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Is the Financial Community Ready for Straight Talk on Climate and Peak Oil?

By Keith Kloor

In the 1980s, commercials like this one for E.F. Hutton made the brokerage firm a household name with this catchy phrase: "When E.F. Hutton talks, people listen."

Today, the same might be said of Jeremy Grantham, the mega-successful hedge fund manager who, according to Wikipedia, "has built much of his investing reputation over his long career by correctly identifying speculative market "bubbles" as they were happening and steering clients' assets clear of impending crashes."  

Credit: Wikimedia Commons.

This week Grantham, a former economist for Royal Dutch Shell, caught the attention of people who believe in "peak oil" — that world oil production has already hit its high point and is now declining — and those who are concerned about climate change. He released his quarterly newsletter to GMO Capital, an investment firm that manages over $100 billion in assets. His essay is titled, "Time to wake up: days of abundant resources and falling prices are over forever."

Grantham cuts to the chase at the outset of his piece, writing that his purpose "is to persuade investors with an interest in the long term to change their whole frame of reference: to recognize that we now live in a different, more constrained world in which prices of raw materials will rise and shortages will be common."

What follows in his analysis is a "comprehensive look" at data that spells out the upward economic growth trajectories (and their rising populations) of developing countries, such as China, and how this will bump up against a finite level of natural resources, especially oil.

To Grantham, climate change adds to this imminent period of volatility. With respect to agriculture, he writes:

The scientific evidence for climate change is, of course, overwhelming. A point of complete agreement among climate scientists is that the most dependable feature of the planet's warming, other than the relentless increase in parts per million of CO2 in the atmosphere, is climate instability. Well, folks, the last 12 months were a monster of instability, and almost all of it bad for farming... Unfortunately, I am confident that we should be resigned to a high probability that extreme weather will be a feature of our collective future.

Grantham's portrayal of a world that will soon be forced to deal with the trifecta of resource scarcity, climate change and population growth, is not unlike the scenarios sketched out by the likes of the environmental thinker Lester Brown and geographer Jared Diamond.

What makes Grantham's essay unusual is the audience it is directed to. Nate Hagens notes this at The Oil Drum, a popular blog about energy issues, when he writes that such frank talk in an investment firm's quarterly newsletter is a "watershed" moment that "deserves to be highlighted." Still,  Hagen doubts that Grantham's message will penetrate the financial community, which is focused largely on delivering shorter term monetary gains to investors:

He [Grantham] is saying these things about limits, resource constraints, and human behavior as the head of a firm whose objective it is to increase financial capital. I expect his message will fall on deaf ears within the industry.

Grantham, who is a big supporter of environmental causes, (he also sponsors an annual environmental environmental journalism award) and has been outspoken about climate change, recognizes the forces he is up against. In his essay, he recounts a "monthly discussion" he was invited to, "held by a very diverse, very smart group," to which he "gave my first-ever 'running out of everything' harangue."

He recalls that not one person in the group agreed. Instead, "What they did agree on was that the human mind is — unlike resources — infinite and, consequently, the intellectual cavalry would always ride to the rescue." Grantham says that owing to jet lag, he didn't bother to remind them that many past civilizations, "despite being armed with the same brains as we have, bit the dust or just faded away after the misuse of their resources." 

Still, let's not underestimate human ingenuity. We have the capacity to delay that day of reckoning Grantham is predicting (if we stay on our high consumption, fossil-fuel reliant path). No less a dye-in-the-wool environmentalist than George Monbiot, a columnist for the Guardian newspaper, has acknowledged as much this week, in his column:

The problem we face is not that we have too little fossil fuel, but too much. As oil declines, economies will switch to tar sands, shale gas and coal; as accessible coal declines, they'll switch to ultra-deep reserves (using underground gasification to exploit them) and methane clathrates. The same probably applies to almost all minerals: we will find them, but exploiting them will mean trashing an ever greater proportion of the world's surface. We have enough non-renewable resources of all kinds to complete our wreckage of renewable resources: forests, soil, fish, freshwater, benign weather. Collapse will come one day, but not before we have pulled everything down with us.

No doubt, Grantham envisions a similar outcome if a more sustainable path is not charted soon. He writes in his essay that, "faith in the human brain" is not "justified by our past disasters, the accumulated damage we have done to the planet, or the frozen-in-the headlights response we are showing right now in the face of the distant locomotive quite rapidly approaching and, thoughtfully enough, whistling loudly." 

Yes, this clarion call from a brilliant financial mind will probably be ignored by his peers. Still, it's not often that the financial community is exposed to such straight talk on climate change and environmental concerns from one of their own — and in an economic context, such as a quarterly investment newsletter.

That's something to build on. As Nate Hagens said in his post at The Oil Drum, "in order to create change, we all have to start speaking a common language."

Comments

By Roddy Campbell
on May 9th, 2011

I very much enjoyed Grantham’s letter, and I am one of his target audience I guess.  One can nit-pick here and there, but essentially his point is that we are at a new level of commodity prices having had many many decades of fabulously falling prices across the board in real terms, because of human ingenuity in production exceeding population growth and consumption.  That last point is beyond argument, and he is right that most of us are conditioned to that.

Whether he is right that it’s all over, and in financial lingo we are now necessarily in a slower GDP growth (a slightly annoyingly tautological argument about the mathematical unsustainability of compound growth) and a bull market in commodity prices, is another thing.

He spends little time on climate impacts imho, which means his points are far better made.

Reply to this comment

By Keith Grubb (Tampa,Fl 33629)
on May 23rd, 2011

Keith,

Every time I try and comment at Collide-a-scape, I get an error message. WUWT?

Reply to this comment

By Susan Anderson (Boston MA)
on June 2nd, 2011

I’d like to see statistics about disaster relief over the decades.  Surely this is getting really expensive, and that would demonstrate the disproportion that is mounting with the passage of years.  A practical illustration might help, and this should put it in dollars which mean a lot more to most people than scientific understanding (sadly).

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