likely outcomes, assess risk, and choose correctly.
- A Cooperative and Contributive Team Member knows how to collaborate to achieve successful results.
- A Strong Work Ethic links perseverance, reliability, and honesty.
- Dreams and Aspirations to Change the World help us remember that directed efforts bring us closer to our goals.
- Traditional American Values and Entrepreneurialism drive a leader to build and sustain a thriving economy.
- Well-Developed People & Communication Skills promote effective sharing with a clear message.
- Gratitude acknowledges the gifts one has been given and the contributions of others.
- A Healthy Mind, Body and Spirit offer the freedom to operate at an optimal level and achieve a higher sense of fulfillment.
https://www.thalesacademy.org/academics/real-world-skills?code=top15
There is something disturbing about the worship of that old bet. It should have a Godwin's Law-type fallacy attached by now. ("How quickly a conversation about the environment is thwarted by reference to an irrelevant old commodity-price bet between a couple of dudes.")
What of other kinds of abundance and scarcity?
A way to get a sense of this - really the only way, perhaps, if you are not unusually perceptive - is to travel to say Tucson. Drive south of town and marvel at the Sierrita copper mine. I don't know whether it is even a particuarly large mine - but it is the largest man-made thing I've ever seen outside of an impoundment. Then drive into Madera Canyon to go birdwatching - esp. hummingbird watching - or batwatching, if that's your thing - on the federal land of the Coronado National Forest. And think about all that will be lost if the people who are confident the Simon-Ehrlich bet tells them all they need to know about the Earth, and the future, get to duplicate that mine in the Santa Ritas.
Excellent post. Two comments
Aluminum can and is substituted for copper in transmission lines. Al was used for home wiring for a while, but now is no longer popular. I've heard different stories as to why. Plastic pipes can be substituted for copper pipes in plumbing (more in waste lines than in supply lines).
In colonial times (if I'm allowed to use the word colonial with out begging forgiveness) laws were enacted to keep people from burning down homes to get the iron nails. Today, thieves break into vacant houses to steal the copper wires and pipes. This reflects the high price of copper.
US could safely substitute into aluminum for many ordinary uses tomorrow if regulators, fire professionals, and building code folks would allow it. There is a kind of long-term complicated entrenched war between the aluminum people, the copper people, the safety people, the regulating people, the construction people, the environmentalists, and the electricity people, and I just invented a new fun board game for Bryan Caplan.
During a copper price spike, US builders attempted replacement with aluminum in the late 60s and early 70s and there were a number of issues. One was with the kind of alloy used which was not as reliable or durable, and in particular aluminum wiring has more of a corrosion issue. That's generally been fixed (at higher cost) and those new better alloys are in use as "Aluminum Building Wiring" in some other countries.
Another issue is that Aluminum is like Lithium is that reduced forms are much more pyrophoric than copper and more likely to spontaneously ignite or even explode when something goes wrong and there is overheating or there is a short or they got cut, exposed to oxygen, heat, and sparks, which is good description of residential electrical systems.
This is a problem has also been solved (with some trade-offs) though some fire professionals insist that an exception is the case of posing a risk of exacerbating existing fires by becoming a secondary fire that is hard to prevent from spreading immediately through all the aluminum wiring in a structure. It helps to respond to fires if the spread is slow enough to evacuate people from the unburnt areas, and to contain and stop the fire before it takes out the whole structure. Having built-in, instantly exploding, firecracker fuses permeating every wall sounds like it could make that a lot worse.
But, again, that seems to be a solved problem, or solved tolerably enough. If it wasn't a solved problem, the FAA would never allow aluminum to be used as aircraft wire and bus bars. I think I remember reading that the super big Airbus A380 used a lot of aluminum wiring to cut down on weight. If it's good enough for an Airbus, it's probably good enough for a house, but I don't know enough to risk my life in the cross-fire of that giant war.
An aspect of these "bets" is to distinguish things that are produced and sold in markets with few if any externalities like copper from things where externalities are important like fossil fuels. If we maintain the hypothesis of continuation of more or less of capitalism, then a bet on lower prices of no-externality "things" compared to wages is pretty sure. How the pricing or not of externalities will go is much more uncertain.
"few if any externalities like copper"
Tell me you've never explored how raw ore is turned to finished metal without saying "I believe all the greentech fantasies".
https://superfund.arizona.edu/resources/learning-modules-english/copper-mining-and-processing/processing-copper-ores
https://federalmetals.ca/how-does-copper-mining-affect-the-environment/
"Copper mining has a devastating impact on the environment. The sheer size of a copper mining operation is enough to consider harmful; however, copper mining also affects environmental and human health.
Deforestation & Land Degradation
Depending on where the ore is located, copper mining can severely damage the environment through deforestation. To pursue an open-pit mining operation, copper miners must remove trees and dig a pit to access it.
Open-pit mines are massive. They can be nearly a mile in diameter and several thousand feet deep. Their size means miners must remove significant amounts of forest, home to thousands of wildlife species.
The sloping nature of an open-pit mine also eliminates topsoil and can cause more rapid soil erosion.
Water Pollution
Often, the water surrounding a copper mine can quickly become polluted, appearing a reddish colour from having been contaminated by copper acid. Contaminated water can severely impact groundwater aquifers, fish, wildlife, and farmland.
Part of the reason water around a copper mine is so contaminated is the effort that goes into waste removal. 99 tonnes of waste material must be removed for every 1 tonne of extracted copper. That number simply isn’t sustainable and makes it difficult to manage waste.
Human Health Risk
Excavating boulders from deep underground can be harmful. As these rocks are removed and exposed to the atmosphere for the first time, they can transmit radioactive substances and damaging chemicals which can affect the soil surrounding the mine.
Copper mining also releases toxic chemicals that pollute the air. This air pollution can harm people’s skin, eyes, and lungs, making breathing difficult. While some copper is essential for human health, an excess can be fatal."
Hmm. Maybe electric cars aren’t the environmental panacea that Biden thinks they are.
Wow. This is like Peak Internet.
Please explain why the Future's price is being discounted to the Spot price as opposed to the Spot price setting the Future's price (using no-arbitrage constraints)?
The Theory of Storage from the CFA website: Futures price = Spot price + direct storage costs (e.g., rent, insurance) - convenience yield.
The Spot price here is the one of the variables that determine the Future's price, not Vice Versa. This makes sense. Would mining companies base production on today's needs .... or on unknowable demand 8 years out?
It seems to me you're overlooking one factor: not all demand can be arbitraged by speculation. If it currently costs $3.74 to produce a pound of copper, no amount of speculation will make it available today for $2, assuming the suppliers are aware of their cost of production. You, I, the producers, and the speculators may all believe that the cost of production in 8 years will be $2 per pound. A speculator would therefore be willing to buy or sell 2032 copper for $2 per pound. But he couldn't sell 2024 copper for $2, because he couldn't procure it for $2.
Apparently there isn't a current market for 2032 copper - if there were, it would be interesting to see what prices would look like. I expect the main reason that commodity futures don't look out that far is that it would be too hard for traders to put up assets to "cover" their positions. Or at least that regulators have determined that traders can't put up those assets.
I think that what would happen if the futures price were known to be $2 is that the spot price would drop below that, and costly copper mines would shut down until the marginal cost of production reaches the spot price. That may sound counterintuitive, but starting with an assumption that copper futures will be $2 is going to confound intuition in any case.
But there is demand for copper for current use. If the spot price drops to $2, there will necessarily be a decrease in supply, leaving unfilled demand. Why wouldn't the spot price be immediately bid up to the level needed to induce enough supply to meet demand?
Because of storage, current supply and demand is linked to future supply and demand. You can't just start by saying, "assume a $4 spot price and $2 futures price" and tell a coherent story. I don't know what else to say.
If current builders want copper wire to build buildings today, the future price is irrelevant. Unless there's sufficient copper in storage today to meet demand for the next eight years, how can storage and arbitrage overcome today's $4 cost of production?
We will not see a copper price of $4 today and also see today a $2 futures price for copper for delivery years from now. That is what I am trying to get across. You seem to want to say "It can happen, and that shows that you are wrong." I am saying "it cannot happen." I think the argument has gotten stale.
"I think the argument has gotten stale."
Hi Arnold,
I'm not even sure what the argument is. We all agree that the price of something relative to, say, wages, indicates the scarcity of that thing relative to wages, right?
So what Julian Simon was saying was that the *long term* prices of virtually all commodities (copper, steel, aluminum, etc.) is headed downward. I recall him writing that the *long term* real price of any *basket* of commodities going down was just about the surest bet in the world.
A way to resolve whether Julian Simon is correct, or Paul Ehrlich (standing in for Malthus) is correct, is to place a bet on the "Long Bets" website, predicting the whether the prices of some basket of commodities would be higher or lower in the year, say, 2100.
I've made just that sort of prediction for economic growth in the 21st century, comparing my prediction of a world per-capita GDP in 2100 of $10,000,000 to Robert Lucas, Jr.'s prediction of $94,000, both in year 2000. (Robert Lucas Jr. was obviously pretty good for an amateur, but he should have left his predictions of long-term economic growth to folks who have read and appreciated Julian Simon and Ray Kurzweil. ;-))
Needless to say, if my prediction of $10,000,000 (again in year 2000 dollars) per-capita gross world product is even an order of magnitude within the true actual value, a basket of commodities is virtually certain to go down in price relative to wages! :-)
https://longbets.org/194/
P.S. Your prediction for wages in the year 2100 is presumably even higher. The world needs to get cracking, and start behaving like we both know it will! ;-)
https://markbahner.typepad.com/random_thoughts/2004/10/3rd_thoughts_on.html
I think I understand your argument a little better. But, if speculators believe the Simonian argument that prices will drop in real terms due to better technology, or discovery of better sources, why could they not bid the future price down? If I understand the Hotelling argument, they would also bid current spot prices down, as anyone with copper in storage tried to unload it in anticipation of lower future prices. If there were infinite copper in storage, I can see this. But, if copper in storage is much lower than current demand, users will have to go back to current production, which is constrained by cost of production. If Handle is correct, and annual production is something like 20 million tons, and the St Louis Fed (https://fred.stlouisfed.org/series/M05F0AUSM601NNBR) says current inventory is on the order of 100,000 tons, current price must have a lower bound set by production cost.
Or are you arguing that no one would bid a future price significantly lower than current spot price? I thought you were explicitly allowing for that possibility. Is $2 too low to consider realistic? Would $3.20 be more plausible? It seems to me that, if the Simonian argument were generally accepted, and if there were liquid markets looking out 8 or 10 years, some price lower than the current price would emerge. Discounting inflation, of course.
I should have said non local externalities. Local externalities are easily priced in
Important caveat: you write "The spot-futures link means that all of the information about the copper market is contained in the futures price." That isn't quite true, rather it is all of the information available about the copper market, along with some misinformation and guesses. So the prices don't include things people don't know about natural reality ("Huh, aluminum mixed with cat spit is really good at conducting. Who knew?") or what crazy things humans might do ("Huh... who'd have thought congress would pass a 60% tax on copper?" or "Who'd have thought we'd be at 8% inflation for so long... why have people been acting like we will be back at 2% tomorrow?")
Hotelling makes sense for really short term stuff, maybe 5 years max, but things change a lot in that time as it is, and so uncertainty increases exponentially over time. Simon and Malthus take a longer view, where natural fundamentals dominate and only the general direction is predictable.
In other words, rational expectations are great, but rationality includes things like "I have no idea about a lot of stuff, so I only have a rough guess" and not "The collective is omniscient."
The collective is not omniscient, but the market price represents the guesses weighted by confidence. If you're confident about your knowledge, feel free to put your money where your mouth is, and, move the price accordingly.
You seem to misunderstand the point, which is that over longer time spans there is vastly more uncertainty, so any confidence in guesses needs to drop sharply. Within a few years, sure, the market prices are pretty good predictors, but over the longer term about the only thing you can rely on is the general trend of "stuff gets cheaper," and even that is not a sure thing.
I'd like to know what assumptions Hotelling made and why they are wrong. Henderson doesn't say.