Global commodities:

a long term vision for stable, 

secure and sustainable 

global markets

June 2008

June 2008

Global commodities:

a long term vision for stable, 

secure and sustainable 

global markets
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Global commodities: long-term vision for stable, secure and sustainable global markets 1

CONTENTS

 Page

Foreword by the Rt Hon Alistair Darling MP, Chancellor 

of the Exchequer 

3

Executive Summary 5

Chapter 1 Introduction 7

Chapter 2 Trends in commodity markets 9

Chapter 3 Implications for the international community 47

Chapter 4 Ensuring stable, secure and sustainable global 

commodity markets 

59

Global commodities: long-term vision for stable, secure and sustainable global markets 3

FOREWORD BY THE RT HON ALISTAIR DARLING MP, 

CHANCELLOR OF THE EXCHEQUER

Commodities are an essential part of people’s every day life, whoever they are and wherever they 

are from. They are the food we eat. They help us heat our homes. They are a critical part of the 

economy. Their affordability therefore matters. At the extreme, their availability is a matter of life 

and death. 

The recent rises in the commodity prices and their volatility has therefore had an impact across 

the world, affecting almost all people and presenting a challenge to the international community. 

The implications of continuing instability and uncertainty are wide ranging and far reaching: 

economic, social, political and environmental. Ensuring stable, secure and sustainable global 

commodity markets is therefore an urgent international priority. It requires action in the short, 

medium and long term; and it requires action at the national, regional and international level. 

This paper sets out Britain’s vision for the required international action to enable efficient and 

effective global commodity markets, and sets the framework for guiding the international 

community's response: maintaining economic stability, promoting openness, encouraging 

cooperation, supporting innovation and investment, ensuring fairness and mitigating and adapting 

to climate change. 

These principles and the policies alongside them can form the basis of a coherent international 

response to what is one of the greatest challenges for ensuring rising prosperity, fairness and 

opportunity for all. 

THE RT HON ALISTAIR DARLING MP, CHANCELLOR OF THE EXCHEQUER

Global commodities: long-term vision for stable, secure and sustainable global markets 5

EXECUTIVE SUMMARY

Over the past six months significant increases in global oil and food prices have led higher fuel and 

supermarket bills, driving inflation around the world. Pictures of food and fuel price 

demonstrations have served as a reminder of how important these essential items are for 

supporting and spreading prosperity and stability. 

This document sets out a comprehensive analysis of the trends and drivers behind commodity 

markets looking at food, oil and other commodities and outlines the UK’s long-term vision for 

the required coordinated international response to ensure stable, secure and sustainable global 

markets that are key ensuring fairness and prosperity for all. 

For most of the past 50 years commodity prices have fallen in real terms, as demand and supply 

have risen in tandem; although this trend has been punctuated by a number of significant supply 

side shocks. In recent years, most prices have risen sharply. There are a number of reasons for 

this, both on the demand and supply side. Commodity prices are notoriously hard to forecast, 

even over relatively short periods, especially oil. However, on balance the expert views and 

market expectations reviewed here suggest that prices are likely to remain higher than their 

historical averages, if lower than today’s levels, with continuing and perhaps more frequent 

shocks, driven by continuing strong demand and a continuing slow supply response. This demands 

a strong response at a national and international level to protect the poor and continue 

sustainable economic growth. 

Continued population growth and rising incomes are driving demand. The world’s population is 

predicted to rise from 6.7 billion in 2007 to 9.1 billion by 2050. Economic growth is being driven 

by the rise of large, fast-growing emerging economies, particularly in Asia. Improving resource 

efficiency will be critical in determining how this growth impacts on demand for commodities. 

Supply will face continued pressure to keep up. The World Bank predicts that world grain 

production will have to rise by 50 per cent to meet demand by 2030. On oil, the International 

Energy Agency predicts that the world could be demanding an extra 30.5 million barrels of oil per 

day by 2030, over a third more than current levels. As the impacts of climate change increase, 

volatility and supply shocks will continue in the coming years and decades, most likely with 

increased frequency. 

As basic necessities for life, commodities have a direct effect on people’s welfare, in the 

developed and developing world alike. With some 850 million people facing hunger each day, and 

commodities such a significant share of personal consumption and economic activity, energy and 

food security are fundamental concerns for all governments, domestically and internationally. 

Globally, increased hunger and malnutrition, as well as the risk of fiscal pressures leading to 

reduced spending on health and education, threaten the achievement of the Millennium 

Development Goals. 
1 EXECUTIVE SUMMARY 

6 Global commodities: long-term vision for stable, secure and sustainable global markets 

Against this background, the overarching aim of the international community’s policy response 

should be to ensure stable, secure and sustainable global commodity markets, by improving 

resource and in particular energy efficiency, and by stimulating supply through technological 

change and creating a business and regulatory environment that encourages investment in 

sustainable supply. 

To do this will require action in the short-term to address immediate drivers of current price 

increases and ameliorate their impact, and in the medium and long-term to address underlying 

causes of inefficiency in the commodity markets, including action against protectionism. Action by 

the international community should be at national, regional and international level and based on 

the following six principles: 

• Economic stability – anchoring inflation expectations and delivering sustainable 

economic growth through sound macroeconomic policies and well-targeted assistance 

from the International Financial Institutions. 

• Openness – allowing markets to function effectively, removing tariff barriers and export 

subsidies and restrictions, promoting structural reform and allowing all countries to trade. 

• Cooperation – reform to the shape and role of the international commodity, trade and 

financial institutions, greater transparency and a radically different level of dialogue 

between producers and consumers. 

• Innovation and investment – stimulating supply side growth through greater 

expenditure on research and technology. 

• Fairness – working nationally and through international institutions to ensure that the 

poor and those hardest hit by higher and more volatile commodity prices receive 

affordable access to the basic commodities they require. 

• Climate change - recognising that no approach to commodities will succeed that does 

not consider the impact on climate change, including the need for an international 

agreement to limit greenhouse gas emissions, and the need to ensure that growth and 

development are climate resilient. 

The world has adjusted to increased commodity prices in the past. The current trends can be 

changed, and economic growth continued, provided there is a concerted effort by all countries to 

enhance efficiency, invest in new technology and maintain open and fair markets. 

The paper therefore argues that the required response from the international community is clear. 

It is not to turn inwards and adopt distorting measures. Rather, achieving the goals of food and 

energy security requires the international community to work together to harness the power and 

the innovation of the global system, underpinned by a renewed commitment to openness and 

fairness, to deliver more stable, secure and sustainable commodity markets. 
Global commodities: long-term vision for stable, secure and sustainable global markets 7

1.1 This paper sets out a comprehensive analysis of the trends and drivers in 

commodity markets that have led to the recent increases in commodity prices. It looks 

at food, oil, gas and other commodities, and outlines the United Kingdom’s long-term 

vision for ensuring efficient and effective global commodity markets that are such a 

critical foundation of economic growth and prosperity for all. 

1.2 Chapter 2 begins by examining the crucial role that commodities play in the 

modern global economy, and underlines how price movements have direct economic, 

public policy, environmental and security implications – including in different parts of 

the world and different parts of the economy – in varying ways. 

1.3 It then continues by analysing past, recent and predicted future trends in 

commodity prices, recalling the general downward trends in prices in real terms over 

the past 50 years and identifying both long-term and short-term drivers of the current 

price rises. The chapter sets out a number of areas where structural changes in the 

global economy affect commodity prices as a whole, for example, through increasing 

demand in the emerging market economies, as well as identifying individual issues that 

have impacted on food or oil prices. 

1.4 Having analysed the causes behind the recent price increases, and differentiated 

between long-term structural issues and short-term supply and demand shocks, the 

paper moves on to discuss the possible future trends in commodity prices. 

1.5 Against this background, Chapter 3 examines the social, economic, political and 

environmental impacts and risks of high and potentially more volatile commodity 

prices. 

1.6 Finally, Chapter 4 builds on the analysis by setting out a framework for an 

internationally coordinated policy response to avoid the most harmful impacts and 

mitigate these risks, which is based on: 

• enabling stable, secure and sustainable global commodity markets; 

• ensuring global markets work as efficiently and effectively as possible and 

ensuring arrangements are in place for managing shocks; and 

• taking action against a framework of six key principles on international, 

regional and national levels, in the short, medium and long-term. 

1 INTRODUCTION

Global commodities: long-term vision for stable, secure and sustainable global markets 9

2.1 This chapter examines the crucial role that commodities and commodity 

markets play in everyday life, and takes a backward and forward look at how the global 

market has developed over time. It looks at four specific issues: 

• what are commodities and why they are important; 

• historic trends in commodity markets; 

• an analysis of recent price increases; and 

• a review of potential future market behaviour.. 

2.2 The analysis in this section provides the background to consider the impacts of 

commodity market developments on the international community covered in Chapter 

3, and the policy framework discussed in Chapter 4. 

WHAT COMMODITIES ARE AND WHY THEY ARE IMPORTANT 

2.3 Due to the importance of food in sustaining human life, food security – ensuring 

the physical availability and affordability of food and supply resilience – is critical. In 

simple terms, food is our most basic source of energy. Energy security is similarly 

critical for heating people’s homes, and an important input for the economy as a whole. 

2.4 It is virtually impossible to think of a good or service consumed that does not 

require energy as an input somewhere along the production chain. In manufacturing, 

metals and petroleum products are used extensively. In agriculture, chemical products 

such as fertilisers are crucial inputs. Even in the service sector, the energy used to heat 

and light offices or retail premises represents an important cost. While food does not 

typically make up a significant proportion of businesses’ input costs, it is a key use of 

what is often their largest cost, the wages and salaries of employees. 

2.5 Some commodities, notably precious metals, are also held as an investment 

asset. This is particularly true of gold, which is often regarded as the safest of assets in 

times of uncertainty and as a hedge against inflation. Income from commodities is 

playing an increasing role in global investment flows, especially in the context of 

Sovereign Wealth Funds (SWFs), which are government-established investment 

vehicles, funded in many cases by oil and commodity revenues. 

2.6 Commodities, as natural resources, also have an important environmental 

impact in terms of how they are extracted, produced, used and consumed. 

Features of commodity markets 

2.7 A commodity is a physical substance, such as food or oil, that is interchangeable 

with another substance of the same type, in other words they are homogenous goods. 

Commodities are traded on over-the-counter and on exchanges, which bring buyers 

and sellers together without the underlying commodity being physically present. In 

recent years, the global trading of commodities, and particularly the trading of 

derivative products related to commodities, has expanded rapidly. 

2.8 As with nearly all goods and services, the price of commodities is determined by 

the balance of supply and demand in the marketplace. There are, however, a number of 

2 TRENDS IN COMMODITY MARKETS

Sustaining 

human life

Vital for the 

economy

An important 

asset class
2 TRENDS IN COMMODITY MARKETS 

10 Global commodities: long-term vision for stable, secure and sustainable global markets 

features of commodity markets, particularly the oil and food markets where recent 

developments have had such an impact on people’s lives, that distinguish them from 

the markets for many other goods and services. These features are important 

underlying factors explaining the trends in prices discussed in this chapter. 

2.9 Within the consumption basket of households there are certain items that are 

essential to our daily lives. In every country of the world these essential items include 

food and, in some form, energy. Households will typically be unable to vary greatly the 

volume of food and energy they consume in response to the price of such items: in 

other words, in the short term demand is inelastic to changes in prices. In the longer 

run, as historical precedents demonstrate, demand does change with price as new more 

energy-efficient technologies become available. The resource efficiency of demand has 

also an important impact on the rate of climate change. 

2.10 In the short term, it is also difficult for suppliers of commodities to increase 

output in reaction to the profit opportunities offered by higher prices. In the case of 

food, higher prices this year might prompt farmers to increase grain production, but the 

supply will not be available until at least the following harvest. In the case of oil, once 

any spare capacity has been exhausted, the time lag between higher prices and 

additional supply can be even longer. In the short term, therefore, supply is also 

relatively inelastic to changes in price. 

2.11 The combination of inelastic short-term demand and inelastic short-term 

supply in many commodity markets means that, in the short term, unanticipated 

changes in demand or supply will tend to generate price volatility. The geographical 

concentration of production of individual commodities, and the importance of such 

factors as the weather, means that many markets are prone to periods of supply 

disruption. Some commodities, especially oil, are also concentrated in areas of high 

geo-political tension that adds to the risk of disruption. Such temporary disruptions 

serve to exacerbate price volatility. 

Demand does 

not change 

much with 

price

Neither does 

supply in the 

short term

So shocks can 

have a big

impact on 

price

Box 2.1: What are ‘non-energy’ and 'non-food’ commodities? 

Among commodities most attention tends to be paid to energy prices, because of the importance 

of energy as a consumption and production good, and more recently to food prices. However, 

other commodities also play an important role in the world economy. ‘Non-energy and non-food’ 

commodities can broadly be split into three groups: 

• ‘base metals’ – industrial metals including copper, aluminium, iron ore, lead, tin and zinc; 

• ‘precious metals’ – including gold, silver, and platinum; and 

• ‘agricultural raw materials’ – which are non-food agricultural goods, often used as a 

production input, including timber, rubber, cotton, wool and animal hides. 

Non-energy and non-food commodities are important for many of the same reasons as 

commodities as a whole. Like food prices, the prices of agricultural raw materials may be 

particularly important to the farming sector, while like energy, base metals are an important input 

to many industrial production processes, and their prices can have direct consequences for the 

profit margins in some industrial companies. 
 TRENDS IN COMMODITY MARKETS 2

Global commodities: long-term vision for stable, secure and sustainable global markets 11

HISTORIC TRENDS IN COMMODITY MARKETS 

General factors 

2.12 Commodity prices have fallen in real terms over the past 50 years. Chart 2.1 

demonstrates this, setting out various measures of average commodity prices using 

different indices, deflated using US consumer price inflation. 

2.13 Four separate periods can be distinguished in the data, providing historical 

precedents for the current price disturbances the world is seeing today. First, in the 

period up to 1972, prices decreased in real terms. Second, during the following ten 

years, a period that included a number of severe supply disruptions, commodity prices 

temporarily doubled. Third, the following two decades from 1982 to 2002 saw 

commodity prices continue to fall in real terms partly because of improving energy 

efficiency and growing supply. Finally, since 2002, commodity prices have experienced 

sustained increases, rising by up to 100 per cent. 

In addition to the general considerations, base metals may be of particular interest because of 

their close relationship with economic industrial activity. Because of their role as an input in 

industrial production, base metals are highly sensitive to changes of economic activity, and often 

provide a leading indicator of future activity. Precious metals, as well as being consumption goods 

for use in jewellery, are also purchased as investment goods, particularly those metals that are 

seen as providing a good store of value. 

The price of gold in particular is influenced by developments in investment markets because it is 

often seen as providing a safe haven for investors in times of crisis and high uncertainty (since 

other financial assets, such as equities, tend to perform poorly during turbulent economic times, 

and because there is no counterparty risk to holding gold). Related to this, gold can provide a 

hedge against inflation, since while the value of other financial assets is eroded by inflation, it 

should maintain its value because of its scarcity as a precious metal. Given its historical role as a 

means of exchange, gold is also often treated as a currency in its own right, and thereby provides 

a hedge against uncertain currency movements, particularly for the US dollar. 
2 TRENDS IN COMMODITY MARKETS 

12 Global commodities: long-term vision for stable, secure and sustainable global markets 

2.14 A number of supply and demand factors underpin these developments. Strong 

income growth, underpinned by population growth, has been the main demand side 

factor. Global real GDP growth averaged around 3 1⁄2 per cent between the early 1960s 

and 2002. This represents a total increase of 350 per cent over the period. During this 

time, the world’s population doubled from three to six billion people. The impact on 

commodity demand was moderated by large improvements in the efficiency of their 

use: the energy intensity of GDP, for example, fell by about a quarter between 1980 and 

2005.1

2.15 That real prices have not, on average, increased over the past 50 years is a 

reflection of supply being able to keep up with demand and as set out above energy 

intensity has dropped significantly despite economic growth, largely due to the 

responses of the advanced economies to the oil shocks of the 1970s. The biggest supplyside factors have been improvements in technology, market structure and competition, 

which have driven up productivity in the commodities sector. 

2.16 These factors, on balance, have meant that price spikes have only been 

sporadic, but when they have occurred, they have been significant. During the 1970s, a 

number of sudden supply-side shocks sent commodity prices considerably higher. This 

included the oil price shocks of 1973 and 1979, as well as occasional short-lived 

weather-related disruptions to the production of food. The price changes announced by 

Organization of Petroleum Exporting Countries (OPEC) in 1973, which helped to 

precipitate the oil shock, is an example of how cartel behaviour has had an influence on 

commodity markets; this is discussed more widely in Box 2.2. The use of some metals as 

stores of value and inflation hedges (see Box 2.1) also led to spikes in their prices during 

the 1970s. 

1 Source: World Development Indicators, World Bank 

Chart 2.1: Commodity price indices in real terms

Notes: Real indices are constructed by deflating with US CPI 

Source: Goldman Sachs Commodity Index (GSCI), US Bureau of Labor Statistics, Economist, Commodity 

Research Bureau (CRB), HM Treasury calculations

Demand 

increasing

With supply 

responses

But with 

periodic 

supply-shocks

0

50

100

150

200

250

1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006

Index, 1970=100

CRB Economist GSCI
 TRENDS IN COMMODITY MARKETS 2

Global commodities: long-term vision for stable, secure and sustainable global markets 13

2.17 The following sections discuss these historic trends in more detail for oil, food 

and other commodities. 

Oil 

2.18 After falling for most of the twentieth century real oil prices spiked in the 1970s 

as a result of geopolitical tensions in the Middle East. In October 1973 the Arab oil 

embargo, following the Yom Kippur War, and OPEC price changes caused prices to rise 

by over 200 per cent in the space of a month. This took place at a time when the world 

financial system was already under pressure from the breakdown of the Bretton Woods 

system of fixed exchange rates, and the uncertainty that resulted. This set large parts of 

the developed world on a series of recessions and high inflation that persisted until the 

early 1980s. The effect was compounded by the impact of the 1979 Iranian Revolution 

and the 1980 Iran-Iraq war, which caused Iranian oil production to drop by two thirds 

over the space of two years and a doubling of oil prices. These price trends are set out in 

Chart 2.2. 

A history of

supply shocks

Chart 2.2: Historical Crude oil prices, in nominal and real (2007) prices 

Notes: The oil consumption growth series starts in 1966. 2008 is a forecast. Real prices are constructed by 

deflating with US CPI 

Source: US Energy Information Administration, US Bureau of Labor Statistics, BP Statistical Review of World 

Energy, BP, June 2007. Bloomberg, HM Treasury calculations, International Energy Agency

-5

-3

-1

1

3

5

7

9

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Global oil consumption growth, per cent

-60

-40

-20

0

20

40

60

80

100

120

US dollars per barrel

Global Oil Consumption growth (%, lhs) $ Nominal (rhs) $ Real (2007, rhs)
2 TRENDS IN COMMODITY MARKETS 

14 Global commodities: long-term vision for stable, secure and sustainable global markets 

Box 2.2: Cartels in commodity markets 

Cartels exist to restrict competition in order to raise prices and boost profits. To be effective, 

cartels need to be able to limit production below what would be produced in a competitive 

market, and ensure all members are complying with their quota. Monitoring and enforcing 

compliance within a cartel is easier and more effective when there are only a small number of 

producers in the market, and the market is sufficiently transparent for the production choices of 

each producer to be observed. If these conditions are not met, it is likely that each player will 

“free ride” by exceeding their individual quota, but hoping that others will observe theirs, thus 

keeping prices high. If each member of the cartel behaves in this way it will quickly break down 

and all market power will be lost. 

Some primary commodities lend themselves to being the subject of cartels, because the 

production or extraction of the commodity is possible in only a few countries or regions, 

naturally restricting the number of players in the market. This prevents competitors from outside 

the cartel entering the market. 

The Organisation of Petroleum Exporting Countries (OPEC), formed in 1960, is the best-known 

commodity cartel. Oil is particularly suited to being the subject of a cartel as it is only extractable 

in significant quantities at an economic cost by a relatively small number of countries. 

The 13 members of OPEC control around 42 per cent of global oil production, and around 78 per 

cent of proven reserves. Although in previous decades OPEC has been very important in 

influencing oil prices, for example, the oil embargo of 1973 when its members accounted for 53 

per cent of global production, this market power is now much reduced. OPEC now has limited 

spare capacity, with only Saudi Arabia retaining a significant margin of spare capacity and most of 

that is unsuited to the current composition of the refinery sector. Historically, OPEC members 

have also proved unwilling to keep production within agreed quotas, further reducing the 

organisation’s influence over prices. 

However, OPEC members, and some other large oil producers such as Mexico, have a greater 

impact on world prices through their market structure. Most of these countries retain large, 

state-owned national oil companies (NOCs) that own the rights to extract oil in their country. 

International oil companies (IOCs) have limited or no access. This is likely to restrict production 

levels. 

In contrast, the gas market is not well suited to cartel behaviour. Although gas reserves are also 

geographically concentrated, pipeline gas is generally traded on the basis of long-term, bilateral 

contracts, and thus achieving the coordination and transparency a cartel requires is difficult. 

Besides, such contracts already typically involve prices some way above marginal costs. The 

Liquefied Natural Gas market is more similar to the oil market in structure, and therefore as this 

market develops and matures the possibility of a gas cartel may emerge in the long run. 

International cartels of agricultural commodity producers also have a weak track record. For 

example, the Association of Coffee Producing Countries attempted to control coffee prices for 

eight years, but disbanded in 2001 after failing to have a significant impact on global prices. Despite 

its members accounting for over 70 per cent of the world’s coffee supply, their failure to respect 

agreed production quotas meant that the association had little market power. In May 2008 the 

Thai government suggested a rice cartel with its south-east Asian neighbours, but the proposal 

received little support. Rice importing countries criticised the distortion in food markets a cartel 

would create, whilst the difficulties in allocating and coordinating production quotas among 

millions of rice farmers were raised to illustrate its unfeasibility. 
 TRENDS IN COMMODITY MARKETS 2

Global commodities: long-term vision for stable, secure and sustainable global markets 15

2.19 Prices declined in nominal and real terms throughout much of 1980s until the 

Iraqi invasion of Kuwait in 1990, which caused prices to spike again. After the Gulf War 

and the liberation of Kuwait in early 1991, prices returned to their declining trend. In 

1998, increased OPEC production coincided with stagnant growth in Asian oil demand, 

due to the Asian financial crisis, sending oil prices below US$10 again. However, strong 

world oil demand, OPEC production cutbacks, and other factors, including weather and 

low inventory levels subsequently caused oil prices to triple between January 1999 and 

September 2000. This increase was interrupted briefly by the global recession in 2001. 

However, robust demand growth from outside the advanced economies prevented 

prices from falling significantly, and this phenomenon has set the backdrop for recent 

price increases. 

2.20 Overall, these shocks not withstanding, the long-run trend of the past 50 years 

has been one of rising demand and supply in a growing world economy. Since 1965, oil 

consumption has risen by over 150 per cent, with growth since the mid-1980s 

increasingly coming from the Asia Pacific region.2 Chart 2.3 demonstrates the overall 

growth in the demand and supply. 

2.21 Alongside this, non-OPEC producers increased supply by 10 million barrels per 

day during the period of 1980 to 1986. This reduced OPEC’s market share from its peak 

of above 50 per cent in 1973 to below 30 per cent in 1985. 

2.22 The balance within non-OPEC producers has also shifted over time. In the 1980s 

production in the developed economies increased significantly, for example, from the 

North Sea and Alaska. As production in these regions has declined, today’s new sources 

of non-OPEC production are more focused on the non-advanced world, for example, 

Mexico and African countries such as Angola. 

2 BP Statistical Review of World Energy, BP, June 2007 

Long-term 

trend is 

increased 

demand and 

supply

Chart 2.3: Historical Oil Demand and Supply 

Source: BP Statistical Review of World Energy, BP, June 2007

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

1965 1970 1975 1980 1985 1990 1995 2000 2005

Global oil demand and supply, 

thousands of barrels per day

OPEC 12 supply Non-OPEC (ex. FSU) supply

Former Soviet Union (FSU) supply Global Oil Demand
2 TRENDS IN COMMODITY MARKETS 

16 Global commodities: long-term vision for stable, secure and sustainable global markets 

2.23 Previous price increases stimulated the introduction of price controls and 

subsidies: for example, the US introduced price controls on domestically produced oil 

in an attempt to lessen the impact of the 1973-74 price increase; and the release of 

strategic inventories. Both supply disruptions in the 1970s, and subsequent price rises 

in the 1990s and 2000s, were preceded by periods of robust demand growth. 

2.24 Previous significant price increases have also driven demand reduction and oil 

substitution strategies: between 1980 and 1986 the G7’s oil consumption declined by 

around 7 per cent; the oil intensity of the G7 economies fell by over 38 per cent between 

1980-1986; oil declined from 53 to 49 per cent of the G7’s overall energy consumption 

between 1980-1986;3

 and consumers have sought alternative energy sources: for 

example, Brazil’s development of a bioenergy sector. 

Other Energy 

2.25 The price of natural gas declined steadily through much of the 1980s and 1990s, 

but has since picked up significantly as illustrated in Chart 2.4. As a natural co-product 

of oil and coal extraction, natural gas has been used since the 1800s, primarily as a 

source of light. Historically, transportation has limited the use of natural gas. Since the 

introduction of technology for its transportation, the use of gas as a source of energy has 

increased significantly, with consumption increasing by over 300 per cent since 1965, 

dwarfing the 150 per cent growth in oil consumption.4 Up until the 1990s, the former 

Soviet Union and Europe accounted for much of this growth. 

2.26 Traditionally, gas was not traded in the global market like oil, but supplied 

under long-term contracts linked to the price of oil; this relationship is discussed in Box 

2.3. Gas markets are essentially regional, fed either by piped gas or more recently by 

3 BP Statistical Review of World Energy, BP, June 2007; World Development Indicators, World Bank; and HM Treasury calculations 

4 BP Statistical Review of World Energy, BP, June 2007 

Chart 2.4: Historical natural gas and coal prices in real (2007) terms 

Notes: Real prices are constructed by deflating with US CPI 

Source: Bloomberg, US Bureau of Labor Statistics, HM Treasury calculations

Natural Gas

0

2

4

6

8

10

12

14

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Natural Gas, US dollars per million Btu

30

50

70

90

110

130

150

Coal, US dollars per tonne

Natural Gas: US Henry Hub (lhs) Coal: Northwest Europe (rhs)
 TRENDS IN COMMODITY MARKETS 2

Global commodities: long-term vision for stable, secure and sustainable global markets 17

dedicated Liquified Natural Gas (LNG) supplies (with the LNG supply route functioning 

as a “virtual pipe-line”). 

2.27 The nominal price of coal remained relatively stable throughout the 1980s and 

1990s, meaning that real prices fell over this period, despite rising demand with a 

significant impact on global carbon emissions. This is illustrated by Chart 2.4. 

Food 

2.28 Prices of most agricultural commodities have also been on a downward trend in 

real terms over the last three decades. 

2.29 Chart 2.5 shows average world prices for wheat, maize, sugar and soybeans from 

1969 to April 2008, in real and nominal terms. The long-run downward price 

movements reflect that supply has kept up with increasing demand. This is primarily as 

a result of technology-driven improvements in productivity and yields, such as during 

the ‘green revolution’ in the 1960s, which was based on improved varieties of wheat, 

rice and maize suited to smallholders in developing countries. For example, it is 

estimated that the production of wheat, rice and maize has roughly doubled between 

1971 and today. Most increased agricultural production has come from increased 

yields, rather than greater land use. 

2.30 In 1972-73, coinciding with the oil crisis, global agricultural production was 

affected by bad weather leading to poor harvests. The former Soviet Union – one of the 

worst affected areas – bought huge quantities of grain on the world markets, reducing 

Coal

Chart 2.5: Monthly agricultural commodity prices in nominal and real (2007) terms 

Source: Chicago Board of Trade and IntercontinentalExchange, US Bureau of Labor Statistics, 

HM Treasury calculations 

Supply shocks 

in the 70s and 

90s

Maize

0

200

400

600

800

1000

1200

1400

Dec69Dec74Dec79Dec84Dec89Dec94Dec99Dec04

Nominal Real

Wheat

0

500

1000

1500

2000

Dec69Dec74Dec79Dec84Dec89Dec94Dec99Dec04

Nominal Real

Soybeans

0

500

1000

1500

2000

2500

3000

3500

Dec69Dec74Dec79Dec84Dec89Dec94Dec99Dec04

Nominal Real

Sugar

0

50

100

150

Dec69Dec74Dec79Dec84Dec89Dec94Dec99Dec04

Nominal Real
2 TRENDS IN COMMODITY MARKETS 

18 Global commodities: long-term vision for stable, secure and sustainable global markets 

world grain inventories to their lowest level for two decades. These factors caused wheat 

prices to treble between mid-1972 and mid-1973. Various national policies to 

encourage production coupled with improved weather brought prices down over the 

next three years. 

2.31 In 1995, again as a result of a bad harvest, there was a production shortfall of 5 

per cent compared to the previous year. Coupled with a significant increase in demand, 

this led to a reduction in global inventories of nearly 15 per cent compared to 1993 

levels and wheat prices rose by over 50 per cent, as chart 2.6 demonstrates. In 1996-97, 

global production and inventories recovered as more cereals were planted in response 

to the higher prices. Within two years, global prices had returned to pre-1995 levels. 

Other commodities 

2.32 In real terms, the prices of many industrial materials, and particularly industrial 

metals, also fell for much of the last century, reflecting technological gains and 

increasingly effective means of extraction. A number of peaks and troughs have been 

observed around this declining trend as demand for these industrial inputs has varied 

with the business cycle. Individual metals prices have also spiked at different points, 

similarly to food and oil, reflecting market-specific factors: gold, for example, saw a 

considerable price spike during the 1970s oil shock, as investors sought a hedge against 

inflationary pressures. 

ANALYSIS OF THE RECENT PRICE INCREASE 

General factors 

2.33 In contrast to the long-term downward trend in the late twentieth century, since 

2002 average real commodity prices have increased markedly. Chart 2.7 shows recent 

movements in real prices, decomposed into the contributions from energy and nonenergy commodities. An increase can be seen in both indices, most noticeably in the 

case of energy commodities since 2002 and in the case of non-energy commodities 

since 2006. 

Chart 2.6: World wheat supply and price 

Source: International Grains Council

600

650

700

750

800

850

199019911992199319941995199619971998199920002001200220032004200520062007

Production+stocks (million 

tonnes)

0

50

100

150

200

250

300

350

US dollars per tonne

Production+Stocks Price
 TRENDS IN COMMODITY MARKETS 2

Global commodities: long-term vision for stable, secure and sustainable global markets 19

2.34 A number of general factors have contributed to the sharp increase in 

commodity prices. On the demand side, these include: 

• steadily rising population; 

• strong economic growth; 

• slower improvements in efficiency of resource use, in particular in terms of 

energy intensity; and 

• in the past year, decreasing interest rates and depreciation of US dollar. 

2.35 The period since 2002 has been one of strong global growth. Between 2003 and 

2007, the International Monetary Fund (IMF) estimate that world GDP grew by a total of 

21 per cent in real terms. This represents an average annual growth rate of 4.5 per cent, 

compared with an average of around 3 per cent since 1980. 

2.36 In April 2003, the IMF’s forecast for world GDP growth over the following three 

years was below 4 per cent a year. Similarly, the consensus view was that the advanced 

economies would lead the recovery following the 2001 recession, with the IMF 

forecasting annual Chinese GDP growth to be just 7 1⁄2 per cent in 2003-04. Instead, 

Chinese growth has been over 10 1⁄2 per cent since 2003, contributing to strong 

emerging market activity, which has outstripped growth in the advanced economies by 

even more than expected earlier this decade. 

2.37 The composition of world activity matters because energy intensity remains 

higher in the emerging economies than in advanced economies, as illustrated by Chart 

2.8. For example, China consumes twice as many barrels of oil to deliver a dollar’s worth 

of GDP, compared to the G7 economies. This means that as global growth will be driven 

by the emerging economies over coming years, that growth will be less resource 

efficient than equivalent growth in advanced economies. This is partly the result of 

these countries’ stage of development reflected by Chinese investment in African 

natural resources, but it does put more upward pressure on prices, partially offsetting 

the global energy efficiency gains of recent years. Although over time energy efficiency 

Chart 2.7: GSCI commodity price indices, in real terms by energy and non 

energy contributions 

Source: Goldman Sachs Commodity Index, US Bureau of Labor Statistics, HM Treasury calculations

Demand 

factors

Resource 

efficiency

0

5

10

15

20

25

30

35

40

45

Aug-01

Dec-01

Apr-02

Aug-02

Dec-02

Apr-03

Aug-03

Dec-03

Apr-04

Aug-04

Dec-04

Apr-05

Aug-05

Dec-05

Apr-06

Aug-06

Dec-06

Apr-07

Aug-07

Index

Non-energy Energy Total
2 TRENDS IN COMMODITY MARKETS 

20 Global commodities: long-term vision for stable, secure and sustainable global markets 

of emerging economies should continue to increase and converge towards advanced 

economies. 

2.38 On the supply side, there are a number of reasons why producers have not been 

able to increase supply sufficiently to meet rising demand at previously prevailing 

prices: 

• there have been restrictions on the immediate availability of supply. A 

number of conflict and weather related events have had an effect on some 

countries’ productive capacity. Political interference, and the effect of 

government policy, has also been a factor in limiting supply of some 

commodities; 

• producers have been slow to respond, in terms of investment in productive 

capacity, for a variety of reasons, including uncertainty about future 

demand, time lags and resource nationalism; 

• the increased cost of a number of inputs into the production process of 

commodities, such as freight, energy and labour, have reduced the return on 

investment in new production. The impact of oil prices on other commodity 

prices is discussed in Box 2.3; and 

• the depreciation of the US dollar and other financial market activity have 

also had an impact on commodity markets. The next section of this chapter 

will expand on some of these factors. 

Chart 2.8 Energy intensity of GDP 

Source: World Development Indicators, World Bank

Supply factors 

0

0.1

0.2

0.3

0.4

0.5

0.6

World

Italy

UK

Japan

Germany

France

US

Canada

Brazil

India

China

Russia

Kilogram of oil equivalent per unit of GDP 

(2000 ppp $)

1995 2005
 TRENDS IN COMMODITY MARKETS 2

Global commodities: long-term vision for stable, secure and sustainable global markets 21

Box 2.3: Impact of high oil prices on other commodity prices 

General impact on commodities

The price of most commodities is heavily linked to the oil price. Oil is often a component of the 

production function of most primary commodities. Some commodities have to go through an 

energy-intensive primary processing stage (e.g. metals such as aluminium). Other commodities can 

be used to produce substitutes for crude oil (e.g. maize and sugar for ethanol production or 

rapeseed and other oils for biodiesel production). In other cases, the main input may be a close 

substitute for crude oil, such as natural gas, which is used when making nitrogen fertilizer. 

Other energy commodities 

Gas and coal constitute key substitutes for oil products (fuel oil and gas oil) in the industrial, 

heating and power generation sectors. The higher oil product prices, the greater the incentive to 

switch to alternatives, and hence the greater the demand and price for alternatives. This 

substitution dominates the relationship between oil, gas and coal in the US. 

In Europe, the impact of oil prices on natural gas prices is mainly through the contractual terms 

between suppliers and consumers of gas. The impact is smoothed and lagged, with analysis 

showing a close linkage between a three month rolling average of oil prices, lagged six months, 

and the quoted price of gas at different entry points in Europea. 

Fossil fuel prices can also have a strong impact on electricity prices, as the wholesale price of 

electricity is typically determined by the short-run marginal costs of marginal power plants, which 

will differ in each country: for example in the UK this is typically gas-fired. 

Impact on food production

The exposure of agricultural products to changes in the oil price has been a key factor in the 

increase of food prices. Higher oil – and metal – prices have put upward pressure on food prices 

by increasing production costs, through high fuel, fertiliser, transport, packaging and processing 

costs. In the UK between 15 and 20 per cent of farm production costs are accounted for by fuel, 

fertilisers and pesticides.b Research from the World Bank estimates that a 10 per cent rise in 

crude oil prices translates into a 1.6 per cent increase in agricultural commodity pricesc. More 

recent findings from the IMF suggest that higher oil prices may explain as much as one-third of the 

increase in US corn prices and around one tenth of US soybean prices since January 2006. Higher 

oil prices also have the effect of stimulating the demand for alternative energy, feeding back once 

more into pressure for increased biofuels, with the potential impacts discussed in the food section 

of this chapter.

Impact on transport

As oil prices have increased, transport costs have increased, putting further pressure on 

commodity prices. The impact is particularly felt through shipping costs, which account for 96 per 

cent of world trade transport and 70 per cent of all the freight carried globally. Because fuel costs 

account for between a quarter and a third of variable costs for vessels, the recent rise in oil prices 

is likely to feed through to other commodities. Increased transport costs are a reflection of 

excess demand over supply: shipping is also supply inelastic in the short term, for example it takes 

around two years to build a new ship, and many ports are facing capacity pressures. 

_____________________ 

a Department for Business, Enterprise and Regulatory Reform

b Department for Environment, Food and Rural Affairs 

c Oil Spills on other Commodities, J. Baffes, World Bank Policy Research Working Paper 4333, August 2007 
2 TRENDS IN COMMODITY MARKETS 

22 Global commodities: long-term vision for stable, secure and sustainable global markets 

The role of financial flows in commodity markets 

2.39 Well-functioning financial markets are critical for well-functioning commodity 

markets.5 However, some commentators have argued that investment activity, shifting 

out of equities and mortgage-related products and into commodities, is causing 

commodity prices to inflate above their fundamental levels creating a ‘bubble’. 

2.40 Investors typically aim to hold a diversified portfolio of assets to reduce risks. A 

longer-term trend has been that institutional investors such as pension funds and 

insurance companies have been looking to diversify by investing more money into 

commodities. Since 2000, the level of investment in commodities has risen significantly 

so that commodity related assets are now regarded as an investment asset class in their 

own right. Chart 2.9 shows how the market has grown: the number of commodity 

contracts trading on exchanges has grown four-fold to reach around 1.7 billion, and 

over-the-counter derivatives have grown exponentially so that the notional value of 

outstanding contracts was US$9 trillion in 2007. 

 

2.41 The established ongoing shift into commodity assets has been accelerating since 

August 2007, most notably for oil, gold, copper and the main agricultural commodities.6

Data show that the move by investors away from US assets, particularly equities and 

asset-backed securities, coincided with a rise in the price of some, but significantly not 

all, commodities. There are a number of reasons for this. 

2.42 Commodities have traditionally been a comparatively attractive investment 

during periods of economic uncertainty. Studies show that commodity-related assets 

have been negatively correlated with the price movements of other assets, and with the 

economic cycle.7

 The current trend may have been strengthened by the combination of 

slowing growth and financial turmoil in advanced economies and continued 

commodity-intensive growth in emerging economies. 

5 For elaboration, see: UK discussion paper on the European Commission’s review of the financial regulatory framework for commodity 

and exotic derivatives, HM Treasury and Financial Services Authority, December 2007 

6 Bloomberg, Reuters and HM Treasury calculations 

7 See for example: Growth in commodity investment: risks and challenges for commodity market participants, Financial Services 

Authority, March 2007 

Investors are 

moving into 

commodity 

markets

Chart 2.9: Commodity derivative trading

Source: Based on the Bank of International Settlements interpretation of commodity derivatives

Exchange-traded commodity trading

0

200

400

600

800

1000

1200

1400

1600

1800

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Number of contracts, millions

Over the counter (OTC) trading

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Notional value outstanding, US dollars billions, end-year*

Gold Other precious metals Other commodities
 TRENDS IN COMMODITY MARKETS 2

Global commodities: long-term vision for stable, secure and sustainable global markets 23

2.43 Inflation uncertainty further increases the attractiveness of commodities. An 

inflationary environment prompts investors to move toward real assets, such as 

commodities and real estate, to hedge against an erosion of the value of money. 

2.44 Commodity prices have also traditionally been closely affected by the value of 

the US dollar, with knock-on impacts for their attractiveness to investors. The IMF 

calculates that, in the long run, a 1 per cent depreciation of the US dollar is associated 

with increases for dollar-denominated gold and oil prices of more than 1 per cent. A 

similar if less pronounced pattern is seen for other commodities.8 Recent trends 

conform to this long-term pattern. 

2.45 Dollar depreciation can make commodities cheaper in non-dollar regions, 

thereby stimulating their demand and depressing supply. If the depreciation is 

associated with lower interest rates in the US, then this will further depress commodity 

supply by lowering the opportunity cost of delaying extraction. 

2.46 In addition, dollar depreciation can increase the overall relative attractiveness of 

commodities as an asset class. This is because returns on US financial assets will fall 

when repatriated in foreign currencies. Also, if the depreciation is associated with lower 

interest rates then US Treasury bills and bonds become less attractive alternatives. 

2.47 These factors – portfolio diversification, inflationary uncertainty and US dollar 

depreciation – help explain the growth in investment activity in commodity derivative 

markets, but they do not explain why commodity prices have risen so rapidly over the 

same period, or whether increased investor activity has played a role. Box 2.3 reviews 

the available evidence of the impact of investor activity in itself, and in particular the 

role of so-called speculators. It finds that investment activity in the financial markets is 

not driving prices, although in following them it could in the short term be having a 

small and transitory impact. It notes however, that it is difficult to find conclusive 

evidence and that there are limitations in the data. 

2.48 It is more likely that wider uncertainty about fundamentals in the commodities 

market and tight supply conditions are driving price levels and volatility in the market. 

In the case of oil, continued pressure on existing capacity has forced producers along a 

steeply upward-sloping short-run marginal cost curve, as the cost of extraction and 

other investment has increased sharply.9 Buffers against supply shocks are low because 

sustained demand growth and production problems have reduced spare capacity and 

put pressure on inventories. This will lead to a greater pass through of shocks to prices 

and so enhancing price volatility. A similar pattern is observed for other commodities; 

for example, the global food market is traditionally comparatively thin. 

2.49 Market uncertainty about future supply conditions may also lead to producers 

demanding a higher risk premium to increase supply in the market. This will, in turn, 

feed through to higher prices. This points to fundamentals in the commodity market 

impacting on investor behaviour in determining prices rather than investor activity 

itself. In turn, this implies the correct policy response should focus on tackling these 

fundamental demand and supply conditions. These fundamentals are discussed in 

more detail in the rest of this chapter. 

8 World Economic Outlook: Housing and the Business Cycle, International Monetary Fund, April 2008 

9 The Revenge of the Old Political Economy, Goldman Sachs, March 2008 

Increased 

investment 

activity does 

not 

necessarily 

increase prices
2 TRENDS IN COMMODITY MARKETS 

24 Global commodities: long-term vision for stable, secure and sustainable global markets 

Box 2.4: Investment activity and commodity prices 

A well-functioning financial derivatives (e.g. future and options) market supports a well-functioning 

commodities market. Speculation, hedging and arbitrage, are all important elements of this. 

Commodity consumers typically want to offset the future risk of rising prices; producers the 

future risk of falling prices. Investment activity helps offset these positions, allowing producers and 

consumers to manage risks. Investors engaging in speculation activity also have a strong financial 

incentive to bring all available information to the market, and thereby facilitate the price discovery 

function of the market. 

Investors engaging in commodity derivatives need not, in principle, have any effect on the 

underlying physical demand and supply for commodities, and therefore its spot price.a This is 

because these investors do not need to take actual delivery of crude oil or grain; in fact, most 

investors settle their contract before delivery, either by selling the contract to a genuine 

consumer or settling with cash. 

However, the relationship is more complicated than this. Futures markets can signal expectations 

about the future direction of prices and can influence a producer’s decision whether to hold on to 

inventories. This can, in turn, feed through to the spot price. It is therefore necessary to test the 

available evidence to understand better the relationship between investment activity and prices: 

• the data show no consistent relationship between rising investment activity and prices 

across commodities. For example, the price of nickel has fallen by half recently, but at the 

same time investment activity in the metal has increased; while the scale of net buyers in 

oil is similar to last July when prices where half of what they are today. So there appears 

to be no clear correlation between investment activity and prices. 

• a comparison of the prices of metals which are exchange-traded and non-exchange traded 

(and so cannot be easily influenced by investment activity), shows little difference in price 

performance, suggesting that other non-financial or structural factors are driving prices in 

metals. 
 TRENDS IN COMMODITY MARKETS 2

Global commodities: long-term vision for stable, secure and sustainable global markets 25

Oil 

2.50 The past six years have seen a significant increase in oil prices. From a low of 

US$18 per barrel after the September 2001 terrorist attacks, oil has ended each year 

higher than it started and has risen to more than US$130 per barrel in recent weeks. 

This unprecedented rise has reflected a broad range of factors, discussed below. 

• econometric analysis finds that, in most cases, high and rising prices attract investors into 

the market, not the other way around. When it is found to run in the opposite direction, 

it is weakly significant and short term.b 

• although investor interest has increased substantially, market participants tend to 

emphasise the longer term nature of the increase in flows reflecting their desire to 

diversify their portfolios, and argue that recent months are little different in that regard. 

In addition, were financial market activity itself driving higher commodity prices, it might be 

expected that inventories would be increasing as prices would be above that required to clear the 

spot market. However, current data shows that inventories, which for food commodities have 

been low for some time, have continued to fall or remain stable. This reflects fundamentals in the 

market discussed in more detail later in this chapter. 

In considering the impact of market activity, no accurate data exists to distinguish between 

different types of market actions. The only available data to examine the role of speculation in 

commodity markets is the US Commodity and Futures Trading Commission (CFTC) data on 

‘non-commercials’. This represents only a subset of all likely financial activity. There remains a 

need for sufficient information on financial flows into commodity derivatives to ensure an accurate 

understanding of market developments. 

Nevertheless, taken together the available evidence suggests that derivative investors are not 

driving price increases and, although there is insufficient evidence to conclusively rule out any 

impact, it is likely to be only small and transitory relative to fundamental trends in demand and 

supply for the physical commodities. 

_____________________ 

a In fact, fewer than 2 per cent of futures contracts result in physical delivery. Source: Commodities Trading 2008, International 

Financial Services London, June 2008 

b See, for example: Box 5.1 of Chapter 5 in World Economic Outlook: Financial Systems and Economic Cycles, International Monetary 

Fund, September 2006 

Rising prices
2 TRENDS IN COMMODITY MARKETS 

26 Global commodities: long-term vision for stable, secure and sustainable global markets 

2.51 Global oil demand has been on an upward trend since the mid-1980s, and has 

increased by 10 per cent since 2002. Unlike episodes in previous decades where 

demand growth in the advanced economies has driven changes in world oil demand, 

the emerging markets particularly China, India and the Middle East have propelled 

recent demand growth, as illustrated by chart 2.11. 

2.52 As explained in the previous section, this shift in the balance of demand is 

important because, the responsiveness of demand to income varies inversely with the 

level of income, and as such is higher in emerging markets than advanced economies. 

The International Energy Agency (IEA) estimates that a sustained 10 per cent increase in 

incomes would increase oil demand by over 70 per cent in developing Asia, compared 

to around 20 per cent in North America.10 While demand from the OECD countries did 

increase in the early phase of the price boom, 2002-2004, it has subsequently contracted 

in response to higher prices, illustrating the greater responsiveness of demand to price 

within OECD countries. This is in contrast to countries where consumers have been 

shielded from the full pass-through of price changes. 

10 World Energy Outlook, International Energy Agency, November 2006 

Chart 2.10: Nominal price of Brent Crude 

Sources: IntercontinentalExchange

Robust 

emerging 

market 

demand

0

20

40

60

80

100

120

140

160

2002 2003 2004 2005 2006 2007 2008

$ per barrel
 TRENDS IN COMMODITY MARKETS 2

Global commodities: long-term vision for stable, secure and sustainable global markets 27

2.53 Policy measures, such as price controls and subsidies, aimed at addressing 

socio-economic objectives including poverty and equitable access to basic economic 

necessities have also played a role in the recent period of strong demand growth. The 

available estimates indicate that that almost a quarter of the world's petrol is sold at less 

than the market price as a result of fuel subsidies.11 Such subsidies inhibit the automatic 

stabilisation that should occur through changes in consumption as a result of price 

movements, while resulting in a deterioration of government fiscal positions. Using 

2005 data, the International Energy Agency has previously estimated that global energy 

consumption subsidies are likely to be of magnitude of $250 billion per year.12

2.54 In response to rising demand and prices, oil production has increased by 11 per 

cent since 2002. OPEC, which provides approximately 40 per cent of the world’s oil 

supply, has been responsible for much of this growth, providing the market with 25 per 

cent more oil in 2007 than in 2002. In contrast, supply from non-OPEC countries has 

only increased by 3.5 per cent over the same period.13

2.55 The increase in supply has not, however, been enough to prevent the overall 

balance of demand to productive capacity tightening in recent years. Reasons for this 

include the long lags involved in increasing oil production and short-term supply 

disruptions, both natural and artificial. 

2.56 As set out earlier in this chapter, there is nothing new in short-term supply 

shocks affecting oil prices. These have had an important impact on recent price rises, 

including weather-related disruptions, and geopolitical tensions, in particular in the 

Middle East and Africa. Security risks particularly affect oil supply because production 

is concentrated in regions affected by instability and, over the longer term, whether 

because of economic sanctions or security threats, this constrains the flow of 

investment. 

11 Enjoy the Energy Subsidies While You Can, Morgan Stanley, May 2008 

12 World Energy Outlook, International Energy Agency, November 2006 

13 Oil Market Report, International Energy Agency, various editions 

Chart 2.11: Global oil consumption. 

Source: World Economic Outlook, International Monetary Fund, April 2008

Supported by 

subsidies

Supply is 

responding

Short-term 

supply 

disruptions

-1

0

1

2

3

4

2002 2003 2004 2005 2006 2007 2008

Consumption growth, 

million barrels per day

72

74

76

78

80

82

84

86

88

Global consumption, 

million barrels per day

United States Other advanced economies China Other Emerging and Developing Economies
2 TRENDS IN COMMODITY MARKETS 

28 Global commodities: long-term vision for stable, secure and sustainable global markets 

2.57 In addition to weather and geopolitical related disruptions, supply to the market 

is partly determined by OPEC and other producers’ behaviour. Accounting for over 40 

per cent of contemporary global production, the setting of production quotas by OPEC 

influences the overall demand-supply balance at any one time and the building of 

inventories. Although there is little consensus on the exact influence OPEC has had 

since 

the 1980s, it is clear that this influence varies over time and has decreased in recent 

years as: 

• the futures market’s role in price discovery has grown - OPEC’s influence on 

prices is now dependent on the expectations of participants in the futures 

market. Specifically, the effectiveness of an OPEC signal will depend on the 

whether the market believes that OPEC is able to undertake the necessary 

output adjustment; and 

• spare capacity has decreased - when most OPEC members are producing at 

or close to their maximum capacity, OPEC has little influence on oil prices. 

This can be compounded by market scepticism about OPEC’s spare capacity 

and its ability to raise production. In the absence of significant spare 

capacity (i.e. above 3 per cent of global supply), prices are increasingly set by 

marginal demand.14

2.58 There are a number of investment related reasons why productive capacity has 

not kept pace with the rise in demand. Key among these is the time lag it takes to bring 

new supply to market, up to ten years in most instances, and rising production costs 

due to shortages in skilled labour and specialist equipment. The cost of developing a 

new oil field is estimated to have doubled in the last four years.15 As a result the real 

value of investment into oil production has been eroded, reducing the number of 

barrels produced per dollar of investment. 

14 OPEC pricing power: the need for a new perspective, B. Fattouh, Oxford Institute for Energy Studies, Working Paper 31, 

March 2007 

15 Upstream Capital Cost Index, Cambridge Energy Research Associates 

Chart 2.12: Global oil productive capacity and supply 

Source: World Economic Outlook, International Monetary Fund April 2008. 2008 figure: Oil Market 

Report, International Energy Agency, May 2008

Investment 

costs are 

rising

-2

-1

0

1

2

3

4

Supply growth, million barrels per day

2002 2003 2004 2005 2006 2007 2008

75

77

79

81

83

85

87

89

91

Global supply, million barrels per day

Saudi Arabia Other OPEC CIS Other Non-OPEC Productive Capacity Global Demand
 TRENDS IN COMMODITY MARKETS 2

Global commodities: long-term vision for stable, secure and sustainable global markets 29

2.59 There are also a number of pressure points within the system. In particular, 

there is an increasingly significant mismatch in the quality of global crude oil supply, 

which is becoming increasingly heavier, and existing refinery capacity, which is mostly 

designed to handle lighter crudes. This influences the price dynamics in both crude oil 

and oil product prices, and is incentivising increased investment in the refinery sector, 

contributing to the rising demand for materials and labour. 

2.60 However, many of the factors that have constrained investment in recent years 

reflect long-term imperfections in the market. These can be characterised in terms of 

disincentives to investment and barriers to investment. 

2.61 The ongoing negotiations regarding global climate change policy has 

contributed to uncertainty over future oil demand, which acts as a disincentive for 

further investment in oil supply. The lack of credible demand projections and robust 

and timely data on key oil market data such as demand, supply, inventories, investment 

and reserves exacerbates this uncertainty. 

2.62 At the same time uncertainty about security, political and regulatory stability in 

producer countries can also affect incentives for oil companies to invest significant 

sums in upstream exploration and development. Recent experiences in Venezuela, 

Russia and legal uncertainty within Iraq underline the significance of stable and 

predictable regulatory frameworks in oil markets. 

2.63 Leading from this there are a number of factors that are acting as further 

barriers to investment. The share of reserves that are now under the control of National 

Oil Companies (NOCs) has been increasing since the 1970s and is expected to continue 

to do so. This has significantly limited the ability of International Oil Companies (IOCs) 

to develop new reserves, constraining the flow of both capital and technology into oil 

production. In some cases, NOCs face constraints on both the level and complexity of 

production they can undertake, including competing wider domestic socio-economic 

priorities, reducing productive efficiency of the supply chain. A desire to save oil for 

consumption for future generations may also motivate slower investment in some 

countries, though this assumes that oil will act as a store of value over time, which may 

not be the case with the development of alternative energy sources. 

2.64 More generally, wider regulatory barriers such as obtaining planning permission 

and licenses can also impact investment by preventing it, slowing it down, or increasing 

its cost. 

2.65 The range of factors limiting access to low cost reserves has increasingly led 

IOCs to focus on development of marginal fields, characterised by increasing geological 

complexity, and non-conventional sources of oil, both involving increased 

technological challenges. 

2.66 With continuing demand pressure, there are a number of consequences on the 

oil market resulting from the continuing slow supply and investment response, in 

particular reducing spare capacity and, increasing pressure on inventories. Both spare 

capacity and inventories provide important buffers to deal with supply shocks or swift 

increases in global oil demand, mitigating the risk of a physical supply disruption to 

consumers and price volatility. Inventories can also provide a timely indicator of the 

fundamental balance between demand and supply. 

2.67 It is important to recognise that maintaining spare capacity carries a high 

opportunity cost, and would be unlikely to exist to any significant degree in a fully 

Disincentives 

to invest

Barriers to 

investment
2 TRENDS IN COMMODITY MARKETS 

30 Global commodities: long-term vision for stable, secure and sustainable global markets 

liberalised market as it is inconsistent with efficient capital allocation and the principle 

of maximising shareholder value. 

2.68 Maintaining inventories also comes at a cost, though consumers will want to 

maintain some inventories as a buffer against supply disruptions in order to ensure 

continuity of production runs. At the international level, the IEA coordinates its 

members’ response systems, which include the holding of inventories, to mitigate 

physical supply shortfalls; but not price increases. 

2.69 Oil producing countries have had to draw heavily on previously spare capacity 

to meet demand. The effect of this has been a significant reduction in the level of spare 

capacity held by OPEC members, as illustrated by chart 2.13. 

2.70 As spare capacity falls, the importance of inventories as a market buffer can be 

expected to increase further. However, as illustrated by Chart 2.17, the overall level of 

OECD inventories has remained broadly constant over the last five years, while demand 

has increased. However, the OECD only accounts for around half of total consumption, 

having fallen over time as demand from non-OECD countries has increased. The most 

recent data for several major non-OECD consumers, shows clear signs of draw downs of 

inventories in these countries, in aggregate, in the second half of 2007 and, tentatively, 

in early 2008 as well. Despite their participation in the Joint Oil Data Initiative (JODI), 

the lack of timely and robust data from the major consuming countries makes it 

difficult to accurately assess the inventory picture. 

Reducing 

spare capacity

Chart 2.13: Effective OPEC spare capacity and OECD inventories 

Source: Oil Market Report, International Energy Agency, various editions 

2000

2100

2200

2300

2400

2500

2600

2700

2800

2900

3000

2002 2003 2004 2005 2006 2007 2008

Total OECD inventories, million barrels

0

2

4

6

8

10

12

Effective OPEC spare capacity, % of global supply

Previous 5 year - range OPEC spare capacity (rhs) Actual Inventories Previous 5 year average
 TRENDS IN COMMODITY MARKETS 2

Global commodities: long-term vision for stable, secure and sustainable global markets 31

2.71 With spare capacity significantly below historical averages, the overall size of oil 

market buffers has decreased in recent years. As discussed earlier in the chapter in the 

context of financial markets, as a result the market is more sensitive to short-term 

uncertainty and supply disruptions, which implies an increasing risk premium within 

the oil price and the potential for greater volatility. This is likely to be reinforced by 

market concern about the factors limiting the level of future investment. 

Other energy 

2.72 Since 2002, UK natural gas prices have nearly trebled. Natural gas prices in 

Europe and the US are also more than two to three times higher than their levels in 

2002. There have also been several price spikes during this period. For example US 

prices also ‘spiked’ in 2005 and 2006 due to Hurricanes Rita and Katrina damaging 

natural gas production, pipeline and processing facilities in the Gulf of Mexico area. The 

resulting shortages in supplies, coupled with higher winter demand, resulted in 

historically high natural gas prices in the US. In addition over the same period, natural 

gas prices also reached their highest levels historically in the UK. This was primarily 

because of tight supply conditions specific to the UK leading to a spike in UK prices. 

2.73 However, most, if not all, of the recent increases in natural gas prices in the UK 

as well as globally are attributable to increases in oil prices (with a small impact from 

seasonality). This relationship is discussed in Box 2.3. 

2.74 From 2001-02 onwards there has been strong growth in the international LNG 

trade, which has grown from a very small base at roughly double the rate of 

international trade in piped natural gas. This increase in global trade of natural gas has 

led to prices being more responsive to supply and demand fundamentals. However, it is 

unlikely that the link between oil and natural gas has been altered significantly due to 

the recent increase in LNG trade, as pipeline trade still dominates gas markets. This 

may change over time, as LNG’s share of the world market grows. 

Chart 2.14: Selected non-OECD monthly inventory changes 

Selected consumers vehicle: China, Chinese Taipei, Thailand, Philippines and South Africa 

Source: Joint Oil Data Initiative

Natural Gas

-15

-10

-5

0

5

10

15

20

25

2006 2007 2008

million barrels

Products Crude Total Oil
2 TRENDS IN COMMODITY MARKETS 

32 Global commodities: long-term vision for stable, secure and sustainable global markets 

Food 

2.75 After 30 years in which global food prices have fallen in real terms, there has 

been a strong increase in food prices since 2006. This has been particularly pronounced 

in the markets for maize, rice, soybeans and wheat, where nominal prices increased 

between 95 per cent and 152 per cent respectively in the period from March 2006 to 

March 2008, as Chart 2.15 illustrates. However, despite these sharp increases, prices 

experienced over recent months are still far below the levels experienced in the 1970s in 

real terms. 

2.76 Historically price increases have been uneven across different foods, as 

producers substitute out of low priced foods into high priced ones in the next planting 

season, thus pushing some prices downwards and others upwards. One of the features 

of the current situation is that prices of all key staples have been high simultaneously. 

2.77 Determining the driving forces and underlying factors behind these price 

increases is difficult and complex, with a mix of interrelated demand and supply factors 

having played a role. 

2.78 Beyond the structural effect of population growth, a recent driver of demand has 

been the effect of rising per capita incomes, particularly in China and India, which tend 

to shift consumer preferences towards more protein products such as meat, dairy and 

vegetable oils. Per capita meat consumption in China is now 50kg of meat per year, 

compared with just 20kg in 198516. These products can push up aggregate agricultural 

demand because of the resource intensity of turning grain into meat. 

16 Tackling the challenge of rising food prices: Directions for EU action, Communication from the Commission to the European 

Parliament, the Council, the European Economic and Social Committee and the Committee of the regions, May 2008 

Chart 2.15: Food Indices 

Source:: Goldman Sachs Commodity Index (GSCI)

Demand side 

pressures

0

50

100

150

200

250

300

350

400

2005 2005 2006 2006 2007 2007 2008

Livestock Soybeans Sugar Maize Wheat
 TRENDS IN COMMODITY MARKETS 2

Global commodities: long-term vision for stable, secure and sustainable global markets 33

2.79 Growing demand for biofuels which has shifted land from crops devoted to food 

to those for fuel. Emerging evidence suggests that, while biofuels cannot explain the 

recent surge in food prices, they seem to have been an important contributing factor. 

For example, research from the IMF estimates that maize-based ethanol accounted for 

three quarters of the increase in demand for maize and could explain one quarter of the 

increase in demand for the four major cereal crops between January 2006 to March 

2008. In the US, around 30 per cent of the corn harvest next year is expected to be 

turned into biofuels, a rapid expansion on past years, as Chart 2.16 demonstrates. 

2.80 As with previous price shocks, a significant determinant in the recent food price 

rises has been the impact of bad weather creating supply shortfalls in a number of 

important producing and exporting countries. With poor harvests in 2006, global 

production fell by 6 per cent compared with the previous year. This was exacerbated by 

the fact that levels of international inventories were already below their long-term 

average and resulted in a nominal price increase of around 20 per cent. In 2007, with 

inventories further depleted and demand increasing, further bad weather hit food 

exporting countries and regions, such as Australia, the US and Canada, restricting 

supply further, and leading to further sharp price increases across a range of 

agricultural commodities. For example, Chart 2.17 shows how Australian wheat 

production fell in both 2006 and 2007. While it is too early to attribute this to climate 

change, it provides an example of the potential future risks to global food production, 

discussed later in this chapter. 

Biofuels

Chart 2.16: Demand for major food crops 

Notes: 2008 is a forecast. Major food crops are wheat, corn, rice and soybeans 

Source: World Economic Outlook, International Fund, April 2008

Temporary 

supply-side 

factors 

-20

0

20

40

60

80

Avg 1995-

2000

2001 2002 2003 2004 2005 2006 2007 2008

Demand growth, million tonnes

Other Emerging and Developing Economies China Industrial Countries Corn Used in US Ethanol Production
2 TRENDS IN COMMODITY MARKETS 

34 Global commodities: long-term vision for stable, secure and sustainable global markets 

2.81 Alongside the weather-related supply shock, a number of countries have 

responded to high food prices by introducing policies aimed at reducing prices 

domestically. These have ranged from generally positive measures such as reducing 

import tariffs, to costly consumer subsidies and harmful beggar-thy-neighbour export 

restrictions that achieve their short-term aims at the expense of further raising world 

prices while dulling domestic supply responses. IMF analysis suggests that recent 

export restrictions in some of the major rice exporters may have accounted for as much 

as half of this year’s price increases. 

2.82 In the wheat market, export restrictions in Argentina, Russia, Ukraine and 

Kazakhstan affected around a third of the supply to the global wheat market. Ukraine’s 

ending of its export ban has contributed to recent falls in global wheat prices, 

emphasising the damaging effect of beggar-thy-neighbour strategies. Table 2.1 sets outs 

a number of examples of these policies. 

Table 2.1: Policy measures introduced by selected countries 

Export restrictions 

e.g. export bans and increased 

export taxes 

Argentina, Bolivia, Brazil, Cambodia, China, DRC, Egypt, Guinea, 

India, Indonesia, Kazakhstan, Pakistan, Russia, Ukraine 

Price measures 

e.g. subsidies 

Bangladesh, China, Colombia, Ecuador, Egypt, Mexico, Morocco, 

Pakistan, Peru, Zambia 

Chart 2.17: Australian Wheat Production 

Source:: Goldman Sachs Commodity Index (GSCI)

Policy driven 

developments

0

5,000

10,000

15,000

20,000

25,000

30,000

1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Production, thousand tones
 TRENDS IN COMMODITY MARKETS 2

Global commodities: long-term vision for stable, secure and sustainable global markets 35

2.83 In addition to the temporary supply side effects described above, there are a 

number of areas where the specific structural characteristics of the agricultural sector 

tend to make it more vulnerable to price volatility. 

2.84 One aspect of this is that for some food types, such as rice, the world market is 

particularly thin. For example, for the period 1998-2002, the proportion of world rice 

production traded internationally (4 per cent) was much less than for maize (14 per 

cent) and wheat (17 per cent).17 In thin international markets, even relatively limited 

supply shocks in a significant producing country can have a proportionately much 

greater impact on the balance between international demand and supply. 

2.85 In many parts of the world, there are market restrictions on openness, while 

agricultural land, labour and capital markets do not function as efficiently as they could. 

This matters because it will affect the level of agricultural production in the face of any 

given set of international prices, and the speed with which global agricultural supply 

responds to changes in those prices. This includes the Common Agricultural Policy 

(CAP) in the European Union (EU), as discussed in Box 2.5. 

2.86 The level of productivity is a critical factor in determining long term supply. The 

past half-century has seen dramatic improvements in agricultural yield growth, with, 

for example meat and sugar production having increased over six-fold. However, in 

recent years there has been a slowing down of growth in cereal yields, which poses a 

significant challenge for the agricultural community in a number of ways. 

2.87 Firstly, there is widespread disparity across the globe in the quality of the 

infrastructure to produce and transport food, impacting on food wastage and 

productivity. Post-harvest crop losses have been reduced significantly in the past 50 

17 Food and Agriculture Organisation of the United Nations 

Wider

structural 

issues 

Openness 

Box 2.5: The role of the Common Agricultural Policy

A significant part of the CAP is geared towards keeping EU agricultural market prices higher than 

they would otherwise be. In particular, the import tariffs necessary to support this system are still 

very high. Whilst the average tariff for non-agricultural goods is 4 per cent, for agricultural goods 

it is around 20 per cent, with tariffs of 70 per cent or more not uncommon for core CAP 

commodities such as sugar, dairy and beef. 

A combination of the CAP and agricultural trade barriers cost EU consumers approximately €43 

billion in 2006. In the UK the average household spends 10 per cent of its expenditure on food, 

rising to 15 per cent for the poorest households. In poorer Member States food accounts for an 

average of 30 per cent or more of household income. 

Because the CAP isolates the EU market from global prices, the impacts of the CAP on the EU 

and international prices are distinct. Whilst the CAP and EU agricultural import tariffs have not 

been a cause of EU price inflation, they do mean that the recent food price inflation has been from 

a higher base. 

Global prices may be modestly tempered by the over-production that results from protecting EU 

farmers from global markets. But this is not positive for global food security, however, as 

(together with higher levels of international price volatility caused by the CAP) it tends to 

disincentivise production elsewhere around the world, particularly in the developing world. 

Improving 

productivity
2 TRENDS IN COMMODITY MARKETS 

36 Global commodities: long-term vision for stable, secure and sustainable global markets 

years. Nevertheless, about 25 per cent of total food products are still lost worldwide 

during the post-harvest period.18 

2.88 Secondly, there is insufficient investment in research. A US Department for 

Agriculture study showed that 75 per cent of the growth of US agricultural productivity 

between 1949 and 1991 was due to public investment in agricultural research and 

development and infrastructure. Developing countries invest only 0.56 per cent of their 

agricultural GDP on research and development (R&D) – including donor contributions 

– and only around 6 per cent of total global private investment spend takes place in the 

developing world, compared to over half in industrial countries. There are many 

reasons for this – including weak enforcement of property rights and overall investment 

climates, trade distortions and scale effects, particularly for smaller countries. With over 

90 per cent of global R&D conducted in developed countries and the research agenda 

shifting away from productivity towards environmental issues, food quality and safety, 

the traditional spillovers that have benefited poor countries cannot be taken for 

granted. 

2.89 Thirdly, there are challenges in developing the next generation of innovations to 

improve agricultural yields. Conventional plant breeding has improved yields 

dramatically in recent decades, and there will need to be continued progress in the 

development of more productive conventional crops. Alongside this, genetically 

modified (GM) technology is an additional tool that could provide significant benefits in 

the future, for example through crops with improved yields under high stress 

conditions or higher vitamin content. Current GM crops have improved insectresistance and weedkiller-resistance traits which make cultivation easier for farmers in 

crops such as soybeans, maize and oilseed rape. Several developing countries are 

already growing the existing types of GM crop, and it is their farmers who would stand 

to benefit most from further GM traits that are under development such as droughtresistance. 

2.90 There are also increasing uncertainties and limitations to the amount of new 

land that can be taken into cultivation over the long term, in particular in terms of 

environmental sustainability in responding to climate change. These issues are 

discussed in more detail in Chapter 3. 

2.91 Much of the world also suffers from poor water resource management. Good 

irrigation is critical to food production, especially in countries with variable and limited 

rainfall, which, as this document has shown is likely to be increasingly common under 

the effects of climate change. 

2.92 By its very nature agriculture relies on climatic and biological processes, which 

give rise to yield variability and supply lags, which are likely to be intensified with 

climate change. A wide range of options exist that allow farmers to manage risk. But 

many farmers, particularly those in developing countries often do not have access to 

the more sophisticated capital markets or scope for economic diversification. 

Other commodities 

2.93 Increased demand from China has been a clear driver of the strong increases in 

industrial metals in the past five years. IMF analysis finds that China was responsible for 

more than 50 per cent of the growth in world consumption of industrial metals between 

2002 and 2005. These high growth rates, in excess of China’s contribution to world GDP 

18 Encyclopaedia of Pest Management, Edited by D. Pimental, Cornell University, 2002 

Land use and 

environmental 

sustainability

Managing 

agricultural 

risk
 TRENDS IN COMMODITY MARKETS 2

Global commodities: long-term vision for stable, secure and sustainable global markets 37

growth over the period, highlight the intensity of commodity-reliant industrial 

production within China’s expansion. China has surpassed the EU and US in terms of 

its share of demand for many key metals, and is now estimated to account for around a 

third of industrial metals consumption overall.19 However, hard commodities are a key 

input into manufacturing and Chinese production has helped keep goods prices down 

in OECD countries. 

2.94 The sharp rise in industrial metals prices over the period is also the result of an 

inability of supply to rapidly respond to increasing demand. Low and falling real prices 

of industrial metals throughout the 1990s led to underinvestment and a limited 

expansion of capacity. While investment has since increased, long lag times mean that 

this new supply is only now coming on-stream. This has also been exacerbated by 

several short-term supply shocks in key producing countries, including miners’ strikes, 

legal challenges to projects, and other unanticipated disruptions. 

FORWARD LOOKING ANALYSIS OF COMMODITY MARKETS 

General 

2.95 Commodity prices are notoriously hard to forecast, even over relatively short 

period. Analysts usually follow two broad approaches. One strategy is to look at the 

prospects for growth in a range of fundamental drivers of demand and supply, which 

will jointly determine prices. An alternative approach is to use data from financial 

market futures contracts to derive the implied price of commodities. Both methods 

have caveats: supply fundamentals, in particular, are often very difficult to disaggregate 

from one another, while futures contracts have typically been very unreliable as 

forecasting instruments. 

2.96 In the UK, HM Treasury requires a forecast of oil prices to underpin Budget and 

Pre-Budget Report public finance projections. It uses a forecasting assumption that is 

audited by the National Audit Office and is based on the consensus view of external 

forecasters presented in Forecasts for the UK economy: A comparison of independent 

forecasts. At the time of Budget 2008, the average independent forecast was for oil to 

average US$83.8 a barrel during 2008. The latest average, published in May 2008, is for 

oil prices to average US$101.5 per barrel during 2008 and US$93.1 in 2009.20

2.97 There has been a marked increase in market uncertainty regarding the future 

path of commodity prices. This is partly a result of the recent increase in daily price 

changes in commodity prices. 

2.98 Notwithstanding these difficulties, on balance experts and the market are not 

predicting significant further rises in commodities prices over the rest of the year, 

although in the case of oil there is a particularly wide range of uncertainty. The overall 

picture for commodities reflects the expected moderation in world GDP growth as a 

result of the credit crisis that originated in the US housing market in the summer of 

2007 and the wider macro-economic impacts of high oil prices. This should, all else 

equal, lead to lower demand for commodities and therefore lower prices. 

19 World Bureau of Metal Statistics 

20 See www.hm-treasury.gov.uk 

Forecasting 

uncertainty
2 TRENDS IN COMMODITY MARKETS 

38 Global commodities: long-term vision for stable, secure and sustainable global markets 

2.99 In their recent World Economic Outlook, published in April 2008, the IMF 

expected commodity prices to remain at the current levels for the immediate future. 

Their forecast is for the prices of energy, food and agricultural raw materials to remain 

flat up to the end of 2009. Metals prices are forecast to increase in the very short term 

and then to start falling gradually from the second half of 2008. Futures markets are 

consistent with this forecast. 

2.100 Beyond this, the fundamentals of demand are not expected to moderate 

significantly. Population growth is projected to remain high: chart 2.18 shows that by 

2050, world population is expected to be 40 per cent higher than in 2005, relative to 

population growth of about 30 per cent between 1985 and 2005. 

2.101 Significantly, much of the increase in population and productivity, and 

therefore the expansion in world economic activity, is expected to come from the 

emerging and developing economies. The most recent IMF forecast of GDP growth 

between 2008 and 2013 confirms that most of the increase in world output is expected 

to come from the emerging economies.21 

2.102 As set out earlier in this chapter, as these economies have a greater energy 

intensity of production, so commodity demand should be expected to increase 

significantly. This may be moderated by the impact, particularly in more advanced 

economies, that higher prices may have on incentives for consumption efficiency and 

preferences for commodity-intensive goods. Overall, as population growth and rising 

incomes are comparatively given, the rate of improvement in resource efficiency will be 

a critical variable factor in determining future demand – with improved energy 

efficiency and diversification of energy sources key. 

2.103 These future demand growth factors will mean that it will be an ongoing 

challenge for supply to match demand at affordable prices. This will be particularly the 

case if there are any positive demand surprises, which will leave suppliers subjected to 

the usual slow responses in production and extraction. 

21 World Economic Outlook: Housing and the Business Cycle, International Monetary Fund, April 2008 

Fundamentals 

of demand 

rising

 Chart 2.18: World population projections 

Notes: More developed regions refers to all regions of Europe plus North America, Australia, New Zealand 

and Japan. Less developed regions refers to the rest of the world excluding the more developed regions. 

Source: United Nations, Department of Economic and Social Affairs, Population Division

Importance of

resource 

efficiency

Supply 

challenges

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Millions of people

More developed regions Less developed regions Total
 TRENDS IN COMMODITY MARKETS 2

Global commodities: long-term vision for stable, secure and sustainable global markets 39

2.104 As set out earlier in this chapter, there are significant long-term challenges 

constraining responsiveness of supply in both food and oil markets, which will 

determine if increased demand expectations can be met without significant increases in 

prices. For example: 

• without further openness, commodity markets will struggle to meet 

increased demand, and be prone to volatility; 

• barriers and disincentives to investment threaten future food and 

particularly energy security. There are a number of informational, political 

and regulatory barriers that are limiting the ability of new investment in 

supply; 

• existing inventories and resources will need to be managed in a more 

productive way; and 

• a key challenge will be to deliver significant technological progress to 

improve the efficiency of production of both energy and food. 

Oil 

2.105 As with commodities generally, the short-term outlook is subject to 

considerable uncertainty. Uncertainty exists over demand growth, the potential for 

additional delays in bringing new supply on-stream, short-term supply disruptions and 

currency movements. As Chart 2.19 illustrates, these combine to make the short-term 

price outlook difficult to forecast with any accuracy, as the wide distribution of the 

independent forecasts show. 

2.106 Several factors point to a possible falling back in prices towards the end of 2008, 

including an expected decline in demand growth in OECD countries, reductions in 

subsidy levels in several developing countries, including Malaysia and India, and an 

additional 1.9 million barrels of oil per day, equivalent to a 3.8 per cent increase in nonShort term

Chart 2.19: Spread of Independent Forecasts for Crude Oil Prices 

Source: Bloomberg 

0

20

40

60

80

100

120

140

160

180

200

Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09
2 TRENDS IN COMMODITY MARKETS 

40 Global commodities: long-term vision for stable, secure and sustainable global markets 

OPEC supply, which is expected to come on-stream by the end of the year.22 This is 

illustrated by the average of independent forecasts for the end of 2008, which show a 

slight decline on current prices. However, balanced against this, upside risks remain, 

including the risk of short-term supply disruptions, such as from the hurricane season 

on production in the Gulf of Mexico, and delays in additional capacity coming onstream, which compound the difficulty in forecasting prices with a high degree of 

certainty. 

2.107 The IEA has estimated that world oil demand in its ‘reference scenario’ (i.e. with 

little improvements in energy efficiency) will grow by 12.7 million barrels per day, 

almost 15 per cent, by 2015, with over 85 per cent of demand growth expected to come 

from the emerging markets.23 This is illustrated by table 2.2. However, these projections 

were made before the rapid price increases of the last nine months and therefore 

should be viewed as an upper bound. 

Table 2.2: Medium-term demand growth projections 

S

o 

2.108 Continuing high prices should encourage improved energy efficiency from 

consumers, especially in advanced economies, and a greater incentive to develop 

alternative energy sources. Indeed, while delays in demand-side responses are to be 

expected, history demonstrates the potential for them to have a significant impact on 

demand as illustrated by the 38 per cent decline in the oil intensity of the G7 economies 

between 1980 and 1986. This underlines the value of an ambitious resource efficiency 

strategy. 

2.109 As Chart 2.20 indicates the current supply tightness may ease towards the end of 

this year and into 2009, but given the level of planned future investment there may need 

to be additional production capacity of around 12.7 million barrels per day in order to 

avoid a supply crunch by 2015. Even under the IEA’s ‘alternative scenario’ in which 

increased energy efficiency reduces oil demand by more than 4 per cent by 2015, the 

need for additional production capacity of nearly 8 million barrels per day in 2015 is still 

forecasted. 

22 Oil Market Report, International Energy Agency, June 2008 

23 World Energy Outlook 2007: China and India Insights, International Energy Agency, November 2007 

Medium term

Source: World Energy Outlook 2007: China and India Insights, International Energy Agency, November 2007: Oil 

Market Report, International Energy, May 2008 

2005 2006 2007 2008 2015 2007-2015

Growth rate

World 83.78 84.69 85.81 86.84 98.5 14.8%

OECD 49.67 49.34 49.09 48.76 50.8 3.5%

Non-OECD 34.12 35.34 36.72 38.09 47.7 29.9%

of which:

China 6.69 7.21 7.54 7.94 11.1 47.2%

India 2.58 2.64 2.79 2.92 3.7 32.6%

Middle East 5.99 6.22 6.51 6.82 7.9 21.4%

million barrels/day
 TRENDS IN COMMODITY MARKETS 2

Global commodities: long-term vision for stable, secure and sustainable global markets 41

2.110 The forthcoming publication of the IEA’s Medium-Term Oil Market Report, due 

in July, should provide further clarity. At present, the medium term outlook for prices is 

for them to moderate from recent real highs on the back of improving energy efficiency 

reducing demand and improved certainty concerning the supply outlook and global 

climate change policy, which should facilitate investment planning. However, prices are 

expected to remain higher than historical real averages due to increased costs of 

production, tightness in input markets and increasing geological complexity of oil 

fields. 

2.111 Projections out to 2030 illustrate the continued importance of emerging markets 

in driving forward demand growth. The IEA projects that emerging markets will account 

for around 90 per cent of the 30.5 million barrels per day demand growth expected by 

2030.24 Oil demand in China alone is expected to grow by 9 million barrels per day by 

2030. The contribution from the advanced countries is predicted to become 

increasingly marginal as their efforts to reduce the energy intensity of production and 

diversify their energy mixes materialise. However, the actual rise in demand will depend 

to a large extent on the energy intensity of future economic growth in the emerging 

markets, especially in light of the technological catch-up potential available to them. 

2.112 In the longer term, there is the opportunity and time for supply to respond to 

demand more effectively. The IEA estimates that under its ‘reference scenario’ over US 

$5.4 trillion of investment will be needed for oil supply to meet demand by 2030. This is 

mostly required for upstream development, including the replacement of capacity that 

will become obsolete. Over half of global energy investment will be needed in emerging 

markets. China alone will require US $3.7 trillion of investment across all energy 

sources. Even under the IEA’s optimistic ‘alternative scenario’, the overall net 

investment will still be in excess of US $5 trillion.25

24 World Energy Outlook: China and India Insights, International Energy Agency, November 2007 

25 Ibid. 

Chart 2.20: Medium-Term Growth Balance 

Source: Medium Term Oil Market Report, International Energy Agency, 2007; Oil Market Report, , 

International Energy Agency, June 2008

Long term

Supply faces a 

continuing 

challenge 

0

1

2

3

2007 2008 2009 2010 2011 2012

Oil consumption growth, 

million barrels per day

Non-OPEC Growth (excl. Biofuels) Biofuels Growth

OPEC NGLs Growth OPEC Capacity Growth

World Demand Growth Low Demand

High Demand
2 TRENDS IN COMMODITY MARKETS 

42 Global commodities: long-term vision for stable, secure and sustainable global markets 

2.113 The lack of reserves (i.e. the peak oil scenario) should not in itself be a 

constraining factor for this production. Proven oil reserves continue to increase, and 

have grown by 15 per cent over the last decade;26 with the IEA’s analysis demonstrating 

that there are sufficient reserves to meet rising demand at least out until 2030.27 Rather 

it is the underlying market conditions and the associated barriers and disincentives to 

investment, discussed earlier in this chapter, such as limitations on access and the 

increasing complexity of reserve exploration and exploitation that are the most 

significant constraining factors. Overcoming these will therefore be critical in 

determining long-term upward pressure on prices. 

Other energy 

2.114 The short-term outlook is subject to considerable uncertainty, given the link 

between oil and gas prices and the added importance of weather in determining 

heating demand. 

2.115 In the longer term, the IEA assumes the global demand for natural gas will 

increase by an average of 2 per cent per year up to 2020, with the demand growing at 

the fastest rates in emerging countries, notably China. The increase in demand for gas 

as forecast by the IEA is primarily due to the global power sector, which is assumed to 

account for more than half the increase in primary gas demand worldwide.28 

2.116 There have been substantial increases in proven reserves over the past two 

decades with large increases recorded in Russia, central Asia and the Middle East.29

Production of gas is expected to grow with regional variations with increases in 

production levels from Middle East and Africa. However, the gas sector faces similar 

challenges to the oil sector in terms of investment, with the IEA estimating that it will 

require more than US $4 trillion of investment to meet growing demand.30

2.117 The demand-supply balance within the coal market is expected to improve by 

around 2010, putting downward pressure on coal prices. However, in the longer term, 

the strength of Chinese and Indian coal demand will add increasing pressure on 

producers to increase supply, with the IEA forecasting that US $600 billion will be 

required by 2030.31

2.118 Over time, coal prices are expected to grow in line with oil and gas prices due to 

the opportunities for substituting between the different fossil fuels but will become 

increasingly sensitive to environmental restrictions on coal-burning and developments 

in clean technology. 

Food 

2.119 Global food price inflation is expected to moderate over the course of the year 

due to increased supply responding to higher prices, improved weather conditions and 

expected moderations in oil prices. Indeed, prices of some food commodities, have 

already started to decline in April after reaching peaks in March, with the Food and 

26 BP Statistical Review of World Energy, BP, June 2007 

27 World Energy Outlook: China and India Insights, International Energy Agency, November 2007 

28 Ibid. 

29 BP Statistical Review of World Energy, BP, June 2007 

30 World Energy Outlook: China and India Insights, International Energy Agency, November 2007 

31 Ibid. 

Natural Gas

Coal

Short term
 TRENDS IN COMMODITY MARKETS 2

Global commodities: long-term vision for stable, secure and sustainable global markets 43

Agriculture Organisation of the United Nations (UN-FAO) food price index declining for 

the first time in 15 months. Nevertheless, in the face of high energy prices, continued 

diversion of crops for biofuels in the US and the EU and strong demand from emerging 

and developing economies, the current cycle of high prices is likely to last longer than 

previous cycles. 

2.120 Over the medium term, global production and consumption patterns will 

continue to shift, with developing countries expected to dominate production and 

consumption of most commodities by 2017, according to the OECD-FAO Agricultural 

Outlook.32 

2.121 Against this background, and given the factors set out earlier in this chapter and 

discussed in more detail in this section, the consensus of experts and market 

expectations is that prices will resume their decline in real terms, but it is unlikely that 

nominal prices will return to the levels experienced over the previous decade. Research 

from the OECD and UN-FAO estimates that average nominal prices for the period 2008 

to 2017 will be around 30 per cent higher for sugar, 40 to 60 per cent higher for wheat 

and maize, and over 80 per cent higher for vegetable oils, compared to the period 1998-

2007.33 Nevertheless, in the longer term, prices are expected to resume their decline in 

real terms, but not to the extent witnessed in the past. 

2.122 In addition, with many agricultural commodity supplies continuing to be tight 

and inventory levels remaining low, the possibility of further sharp price increases 

continues to present an upside risk. 

32 OECD-FAO Agricultural Outlook 2008-2017, OECD and UN-FAO, June 2008 

33 Ibid. 

Medium term
2 TRENDS IN COMMODITY MARKETS 

44 Global commodities: long-term vision for stable, secure and sustainable global markets 

2.123 Population growth, rising incomes and changing diets in developing countries 

will remain the largest source of demand growth in agriculture. It is estimated that to 

meet projected demand cereal production will need to increase by 50 per cent and meat 

production by 80 per cent between 2000 and 2030.34

2.124 Historically, agricultural productivity increases have outpaced population 

growth, hence decreasing prices. However, a combination of climate change, higher 

prices for energy and inputs such as fertiliser presents a significant challenge to the 

world’s agricultural sector as it strives to meet the expected increase in demand. Box 2.6 

underlines some of the long-term impacts of climate change on agricultural production. 

The extent to which the sector is successful in meeting this demand will affect the price 

of food, the level of real incomes around the world and hence household food security. 

34 World Development Report 2008: Agriculture for Development, World Bank, October 2007 

Chart 2.21: Food commodity prices, 1971-2007 with projections to 2017 

Source: OECD and FAO Secretariats

Long term
 TRENDS IN COMMODITY MARKETS 2

Global commodities: long-term vision for stable, secure and sustainable global markets 45

2.125 This chapter has already discussed a number of the challenges structural supply 

facing agricultural markets, including a lack of openness and restrictions in some 

agricultural markets; poorly functioning agricultural land, labour and capital, markets; 

the level of expenditure on research and development; environmental factors around 

utilising the world’s agricultural land resources to best effect; and the limited 

development of risk markets. These are long term challenges. The extent to which these 

are overcome will play an important part in helping to reduce the upward pressure on 

agricultural commodity and food prices through increased demand in the long term. 

Other commodities 

2.126 The prices of most industrial metals are expected to moderate in the short to 

medium term in line with slower world growth, and as new capacity comes on-stream. 

However, several forecast price declines have not been realised in recent years, 

highlighting the sensitivity of the market to even small changes in supply and demand 

because of low inventories and limited spare capacity. While prices are expected to 

moderate in the medium term, they may remain at an elevated level over a longer time 

horizon, sustained by continued strong underlying demand for industrial inputs, 

especially from the emerging markets. 

Box 2.6: Impact of climate change on agricultural production 

The eventual impact of climate change on global food production is uncertain, but there are 

serious downside risks. The International Food Policy Research Institute believes that 'climate 

change risks will have adverse impacts on food production, compounding the challenge of meeting 

global food demand'. It estimates that the aggregate impact on cereal production between 1990 

and 2080 might be small (a decrease of less than 1 per cent) but notes that within this aggregate 

there is likely to be wide inter-regional variability, with the poorest being hardest hit. The 

prevalence of extreme weather events will increase yield variability and uncertainty. 

Decreased yields are expected in warmer/low latitude areas of the world as global average 

temperatures increase. Increased yields are expected initially in colder/higher latitude areas, but 

such increases are likely to be reversed in some such areas as global temperatures increase 

by 30C and more. Developed countries, including the EU, and Latin America are expected to see 

gains in production for warming up to 30C, but reductions of up to 22 per cent are likely in South 

Asia, and food import dependency is projected to rise in many regions of the developing world. 

By 40C, entire regions may be too hot and dry to grow crops, including parts of Australia. 

Agricultural collapse across large areas of the world is possible at even higher temperatures, but 

clear empirical evidence here is still limited. 

Climate change will leave at risk the many millions of small scale subsistence farmers in Africa and 

South Asia whose yields will be adversely affected. Not only will average yields change, but the 

variability of yields is expected to increase too, with the distributions of pests and disease moving 

in response to climate change. 

Source: Climate Change 2007: synthesis report, Fourth Assessment Report of the International Panel 

on Climate Change (IPCC), November 2007; Climate Change 2007: Impacts, Adaptation and 

Vulnerability, Contribution of Working Group II to the Fourth Assessment Report of the IPCC, 

November 2007; and The Economics of Climate Change: The Stern Review, N. Stern, October 2006 

Supply faces a 

continuing 

challenge
2 TRENDS IN COMMODITY MARKETS 

46 Global commodities: long-term vision for stable, secure and sustainable global markets 

CONCLUSION 

2.127 This chapter has shown that commodity prices have, on average, fallen in real 

terms over the past 50 years, as supply kept up with the substantial increases in 

demand. This trend has been punctuated by a number of significant supply shocks. 

2.128 In recent years prices have risen sharply, starting with non-food commodities 

and more recently food. This has been driven by strong demand growth, and 

continuing supply problems caused by short-term shocks, and longer-term market 

inefficiencies that are affecting the ability of supply to respond. 

2.129 Commodity prices are notoriously hard to forecast, even over relative short 

periods, especially oil. Going forward, on balance the expert views and market 

expectations reviewed here suggest that real prices are likely to remain higher than their 

historical averages, if lower than today’s, with continuing and perhaps more frequent 

spikes, driven by continuing strong demand and slow supply response. 

2.130 For energy markets, with demand driven by rising population and economic 

growth, efficiency of use will be an important factor determining the level of demand. 

Improvements in supply-side efficiency will be an important factor in determining the 

speed of the supply response. 

2.131 Chapter 3 goes on to set out the impact and risk of continuing high prices, 

underlining the importance of a coherent international policy response with a 

framework for enabling stable, secure and sustainable global commodity markets. 

Chapter 4 goes on to set out the UK’s vision for what that framework should look like.
Global commodities: long-term vision for stable, secure and sustainable global markets 47

3.1 This chapter builds on the analysis of the recent commodity price rises and 

future market trends carried out in Chapter 2, and examines the global implications and 

risks of higher and potentially more volatile commodity prices. It looks at the 

widespread social, economic, political and environmental implications of high and 

volatile prices, and underlines the importance of a coherent international policy 

response, which will be discussed in Chapter 4. 

Social impacts 

3.2 Rising food and fuel prices are felt disproportionately by the poorest in society. 

Up to 90 per cent of the household income of the poorest families in developing 

countries is spent on food and the landless poor in rural areas can be as badly affected 

as those in towns and cities. As prices for these goods increase, in the short term, until 

other prices and wages adjust or policies reduce the impact, real incomes will be 

eroded. Similarly, in the advanced economies, the poorest people spend a larger 

proportion of their income on commodities. 

3.3 As prices rise, food and energy security are threatened as the affordability of 

these basic necessities declines. Box 3.1 sets out the UN’s definition of food and energy 

security. 

Box 3.1: Food and energy security at international level 

The UN’s Food and Agriculture Organisation defines food security as a state in which: 

“...all people, at all times, have physical and economic access to sufficient, safe and nutritious food 

to meet their dietary needs and food preferences for an active and healthy life”. 

The UN’s Economic Commission for Europe defines energy security as: 

"the availability of usable energy supplies, at the point of final consumption, at economic price 

levels and in sufficient quantities and timeliness so that, given due regard to encouraging energy 

efficiency, the economic and social development of a country is not materially constrained".

3 IMPLICATIONS FOR THE INTERNATIONAL 

COMMUNITY

Social, 

economic 

political and 

environmental 

impacts

Food and 

energy 

security
3 IMPLICATIONS FOR THE INTERNATIONAL COMMUNITY 

48 Global commodities: long-term vision for stable, secure and sustainable global markets 

3.4 High food and energy prices threaten to put back the advances in poverty 

reduction made over the last ten years and the achievement of the Millennium 

Development Goals (MDGs). Public expenditure on health, education and other social 

programmes can also be squeezed by the rising cost of food and fuel subsidy 

programmes. 

Box 3.2: the Millennium Development Goals: 

The Millennium Development Goals are a set of ambitious international development goals that 

were agreed at the United Nations Millennium summit in September 2000, to be achieved by 

2015. 

1: Eradicate extreme hunger and poverty 

2: Achieve universal primary education 

3: Promote gender equality and empower women 

4: Reduce child mortality 

5: Improve maternal health 

6: Combat HIV/AIDS, malaria and other diseases 

7: Ensure environmental sustainability 

8: Develop a global partnership for development 

Chart 3.1: Proportion of household expenditure spent on food and fuel in 

selected countries 

Source: World Economic Outlook: Housing and the Business Cycle: International Monetary Fund, 

April 2008: 

0

10

20

30

40

50

60

70

80

90

Nigeria

Afghanistan

Tanzania

Ukraine

Iran

Kenya

Egypt

Saudi Arabia

Russia

China

Turkey

India

Brazil

United Kingdom

G7

Proportion of household expenditure, per cent

Food Fuel
 IMPLICATIONS FOR THE INTERNATIONAL COMMUNITY 3

Global commodities: long-term vision for stable, secure and sustainable global markets 49

3.5 The achievement of the MDGs could be endangered both directly and indirectly 

by high commodity prices. As food prices rise, the amount of food consumed by the 

poorest in society will decrease and so will hunger (MDG1). As people switch their 

spending towards basic staples such as cereals, expenditure on other foodstuffs and 

non-food items such as education and health will be squeezed (MDGs 2, 4, 5 and 6). 

Public expenditure on health, education and other social programmes can also be 

squeezed by the rising cost of food and fuel subsidy programmes. Decreasing levels of 

nutrition can also impact on the ability to concentrate, cognitive development in 

children and resistance to disease. The greatest impact will be felt not only by the 

poorest, but also by vulnerable groups such as women who will tend to be affected most 

severely (MDG3). 

3.6 Higher commodity prices are likely to have a disproportionate impact on low 

income and vulnerable households in developed countries. This is particularly true of 

energy costs. For example, in the UK in 2005-06 households spent, on average, 2.1 per 

cent of their income on fuel and power, but those on lower incomes spent substantially 

more, with households in the lowest income decile spending 9.2 per cent. Around half 

of households in England in the lowest decile are estimated to be fuel poor, defined 

where where a household needs to spend more than 10 per cent of income to achieve 

an adequate standard of warmth. Vulnerable groups such as pensioners, who make 

around half of the fuel poor, are also more likely to be more exposed to increasing fuel 

prices. Lower income groups also spend a larger proportion of their income on food – 

on average 16 per cent of total expenditure for the lowest decile is on food and nonalcoholic drinks compared to 10 per cent for households as a whole. 

3.7 Some countries are endowed with significant natural reserves of commodities; 

others benefit from geographic traits and climatic conditions that facilitate their 

production. This is important, as it means that increasing commodity prices have the 

effect of redistributing income and wealth from those who buy commodities to those 

who sell them. However, the generalised nature of price rises across energy, food and 

metals mean that quantifying the specific impacts for different parts of the world is not 

straightforward; for example, countries which are net exporters of energy may be net 

importers of food. This redistribution of income will have an impact on people’s welfare 

immediately, but could also affect countries’ economic growth going forward. 

3.8 As an example of this, the redistributive nature of high energy prices is 

illustrated in Chart 3.2. The Middle East remains by some margin the region that 

produces the most oil. High oil prices have dramatically increased revenue from 

exporting this resource. Conversely, the rapid growth of Asian emerging markets, 

particularly China, has positioned the Asia Pacific region as the largest net consumer. 

High oil prices are redistributing income away from this region to the energy producers. 

In recent years, a number of previously significant oil-producing countries have 

become net importers of oil, for example Indonesia. 

Redistribution
3 IMPLICATIONS FOR THE INTERNATIONAL COMMUNITY 

50 Global commodities: long-term vision for stable, secure and sustainable global markets 

3.9 More generally, advanced economies and less developed countries, which tend 

to be net importers of both food and energy, are feeling the negative Effects of high 

commodity prices. In less developed countries, rising prices will present an opportunity 

for some of the poor, notably those farmers who are able to produce a surplus after 

feeding their families, to sell their produce for a higher income, but only if the enabling 

environment is sufficient. However, only a small proportion of those in extreme poverty 

(with incomes of less than one dollar a day) are net sellers of food. This is particularly 

the case in Africa, where a recent World Bank analysis for Zambia, for example, 

demonstrated how a 10 per cent increase in the price of maize, would lead to a 

percentage increase in rural poverty four times as great as that in urban areas.1

3.10 Amongst emerging markets the patterns are more mixed, depending on 

countries’ trade patterns. Latin American countries such as Argentina, Brazil, Chile and 

Venezuela with significant commodity exports are benefiting from current price trends. 

Large importers such as China or Turkey are being negatively affected. 

3.11 Overall, by redistributing income away from less developed countries, and some 

of the large Asian countries which still have significant populations on low incomes, 

elevated overall commodity prices are having a substantial negative impact on global 

poverty. 

Macroeconomic implications 

3.12 The macroeconomic implications of commodity prices will depend on a 

number of factors. Both rises and unsustainable falls could pose risks to stability. At a 

national level, commodity price rises may feed through into inflation and add to 

balance of payments pressures. However, the impact varies enormously from country 

to country. Globally, the redistribution of income from consumer to producer regions 

can also impact on global imbalances. 

1 Implications for Higher Global Food Prices for Poverty in Low-Income Countries, M. Ivanic and W. Martin, The World Bank 

Development Research Policy Research Working Paper 4594, April 2008 

Chart 3.2: Net oil production by region 

Source: BP Statistical Review of World Energy, BP, June 2007

-20

-15

-10

-5

0

5

10

15

20

25

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Net production, million barrels per day

Africa Asia Pacific

Middle East Europe Eurasia

Central and South America North America
 IMPLICATIONS FOR THE INTERNATIONAL COMMUNITY 3

Global commodities: long-term vision for stable, secure and sustainable global markets 51

3.13 In a market economy, with fully flexible prices and unchanged monetary policy, 

a shock to prices in a particular sector (such as food or energy) should result in a change 

in relative prices, leaving the aggregate price level unchanged. However, other noncommodity prices may not adjust immediately, and there can be an effect on general 

inflation for some time. If the price of a good or service rises faster than the general rate 

of inflation it provides a signal to potential suppliers that the good or service is 

becoming relatively scarcer, and provides an incentive for producers to increase their 

supply of this good or service and to profit from the higher prices. It also provides an 

incentive for consumers to reduce their consumption of this relatively higher priced 

good or service. These relative price movements therefore attract resources to a given 

activity so that resources are allocated to their most efficient and productive use. The 

increase in commodity prices should be viewed through the same lens: high commodity 

prices are signalling to existing and potential producers profit opportunities in 

supplying these commodities and to consumers to reduce or change their 

consumption. 

3.14 The speed with which an economy reacts to relative price signals has important 

implications for growth and inflation at the macroeconomic level. The more flexible an 

economy, the more quickly resources can be reallocated in response to changing price 

signals and the stronger output growth may be while inflation at the macroeconomic 

level remains stable. As set out in Chapter 2, there are many factors that will delay or 

dampen the response to relative price changes, which, in the case of rising commodity 

prices affecting retail food and energy prices, has meant that these items have added to 

inflationary pressure and contributed to higher consumer price inflation across the 

world. 

3.15 As demonstrated by Chart 3.3, average inflation across advanced economies 

exceeded 31⁄2 per cent in March 2008, up from less than 2 per cent at the start of 2007. 

Across the BRICs countries (Brazil, Russia, India and China), inflation has risen 

consistently since late 2006 and reached 6 per cent in April this year. Food and energy 

prices have been important contributors to headline inflation in emerging markets; the 

increase in headline inflation in China from 3 per cent one year ago to 81⁄2 per cent in 

April 2008 was almost all accounted for by rising food prices. 

Relative prices 

and resource 

allocation

Chart 3.3: Inflation in advanced economies and emerging markets 

Source: Reuters Ecowin, HM Treasury calculations

0

1

2

3

4

5

6

7

Jan-06 Jul-06 Jan-07 Jul-07 Jan-08

Annual inflation, per cent

BRICs OECD
3 IMPLICATIONS FOR THE INTERNATIONAL COMMUNITY 

52 Global commodities: long-term vision for stable, secure and sustainable global markets 

3.16 In the last year, commodity price inflation has made an important and growing 

contribution to headline inflation across advanced economies. In the UK, US, Japan, 

Germany, France and Italy, the contribution of rising food and energy prices was at 

least 50 per cent of headline inflation rates over this period. In the past, food and energy 

prices only contributed around a third to headline inflation. If the contribution from 

other commodities, and the indirect effect through the production chain, were also 

factored in this share could have been higher still. 

3.17 The extent to which monetary authorities are successful in meeting the 

challenge of rising inflationary pressures will depend, in part, on the effectiveness of 

their monetary policy frameworks. One concern is that in some emerging market and 

developing countries, where inflation has been increasing strongly, these frameworks 

are sometimes not very clear and the policy instruments available to the authorities 

may not be very effective. 

3.18 Whether short-term inflationary pressure from higher commodity prices feeds 

through to higher general price inflation depends on how it affects inflation 

expectations and wage growth, and the response of monetary policymakers. If 

households and businesses view higher commodity prices as temporary and inflation 

expectations are well anchored, then businesses are less likely to pass on the additional 

costs in full to consumers, and workers are less likely to demand higher wages to 

compensate for the costs that are expected to be passed on. Alternatively, if workers try 

to maintain real incomes by bidding up wages in response to higher current inflation 

and higher expected inflation, costs for business increase further generating further 

inflationary pressure, something most large advanced economies experienced in the 

mid-1970s and early 1980s. 

3.19 In the short term, rising commodity prices are straining some countries’ balance 

of payments positions by increasing the cost of their imports. For example, the UN FAO 

has identified 19 countries where large (more than 5 per cent of GDP) pre-existing 

current account deficits coincide with an expected increase in the cereal import bill of 

more that 1 per cent of GDP. In 11 of these 19 countries, more than one in five people 

are undernourished, a further illustration of the link between rising prices, 

macroeconomic, socioeconomic and political security concerns. In the medium term, 

this may increase the risk of these countries experiencing a balance of payments crisis 

in which the cost of borrowing becomes unsustainable, with the associated loss of jobs 

and output. 

3.20 In the short term, the redistribution of income between countries currently 

taking place could impact upon global economic growth through different countries’ 

preferences for spending or saving additional income. For example, high energy prices 

are transferring income from advanced economies, where saving rates are low, to the oil 

producers of the Middle East, where saving rates are higher. This has led to the rapid 

accumulation of wealth in this region, which could lower global growth in the short 

term. However, the capitalisation of the various Sovereign Wealth Funds with excess oil 

revenues provides a mechanism to reinvest these funds back into the US and Europe 

and a greater opportunity for productive investment, including domestically in 

economic development and diversification. 

Implications 

for consumer

price inflation

Balance of

payments 

difficulties 

Global 

redistribution 

of income 
 IMPLICATIONS FOR THE INTERNATIONAL COMMUNITY 3

Global commodities: long-term vision for stable, secure and sustainable global markets 53

Box 3.4: Impact of commodity prices on trend growth 

It is difficult to assess the impact of higher commodity prices on potential output in real time, 

particularly in light of uncertainty over the persistence of higher prices. However, if prices for key 

inputs into production, such as oil or energy, were permanently higher, this could increase the 

cost of supply, and therefore limit the rate at which output could grow without inflationary 

pressures. In the 1970s, shocks in energy prices in particular were accompanied by sharply 

slowing growth and rising inflation, a phenomenon that came to be known as 'stagflation'

However, there are reasons to suppose that the impact of energy and other commodity prices on 

economic performance will be less severe than in the past, particularly in advanced economies. 

Experts cite greater flexibility in labour markets and improved credibility of monetary policy as 

factors that have helped limit the impact of the sharp energy price rises seen between 2003 and 

2005 on performance in advanced economies.a They also cite the declining share of energy as an 

input into economic activity as limiting the impact on economic performance relative to earlier 

periods. 

__________________ 

a The Macroeconomic effects of oil shocks – why are the 2000s so different from the 1970s?, Blanchard and Galli, 2007

3.21 Finally, it is important to consider the economic impact of commodity prices in 

the broader context of globalisation. In addition to raising living standards in the 

emerging economies themselves, the integration of the large emerging markets into the 

world economy has resulted in many important benefits for advanced economies, such 

as access to much cheaper manufactured goods. Any negative impacts from higher 

commodity prices caused by increasing demand in these newly integrated countries 

must be set against these benefits. 

Fiscal impacts 

3.22 Changes in commodity prices have effects on public finances. The production 

and consumption of commodities is often subject to taxation, and is an important 

source of government revenue. Some countries operate subsidies, or place price caps 

on the prices of energy and food. For these governments, expenditure usually rises 

alongside commodity prices as they must increase subsidies. 

3.23 Governments often levy taxes on the production and export of commodities, 

and on profits made by commodity firms. Indeed in many producing countries, as set 

out in Chapter 2, the energy sector is entirely or partly owned by the state – so higher 

prices have translated directly into higher government revenue. Chart 3.4 shows the 

contribution of the energy sector in selected producer countries’ economies to exports 

and to government revenues. In those countries where income from commodities is a 

substantial part of government revenue, volatility in prices will have an important 

impact on fiscal stability. 

Revenues
3 IMPLICATIONS FOR THE INTERNATIONAL COMMUNITY 

54 Global commodities: long-term vision for stable, secure and sustainable global markets 

3.24 In advanced economies, commodity prices affect public finances primarily 

through the tax base. Rising input costs will tend to reduce profits, potentially reducing 

corporation tax receipts. As higher prices change consumption patterns, with people 

spending a higher share of their income on food, and less on other goods, which tend to 

attract a higher rate of consumption tax in advanced economies, indirect tax revenues 

can be adversely affected. 

3.25 All countries which have expenditure-based policies to address food and fuel 

security will be affected by changes in commodity prices. The impact on expenditure 

will be greatest in those countries with direct food and fuel subsidies. Many emerging 

and developing countries subsidise certain food staples and energy to facilitate access 

to basic goods for the poor. Countries including Vietnam, South Korea and Ecuador 

have introduced further policies in this area in recent months. Rising food and fuel 

prices will raise the budgetary cost of providing such subsidies. Indeed, fiscal pressures 

have built up in a number of countries in recent months, including Pakistan, Cuba and 

Morocco where subsidies could cost up to 10 per cent of GDP in 2008. 

3.26 Despite their short term impact, subsidies are an inefficient way to tackle 

poverty, as they distort markets, hinder the working of the price mechanism, and are 

ineffective in targeting those most in need. In general, untargeted subsidies tend to 

benefit most the urban middle classes, because of their higher consumption. Targeted 

transfers to the poor are the most effective and least distorting responses. 

3.27 As we have seen, commodity price rises can also boost government revenue, 

and as such give more scope to invest and intervene to support growth for those 

countries which benefit. This has been the case in Mexico, where oil revenue was used 

to finance a programme of infrastructure investment and measures to support 

businesses equal to around US $9 billion, or 1 per cent of GDP. 

Chart 3.4: Contribution of the energy sector to selected countries’ economies in 2007 

Source: Various Article IV consultations, International Monetary Fund

Expenditure

0

10

20

30

40

50

60

70

80

90

100

Algeria Iran Libya Mexico Nigeria Russia Saudi Arabia Venezuela

Per cent of total

Exports Government revenues
 IMPLICATIONS FOR THE INTERNATIONAL COMMUNITY 3

Global commodities: long-term vision for stable, secure and sustainable global markets 55

Political and security impacts 

3.28 The essential importance of commodities to family wellbeing, especially in 

poorer countries, means that price rises have immediate implications for political and 

social stability. Sir John Holmes, UN Under-Secretary General for Humanitarian Affairs, 

has warned that “the security implications should not be underestimated”. 

3.29 Already in 2008 rioting has taken place in a number of countries including 

Cameroon, Niger, Mozambique, Cote d’Ivoire, Burkina Faso, and Senegal in protest at 

high food prices. Demonstrations have on occasion turned violent and led to fatalities, 

as in Haiti, Yemen, Egypt and Morocco. In producer countries, high prices can also 

generate tensions between social groups over the sharing of the commodity windfall. 

Vulnerable groups within society, defined by gender, age or disability, can also suffer 

disproportionately. Where prices remain high and volatile, many experts predict more 

instability. The Vice-President of the UN International Fund for Agricultural 

Development has expressed concern that social unrest may become common in more 

parts of Africa, and the World Bank estimates that a further 33 countries are at risk of 

social instability. 

3.30 Research has demonstrated the strong linkages between commodity production 

and conflict, particularly in less developed countries, including from competition for 

control of commodities and the income from them. This reinforces the need for the 

transparent accounting of commodity revenues and strong institutional frameworks to 

ensure that state commodity earnings are used responsibly and effectively. Going 

forward, the pressure on natural energy resources caused by increased demand, and the 

concentration of those resources in a limited number of countries in parts of the world 

that are often struck by geo-political tensions, is another factor that could affect global 

security. 

3.31 When the social implications of high commodity prices negatively affect the 

popularity of governments, knee-jerk policy responses become a danger. In response to 

surging commodity prices many countries have introduced trade restrictions in an 

attempt to limit domestic price rises, as illustrated in Chapter 2. While such measures 

can help contain domestic prices in the short term, they have strong long-term negative 

effects. At a global level these beggar-thy-neighbour measures damage the world 

economy by restricting trade flows and adding to price pressures faced by food 

importers. Domestically, they damage the countries themselves by distorting the 

incentive for producers to increase production, and for consumers to reduce demand. 

In addition, protectionist polices can lead to retaliation and the adoption of tit-for-tat 

measures by other countries. Protectionism and trade barriers impose significant costs 

on the world economy; the World Bank estimates that the total liberalisation of trade in 

goods would be worth around $290 million by 2015. 

Impact on the natural environment and climate change 

3.32 Commodities are natural resources. Oil and metals are taken from underneath 

the Earth’s surface, and crops for food are cultivated on it. The way in which the 

processes of extraction, production and consumption are managed have direct impacts 

on the natural environment – impacts which intensify as global demand increases and 

which will need to be carefully managed. 

Falling real 

incomes

Rising tensions 
3 IMPLICATIONS FOR THE INTERNATIONAL COMMUNITY 

56 Global commodities: long-term vision for stable, secure and sustainable global markets 

3.33 The net effect of the high commodity prices on overall global greenhouse gas 

(GHG) emissions is unclear. However, in the long run, tackling climate change can have 

mutually reinforcing benefits for commodities markets, for example: 

• improving resource efficiency helps reduce emissions and demand for 

commodities; 

• developing alternative sources of energy helps diversify supply and in turn 

should increase security and reduce the risk of price shocks; and 

• tackling climate change should reduce the risk of increased weather-related 

shocks, and introducing adaptation policies will help reduce countries’ 

exposure to them. 

3.34 In the shorter run, the relationship is more complex and less clear. For example, 

high oil prices tend to encourage improved efficiency and substitution towards other 

fuels, including low carbon or renewables. On the other hand, high oil and gas prices 

can lead to substitution to coal and non-conventional sources of oil, which tends to 

increase GHG emissions. In the case of transport (which accounts for the bulk of oil 

demand in OECD countries), despite some evidence that higher prices are changing 

consumer behaviour by, for example decreasing demand for the least fuel efficient 

vehicles, substantial switching towards cleaner fuels with demonstrably lower 

emissions is limited in the short run because of the lack of commercially available 

alternatives. As outlined in the Stern Review, the regulatory framework for managing 

greenhouse gas emissions, in particular the development of global carbon pricing, will 

play the key role in determining how these issues develop. 

3.35 At the same time, there are wider tensions to be managed, notably those related 

to land use in the context of increasing food production: including protecting 

rainforests, the use of irrigation and the development of biofuels. As agricultural 

production increases, it is important that it happens in a way that is as carbon efficient 

as possible, since agriculture itself already accounts for 14 per cent of global emissions. 

3.36 In general, we can expect markets to provide efficient incentives for more food 

production relative to other economic uses for land. However, there will be cases where 

market failures may result in undesirable outcomes in terms of environmental 

sustainability. The most serious risk is that higher demand for food increases incentives 

to cut down forests, thus increasing global greenhouse gas emissions and climate 

change. Deforestation already accounts for around a fifth of mankind's contribution to 

greenhouse gases in the atmosphere. 

3.37 Chapter 2 set out that high oil prices were encouraging the development of 

biofuels to replace oil in transport. There are now growing concerns over the indirect 

impacts of biofuels, with evidence that certain biofuels have greater potential to reduce 

greenhouse gas emissions than others, and in the extreme that some biofuels’ 

production could actually increase carbon emissions. 

Complex 

impact on 

emissions 
 IMPLICATIONS FOR THE INTERNATIONAL COMMUNITY 3

Global commodities: long-term vision for stable, secure and sustainable global markets 57

CONCLUSION 

3.38 This chapter has set out the implications and risks of continuing high and 

volatile commodity prices. It has shown that the risks are substantial, with potentially 

widespread social, economic, political and environmental impacts. 

3.39 Rising commodity prices have been a contributory factor to social unrest across 

the globe, and impacted negatively on poverty – particularly amongst the most 

vulnerable and in the poorest countries. Going forward, high prices threaten the 

achievement of the Millennium Development Goals. 

3.40 Rising commodity prices have been an important contributor to inflation 

around the world, affecting all countries. They have led to a redistribution of income 

between countries, benefiting those selling commodities, and also contributing to the 

persistence of global imbalances. Public finances have been affected by commodity 

prices through both revenue and expenditure. 

3.41 Political stability in a number of countries around the globe has been threatened 

as people have protested against the cost of key commodities – and the World Bank and 

others are anticipating further threats to security in the future. 

3.42 Finally, rising demand for commodities is having an impact on the natural 

environment, which if poorly managed, could have severe implications for the fight 

against climate change and wider environmental sustainability. 

3.43 The widespread nature and severity of these risks underlines the importance of 

a coherent international policy response with a framework for enabling stable, secure 

and sustainable global commodity markets. Chapter 4 goes on to set out the UK’s vision 

for what that framework should be. 

Global commodities: long-term vision for stable, secure and sustainable global markets 59

4.1 This document has drawn together the current expert and market expectations 

for the short, medium and long-term prospects for commodity markets. Forecasting 

commodity markets is extremely difficult, even over relatively short-term periods and 

especially as regards the oil market. However, Chapter 2 set out that on balance the 

expert views and market expectations reviewed suggest that prices in real terms will 

remain higher than their historical averages, if lower than today’s levels, with 

continuing and perhaps more frequent shocks, driven by continuing strong demand 

and a slow supply response. Chapter 3 set out the economic, social and political risks of 

unstable and sustained higher prices. 

4.2 This underlines the importance of a coherent international policy response. The 

world’s economies have responded successfully to commodity shocks in the past. 

Against this background, the overarching aim of the international community’s policy 

agenda should be to ensure stable, secure and sustainable global commodity markets. 

4.3 Volatile and high prices can have negative impacts across a wide range of 

economic, social, political and environmental indicators. Of course, as in any 

functioning market, price signals must be able to drive appropriate demand and supply 

responses – and the international community cannot seek to remove all volatility. 

However, as Chapter 2 set out, a number of factors across energy and food markets are 

driving demand on the one hand, while limiting the supply response on the other. The 

international community can drive forward better functioning markets by focusing 

policies on removing those barriers and providing a stable framework for demand and 

supply to meet more effectively. 

4.4 Commodities play an essential role in both the wider economy and in 

consumption patterns across the globe. Volatility and insecurity in commodity markets 

are felt more keenly by people than for many other goods and services. Delivering 

energy and food security are fundamental concerns for all governments. This is 

commonly addressed at household and community level through national government 

policies. The desire for energy and food security has led to nationalisation of energy 

resources and protectionism in agriculture. However, with current high global food and 

energy prices and country-level insecurity, this is an international challenge and the 

international community must act quickly to encourage global dialogue. 

4.5 The increased global demand for commodities over the coming decades will 

have significant implications for the global environment unless managed properly. It 

will require coordinated international action to ensure that increased production is 

undertaken in an environmentally sustainable manner. Chapter 3 set out some of these 

issues. For many economies, managing the transition to a food and resource efficient 

world will involve spin-off benefits, such as improvements in local air quality, reduced 

energy use and a more diversified fuel supply that can alleviate security concerns. 

However, it will also involve challenging transitional judgements, such as the optimum 

future use of coal, the exploitation of non-conventional sources of oil, changes in 

consumer and commercial behaviour, and the optimum use of land, including forestry 

management and biofuels production. Ensuring a market-based response to climate 

change, with a price for carbon, as well as allowing the market to set prices in other 

commodities, should be central to tackling these trade-offs in a fair and efficient way. 

4 

ENSURING STABLE, SECURE AND 

SUSTAINABLE GLOBAL COMMODITY 

MARKETS 

Prospects for

commodity 

markets 

Stable 

markets

Secure 

markets

Sustainable 

markets
4 ENSURING STABLE , SECURE AND SUSTAINABLE GLOBAL COMMODITY MARKETS 

60 Global commodities: long-term vision for stable, secure and sustainable global markets 

A principled framework to guide policy responses 

4.6 To best achieve the aim of ensuring stable, secure and sustainable global 

commodities markets, the objective of the international community’s policies should 

be to enable these global markets to work as efficiently and effectively as possible. That 

requires: 

• encouraging the most efficient level of demand, recognising the necessity of 

improved energy efficiency, environmental sustainability and reducing 

carbon dependency; 

• enabling supply to respond as effectively as possible through technological 

improvements and providing a business and regulatory environment that 

encourages investment in sustainable supply; and 

• increasing capability to respond to increased volatility and more frequent 

supply shocks. 

4.7 It requires action in the short-term to address immediate drivers of current price 

increases, and in the medium and long-term to address underlying causes of 

inefficiency in the commodity markets. 

4.8 It also requires a principled framework for policies. This document focuses on 

the collective priorities for the international community, but there is also a key role for 

national governments. Box 4.1 sets out the policy framework that the UK is following 

domestically to deal with both the immediate drivers of high prices and underlying 

structural problems. The remainder of this chapter sets out the six core principles 

against which the international community should take action to ensure stable, secure 

and sustainable global commodities markets: 

• maintaining economic stability; 

• promoting openness; 

• encouraging cooperation; 

• supporting innovation and investment; 

• ensuring fairness; and 

• mitigating and adapting to climate change, especially increased resource 

efficiency. 

Aim and 

objective

Short, 

medium and 

long-term 

action 

National, 

regional and 

international 

action 
 ENSURING STABLE , SECURE AND SUSTAINABLE GLOBAL COMMODITY MARKETS 4

Global commodities: long-term vision for stable, secure and sustainable global markets 61

Box 4.1: UK Government policy framework for stable, secure and sustainable food 

and energy markets 

Improving energy and fuel efficiency to reduce costs to consumers and businesses is a UK 

Government priority. This is in addition to existing policies, including income measures to support 

the most vulnerable members of society. Over time, increasing the diversity of energy supplies 

and pursuing technological improvements also reduces exposure to international volatility in fossil 

fuel prices. 

The UK’s domestic policy response reflects the same principles that underpin the analysis of an 

effective international response set out in this document: 

• maintaining economic stability: a stable macroeconomic framework that delivers low 

inflation and sound public finances; 

• promoting openness: UK energy and retail markets are open and competitive, with 

strong, independent economic regulators to provide certainty for investment decisions. 

Consumers can switch suppliers to choose the best value deal for them. The UK 

continues to pursue an end to Pillar 1 of the CAP and an ambitious Doha Development 

Agenda agreement at the WTO, both of which would result in lower domestic food 

prices; 

• encouraging cooperation: the Government works with Great Britain's six main energy 

suppliers to encourage and support them to target their collective annual spend on social 

assistance effectively. Suppliers have agreed to triple their collective contribution to £150 

million by 2011, and the Government is taking steps to share data with suppliers to 

improve targeting; 

• supporting innovation and investment: ongoing investment into the development and 

commercialisation of low-carbon energy technologies, including establishing the £400 

million Environmental Transformation Fund, and partnership with the private sector 

through the Energy Technologies Institute; 

• ensuring fairness: the Government’s welfare reforms reflect its aims of eradicating child 

poverty, supporting families, and ensuring security for all in old age. Pensioner households 

also receive Winter Fuel Payments worth at least £200. Recognising the pressures on 

pensioners, such as higher energy bills, Budget 2008 announced an additional one-off £100 

payment for households with someone aged 80 or over and £50 for households with 

someone aged 60 or over; and 

• mitigating and adapting to climate change: the long-term targets and carbon budgets being 

introduced by the Climate Change Bill, alongside domestic policies and support for the 

reform of the EU Emissions Trading Scheme, will provide a credible, long-term carbon 

framework. A key element of this is incentives to improve energy efficiency, including for 

vehicles, homes and businesses. 
4 ENSURING STABLE , SECURE AND SUSTAINABLE GLOBAL COMMODITY MARKETS 

62 Global commodities: long-term vision for stable, secure and sustainable global markets 

1. MAINTAINING ECONOMIC STABILITY 

4.9 Chapter 3 has set out the effect that poorly functioning commodity markets can 

have on global economic growth, and the associated risks to inflationary pressures, real 

income growth, political stability and poverty that can be the result of volatile and high 

prices. 

4.10 A framework for maintaining macroeconomic stability in both developed and 

developing countries is an essential underpinning element of the international 

community’s strategy for ensuring stable, secure and sustainable commodity markets, 

and maximising resilience to short-term price shocks. This requires sound long-term 

macroeconomic policies, based on transparency and accountability. Central banks 

have a primary role in maintaining low and stable inflation rates through appropriate 

monetary policy, with the credibility of these policies critical to anchoring inflation 

expectations, in particular during periods of commodity price disturbances.

4.11 It is also essential that, in responding to the pressures placed on their 

economies from high oil prices, countries take forward responsible fiscal policies based 

on sustainable long-term growth, including, as appropriate, through the removal of fuel 

price subsidies, and the IMF has a role to play in advising all policy makers to support 

an appropriate resolution to these challenges. 

4.12 Going forward, active monitoring of the risks from global current account 

imbalances arising from commodity price fluctuations is needed. To support this, the 

IMF must continue its role in helping the international community to form a shared 

view of the trends, risks and the appropriate policy responses, working closely with 

other international organisations, central banks, finance ministries and other national 

authorities. The IMF should integrate its analysis of the impact of rising commodity 

prices into its surveillance activities, and help its members to respond to these 

challenges through its policy advice. 

4.13 International institutions should also continue to enhance their capacity to 

provide financial support to countries facing instability though the provision of 

adequate and targeted shocks assistance. Recently, as food prices have remained high 

and fuel prices continue to escalate, there has been a marked acceleration in the 

number of countries seeking assistance, for example through an augmentation of their 

IMF Poverty Reduction and Growth Facility. The international financial community 

now needs to redouble its efforts and work with international institutions, including the 

IMF, the World Bank, and Regional Development Banks, to ensure rapid responses are 

delivered, with all countries able to take advantage of the appropriate financing 

facilities. 

4.14 Looking to the medium term, the international financial institutions, as well as 

bilateral donors, also have a role to play in continuing to support developing countries’ 

capacity to establish and implement sound macroeconomic frameworks, through 

capacity building and sharing of best practice. 

A macroeconomic and 

fiscal 

framework for

stability

Role for the 

international 

institutions
 ENSURING STABLE , SECURE AND SUSTAINABLE GLOBAL COMMODITY MARKETS 4

Global commodities: long-term vision for stable, secure and sustainable global markets 63

2. PROMOTING OPENNESS 

4.15 A renewed momentum to open up global markets and remove price-distorting 

policies is a critical part of the action needed to tackle the factors impacting on an 

effective and efficient supply response to demand that were set out in Chapter 2 – and 

remains the best way of delivering continued long-term growth and prosperity for all. 

4.16 The most urgent priority for action to secure the benefits of increased global 

trade is to make progress and secure a breakthrough in the Doha Development Agenda 

(DDA) trade talks. An ambitious deal is an essential part of a sustainable long-term 

solution to the current global food challenges. It will also help increase resilience to 

shocks by mitigating geographic-specific risks, including from climate change – if there 

is a constraint on supply in one region, alternative suppliers can fill the gap. More 

broadly, a successful agreement would provide a significant boost to the global 

economy at a time of economic uncertainty and is a critical element of any strategy to 

reduce global poverty and achieve the Millennium Development Goals. Given this, it is 

crucial that all parties to the negotiations show the necessary flexibility and political will 

to deliver a successful outcome. 

4.17 Alongside efforts to reach a long-term multilateral deal on trade, countries should 

resist distortions and protectionist measures, aimed at tackling immediate price shocks 

domestically, but which exacerbate price increases internationally. Action to reduce the 

impact of such measures should include: 

• removing artificial restrictions on supply; 

• lifting export restrictions, in particular on food; 

• phasing out harmful subsidies, including on fuel; and 

• lowering tariff barriers, including on agricultural products. 

These steps should be supported by international financial institutions, with the IMF 

providing guidance on how developing countries can move away from distortions and 

protectionist measures in a manner that minimises any impact on the most vulnerable, 

including through its forthcoming work on best practice for reform of fossil fuel 

subsidies. 

Policy responses: maintaining economic stability 

Short-term: 

• improving the international community’s existing shocks facilities, including simplifying the 

process for accessing the IMF’s Exogenous Shocks Facility; 

• supporting the IMF to integrate analysis of impact of rising commodity prices on balance 

of payments, and help its members to respond to these challenges through its policy 

advice. 

Medium/long-term: 

• increasing the support given by international financial institutions to support developing 

countries in establishing sound macroeconomic frameworks. 

A new world 

trade deal

Removing 

distortions 

and 

protectionist 

policies
4 ENSURING STABLE , SECURE AND SUSTAINABLE GLOBAL COMMODITY MARKETS 

64 Global commodities: long-term vision for stable, secure and sustainable global markets 

4.18 In the medium term, renewed effort should be focused on removing a number of 

longer-term structural problems and harmful policies that are reducing the capacity of 

global commodity markets to respond to price signals. In the global food market that 

means reform of the Common Agricultural Policy in the EU, as set out in more detail in 

Box 4.2, and agricultural reform elsewhere in the OECD. For example, the OECD 

estimates that agricultural support (as measured by the Producer Support Estimate – 

PSE) was worth 11 per cent to farmers in the US in 2006, compared to 32 per cent in the 

EU. The PSE figures in other OECD countries such as Japan (53 per cent), and Korea (63 

per cent) are also very significant. 

4.19 Beyond this, renewed focus on wider economic reform across economies is 

needed to improve the performance of factor markets, drive competition and efficiency, 

facilitate the better management of price risk, and lead economic growth to lift more 

citizens out of food and fuel poverty. 

4.20 For example, in the EU, delivering energy market liberalisation following 

agreement of a legislative package by EU energy ministers is an urgent priority that will 

improve the single market. This will help lower electricity and gas prices for consumers. 

4.21 More broadly, the first single market monitor into the retail sector, including 

groceries, will help identify any other barriers to an efficient and effective food market 

for Europe’s citizens. 

Achieving 

efficient 

commodity 

markets 

Box 4.2: Reform of the Common Agricultural Policy 

The UK’s CAP Vision aims: by 2015 to 2020, to have cut agricultural tariffs to the levels that 

prevail on industrial goods, to have eliminated all market management measures such as 

intervention and export subsidy, and all direct payments, which costed taxpayers €36 billion in 

2007 - with remaining agricultural spending focused on securing public benefits that the market 

would not otherwise provide. 

The immediate priority is to agree an ambitious, balanced WTO deal reducing agricultural tariffs 

that offers a real opportunity to make the global agricultural trading system fairer, more efficient, 

and more resilient in the face of any future production problems around the world. 

The UK supports the end of export subsidies and export taxes. Although used very rarely, 

abolishing export taxes would reassure global markets that the EU will not seek to withhold 

exports and would send the right global signal on the need to keep markets open. 

We also need, this autumn, to agree the EU’s CAP Health Check. Permanent elimination of setaside, for example, could lead to a modest reduction in the EU price for cereals of up to 5 per 

cent. Eliminating dairy quotas could lead to a substantial decrease in prices in EU Member States 

of up to 11 per cent. 

Whilst the decisions to suspend set-aside and import duties on grains are welcome, there is scope 

for the European Commission to look at what it can do in respect of other relevant policies that, 

at a time of significant food price inflation, are still being used to keep EU prices higher than they 

would otherwise be. 

Broader

openness and 

economic 

reform
 ENSURING STABLE , SECURE AND SUSTAINABLE GLOBAL COMMODITY MARKETS 4

Global commodities: long-term vision for stable, secure and sustainable global markets 65

4.22 The developed world must also continue to play a leading role in building the 

capacity of developing countries to respond to new market opportunities. In particular, 

aid for trade can play an important role in building infrastructure to enable countries to 

compete in global markets, but also help to transport goods, including food, within 

their own countries. It can also provide assistance to countries facing significant shortterm adjustment costs arising from preference erosion, loss of tariff revenue or higher 

food import prices. The G8 should meet its 2005 commitment to increase trade-related 

assistance by $4 billion. 

4.23 Wider economic reform should also be supported by openness to investment, 

both by producers and consumers. Openness to international capital, resources and 

technology in producing countries will lead to the most efficient exploitation reserves. 

Similarly, there also needs to be an openness to capital flows from producers. The 

growth in sovereign wealth funds (SWF) is an example of how these countries are 

seeking to recycle their income from commodities into long-term investments in other 

countries. Limiting investment from SWFs will lower the expected returns on their 

assets and in turn reduce the opportunity cost of delaying commodity extraction, 

discouraging growth in oil supply. SWFs, working though the IMF, are developing a set 

of best practices for SWFs that will increase transparency. Recipient countries, working 

though the OECD, are making progress on a set of best practice principles to give 

investors clarity. Together these initiatives are important and should build confidence 

between states and facilitate free flows of investment. 

3. ENCOURAGING COOPERATION 

4.24 As the global economy becomes ever more interdependent and financial and 

commodity flows between global producers and consumers increase through openness 

and fair trade, so cooperation and information-sharing between countries becomes an 

increasingly important part of the global response, to avoid volatility and to build up 

trust in markets. 

Openness to 

investment

Policy responses: promoting openness 

Short-term: 

• agreeing an ambitious Doha Development Agenda world trade deal; 

• phasing out distortionary food and fuel policies, with guidance by international 

organisations of how to manage transition; 

• delivering liberalisation of EU energy markets through the legislative package agreed by all 

member states;

• achieving regulatory reform of EU agriculture through the CAP Health Check; and

• agreeing an aid for trade deal as part of the conclusion of the world trade negotiations. 

Medium/long-term 

• reforming distorting agricultural support mechanisms in the EU and across the 

OECD; and

• increasing openness to global investment flows by producers and consumers, including 

access to Sovereign Wealth Funds.
4 ENSURING STABLE , SECURE AND SUSTAINABLE GLOBAL COMMODITY MARKETS 

66 Global commodities: long-term vision for stable, secure and sustainable global markets 

4.25 Open and constructive dialogue is essential if the causes of high and volatile 

prices and their impact are to be tackled. To help achieve this, the shape and role of the 

international institutions needs to be reformed. This should include offering countries 

such as China, India, South Africa, Mexico, Brazil and other emerging countries a 

greater role on the international stage, including with the G8, the IMF and the World 

Bank, alongside wider reform of the United Nations. Developing regional institutions 

have a role to play as well, including the EU, the Association of South East Asian 

Nations, and the African Union. 

4.26 Specifically on oil, increased dialogue between producers and major consumers 

including the EU, will help foster shared understanding of both the demand and 

supply-side actions needed to mitigate high oil prices, including actions to increase 

energy efficiency and expand supply. The UK welcomes the recent call by Saudi Arabia 

to this end. 

4.27 On food, the independent external evaluation identified a number of issues for 

the FAO management to address. Key to this will be a fully operational strategy linking 

the organisation's goals with its actions and programmes. The administrative and 

managerial systems should be modernised and made more transparent and efficient so 

the organisation can perform more effectively. 

4.28 Greater transparency across all parts of the commodity market – from 

information on harvest predictions to local farmers through to the production capacity 

of the major energy producing countries – can also play a role in helping all sides gain a 

better understanding of trends in supply and demand. Chapter 2 set out areas where 

limited information is impacting on the market. 

4.29 In the oil market, the International Energy Forum should be supported in taking 

forward its work to improve and extend the coverage of the Joint Oil Data Initiative 

(JODI). Consumers can play an important role by more regular publication of 

inventories data. The IEA’s analysis of the economic impacts of higher oil prices will 

help further improve understanding of the medium and long-term impacts of higher oil 

prices on the global economy. Increased membership and implementation of the 

Extractive Industries Transparency Initiative (EITI) will help increase understanding of 

the volumes and uses of oil revenues and improve the functioning of the market. 

4.30 In financial markets, as set out in Chapter 2, the only available data to examine 

the role of investment activity in commodity markets is the US CFTC’s data on ‘noncommercials’. This represents only a subset of investment activity. Within the EU, the 

European Commission is reviewing its existing financial regulatory framework for 

commodity and exotic derivatives, including looking at what sort of business should be 

regulated, and market integrity issues such as conduct of business, transparency and 

market abuse. This will report at the end of 2008, and the UK has recently set out its 

priorities for this work, concluding that there is no evidence of market failures justifying 

increased financial transparency regulation. However, there remains a need for 

sufficient information on financial flows into commodity derivatives to ensure 

interested parties have an accurate understanding of market developments. The first 

step is to ensure best use of existing information sources, sharing where appropriate, 

and the Bank of International Settlements (BIS) and IMF are well-placed to work across 

the international financial community to facilitate this. 

Increased 

dialogue

More 

transparency
 ENSURING STABLE , SECURE AND SUSTAINABLE GLOBAL COMMODITY MARKETS 4

Global commodities: long-term vision for stable, secure and sustainable global markets 67

4. SUPPORTING INNOVATION AND INVESTMENT 

4.31 Stability, openness and cooperation are essential components to help 

strengthen market forces and restore sustainable demand-supply balances and should 

be the focus of international policy interventions. But the international community also 

has a role to play in introducing targeted policies to mitigate demand growth and 

manage the supply response – encouraging investment and research, focusing on more 

efficient production and distribution, and driving forward technological change. 

Chapter 2 set out how barriers and disincentives to investment and innovation are 

affecting the market. 

4.32 Given the scale of output and productivity growth and technological innovation 

that is needed to meet predicted future demand for commodities outlined in this paper 

– a 50 per cent increase in grain production by 2030 and a 30.5 million barrels per day 

increase in oil over the same period – it is critical to ensure that national, regional and 

international polices work together to deliver a fundamentally sound framework for 

investment. 

4.33 This effort must start by removing barriers to investment. The International 

Energy Forum’s (IEF) work on examining the barriers to investment should be 

prioritised, and the IEF should continue to lead on increased cooperation between 

international oil companies, national oil companies and service companies on how to 

best manage the increasing costs, complexity and risks of large investment projects, and 

on the sharing of technological expertise. 

4.34 This analysis will support a strengthened international dialogue to address 

barriers to investment, enable an agreed understanding of the levels of investment 

required, including in refining capacity and human capital and expertise, and enable 

better action to address this. As part of this, the oil and gas industry, universities and 

research centres should also work together to promote a global skills initiative and help 

address the current shortages of skilled technicians. 

Policy responses: encouraging cooperation 

Short-term 

• enhancing dialogue and cooperation between major oil consumers and producers; and 

• improving the accuracy and coverage of JODI and strengthening the implementation of 

the Extractive Industries Transparency Initiative (EITI). 

Medium/ long-term 

• reform to the shape and role of the international institutions; and 

• improving financial market transparency though BIS and IMF to facilitate use of existing 

sources of information on financial flows into commodity derivatives. 

Getting the 

investment 

framework 

right

Reducing 

barriers to 

investment
4 ENSURING STABLE , SECURE AND SUSTAINABLE GLOBAL COMMODITY MARKETS 

68 Global commodities: long-term vision for stable, secure and sustainable global markets 

4.35 Reducing barriers to investment is equally important on food, especially in 

developing countries, where investment in infrastructure such as roads and irrigation is 

vital. Developing countries have a responsibility to strengthen their own investment 

environment, for example, by strengthening land and property rights, improving 

regulatory regimes and tackling corruption. Donor countries can assist in removing 

barriers to investment. For example, the Private Infrastructure Development Group 

(PIDG) facilities have been extremely successful in helping to mobilise additional 

private investment in projects covering agriculture, water and transport among others. 

4.36 To meet the need for agricultural research directed to poor, smallholder farmers 

will require a doubling of total international investment. Increased investment is an 

essential foundation for enabling innovation to respond to the need for increased 

supply. That is why the UK is calling for an International Partnership for Agriculture and 

Food to bring the international community together and to make sure that our 

aspirations are backed by resources and result in achievement. 

4.37 The Consultative Group on International Agricultural Research (CGIAR) is 

central to achieving this ambition. With improved funding arrangements and clearer 

articulation with regional and national research systems, the CGIAR will warrant 

doubling of funding to become a billion-dollar-a-year organisation. Alongside this, to 

protect against agricultural risk acting as a disincentive to investment in countries 

without strong capital markets, priority should be given to assessing whether it is 

possible to manage their risk in an exchange in a different country. 

4.38 Public policy should encourage all forms of innovation that support the aim of 

increasing agricultural productivity on a sustainable basis. In addition to conventional 

approaches, biotechnology, including GM, has the potential to make agricultural 

production more efficient and sustainable. Subject to future research, biotechnology 

could increase crop resilience to pests, diseases and consequences of climate change 

(e.g. drought); increase yield per crop planted, and lead to more efficient use of 

nutrients (e.g. nitrogen). Over time biotechnology has the potential to increase supply 

in feedstock markets and so lower prices in both grain and meat markets. 

4.39 In order to take advantage of technological innovations in GM research and 

development – while maintaining the existing high level of EU safety standards – the 

operation of the EU’s existing regulatory regime for GM products should be improved, 

including speeding up procedures for importing safe GM feedstocks. This would ensure 

that the regime does not act as a disincentive to the potential development and use of 

beneficial GM crops. 

Incentivising 

innovation
 ENSURING STABLE , SECURE AND SUSTAINABLE GLOBAL COMMODITY MARKETS 4

Global commodities: long-term vision for stable, secure and sustainable global markets 69

5. ENSURING FAIRNESS 

4.40 The impacts of food and fuel inflation are not felt equally throughout the world, 

as set out in Chapter 3. Across all countries, developed or developing there will be a 

need for sound policies to support those most at risk. It is important that these policies 

are offered as general support and are designed to minimise distortions to the markets 

themselves. The World Bank has described such social protection schemes as the “first 

best” option for addressing food security. The UK announced additional funding of US 

$44 million for the Ethiopia safety net and US $64 million for social protection in 

Mozambique and Bangladesh. 

4.41 International institutions providing immediate food aid, in particular the World 

Food Programme (WFP), should be properly resourced and may need to be given 

additional support during periods of high food prices. In this regard the swift 

international response to the WFP’s recent appeal for increased funding is extremely 

welcome. Where possible, providers of food aid should look to source the food locally in 

order to encourage agricultural development. 

4.42 Rapid response financing facilities such as the World Bank, the International 

Fund for Agricultural Development and Regional Development Banks should assist 

countries in need of policy support and assistance with the procurement of agricultural 

inputs, in particular fertilisers and seeds, and their affordability by poor farmers. 

4.43 Longer-term aid is needed to address the broader issues that make individuals, 

households and countries vulnerable to increasing prices, for both food and oil. For 

example, long-term, predictable financing for education is essential for providing the 

human capital needed to sustainably raise incomes. Measures that support inclusive 

growth will in turn improve access to food and energy, reducing the insecurities 

experienced by the poor. The international community must live up to its commitments 

on Official Development Assistance (ODA). 

Policy responses: supporting innovation and investment 

Short-term 

• working with oil producing countries and companies to overcome constraints on 

increased supply; 

• implementing G8 initiatives on enhanced energy technology research, development and 

demonstration; and 

• improving the operation of the EU regulatory regime for genetically-modified organisms 

(GMOs).

Medium/ long-term 

• doubling international investment in agricultural research through the Consultative Group 

on International Agricultural Research (CGIAR). The UK has announced a doubling of UK 

funding to agricultural research, to US $800 million over the next 5 years; 

• supporting the IEF and others in removing barriers to investment in the energy industry, 

including a skills initiative for the oil and gas industry. 

Food aid

Long term aid
4 ENSURING STABLE , SECURE AND SUSTAINABLE GLOBAL COMMODITY MARKETS 

70 Global commodities: long-term vision for stable, secure and sustainable global markets 

6. MITIGATING AND ADAPTING TO CLIMATE CHANGE 

4.44 Moving to a sustainable low-carbon economy will provide greater security to 

global commodity markets, by encouraging better resource efficiency and greater 

supply diversity. But coordinated international action is required if we are to make the 

global transition to a food and resource efficient economy. This international action 

must comprise both measures to move to a carbon constrained economy as well as 

support for adaptation to climate change 

4.45 Action to mitigate against climate change will form part of the international 

community’s policy response to ensure sustainable commodity markets. Diversification 

of energy supplies towards low carbon sources will improve security of supply. Existing 

renewable technology, carbon capture and storage and nuclear must all be a large part 

of a solution, supplemented by international research and development of alternative 

energies, such as those explored in IEA roadmaps on 17 key technologies. For 

developing countries, the international community must provide financial and 

technical assistance to support low carbon and climate resilient economies, which are 

protected from some of the impacts of high commodity prices. The Strategic Climate 

Fund will provide funding to this end. 

4.46 Moves towards resource efficiency and improved emissions intensity will help 

to reduce and stabilise demand. Recent agreement to the IEA’s 25 recommendations on 

energy efficiency is an important development, and further ambitious international 

cooperation will be required. 

4.47 Climate change will increasingly affect agricultural production through changes 

in temperature, rain patterns and increased severe weather events. The effect of this 

will fall disproportionately on low-income developing countries. These countries must 

be assisted in adapting to climate change, so that they are provided with more secure 

and stable access to food. 

Policy responses: ensuring fairness 

Short-term 

• resourcing properly effective humanitarian assistance through the World Food 

Programme. The UK has provided $60 million to the recent WFP appeal; and 

• improving provision of cheap seeds and fertilisers ahead of the next planting season; 

Medium/ long-term 

• doubling of agricultural production in Africa and agricultural growth rates in South Asia. In 

both Africa and Asia, agriculture must be a driver of growth and poverty reduction; and 

• delivering international commitments on Official Development Assistance (ODA). 
 ENSURING STABLE , SECURE AND SUSTAINABLE GLOBAL COMMODITY MARKETS 4

Global commodities: long-term vision for stable, secure and sustainable global markets 71

4.48 An ambitious global climate change deal is needed that places all countries on a 

low-carbon growth path, and which addresses the challenges faced by adapting to 

climate change. Such a deal, which must enable countries to reduce emissions at the 

least cost to their growth and development ambitions, should be mindful of Stern’s 

conclusion that a 1 per cent of GDP invested now in tackling global climate change will 

save us 5 to 20 per cent later. At its core must be market-based incentives, that put a 

cost on carbon, such as the global carbon market, for private finance to drive 

investments into lower-carbon technologies. Late last year, all countries agreed to 

launch negotiations, which should conclude by end 2009, under the UNFCCC ‘Bali 

Action Plan’, for a global deal to succeed the Kyoto Protocol, which expires in 2012. 

4.49 As set out earlier in the document, balancing competing demands for land use 

presents a particular challenge for commodity markets in the context of climate change, 

including protecting rainforests, the use of irrigation and water sustainability, and the 

development of biofuels. A number of recent policies and commitments have been put 

in place to encourage the production and use of biofuels in particular. 

4.50 In light of recent concerns over the sustainable use and production of biofuels, 

the UK Government has commissioned an independent review of the impacts (direct 

and indirect) of biofuels, including implications for land use and food production. The 

Gallagher review is due to report in late June. It will ensure that policy decisions are 

taken on the best possible evidence basis and should provide useful information for the 

re-examination of EU and international biofuels policy and related targets, including a 

full assessment of the impact on global food prices. 

Land use and 

biofuels

Policy responses: mitigating and adapting to climate change 

Short-term 

• securing agreement to the Strategic Climate Fund, assisting low-carbon and climateresilient growth for developing countries; 

• implementing measures within the EU to substantially reduce emissions by 2020, increase 

energy efficiency and deliver up to 12 carbon capture and storage demonstration plants; 

• examining the impact of biofuels on food production; and 

• implementing the recent G8 Energy agreement to take forward the IEA’s 25 

recommendations on energy efficiency. 

Medium/ long-term 

• agreeing an ambitious international deal on climate change reached by the end of 2009; 

• developing the global carbon market, including through the linking of emissions trading 

schemes; 

• increasing international commitment to accelerate the development and deployment of 

low-carbon technologies; and 

• incorporating mitigation and adaptation strategies within national development plans. 
9 781845 324674

ISBN 978-1-84532-467-4