From a private sector, some issues are just too big that it is impossible for a single company to bring about change or initiate a change. The McKinsey Global Institute was developed for such a reason. Each year McKinsey Global Institute will look at problems that are too large for a company to invest in. For example resource management, a resource nexus, water security, energy shortage, etc.
Marc Zornes was nice to have a skype chat to talk a little about what resource management. Marc’s work included Resource Revolution: Meeting the world’s energy, materials, food, and water needs published in 2011.
Marc started the conversation with a history lesson. “Some things have gotten bigger, while others have gotten smaller,” he said. Resource got smaller so guess what got larger. In the last past 10 years, the commodity price increased well above that of World War I and World War II. Goods are at its highest value since all the way back in the 1800’s. So what is the cause?
- Growth of new middle class consumers – there will be 3 billion new middle class consumers in the next 10 years. Demand is being increasing year after year
- Increasing cost of new supply – although there are still enough resource to satisfy the growth and consumption for a while, getting to the resource is getting harder and more consuming.
- Resources are increasingly linked – in a global market, there are so many links that depend on one another.
- Environmental concerns impacting production – climate adaptation and mitigation of concern and risk management in environmental issues is driving the price up
- Concern about resource access – on a global stage, there are voices that are calling to bring everyone equal access which is driving the demand as well as increasing supply.
It took 154 years for UK to double its GDP, the US and Germany took about 50 years, but China and India only took 10 years. The UK growth involved 9 million people while in China and India over 1 billion people is affected. Marc stress how the demand and supply are not lining up.
Marc then goes into detail about how the links between resources is vital to resource management. Consumption and supply does not answer all the questions in the links between resources. There are the problems of risk, finance, policy, and technology. Take water for example, 70% of water goes on agriculture and land use while only about 15% are used in energy and material. But think of the current issues about water. Energy and water bring about major problems such as pollution, water storage, and ecosystem change.
Resource management and the lack of resource management of ten pose risk to global growth as well as welfare. 10% increase of crude oil can reduce global GDP by 0.2-0.3% according to IMF. The World Bank also showed that in 2007-2008, over 48 countries experienced riots and protests due to food.
So how do we achieve the demand and adopt a program to solve the resource problem.
- Supply Expansion – invest in supply ensures 2030 supply is equal o projected base case. For example we need to add 30% more capacity compared to 2030’s in energy. How about water? We have extracted more water than it replenish. There are already water sources that are drying out. Water pricing may help in this case but what amount? Marc did not answer the question.
- Political openness – political risk in resource is high. A regulation or policy may hinder the growth in resource management. For example, building buildings with LEED or energy star will be built differently than other that has not.
- Adopt an intergrated approach – look at resource as they are linked together.
- Strengthen market signals- allow market to make the change depending on how the private industry will bring about the change
- Address other market failures: same as 3 in which resources are linked. So one failure may lead to another
- Create long-term resilience: technology can bring about a lot of changes and from an environmental perspective, a long-term resilience is needed.