Pity Tommy Norris and his real-world counterparts, writes The Economist. Tommy Norris, a character in the movie “Landman” played by Billy Bob Thornton, is an oil industry expert with a complicated personal life. According to him, the ideal price for a barrel of oil is $78. At this level, producers have enough profits to pay for geological exploration, while consumers do not face large changes in prices.
Today, the price of Brent crude, the global benchmark, is around $65, below Norris’s ideal level and also highly volatile, having fluctuated significantly in recent weeks due to tensions in the Middle East. Most industries face long-term price trends. For example, the consumer electronics industry has been making technological advances that have made it cheaper in real terms for decades.
In labor-intensive services, such as education and health care, prices tend to rise due to a phenomenon known as “Baumol’s cost disease,” the tendency for wage pressures to rise in line with rising incomes throughout the economy. In contrast, physical goods such as agricultural products, energy, and metals do not follow a clear long-term trend. They have a problematic tendency: during periods of great prosperity, production exceeds ideal demand, while during crises it falls far below it.
This effect is important because commodities are an essential part of almost every product, from tennis rackets to cosmetics and medical equipment. The recent oil price shocks caused by war are familiar to industry experts. According to a World Bank study, these fluctuations have become more frequent and severe in recent years. Today’s cycles of fluctuations are shorter and more extreme than before.
The main reason for the change is that previously commodity cycles were largely driven by supply. Production is time-consuming and capital-intensive. An offshore oil rig takes years to build, while extracting oil from shale deposits takes months. It takes 10 to 20 years from discovery to production. This means that supply cannot respond quickly to price changes, leading to overinvestment during boom periods and oversupply during downturns.
Inventory dynamics also affect the cyclical nature of commodities. Often, storing goods is expensive, and some agricultural products are volatile. Low inventories mean that even short-term balances between supply and demand can cause large price swings. Financial speculation also intensifies these fluctuations. More generally, demand for commodities is closely linked to the global economic cycle, and there is always the risk of a new war.
World Bank researchers used an algorithm to identify turning points in the prices of 27 commodities from 1970 to 2024. On average, each commodity experienced about 14 turning points in the past 50 years. Crises lasted an average of less than 4.5 years, while booms lasted about 3 years. Although the crises lasted longer, price fluctuations in positive and negative periods were roughly equal in size. About two-thirds of the time, commodities moved through common cyclical phases, reflecting the influence of the global economic cycle.
Industrial metals and energy were strongly correlated, while agricultural commodities moved more independently, driven by local factors such as weather and disease. From 1970 to 1985, cycles were largely driven by supply shocks, especially in energy. Then, in the period 1986-2001, markets became more stable, thanks to technological advances and the liberalization of global trade. But since the 2000s, volatility has begun to rise again, and since 2020 it has intensified significantly.
Now, booms last an average of 24 months, and busts only 23 months. The cycle has halved, from 90 months to 45 months. The World Bank calls this a new commodity market regime. This shift has been driven in part by events such as the Covid-19 pandemic, Russia’s invasion of Ukraine, and monetary policy changes over the past five years. But long-term structural changes also play a role. The global shift to green energy has boosted demand for critical minerals such as nickel and lithium.
At the same time, frequent extreme weather increases supply risks, especially in agriculture. The fragmentation of the global economy and trade barriers have negatively affected trade in goods. Concentrated production and a lack of diversification in supply chains make these markets very vulnerable to protectionist measures. This situation has important consequences for governments around the world.
According to the World Bank, two-thirds of developing and emerging market economies are heavily dependent on exports, fiscal revenues, and commodity-based economic activity. A more volatile price cycle poses a serious challenge to these countries' economic policies, reducing their chances of achieving sustainable growth.
This is also a challenge for central bankers in rich countries. Historically, they have “looked beyond” commodity price fluctuations, focusing more on core inflation measures, which typically exclude energy and food. This strategy made sense, as until 2020, periods of price increases and decreases were of equal magnitude.
But if the increases now outweigh the decreases, the situation becomes much more complex. The anger of Tommy Norris and his real-world counterparts is understandable. The change in commodity market dynamics means that oil prices will remain at their ideal levels for even less time./ The Economist
