production capacity in the Gulf of Mexico and the North Sea and, second, additional capacity following the collapse of the Soviet Union. COVID-19, which caused a 9 percent decline in oil consumption during 2020, triggered supply cuts of similar magnitude by the OPEC+ group in April 2020 (World Bank 2020).

# **3. Literature review on commodity price behavior**

The likely paths of commodity prices and their relationship with economic development figured prominently in the early economic literature (Table 1). Malthus (1798) assumed that population growth would outpace production growth of commodities and foresaw shortages; although he did not explicitly mention food prices, the eventual shortages would be expected to exert upward pressure on commodity prices. Based on statistical evidence, Engel (1857, discussed in Stigler 1954) showed that consumers allocate a smaller proportion of their income to total food expenditures as they become wealthier. Engel’s conclusion, which was popularized by Kindleberger (1943) and became known as the declining terms-of-trade hypothesis, was later discussed and somewhat confirmed by Prebisch (1950) and Singer (1950).<sup>**2**</sup> In a related context, Hotelling (1931) demonstrated that the extraction costs of non-renewable resources should rise over time at a rate equal to the interest rate, implying that, for as long as real interest rates are positive, the real prices of non-renewable resources will be trending upwards.

In contrast to these ‘monotonic’ views, consistent with either upward (Malthus, Hotelling) or downward (Engel, Kindleberger, Prebisch-Singer) price paths, Schumpeter (1939) argued that innovation generates investment booms and busts (“creative destruction”) which lead to long-term cycles in the economic activity and, consequently, cycles in commodity prices.<sup>**3**</sup> Schumpeter’s views followed earlier work on cycles by Kondratieff (1926, discussed in Kondratieff and Stolper 1935) and Kuznets (1930). Similar conclusions were reached by others from different perspectives, including Slade (1982) who argued that the combination of low income elasticity of supply and delays caused by investment projects generate cycles with longer duration than the traditional business cycle.

> **2** The declining Terms-of-trade hypothesis, which served as the intellectual foundation of the post-WWII industrialization policies, was championed by Kindleberger (1943) who wrote (p. 349): ”A comparative advantage in natural silk, nitrates, or rubber, or an economy founded on coal and steam may be of fleeting profitability. Inexorably, too, the terms of trade move against agricultural and raw material countries as the world's standard of living increases (except in time of war) and as Engel's law of consumption operates. The elasticity of demand for wheat, cotton, sugar, coffee, and bananas is low with respect to income. If the agricultural and raw material countries of the world want to share the increase in the world’s productivity, including that in their own products, they must join the transfer of resources from agricultural, pastoral pursuits, and mining to industry.” It is noteworthy to mention that Engel’s statistical analysis applied to food commodities while Kindleberger generalized it to all primary commodities.

3 Jégourel (2018) discusses extensively the relationship between commodity price cycles and business cycles.

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