Real dangers of low oil and commodity prices – can a circular economy help?

The rising trend of oil and commodity prices in the periods 2001 to 2008 and 2009 to 2012 might be thought to be enough of a rationale for getting smarter with resource use and meeting customer demands in novel ways, such as selling products as services. Add in the very volatility of many of these prices and it should be compelling.

The present prolonged downturn in prices presages a third challenge. It is that of demand. Anyone who thought a functioning economy was or is primarily a question of supply needs to get out more. The customer, often a worker, requires sufficient income to make purchases, and to meet the other costs quite outside of products and everyday services such as rent/mortgages, insurance and taxes to name but a few. This is hardly new or rocket science, yet so little is written on the demand side of the circular economy that making the point again is, nevertheless, useful. A circular flow of income and expenditure is forever an interdependent feature of a circular flow of materials or the cascading of energy. In an era long characterised by stagnant or falling wages in the developed world; in which debt to income ratios are extremely high – and it’s hard to see them getting much higher – then it’s important to ask where sufficient demand will come from? 

Image: lyzadanger / Flickr CC BY SA
Image: lyzadanger / Flickr CC BY SA

The report Growth Within suggests lowered costs are possible – or even likely – in sectors like the built environment, food and mobility. With this would come an increase in consumer spending which will add to economic growth, but without creating a resources challenge. This should, the report notes, add to employment and encourage positive cycles of development.

In a benign environment this seems reasonable. But if it’s a truism that ‘all economic models are wrong but some are useful’, there are still obvious dangers. We’re seeing rising charges for rents and mortgages in an economy marked by easy money and asset bubbles, or simply because asset owners sense additional revenue is available to be had if other costs – mobility or food for example – are easing. The additional spending available might also be absorbed in compensating for stagnant real wages. It would be a question of holding on to a standard of living not increasing it. What’s more, in the USA, for example, 95% of all the additional growth from 2009-2012  has gone to the top 1%. Storing revenue as wealth in this way (e.g. real estate assets, stocks and bonds) usually works against the main purpose of income more generally, which is revealed in its circulation.

A fourth challenge has emerged from these years of low prices and that is the effects of rising costs of extraction for raw materials – and oil especially – meeting head on the reduction in capex (capital expenditure on new facilities or exploration) and the imminent bankruptcy of many, many businesses in the near term. If you see a price below $60 then expect supply destruction. This destruction now and into the future will leave only the genuine low cost suppliers (rather than those kept alive by exuberant, debt fuelled speculation). If so, oil and commodity prices can be expected to spike significantly as the medium and long term-fundamentals are revealed. Actual production will be hit by being expensive to ramp up and then demand-constrained when it is available. That’s a double whammy, likely to trigger a drop in economic activity once more. It’s a miserable situation for the productive economy and citizens alike.

Synergy Map of Higueras Village’s main stakeholders and economic players
Synergy Map of Higueras Village’s main stakeholders and economic players

Proactive businesses, in manufacturing and retail especially, might consider these co-mingling circumstances reason enough to increase resource efficiency and look at some of the circular economy business models. They might also look to the influencing of the ‘rules of the game’; to ensure worker/citizen income is sufficient to buy business’s products and services, because no income = no business. It’s an example of attempting to be effective to benefit the economy more broadly by being more context-driven. Plutocrat entrepreneur Nick Hanauer said it quite succinctly “We are all better off, when we are all better off.” In influencing overall demand through, for example, supporting higher minimum wages or a universal citizens income, businesses potentially enrich themselves through an increased flow of income and expenditures. A pro-growth agenda for sure, but within the auspices of a circular economy.

Such businesses might also accelerate transition to a circular economy themselves by reinforcing the idea and practice of directing materials and energy flows to be both ‘leaky’ and ‘nutritious’ so that even if some flows are not captured by the business themselves, ‘everything is food’ – it has a benefit elsewhere – while being ultimately restorative or regenerative if the systems conditions are right (see diagram above for an example from Eduardo Aguiñaga and Carlos Sheel’s work). This should increase economic resilience, overall access to usable resources, spur entrepreneurship and create more economic activity throughout.

Surely that’s fine by most of us?

Lead image: Image: Alan Greig / Flickr CC BY NC SA

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The Author

Ken Webster

Ken Webster

Ken Webster is Head of Innovation at the Ellen MacArthur Foundation and he is a major contributor to the development and communication of ideas in this field.