Do Higher Commodity Prices Signal Military Conflict?

Over the weekend while reading The Economist, I came across one of the more unique and insightful extrapolations of what rising commodity prices might signal going forward in. The story (registration required), discusses how higher commodity prices can signal an escalation in the potential for military conflict. The article explore how "Higher prices are often a symptom of scarcity … when those scarce goods are vital for the smooth running of the economy (as oil is), it is natural for countries to get a bit desperate." As an example, consider how, "China, is attempting to secure its commodity supplies by doing deals with producers ... [Because of this US] attempts to send peacekeepers to Sudan, or to impose sanctions on Iran, may be frustrated by Chinese opposition. In turn, that may increase hostility towards China in American political circles."

Now if you layer on top of this the general belief that countries with greater mineral resources tend to be less developed from a democratic standpoint -- and would be less likely to share the same economic incentives of Western nations -- things get even more interesting. In this regard, "raw materials are usually found in troublespots, rather than liberal democracies (Canada and Norway being among the honourable exceptions). This is no coincidence. Raw material wealth is often described as a curse, having an effect similar to inherited wealth on younger generations. Governments simply skim the wealth from the resource sector, rather than build up other industries or create legal structures that give property rights to the broad population. Corruption flourishes. So high commodity prices tend to take money away from 'nice' people and give it to 'nasty' people."

Personally -- and unfortunately -- I believe The Economist is onto something here. But just as sophisticated procurement organizations are best equipped to manage through volatility to get ahead of the competition in challenging times, more sophisticated nations are likely to think through the implications and strategies to deal with military scenarios based on rising commodity markets (versus just acting impulsively to secure short-term interests). In some cases, this might mean investing more in actions to secure long-term interests and international security (e.g., doing something about that yahoo in Venezeula). Perhaps it might mean thinking more seriously about the game theory involved in China's thirst for securing commodities to fuel its growth. Or, as the article suggests, we could all just "put on helmets" as a last resort.

Jason Busch

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