The Ocean of Resources

The question of declining resources is not new. Long before current frameworks, such as the Natural Step, put declining resources at the center of attention, the issue of resource scarcity commanded the notice of theorists and practitioners alike. From Plato in the fourth century BC to Thomas Malthus in 1798 to the Club of Rome in 1972, a parade of esteemed thinkers drew our attention to the looming collapse—to no avail. Hardly any changes in the behavior of businesses, governments, and consumers alike were inspired by their powerful outcry—if anything, the global market grew tired and deaf to the calls for radically new business models. Why?

While the theory of resource decline seemed strong and sound, for nearly two centuries the market reality had been telling the opposite story. McKinsey’s 2011 report Resource Revolution puts it best:

Throughout the 20th century, resource prices declined in real terms or, in the case of energy, were flat overall despite periodic supply shocks and volatility. The real price of MGI’s index of the most important commodities fell by almost half. This decline is startling and impressive when we consider that, during this 100-year period, the global population quadrupled and global GDP increased by roughly 20 times. The result was strong increases in demand for resources of 600 to 2,000 percent, depending on the resource.

In essence, what the declining prices of resources told us for so long was that we could have our cake and eat it too—grow our population, increase our consumption, and keep cutting prices, all at the same time.

But that was then.

The now looks drastically different—and the speed of waking up to this new reality will determine who will survive and who will vanish in the new era. Each year, I work with about 5,000 senior managers directly, and our conversations so far suggest that the majority have not yet fully awakened to this new world of a rapidly collapsing resource base. So here are a few alarm sirens for you—the general trends that are beyond striking:

 

• Since the turn of the 21st century, real commodity prices increased 147 percent.

• At a minimum, an additional $1 trillion annual investment in the resource system is necessary to meet future resource demands.

• Three billion more middle-class consumers are expected to be in the global economy by 2030, all putting new pressures on resource demand.

 

The particularities are no less alarming. Whatever key aspect of business—or life—we consider, declining resources are unraveling the very foundation on which we built our economy.

For decades, the energy debate has been struggling with the question of how much oil and other fossil fuel is left, with no agreement in sight. What we do have agreement on are the demand and the cost of energy. By 2030, world energy use is expected to exceed the 2011 baseline by 36 percent, and the past decade has seen a 100 percent increase in the average cost to bring a new oil well on line. The demand and the supply pressures together create a perfect storm for any business—not because we are running out of oil or any other resource but because the price of energy is becoming severely unpredictable.

Figure 1 is a simple visualization of this volatility: using nominal data from the Energy Information Administration on spot prices of a Brent barrel of petroleum, converted to US dollars in August 2013 using the US Consumer Price Index for All Urban Consumers (CPIU) to show a more realistic picture, I have plotted the price of oil from January 1986 to August 2013. It turned out to be a rather exciting roller-coaster ride!

Imagine that we run a company producing chairs—perhaps the very chair you are now sitting on. Much of the raw materials in the chair are petroleum derived or petroleum dependent. Now, imaginethat we are trying to set a sound pricing policy for our beautiful chair—and naturally, we need a somewhat stable cost structure. How do you manage the up-and-down movement in the price of oil—and all dependent products—like what we have seen in the last five years?

If oil prices seem remote to you, the next group of resources cannot possibly leave you uninterested. Do you know anybody who doesn’t eat?

Whenever one talks about food, it is assumed that availability is an issue. Yet when 40 percent of food in the United States is never eaten—amounting to $165 billion a year in waste—clearly, when it comes to the developed world, availability is not an issue. Instead, accessibility of food is becoming a strategic concern. Like a nice risotto or rice pudding? Of the top 10 rice-producing countries of the world, the first two—China and India—produce and control more than the other eight combined. If your company or your supplier depends on rice production, such dependency creates real strategic concern, as exemplified by the story of the 2008 global rice crisis. The crisis took place in early 2008, when the international trading price of rice jumped dramatically, increasing more than 300 percent, from $300 to $1,200 per ton, in just four months.

Perhaps rice is not your food of choice, and access to India’s resources is far from your business challenges. Yet the global decline of food resources touches every person and every company, if we look at the level of the nutritional content of our most precious vegetablecrops. A 2004 study shows an average decline of 20 percent of vita-min C, 6 percent of protein, 16 percent of calcium, 9 percent of phosphorus, 15 percent of iron, and 38 percent of riboflavin from 1950 to 1999 in 43 vegetable crops. We can already foresee a beautiful ripe tomato with absolutely no nutritional value.

A discussion of food leads straight to another essential resource, used in every sphere of business across the global value chain: water.

Water is the new oil, says the conventional wisdom of the 21st century. So how much water did you use today?

If you skipped the shower, you might have guessed three to five gallons (or about 10 to 20 liters). A nice bath, and you are probably hitting around 40 gallons (around 150 liters). So what would be the total water count for the day? Fifty gallons, anybody? Or perhaps 100? Think again!

If you had a cup of coffee, some toast, and an egg this morning, you have already consumed about 120 gallons (about 450 liters) of water—enough for three typical baths! And if these words catch you after a nice steak, you might be surprised that a half-pounder would “cost” you a whopping 1,017 gallons (or 3,850 liters)! These calculations are based on the Global Water Footprint Standard, developed through the joint efforts of scientists to allow companies and consumers to deal with the growing water shortages. When it comes to disruption of corporate competitiveness and profitability, the shortages are no joke.

Already today, as the clean water supply is unable to keep up with demand, an estimated 1.1 billion people lack access to safe drinking water. No wonder that Paul Bulcke, CEO of one of the largest food corporations in the world, Nestlé, is calling water scarcity the greatest threat to food security in the future. “By 2030, the demand for water is forecast to be 50 percent higher than today; withdrawals could exceednatural renewal by over 60 percent, resulting in water scarcity for a third of the world’s population…. It is anticipated that there will be up to 30 percent shortfalls in global cereal production by 2030 due to water scarcity,” says Bulcke. “This is a loss equivalent to the entire grain crops of India and the United States combined…. Resource shortages lead to price increases and volatility.” What a world for us to navigate!

And global water scarcity is only the tip of another gloomy iceberg.

The year 2012 was tough for the US insurance industry. “From Hurricane Sandy’s devastating blow to the Northeast to the protracted drought that hit the Midwest Corn Belt, natural catastrophes across the United States pounded insurers last year, generating $35 billion in privately insured property losses, $11 billion more than the average over the last decade,” the New York Times reported in May 2013. Much of that bill was covered by the reinsurers—companies that take on insurance policies from primary insurance companies eager to spread out their risk. And if you were an insurance company affected by Sandy, you’d better pray that you had a reinsurer behind you. What about the reinsurers themselves? One of the biggest companies in this business is Swiss Re. J. Eric Smith, CEO of Swiss Re Americas, says of these concerns, “What keeps us up at night is climate change. We see the long-term effect of climate change on society, and it really frightens us.”

We might keep debating the science of climate change, going back and forth in politicized discussions of every kind. A stable climate, however, is a key resource for all countries and economies to manage in the years to come. And already today, for one crucial industry—which services much of the global market—the verdict is painfully clear: “For insurers, no doubts on climate change.”

Just about now, it would be a good idea for me to stop this doom-and-gloom overview of the upcoming Armageddon. But my hope is that you can see past the challenges to the opportunities. When dealing with a heavy load of data, a wonderful friend and one of the best management professors in the world, J. B. Kassarjan, always offers his clients a magic phrase: “Facts are friendly.” Facts are friendly, indeed—and for all the companies pursuing the Overfished Ocean Strategy, they have become a source of competitive advantage. From one set of facts we go to another, traveling from the ocean of resources to the ocean that is getting intensely abused: waste.