Natural Resources Definitions Trade Patterns and Globalisation

world trade report 2010
44
This section provides a broad overview of the
role that trade in natural resources plays in the
global economy. It begins with a discussion of
definitions and terminology, focusing on key
features that distinguish natural resources from
other types of traded goods. These features
include the exhaustibility of natural resources,
the uneven geographical distribution of resource
endowments, the presence of externalities in the
spillover effects of extraction and use of natural
resources, the dominance of the natural
resources sector in many national economies,
and the high degree of price volatility in this
class of goods. A variety of statistical data related
to natural resources are presented in order to
illustrate the magnitude and direction of global
trade flows.
B. Natural resources:
Definitions, trade patterns
and globalization

II – Trade in natural resources
45
B.NATURALRESOURCES
Contents
1. Definitions and key features of natural resources 46
2. Natural resource trade flows and related indicators 54
3. Modes of natural resources trade 59
4. Natural resources: Globalization and the intellectual debate 63
5. Conclusions 70

46
Since most natural resources trade is conducted
through organized commodity exchanges, we examine
the role that financial markets play in determining prices
and quantities. This is followed by a historical account
of trade in natural resources since the industrial
revolution, touching on the recurring themes of
technological change, trade liberalization and scarcity.
This account also elaborates the evolution of thinking
about how perceptions of natural resources have
evolved over time, including their role in determining
economic and political outcomes. Together, these
analyses provide essential background information for
the theoretical and policy-related discussions in
subsequent chapters.
1. Definitions and key features
of natural resources
Natural resources are difficult to define precisely,
particularly in the context of international trade. Most
people have an intuitive idea of what natural resources
are, but “common sense” definitions cannot be relied
upon since they eventually run into problems when
dealing with ambiguous cases. For example, crude oil
and wood are clearly natural resources, but it is less
obvious how intermediate and final goods made from
these products should be classified.
All goods either embody natural resources (e.g.
automobiles contain iron ore) or require resources for
their production (e.g. food crops require land and water
to grow), so all goods could conceivably be classified as
natural resources. Such an approach would be logically
consistent but otherwise unenlightening. At another
extreme, one could choose to focus strictly on resources
in their natural state. However, even clear-cut examples
of natural resources would be difficult to classify as
such under this approach, since most resources require
at least some processing before they can be traded or
consumed. Regardless of the choice of definition, the
line of demarcation between natural resources and
other goods will always be somewhat arbitrary.
For the purposes of this report we define natural
resources as “stocks of materials that exist in the
natural environment that are both scarce and
economically useful in production or consumption,
either in their raw state or after a minimal amount of
processing”.1
Note the qualifier “economically useful” in
this definition. For example, sea water is a natural
substance that covers much of the earth’s surface, but
it is of limited intrinsic or direct value for consumption or
production. Goods must also be scarce in the economic
sense to qualify as natural resources; otherwise people
could consume as much as they wanted at no cost to
themselves or to others.
Air would not be considered a natural resource under
this definition because people can obtain it freely simply
by breathing. This is not to suggest that air (especially
clean air) or for that matter sea water (e.g. as a carbon
sink) are without value, but it does mean that they are
not commodities that can be traded in markets. In this
report, the term “resources” is used interchangeably
with “natural resources”.
A useful definition should not only identify the nature of
natural resources but also distinguish what is and what
is not a natural resource. Under the above criteria, it is
clear that manufactured goods such as automobiles
and computers would not be considered resources,
since both are subject to more than a minimal amount of
processing. However, this should not be taken to imply
that all primary products are covered as natural
resources in the report. For example, while most
agricultural goods including food are primary products,
we do not classify them as natural resources for a
number of reasons. To begin with, their production
requires other natural resources as inputs, particularly
land and water but also various types of fertilizer. More
importantly, agricultural products are cultivated rather
than extracted from the natural environment.
Two important exceptions in this report relate to fish and
forestry products, which are normally classified under
agriculture in WTO trade statistics, but which are treated
here as natural resources. Both fish and forestry products
can be cultivated, for example in aquaculture for fish or
through forest management for wood. However,
traditionally they have simply been taken from existing
natural stocks, and still are for the most part. Unfortunately,
it is impossible to distinguish between cultivated and non-
cultivated varieties of these products in standard
databases on international trade, but some effort has
been made to identify these in the case of fish.
Natural resources can be thought of as natural capital
assets, distinct from physical and human capital in that
they are not created by human activity. Natural capital
may be a potentially important input in a country’s
“production function” – that is, Y = f (K, L, N), where “Y”
is output, “K” is capital, “L” is labour and “N” is natural
resources. It is important to distinguish between natural
resources as factors of production and natural resources
as goods that can be traded internationally. For instance,
minerals, oil, and various other materials can be
extracted and enter into trade. However, other resources
may form the economic basis for various sectors of the
domestic economy, and therefore are only involved in
trade in an indirect way (Josling, 2009). For example,
climate and scenery can be exported through tourism.
Similarly, agricultural land, which is the archetypal “fixed,
immobile” natural resource, can be exported through
agricultural commodities grown on that land. Hence, at a
fundamental level, natural resources are often a reason
for trade rather than tradable goods in their own right.
A more precise statistical definition that identifies
exactly which products are to be counted as natural
resources in trade data is provided in a Statistical
Appendix, but the main product groups covered in this
report are fish, forestry products, fuels, ores and other
minerals, and non-ferrous metals. Taken together, the
product groups ores and other minerals and non-ferrous
metals are referred to as mining products. Broader
conceptions of natural resources will also be employed
from time to time, particularly as they relate to non-

47
B.NATURALRESOURCES
tradable resources such as scenery, bio-diversity or
non-traded goods such as water or land.
As noted earlier, natural resources falling under our
definition typically share a number of key features,
including exhaustibility, uneven distribution across
countries, negative externalities consequences in other
areas, dominance within national economies and price
volatility. We now examine each of these features and
illustrate them with some concrete examples.
(a) Exhaustibility
In resource economics, a distinction is usually made
between renewable and non-renewable resources. A
renewable resource is a resource that either increases
in quantity or otherwise renews itself over a short (i.e.
economically relevant) period of time. Hence, if the rate
of extraction takes account of limitations in the
reproductive capacity of the resource, renewables can
provide yields over an infinite time horizon. Of course,
the timeframe must be economically relevant, since
some resources may be renewable in principle but not
in practice. For example, it takes hundreds of millions of
years for dead trees to be transformed into coal and oil
(Blundell and Armstrong, 2007), and hundreds of years
for certain kinds of trees to grow to maturity (Conrad,
1999), so old growth forests would not be considered
renewable resources despite the fact that they do
renew themselves over time. Classic examples of
renewable resources are fisheries and forests.
Non-renewable resources are defined as all resources
that do not grow or otherwise renew themselves over
time. Another way of putting this is that non-renewable
resources exist in finite quantities, so every unit
consumed today reduces the amount available for
future consumption. The most common examples of
non-renewable resources are fossil fuels and mineral
deposits. The term exhaustible is sometimes used as a
synonym for non-renewable, but it is worth noting that
renewable resources may also be exhaustible if they are
over-exploited.
In general, the sustainable management of any resource
rests on a capacity to monitor the evolution of stocks
and take corrective action in cases of significant
degradation or decline. In the case of man-made
physical assets, the cost of maintaining, renewing,
expanding and improving the capital stock is an explicit
part of production costs (capital depreciation is
accounted for as an expense). For natural resources,
however, this is not always the case. The value of natural
capital is often not accounted for at the level of the
individual firm or in national accounts. This implies that
neither their contribution to growth nor the extent and
impact of their degradation are fully measured and
recognized by policy makers.
Another type of cost that is related to exhaustibility but
not explicitly accounted for in natural resources use is
the effect of rent-seeking behaviour. The scarcity of
natural resources generates economic rents (i.e. the
premium that the resource owner receives above
opportunity cost, or the cost of the next best alternative
use of the relevant assets). Policies, including trade
measures, that alter the supply and demand and hence
the price of resources alter the distribution of rents
across time and countries, sometimes lead to
international tension.
Technological change can effectively increase the
supply of resources by contributing to new discoveries
and allowing extraction of stocks that could not be
reached before. According to the BP World Energy
Review (2009), proven world oil reserves2
rose from
998 billion barrels in 1988 to 1,069 billion barrels in
1998 and 1,258 billion barrels in 2008, thanks largely
to new discoveries and advances in extraction
technology. Changes in technology can also influence
the rate of depletion of a resource by either increasing
its rate of use (e.g. electrical energy for increased use
of electronics, computers, etc.) or decreasing it (e.g.
improvements in the efficiency of automobiles).
Technological developments like these would change
the rate at which a resource was used up, but it would
not alter the fact of its exhaustibility.
Many petroleum experts believe that world oil production
has or soon will reach its maximum point, known as
“peak oil” (Hackett, 2006) . Once oil production peaks,
it is believed that future supplies will become more and
more difficult to obtain, causing the flow of oil to decline
inexorably according to a logistic distribution known as
the Hubbert curve. This bell-shaped curve is named
after M. King Hubbert, who accurately predicted in the
1950s that United States oil production would peak
around 1970 and decline thereafter (see Figure 1).
More pessimistic peak oil theorists predict enormous
economic disruptions in the near future as a result of
rapidly dwindling supplies, while more optimistic
observers put the date of world peak oil production
many years, if not decades, in the future. Peak oil theory
has been less successful at predicting maximum oil
production in countries other than the United States or
at the world level, but few would dispute the notion that
oil production will begin to decline at some point in the
future if current rates of consumption continue.
Another example of a renewable resource that may be in
decline is fish. According to statistics from the United
Nations Food and Agriculture Organization (FAO), total
world fisheries production rose from 98 million tonnes in
1990 to 140 million tonnes in 2007, an increase of 42 per
cent. During the same period, total world exports of fish
jumped 60 per cent from 33 million tonnes to 53 million
tonnes. The share of trade in world fish production also
advanced from 34 per cent in 1990 to 38 per cent in
2007. Despite rising production and trade, annual catches
from oceans and fresh water fisheries have been mostly
flat during this period, at around 90 million tonnes, with
nearly all growth in recent years accounted for by
aquaculture, otherwise known as “fish farming” (see
Figure 2). This could indicate that the world’s oceans and
fresh water fisheries have reached peak production and
are in danger of over-exploitation in the face of growing
demand.

48
(b) Uneven distribution across countries
Many natural resources are concentrated in a small
number of countries, while others have limited domestic
supplies. For example, Appendix Table 1 shows that
nearly 90 per cent of the world’s proved oil reserves
are located in just 15 countries (out of slightly more
than 200 in the world today), and 99 per cent of oil
reserves are found in 40 countries.3
International trade
can help to alleviate these kinds of disparities in natural
endowments by allowing resources to move from areas
of excess supply to areas of excess demand, which
may also serve to promote the most efficient use of
these products. However, since natural resources are
indispensable inputs for production and are also
necessary for maintaining a high quality of human life,
the unequal distribution of resources can cause friction
among nations.
The nature of the friction associated with natural
resources may be different from that observed in the
case of other types of goods. In most trade disputes
involving agricultural or manufactured goods, a country
seeks to restrict imports. Many reasons may be given
for this, including fiscal needs, support for an infant or a
“strategic” industry, public considerations (health,
environment, safety etc.), or as a response to trade
practices that the importing country perceives to be
unfair. Conversely, most importing countries are eager
to obtain natural resources from foreign suppliers. But
exporting countries may be reluctant to allow their
resources to flow freely to other nations, also for a
variety of reasons. These include fiscal needs, the
desire for economic diversification through additional
processing of raw materials, ensuring adequate
domestic supplies, and protecting the environment.
The uneven geographical distribution of traded natural
resources is further illustrated by Maps 1 to 5 in the
Figure 1: Monthly United States oil production, Jan. 1920-Jan. 2010 (Million barrels)
0
50
100
150
200
250
300
350
Jan-1920
Jan-1925
Jan-1930
Jan-1935
Jan-1940
Jan-1945
Jan-1950
Jan-1955
Jan-1960
Jan-1965
Jan-1970
Jan-1975
Jan-1980
Jan-1985
Jan-1990
Jan-1995
Jan-2000
Jan-2005
Jan-2010
Source: United States Department of Energy, Energy Information Adminstration.
Figure 2: World fisheries production, 1990-2007 (Million tonnes)
0
20
40
60
80
100
120
140
160
1990
1991
1992
1993
1994
1995
1996
1997
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2007
Aquaculture production Capture production Total fish production
Source: United Nations Food and Agriculture Organization, AQUASTAT database.

49
B.NATURALRESOURCES
Appendix, which show net exporters and net importers
by product, based on merchandise trade data from the
UN Comtrade database. The distribution of fuels and
non-ferrous metals is particularly noteworthy, since all
of the world’s largest industrial economies are net
importers of these goods. With few exceptions,
European countries are net importers of all types of
natural resources, as are Japan and the Republic of
Korea. The United States is a net exporter of forestry
products and mineral ores, but a net importer of all
other tradable resources. India and China are only net
exporters of fish, while they are net importers of the
other resource products dealt with in this report. Russia
is a net exporter, except of fish. Among major developed
economies, only Canada is a net exporter of all types of
natural resources discussed here.
Water is mostly non-traded but it is also very unevenly
distributed across countries. According to the United
Nations, humanity is facing a drastic problem of water
scarcity (United Nations, 2009). The vast majority of
the earth’s water resources are salt water, with only 2.5
per cent being fresh water. Approximately 70 per cent
of the fresh water available is frozen in the icecaps of
Antarctica and Greenland, leaving just 0.7 per cent of
total world water resources for consumption, and of this
0.7 per cent, roughly 87 per cent is allocated to
agricultural purposes. The world’s limited reserves of
clean, fresh water for human consumption are shrinking
fast, posing a serious threat to public health, political
stability and the environment.
Among the main factors aggravating water scarcity are
population growth, increasing urbanization, and high
levels of per capita consumption. Climate change is also
expected to contribute to greater water scarcity in the
future, as rising temperatures lead to droughts,
desertification and increasing demand for water. The
problem of water scarcity is more acute in some
countries than in others, which is illustrated by Map 6 in
the Appendix. It shows that per capita water supplies are
many times greater in countries like Canada, Russia and
Brazil than they are in the Middle East and large parts of
Africa. For example, Canada’s supply of 87,000 m3 per
person per year is roughly nine times greater than the
9,800 m3 available to citizens of the United States every
year. However, the US supply is nearly 14 times greater
than that of Egypt, at 700 m3 per person per year.
Moreover, Egypt’s water supply is roughly seven times
greater than that of Saudi Arabia, with resources of just
95 m3 per person per year (UN Food and Agriculture
Organization, AQUASTAT database).
International trade could conceivably help to alleviate
local problems of water scarcity by moving resources to
where they are most needed. However, countries are
unable or unwilling to do so, as large-scale shipments
are essentially non-existent. Reasons for this lack of
trade are largely technical, since water is bulky and is
therefore difficult to transport. Water scarcity or
abundance also tends to be shared by most countries
within a given region, so water would have to be
transported long distances to make a difference to the
problem of scarcity.
Although water itself may not be tradable, international
trade can have an indirect and beneficial effect on
domestic supplies of water. Exports of water-intensive
products (e.g. agricultural goods) from regions of water
abundance to regions where water is scarce can
generate savings in importing countries by freeing up
resources for other uses. For example, from 1997 to
2001, Japan’s imports of water-intensive goods saved
the country 94 billion m3 of water that would have been
required if Japan had produced the goods domestically
(Hoekstra, 2008b).
(c) Externalities
An externality occurs when the actions of one economic
agent affect other agents indirectly, in either a positive
or negative way (Nicholson, 2001). Another way of
expressing this is that the outcomes of certain activities
may impose external costs on, or provide external
benefits to, consumers or firms not involved in the
relevant production or consumption decision. These
“externalities” can be negative or positive. An example
of a negative externality would be when a production
process results in pollution that adversely affects the
health of people who live nearby, or that damages the
natural environment in a way that reduces the well-
being of individuals indirectly. A positive externality
might occur when homeowners make improvements to
their properties that raise the market value of
neighbouring houses as well.
From a perspective of social well-being, externalities
cause goods to be over-produced or under-produced,
depending on whether the externality is positive or
negative. This is because the market price of the good
in question does not reflect its true cost or benefit to
society. A good whose production and use imposes
external costs on other agents would tend to be over-
produced because these additional costs are not
included in the buyer’s calculations. On the other hand,
goods that provide external benefits tend to be under-
produced because their market price is too low. The
solution to the problem of externalities, whether positive
or negative, is to internalize all costs and benefits into
the price of the good, but this is difficult to achieve in
practice without the intervention of an external agent
such as a government.
Natural resource economics is mostly concerned with
negative externalities arising from the extraction and
consumption of resources, but positive externalities in
this area are not inconceivable. For example, over-fishing
of one species of fish may benefit another competing
species and improve the welfare of other fishing
enterprises. Another example would be when a mining
company builds a road that enables nearby farmers to
ship their goods to market. Since this kind of unintended
consequence is rare, the remaining discussion will focus
exclusively on negative externalities. Externalities will be
discussed in greater detail in Section C, but the following
examples illustrate the problem in the context of natural
resources.

50
The burning of fossil fuels produces a variety of
pollutants that directly harm human health, while also
emitting large quantities of greenhouse gases (mainly
CO2) that contribute to global warming. Since global
warming affects everyone on the planet, including
people who consume little fuel, the consumption of
fuels results in large externalities.
According to statistics from the International Energy
Agency, annual world CO2 emissions from fuel
combustion more than doubled between 1971 and
2007, rising from 14.1 billion tonnes to 28.9 billion
tonnes (International Energy Agency (IEA), 2009a).
During this period the share of developing countries in
world emissions increased from 34 per cent to 55 per
cent (see Figure 3). This increase can be attributed to
population growth, rising GDP, and increasing per
capita CO2 emissions in a number of developing
countries. Global CO2 emissions per person grew by
around 17 per cent between 1971 and 2007, with
sharper increases towards the end of the period on
account of rapid growth in some emerging economies
(see Figure 4). Per capita CO2 emissions of most
developed economies rose through the 1970s, but have
since either stabilized or declined slightly.
The above figures are not adjusted for levels of
economic activity. The influence of this factor is
observable in terms of the carbon intensity of world
output, or the CO2/GDP ratio (see Figure 4). The ratio
declined 33 per cent at the global level between 1971
and 2007. To the extent that globalization raises
consumption of fossil fuels through higher incomes and
industrialization, it can be seen as having a negative
impact on the environment, but the increased efficiency
of production and the spread of technology associated
with globalization may create some countervailing
benefits.
Another example of a negative externality is Hardin’s
well known “tragedy of the commons” (Hardin, 1968) in
which lack of ownership rights over a common pool
Figure 3: Total world CO2 emissions by level of development, 1971-2007 (Million tonnes of CO2)
0
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1981
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2003
2005
2007
Developed (OECD) Developing (rest of world)
Source: International Energy Agency.
Figure 4: World CO2 / GDP and CO2 per capita, 1971-2007
(kg of CO2 per 2000 US dollars and tonnes of CO2 per capita)
3.5
3.6
3.7
3.8
3.9
4
4.1
4.2
4.3
4.4
4.5
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1.2
1971
1973
1975
1977
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1981
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1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
World CO2
/ GDP (left scale) World CO2
per capita (right scale)

51
B.NATURALRESOURCES
resource leads to depletion of that resource. The
tragedy of the commons was first used to explain
overgrazing on public land, but the concept can also be
applied to other common pool resources such as
forests. Table 1 shows the countries with the largest
declines in forest land between 1990 and 2005, based
on data from the World Bank’s World Development
Indicators database. Countries in South America and
Africa experienced the biggest declines during this
period, while other regions recorded smaller drops, or in
some cases small increases. Europe saw its forest area
rise more than any other region, but there is considerable
uncertainty surrounding increases in other areas,
particularly in Russia. It should be noted that forests
differ significantly in the number of plant species they
contain and the number of animal species that inhabit
them, so that a given decline in forested land may have
a greater impact on biodiversity in some regions than in
others. As of 2005, 11 per cent of the world’s forests
were designated for the protection of biodiversity (FAO
Global Forest Resources Assessment, 2005).
(d) Dominance of natural resources
Another important feature of natural resources is the
dominant position of this sector in many national
economies. Many of these countries tend to rely on a
narrow range of export products. Table 2 shows export
concentration indices from the 2008 UNCTAD
Statistical Handbook, along with shares of natural
resources in total merchandise exports for selected
economies. Concentration indices are based on the
number of products in the Standard International Trade
Classification (SITC) at the 3-digit level that exceed 0.3
per cent of a given countries exports, expressed as a
value between 0 and 1, with values closer to 1 indicating
greater concentration. It is clear that with very few
exceptions, countries with the highest export
concentration scores also have high shares of natural
resources in total exports.
Appendix Tables 8 and 10 show leading traders of fuels
and mining products in 2008 and also illustrate the
importance of these products for exporting and
importing countries alike. For example, the share of
fuels in Saudi Arabia’s total merchandise exports was
some 90 per cent in 2008, while the equivalent share
for Iran was 82 per cent. Export shares for Kuwait, the
Bolivarian Republic of Venezuela, Algeria, Nigeria and
Angola were all in excess of 90 per cent. Although not
as high as the shares for exports, fuels made up a
significant part of imports for the leading developed
economies in 2008, including the United States (23 per
cent) and Japan (35 per cent).
Shares of mining products in total exports are much
smaller than the equivalent shares for fuels, but mining
products still dominate exports in many countries,
including Zambia (80 per cent), Chile (60 per cent),
Niger (58 per cent), Jamaica (56 per cent) and Peru (43
per cent).
The dominance of natural resources in exports conforms
with predictions from trade theory that countries will
specialize in the production of goods where they have a
comparative advantage, and export them in exchange
for other goods. However, the fact that many countries
are both exporters and importers of natural resources is
harder to explain. The Grubel-Lloyd (GL) index provides
a useful measure of this kind of “intra-industry” trade.
For a given country, the share of intra-industry trade in
sector i is defined as follows:
GLi = 1 - ( |exporti – importi | / (exporti + importi) )
If a country only exports or imports good i, then the GL
index for that sector would be equal to 0, whereas if a
country imports just as much as it exports it would have
a GL score of 1 for that sector.
Table 1: Countries with the largest declines in forested land, 1990-2005
(1000 sq. km and percentage of land area)
1000 sq. km % of land area
Brazil -423 Honduras -24
Indonesia -281 Solomon Islands -21
Sudan -88 Korea, Rep of -17
Myanmar -70 Indonesia -15
Congo, Dem. Rep. -69 Cambodia -14
Zambia -67 Zimbabwe -12
Tanzania -62 Nicaragua -12
Nigeria -61 Philippines -11
Mexico -48 Timor-Leste -11
Zimbabwe -47 Myanmar -11
Bolivarian Rep. of Venezuela -43 Ecuador -11
Australia -42 Liberia -9
Bolivia -41 Zambia -9
Philippines -34 Benin -9
Cameroon -33 Ghana -8
Source: World Bank World Development Indicators.

52
Table 3 shows GL indices for natural resources in major
economies at the 3-digit SITC level. Figures closer to 1
indicate more trade in similar products, whereas smaller
figures indicate less intra-industry trade. Some products
have relatively high scores, including fuels and non-
ferrous metals. This could be explained by the fact that
these products may be differentiated at lower levels of
aggregation, but it is also possible that large diverse
economies contain some regions that export natural
resources and others that import them. Canada provided
an example of this when, in 2006, the province of Ontario
imported electricity from the United States while the
province of Quebec exported the same product. This
conjecture is supported by Table 4, which shows average
GL indices for natural resources and manufactured goods
for a larger group of countries. The average GL scores for
manufactured goods are consistently higher than the
scores for resources, but smaller countries also tend to
have lower average GL values in both manufactured
goods and natural resources.
(e) Volatility
The final characteristic of natural resources examined
here is their occasional extreme price volatility. This is
especially true for fuels, which have experienced sharp
price rises from time to time since the 1970s, only to
collapse at a later date. Prices for minerals and metals
have also fluctuated dramatically in recent years,
although their importance for the world economy is
perhaps lessened by their smaller share in world trade.
Price volatility for forestry products and fish is much
less than for other types of natural resources. According
to the International Monetary Fund’s International
Financial Statistics, fuel prices jumped 234 per cent
during 2003-08, while mining products rose 178 per
cent. During the same period, prices of fish and forestry
products advanced at the relatively modest rates of 38
per cent and 26 per cent, respectively.
Figure 5 shows the evolution of prices for West Texas
Intermediate (WTI) crude oil from 1970 to 2009. The
first big price increase occurred in 1973, when members
of the Organization of Petroleum Exporting Countries
(OPEC) proclaimed an embargo against the United
States and other countries that supported Israel in the
Arab-Israeli war. Prices again rose sharply in 1979-80
following the Iranian revolution and the outbreak of the
Iran-Iraq war. This was followed by a steep slide between
1982 and 1986, during which oil prices fell roughly 75
per cent in real terms. A prolonged period of weakness
ended in 2003, when prices began their climb to the
record levels of mid-2008. This was followed by yet
another collapse brought on by the global recession.
The most noteworthy features of this chart are the
sustained deviations of oil prices from their long-run
average. Between 1979 and 1986 prices were
consistently above their average level during the period
1970-2009. Then, with the exception of a brief spike
that coincided with Iraq’s invasion of Kuwait, oil prices
stayed below average from 1986 until 2005. Since
2005 prices have remained above average except for a
brief period in February 2009.
Table 2: Export concentration and share of natural resources in merchandise exports, 2006
(Indices and percentage)
UNCTAD Concentration Index
(0-1)
Share of natural resources in total
exports (per cent)
World 0.08 24
Angola 0.96 100
Iraq 0.95 100
Bolivarian Rep. of Venezuela 0.91 96
Sudan 0.87 95
Congo 0.87 ..
São Tomé and Príncipe 0.87 47
Nigeria 0.86 92
Yemen 0.85 91
Libyan Arab Jamahiriya 0.84 97
Gabon 0.84 95
Bahrain 0.79 90
Iran 0.78 86
Tajikistan 0.77 67
Solomon Islands 0.77 81
Maldives 0.77 99
Saudi Arabia 0.76 88
Guinea-Bissau 0.75 1
Oman 0.75 79
Mali 0.75 75
Mauritania 0.74 87
Source: UNCTAD Handbook of Statistics 2008 and WTO Secretariat estimates.

53
B.NATURALRESOURCES
A number of possible explanations for these large
swings in oil prices have been put forward, including
geopolitical uncertainty, shocks to the flow of oil,
changes in demand and speculation. There is no
consensus in the relevant literature on which of these
forces is most important, but recent research suggests
that changes in supply are relatively unimportant, while
changes in demand associated with global business
cycles have significant effects (Kilian, 2009).
Table 3: Grubel-Lloyd (GL) indices for selected economies, 2008 (Index, 0-1)
United States European Union (27)
Stone, sand and gravel 0.93 Briquettes, lignite, peat 0.96
Other crude materials 0.92 Petroleum products 0.93
Iron ore, concentrates 0.91 Wood, simply worked 0.89
Natural abrasives 0.83 Non-ferrous waste, scrap 0.86
Fuel wood, wood charcoal 0.78 Silver, Platinum, etc. 0.86
Petroleum products 0.73 Electric current 0.84
Pulp and waste paper 0.69 Nickel 0.84
Residual petroleum products 0.68 Natural abrasives 0.82
Nickel ore, concentrates, etc. 0.67 Stone, sand and gravel 0.78
Fish (fresh, chilled, frozen) 0.67 Residual petroleum products 0.77
Ores, concentrates of base metals 0.65 Copper 0.73
Aluminium 0.64 Ferrous waste, scrap 0.72
Nickel 0.64 Pulp and waste paper 0.68
Petroleum gases 0.62 Coal gas, water gas, etc. 0.65
Silver, platinum, etc. 0.60 Lead 0.63
Japan China
Lead 0.95 Petroleum gasses 0.91
Aluminium ore, concentrates, etc. 0.85 Crustaceans, molluscs, etc. 0.85
Petroleum products 0.84 Fish (fresh, chilled, frozen) 0.85
Residual petroleum products 0.84 Coal, not agglomerated 0.81
Pulp and waste paper 0.71 Residual petroleum products 0.80
Non-ferrous waste, scrap 0.68 Fuel wood, wood charcoal 0.78
Precious metal ores, concentrates 0.66 Silver, platinum, etc. 0.74
Nickel 0.62 Wood, simply worked 0.73
Zinc 0.61 Other crude minerals 0.68
Petroleum gases 0.54 Natural gas 0.66
Natural abrasives 0.53 Petroleum products 0.63
Coke, semi-coke 0.51 Lead 0.62
Aluminium 0.42 Aluminium 0.61
Copper 0.42 Natural abrasives 0.46
Silver, platinum, etc. 0.40 Liquified propane, butane 0.42
Source: UN Comtrade database.
Table 4:Average GL indices for manufactured goods and natural resources, 2008 (Index 0-1)
Natural resources Manufactured goods
Australia 0.28 0.33
Bahamas 0.06 0.13
Brazil 0.29 0.52
Canada 0.49 0.59
China 0.34 0.47
European Union (27) extra-trade 0.47 0.68
Iceland 0.09 0.14
India 0.27 0.53
Japan 0.29 0.49
Russian Federation 0.25 0.32
South Africa 0.33 0.46
Sri Lanka 0.16 0.20
United States 0.49 0.68
Source: WTO Secretariat estimates.

54
2. Natural resource trade flows and
related indicators
Having defined natural resources in general terms as
the sum of forestry products, fish, fuels and mining
products, we now present a variety of descriptive
statistics on international trade in these products.
Merchandise trade data are first shown at the world
level, but are then progressively broken down by product
and region to give a more detailed picture of global
trade flows. Tables on trade of individual countries by
product are provided in a statistical appendix, which
also contains illustrative maps showing a variety of
resource-related indicators.
Two definitions of natural resources are used in the
merchandise trade statistics, with one slightly broader
than the other. Tables showing country and product
shares in world natural resources trade use the narrower
definition that only includes forestry products, while
tables on trade by geographic region use the slightly
broader definition that includes all agricultural raw
materials. This is solely for reasons of data availability,
and the difference is minimal at the world or regional
level.
Some grey areas in product coverage should be noted.
In addition to raw fossil fuels such as coal, crude oil and
natural gas, the fuels product group also encompasses
refined petroleum products and electricity. It may seem
odd at first to count electricity (see Box 1) and refined
fuels as resources, since their production requires
substantial capital inputs, and the final output is
produced by human activity rather than simply extracted
from the natural environment. However, fossil fuels are
rarely consumed in their raw form, so we may still
consider refining and electricity generation to represent
the minimum amount of processing necessary to allow
these goods to be traded.
Nominal trade flows are expressed in current US dollars
and are strongly influenced by changes in exchange
rates and commodity prices. This is especially true of
fuels, which represent the largest component of natural
resources trade in dollar terms, making up some 77 per
cent of world natural resources trade and 18 per cent of
total merchandise trade in 2008.
(a) World trade in natural resources
The dollar value of world exports of natural resources
increased more than sixfold between 1998 and 2008,
rising from US$ 613 billion to US$ 3.7 trillion, thanks in
large part to steadily rising prices for primary
commodities (see Figure 6). Higher oil prices in particular
helped push the share of fuels in world natural resource
exports to 77 per cent in 2008 (US$ 2.9 trillion), up from
57 per cent in 1998 (US$ 429 billion). Although prices
for metals have also risen sharply in recent years, they
have not kept pace with fuels, and as a result the 2008
shares of ores and other minerals and non-ferrous
metals in natural resources trade fell to 8.2 per cent
(US$ 308 billion) and 9.6 per cent (US$ 360 billion),
respectively. Shares for these products were also below
their respective long-run averages of 8.3 per cent and
13.3 per cent.
The value of global fish exports rose from US$ 53
billion in 1998 to US$ 98 billion in 2008, while exports
of forestry products increased from US$ 52 billion to
US$ 106 billion. Despite the growing dollar value of fish
and forestry exports, shares of these products in world
natural resources trade fell from 8.6 per cent to 2.6 per
cent and from 8.5 per cent to 2.9 per cent, respectively,
due to the even faster growth of fuels and mining
products.
Higher commodity prices also boosted the share of
natural resources in world merchandise trade from 11.5
per cent in 1998 to 23.8 per cent in 2008 (see Figure 7).
Meanwhile, the share of fuels in world trade jumped
Figure 5: Nominal and real crude oil prices, Jan. 1970-Oct. 2009 (Current dollars per barrel and 2008 dollars per barrel)
0
20
40
60
80
100
120
140
Jan-1970
Jan-1972
Jan-1974
Jan-1976
Jan-1978
Jan-1980
Jan-1982
Jan-1984
Jan-1986
Jan-1988
Jan-1990
Jan-1992
Jan-1994
Jan-1996
Jan-1998
Jan-2000
Jan-2002
Jan-2004
Jan-2006
Jan-2008
Nominal WTI crude oil price
Real (CPI deflated) WTI crude oil price
Average real crude oil price
Note: West Texas Intermediate crude oil prices are deflated by US CPI for all urban consumers to obtain real prices.
Source: Federal Reserve Bank of St. Louis.

55
B.NATURALRESOURCES
Box 1: Is electricity a natural resource?
Electricity is generated from natural resources such as coal, gas, water, and uranium, but should it also be
considered a natural resource? Since its production requires other natural resources as inputs, it is perhaps
more natural to view electricity as a manufactured good. However, electricity arguably should be counted as a
natural resource since some processing must be applied to most resources before they can be traded or
consumed. In this respect, electricity can simply be seen as transformed coal, natural gas, etc. Electricity also
allows energy resources that are normally untradable (e.g. flowing water in rivers used for hydroelectric
generation) to be traded across national borders.
Electricity has a number of unusual properties that distinguish it from other goods. First, it is intangible and can
only be stored in very small quantities. (An exception is pumped-storage of hydro energy, where water is
pumped uphill into a reservoir during low demand periods and released later during high demand periods in
order to generate additional electricity to balance supply and demand more efficiently.) Also, it must be
produced at the same time that it is consumed, making it more like a service than a good. Electricity is classified
as a fuel in international trade statistics, but it is not recorded systematically by all countries. As a result,
merchandise trade statistics on electricity may be incomplete or inaccurate.
Generation facilities can be classified as base-load capacity or peak-load capacity depending on the type of
fuel used. Base-load capacity has low marginal cost but usually has very large fixed costs. Examples include
hydroelectric and nuclear power plants. Peak capacity has high marginal cost but is usually much more flexible
in terms of scheduling output. Natural gas is often used for peak-load generation. Patterns of international
trade in electricity depend to some extent on the type of generating capacity that a country possesses. Some
countries export large quantities of nuclear energy (e.g. France) or hydroelectric power (Canada), resulting in
large volumes of trade but lower cost per unit. Other countries may engage in international trade only during
times of peak demand (e.g. to meet air-conditioning demands on hot summer days) in order to maintain the
stability of their electricity grids. In such cases, the volume of electricity trade could be quite small but the
dollar value might be large.
International trade in electricity is limited by physical constraints, including geographic proximity and
infrastructure requirements. Only neighbouring countries trade electricity. Furthermore, power systems across
countries must be interconnected. Importantly, international trade in electricity can result in better use of
complementary resources (e.g. using flexible hydro generation to export peak power and importing thermal
power during off-peak hours), the balancing of annual demand variations and of current versus future needs,
and the pooling of reserve capacity.
Figure 6: World natural resources exports by product, 1990-2008 (Billion dollars)
0
500
1000
1500
2000
2500
3000
3500
4000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Fuels
Mining products
Forestry products
Fish

56
from 6.5 per cent to 18.2 per cent. Total merchandise
exports increased from US$ 5.3 trillion to US$ 15.7
trillion during the same period, implying an average
annual growth rate of 12 per cent, while natural resource
exports grew 20 per cent per year on average over this
period. Exports of manufactured goods increased from
US$ 4.1 trillion in 1998 to US$ 10.5 trillion in 2008, an
average growth rate of 10 per cent per year, or about
half the rate of increase of natural resources. Despite
the rapid growth of natural resources trade,
manufactured goods still made up the bulk of world
merchandise exports in 2008, at 66.5 per cent.
The growing share of oil in world trade is mostly the
result of higher prices rather than increased quantities.
This is illustrated by Figure 8, which shows world
production of fossil fuels including crude oil since 1970.
Output of oil has been remarkably steady in recent
years, but this has coincided with rising demand on the
part of major developing countries such as China and
India, which has put upward pressure on prices.
Constant oil production also fails to keep up with
demand due to normal population growth. It should be
noted that the relationship between world oil trade and
production is not one-to-one, but given the uneven
distribution of these resources across countries, it is
reasonable to link the two. The share of world oil
production that is exported has in fact been remarkably
steady over time, rising from 50 per cent in 1970 to
55 per cent in 2000, and remaining unchanged since
then. Coal and natural gas production has continued to
expand in recent years, mostly to meet growing demand
for electricity generation (International Energy Agency
(IEA), 2009b).
For a longer-term perspective on natural resources
trade, we must resort to estimation, since breakdowns
of merchandise trade statistics by product are not
readily available for the years before World War II.
Using historical data from the United Nations and the
General Agreement on Tariffs and Trade (GATT), it is
possible to construct a data series going back to 1900
Figure 7: World merchandise exports by product, 1990-2008 (Billion dollars)
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Manufactures
Natural resources
Other primary products
not elsewhere specified
Figure 8: World production of fossil fuels by
product, 1970-2008 (kt and TJ)
Crude oil (kt)
Coal (kt)
Natural Gas (TJ)
0
500000
1000000
1500000
2000000
2500000
3000000
3500000
4000000
4500000
1970 1980 1990 2000 2005 2006 2007 2008
0
1000000
2000000
3000000
4000000
5000000
6000000
7000000
1970 1980 1990 2000 2005 2006 2007 2008
0
20000000
40000000
60000000
80000000
100000000
120000000
140000000
1970 1980 1990 2000 2005 2006 2007 2008

57
B.NATURALRESOURCES
that shows the split between manufactured goods,
natural resources and other primary products, with a
more detailed breakdown of natural resources available
beginning in 1955 (see Figure 9). These data show that
manufactured goods only made up about 40 per cent
of world merchandise exports at the beginning of the
last century, with the remaining 60 per cent being
primary products, including natural resources and
agricultural products. However, between 1955 and
2000 the share of manufactured goods in world trade
increased steadily from 45 per cent to 75 per cent,
largely at the expense of agricultural products. The
share of natural resources also tended to fall after
1955, but the decline was less pronounced than for
agricultural goods and was punctuated by increases
coinciding with oil price rises.
Between 1955 and 2004 the share of natural resources
in world trade fell from 22 per cent to 14 per cent, but
rose to 30 per cent in 1980 and to 24 per cent in 2008
due to higher prices for oil and other commodities. The
rising share of natural resources between 1900 and
1955 is probably explained by trade in fuels, which was
negligible at the beginning of the century but which
expanded as use of the automobile became more
widespread.
The pre-war shares for natural resources in Figure 9 are
very rough estimates and therefore should be interpreted
with caution. The definition of manufactured goods also
differs slightly in the earlier period since it includes non-
ferrous metals, which means that the rise of
manufactured goods depicted in Figure 9 may be slightly
understated. Whether the share of manufactured goods
will continue to rise is difficult to say, but this chart
suggests a large part of international trade in natural
resources may be in the form of manufactured goods.
(b) Natural resources trade by region
Due to the uneven distribution of natural resource
deposits across countries, the pattern of exports is quite
different from one region to another. For some regions
(e.g. the Middle East, Africa, the Commonwealth of
Independent States), resources represent a significant
proportion of merchandise exports, while others (Asia,
Europe and North America) have more diverse export
profiles (see Table 5). South and Central America is an
intermediate case, with resources making up a significant,
but not dominant share of merchandise exports. In 2008,
the Middle East had the largest share of resources in
merchandise exports, at 74 per cent, with total shipments
of resources valued at US$ 759 billion.
Figure 9: Shares of product groups in world merchandise trade since 1900 (Percentage)
3.0
40.0 40.0
45.0 44.7
52.3
61.0
55.0
70.4 74.8
66.5
11.0
10.2
9.2 23.7
10.7
10.6
18.2
7.6
6.3
7.2
4.8
3.7
3.1 4.3
3.2
3.0 5.8
11.4
57.0 54.2
43.6
31.7
26.1
18.1
13.1 10.7 7.8 7.9
0
10
20
30
40
50
60
70
80
90
100
1900 1925 1938 1955 1963 1970 1980 1990 2000 2008
not elsewhere specified Manufactures Fuels Mining products Forestry Natural resources Other
Source: UN Statistical Yearbook (1969), GATT Studies in International Trade No. 7 and WTO Secretariat estimates.
Table 5: Natural resources exports by region, 2008a (Billion dollars and percentage)
Value
Share in total
merchandise exports
World 3855.4 25
Middle East 758.7 74
Africa 406.0 73
Commonwealth of Independent States (CIS) 489.7 70
South and Central America 281.3 47
North America 397.8 20
Asia 630.4 14
Europe 891.5 14
a This table uses the broad definition of natural resources to include all agricultural raw materials rather than just forestry products. As a result, the world
total is slightly larger than the US$ 3734.2 shown in Appendix Table 1.

58
The total value of Africa’s exports of natural resources
was just under US$ 406 billion, representing 73 per cent
of the continent’s exports. Resource exports from CIS
countries were worth US$ 490 billion, equal to
70 per cent of total merchandise exports. Europe had
the smallest share of resources in total exports at
14 per cent, although the value of this trade was greater
than any other region at nearly US$ 892 billion. Asia’s
share of resources in exports was relatively low, at just
over 14 per cent, but the total value of resource exports
was the second largest of any region at nearly US$ 630
billion. South and Central America exported natural
resources worth US$ 281 billion, or nearly half of the
region’s total exports. In general, more industrialized
regions have smaller shares of resources in exports
than less industrialized regions.
Regions that predominantly export natural resources
tend to ship these goods to other regions, whereas
regions that produce more manufactured goods have
much higher intra-regional shares in natural resources
trade (see Figure 10). For example, 82 per cent of
Europe’s exports of natural resources were shipped to
other European countries. Similarly, 78 per cent of
Asia’s exports were intra-regional, as were 62 per cent
of North America’s exports. On the other hand, the
intra-regional shares for the Middle East, Africa and the
CIS were 2.3 per cent, 5.3 per cent and 11.8 per cent,
respectively. The intra-regional share of South America
was higher than those of other resource exporting
regions at 22 per cent, but this is still well below the
levels recorded by industrialized regions.
Fuels were the largest component of natural resource
exports for all regions in 2008 (see Figure 11). Resource
exports from the Middle East were almost entirely
composed of fuels, with a 98 per cent share in resource
exports. South and Central America had the smallest
Figure 10: Natural resources exports of regions by destination, 2008 (Percentage)
5.3
23.5
78.0
11.0
70.5
15.3
21.5
11.8
38.9
8.7
67.9
82.1
12.0
14.5
18.2
27.5
5.8 5.4 7.2
12.4
61.6
36.2
6.8
22.1
0
10
20
30
40
50
60
70
80
90
100
Africa Asia CIS Europe Middle East North America South and Central
America
Africa Asia CIS Europe Middle East North America South and Central America
Figure 11: Natural resources exports of regions by product, 2008 (Percentage)
Africa Asia CIS Europe Middle East North America South and Central
America
5.6
8.7 9.9 10.8 5.75.3
12.3
8.3 12.8 20.2
86.1
61.2
85.1
61.9
97.6
63.7 58.0
5.6
12.1
6.7
15.9
10.4 12.7
0
10
20
30
40
50
60
70
80
90
100
Fish Raw materials Ores and other minerals Fuels Non-ferrous metals

59
B.NATURALRESOURCES
share of fuels in natural resource exports (58 per cent)
due to significant exports of ores and other minerals
(20 per cent) and non-ferrous metals (12 per cent).
Shares of fuels in natural resources trade for Asia,
Europe and North America were all between 61 per cent
and 64 per cent. North America had the largest share
of raw materials in its exports, at 10.8 per cent, followed
by Europe at 9.9 per cent and Asia at 8.7 per cent.
(c) Leading exporters and importers of
natural resources
Appendix Tables 2 and 3 show the top 15 exporters
and importers of natural resources, both including and
excluding the member states of the European Union.
The largest exporter of natural resources in 2008
(including EU members) was Russia, with exports of
US$ 341.2 billion or 9.1 per cent of world natural
resources trade. The share of natural resources in
Russia’s merchandise exports rose to 72.9 per cent in
2008 as the value of resource exports jumped 34 per
cent year-on-year. Russia was followed by Saudi Arabia
(exports of US$ 282 billion, or 7.6 per cent of world
trade), Canada (US$ 177.7 billion or 4.8 per cent), the
United States (US$ 142.5 billion or 3.8 per cent),
Norway (US$ 130.6 billion or 3.5 per cent) and
Australia (US$ 114.3 billion or 3.1 per cent).
The leading importer of natural resources in 2008
(also including EU members) was the United States.
The country’s resource imports were worth US$ 583.4
billion, or 15.2 per cent of world natural resources
trade. US imports of natural resources increased 27.9
per cent in 2008 while the share of natural resources
in total imports rose to 27 per cent, mostly due to
higher oil prices. Other leading importing countries
include Japan (imports of US$ 350.2 billion or 9.1 per
cent of world trade), China (US$ 330.3 billion or 8.6
per cent), Germany (US$ 231.5 billion or 6.0 per cent),
Republic of Korea (US$ 182 billion or 4.7 per cent),
France (US$ 148.5 billion or 3.9 per cent) and India
(US$ 135.4 billion or 3.5 per cent).
If we consider the European Union as a single trader, it
ranks fourth in world exports of natural resources after
Russia, Saudi Arabia and Canada. The European Union
exported US$ 176.6 billion worth of natural resources
to the rest of the world in 2008 and imported US$ 766.6
billion, making it the largest single market for natural
resources, with a share in world imports (excluding
trade within the EU) of nearly 23 per cent. Tables on
leading exporters and importers by product are also
provided in the Appendix.
Appendix Table 12 shows imports of resources by
region and supplier for some of the world’s largest
economies (the European Union, the United States,
Japan and China.) It should be noted that the figures
for the European Union include trade within the EU: in
2008, nearly 37 per cent of EU imports originated from
within the trading bloc. EU imports overall totalled
US$ 1.1 trillion for the year. The top five suppliers of
resources to the EU were Russia (16 per cent), Norway
(8 per cent), Libya (4 per cent) and the United States
(2 per cent). Most of the European Union’s imports
of natural resources come from Europe, the
Commonwealth of Independent States and Africa,
which together made up almost 80 per cent of resource
imports in 2008.
Total US imports of natural resources in 2008 were
valued at US$ 583 billion. The country’s top five
suppliers of resources were Canada (24 per cent),
Saudi Arabia (10 per cent), the Bolivarian Republic of
Venezuela (9 per cent), Mexico (8 per cent) and the
European Union (7 per cent). Japan’s imports for the
year came to US$ 350 billion, and its leading suppliers
were Saudi Arabia (14 per cent), the United Arab
Emirates (13 per cent) Australia (12 per cent), Qatar
(8 per cent) and Indonesia (7 per cent). China imported
US$ 331 billion worth of natural resources from other
countries in 2008. Top suppliers include Australia
(10 per cent), Saudi Arabia (8 per cent), Angola
(7 per cent), Russia (6 per cent) and Brazil (6 per cent).
3. Modes of natural resources trade
Many natural resources are fairly homogeneous and
may be classified as “commodities”. Unlike the many
varieties of manufactured products – automobiles, for
example – they are suited to centralized trading and the
formation of a unified price. In addition, characteristics,
such as the uneven geographical distribution of natural
resources around the world, and the consequent
accumulation of market power, has triggered the
evolution of alternative modes of trade that reduce
market risks, such as disruptions in the supply of critical
natural resource inputs. It is important to keep in mind
these particular modes of natural resources trade when
considering the consequences that some of the key
features of natural resources, such as volatility, may
have for trade and trade policy.
This sub-section first describes the role of centralized
spot and futures markets in commodities trade, notably
in the context of organized exchanges. It also provides
an account of the evolution of these exchanges,
describes their geographical distribution, and highlights
their principal functions. These include price discovery,
liquidity, management of risk, financial intermediation
and clearing house guarantees. Second, we analyze
alternative arrangements for trade in commodities that
may be important for strategic reasons or quality
control. These include bilateral long-term contracts,
which are relevant for certain energy and metal
commodities. We also explore the prevalence of vertical
integration in some natural resource sectors.
(a) Commodity exchanges
(i) Key definitions
A commodity is typically defined as a homogeneous
product which can be exchanged among consumers and
producers. The term “commodities” is often used in the
relevant literature to refer to agricultural goods, but it also

60
includes a number of other products that are classified as
natural resources in this report. Examples are fuels,
forestry products, minerals and metals. Given their mostly
homogeneous nature and the fact that their quality can
usually be easily verified, trade in commodities is facilitated
by organized market places where trade is centralized
(UNCTAD, 2006). A concentration of buyers and sellers in
one place reduces the transactions costs that would be
incurred in the search for a suitable counterparty
(Thompson and Kunda, 2000).
Trades in organized commodity exchanges are carried
out either electronically or verbally in a trading pit
between buyers and sellers who are anonymous to
each other (Stroupe, 2006). Trades are carried out both
“on the spot” and via “futures” contracts, usually on a
daily basis. In “spot” markets, physical delivery to the
importing nation, via tankers or pipelines, is immediately
arranged (Neuhoff and von Hirschhausen, 2005).
Commodity producers, marketers, trading companies,
local distribution companies and consumers are the
major participants in these markets.
In “futures” markets, contracts represent a commitment
to buy or sell a given quantity of an underlying product
on a given date in the future at a price agreed upon
now (Valdez, 2007).4
This enables market participants
to “hedge” or eliminate price uncertainty. For example,
a gas distributor may purchase a futures contract to set
a price cap on the gas it buys in some future period.
Futures contracts dating anything between a few
months and several years are traded. Most often, these
contracts are settled in cash and do not result in
physical delivery of the underlying commodity as the
existing position of a trader is negated with the polar-
opposite contract and his or her account is closed
(Smith, 2009). In futures trading, others in the market
besides those involved in the commodity business
include hedge funds, banks and commodity index
funds. These “non-traditional” investors use commodity
markets to diversify their total investment portfolio.
Their possible contribution to increased commodity
price volatility has given rise to controversy (see
Section C.5).
(ii) Evolution
The evolution of modern commodity markets may be
traced back to the beginning of agricultural
mechanization and the industrial revolution in present-
day advanced countries. At the time, trade in agricultural
crops was a hit-or-miss proposition. In the United
States, for example, farmers went to Chicago to sell
their goods because of its central location. However,
having little idea of crop demand, farmers took whatever
price they could get and unsold crops went to waste in
the streets. In the mid-19th century, a central grain
commodities market, which allowed farmers to sell their
crops directly and on the spot for cash, was created.
This market, named the Chicago Board of Trade, is the
oldest organized commodity exchange in the world
(Nathan, 2008). It reduced transactions costs and
enabled buyers and sellers to find a ready market.
Subsequently, forward delivery also became an option.
Over time, these forward contracts evolved as more
farmers began committing their grains to future
exchanges for cash. For example, if a producer no
longer needed the commodity, he or she would sell it to
another producer who did. This dynamic, coupled with
the uncertainty of price change over time, led to the rise
of futures contracts (UNCTAD, 2001).
(iii) Geographical distribution
The old exchanges are located mainly in the United
States (Chicago Board of Trade, Chicago Mercantile
Exchange, New York Mercantile Exchange (NYMEX)),
the United Kingdom (London Metal Exchange,
International Petroleum Exchange) and Japan (Tokyo
Commodity Exchange). The 1980s and 1990s saw a
proliferation of commodity exchanges in emerging
economies such as the Dalian Commodity Exchange,
the Zhengzhou Commodity Exchange, and the Shanghai
Futures Exchange in China, and various exchanges in
East Asia (for example, in Kuala Lumpur, now part of
Bursa Malaysia Derivatives), in Latin America (for
example, Bolsa de Mercadorias & Futoros in Brazil and
Bolsa de Cereales in Argentina) and in Eastern Europe
(UNCTAD, 2006).
The 21st century is seeing the onset of a third wave in
the evolution of commodity exchanges, driven primarily
by developments in information technology. Examples
include the National Multi-Commodity Exchange of
India, established in 2002, the Dubai Gold and
Commodity Exchange (2004) and the Dubai Mercantile
Exchange (2005). Africa has seen the least success in
developing its commodity exchanges, with the South
African Futures Exchange (SAFEX), established in
1987, being the only major commodity exchange
(UNCTAD, 2006).
Despite the development of organized commodity
exchanges in different parts of the world, there is still a
high degree of market concentration with the bulk of
commodity trading occurring in just four countries,
namely the United States, the United Kingdom, Japan
and China. In fact, the top 11 commodity exchanges, in
terms of market turnover, are located in one or other of
these four countries (Lewis, 2005). Moreover, these
exchanges are dominated by certain commodity groups.
For instance, in the United States, energy and agricultural
futures constitute the lion’s share of turnover. In the
United Kingdom, commodity trading is highly skewed
towards the metals sector. In Japan the focus is on
energy commodities and precious metals, and in China
trading is dominated by agricultural commodities (Lewis,
2005).
(iv) Key functions
Price discovery
Organized commodity exchanges form natural reference
points for determining market prices – the price
discovery process – because they enable market supply

61
B.NATURALRESOURCES
and demand forces to determine spot and futures
prices. Exchange trading may bring about greater
volatility in commodity prices. At the same time, by
enabling effective competition (Thompson and Kunda,
2000), it may also result in lower prices, relative to
those negotiated by parties in a bilateral contract.
Liquidity
Organized exchanges have facilitated the creation of a
common global pool into which nearly all exporters sell
their commodities and out of which nearly all importers
purchase commodities, on a daily basis (Stroupe, 2006).
Hence, they provide more liquidity, as disruptions in
supply from one producer country may be offset by
alternative supplies from elsewhere. This function of
organized exchanges may have implications for price
volatility, a key feature of resource commodities, which
is analyzed in Section C.5.
Insurance against risk
An important function of futures markets is to allow
suppliers and customers to hedge their future
requirements for buying and selling commodities at a
future contract price. By locking in the price for future
delivery, market participants can hedge against
unfavourable price movements that may occur before
the delivery date (Valdez, 2007). For instance, if a future
price rise can cause a loss to the prospective buyer of a
commodity, the purchase of a futures contract ensures
that the buyer can lock in the price at the current level. In
this case, the market is used as an insurance mechanism.
Futures contracts may also be bought and sold for
speculative reasons, or in other words for profit (or loss)
by betting against future price movements.
Clearing house feature
Every organized trading exchange operates with a
clearing house, which takes initial margins or deposits
from both parties of a contract. Subsequently, if the
contract moves into loss, extra margin is debited on a
daily basis from the relevant party in order to restore the
amount of the initial margin available (Valdez, 2007).
Hence, clearing houses provide financial intermediation
services to major players in commodity markets and, if
sufficiently well-capitalized, minimize risk of
contemporary default. They also manage risk associated
with exchange transactions by being a central
counterparty to all exchange needs – that is, the buyer
to every seller and the seller to every buyer (Valdez,
2007). Furthermore, clearing houses protect the
integrity of the marketplace by ensuring that trades are
executed in accordance with the rules (Neuhoff and
von Hirschhausen, 2005)5
and guaranteeing that
contracts are honoured (Valdez, 2007).
(b) Other trading arrangements
Besides organized exchanges, commodities are traded
via spot and futures contracts in over-the-counter (OTC)
markets. For certain commodities, bilateral trades are
important, notably taking the form of long-term supply
contracts between countries. Finally, commodities may
also be traded in the context of vertically integrated
supply chains.
(i) Over-the-counter (OTC) markets
OTC trade is not conducted through a common trading
facility, but directly between two parties, which in the
case of commodity markets include both traditional
(producers and consumers) and non-traditional (index
funds and hedge funds) participants. Unlike organized
exchanges, OTC markets are characterized by a lack of
liquidity, the absence of competition and no protection
against default. In addition, they are largely unregulated
(Valdez, 2007). Although OTC markets are
fundamentally bilateral trading arrangements, the
negotiation process is often highly automated with
dealers being interconnected among themselves as
well as with major customers. This enables traders to
survey the market almost instantaneously (Dodd, 2002).
(ii) Long-term contracts
Until the early 1970s, trade in energy commodities such
as oil and natural gas, and in metals, such as copper,
aluminium and iron ore was conducted primarily through
long-term contracts between producer and consumer
countries, mostly via state or multinational companies
(Stroupe, 2006). These long-term take-or-pay contracts
(ToP) join sellers and buyers in a bilateral contract, typically
for about 15 to 20 years, during which time both have
strictly defined obligations. In particular, these contracts
require buyers to pay for a pre-specified minimum quantity
of the commodity whether or not it is actually taken. At the
same time, in most cases, some form of price indexation is
used to protect the buyer against price changes on a long-
term basis (Masten, 1988). Hence, the buyer bears the
volume risk and the seller bears the price risk. Furthermore,
under this system, if one exporting state fails to honour its
delivery commitments to another, then the affected
consumer state has to acquire replacement supplies
(Stroupe, 2006). These arrangements are generally
associated with limited market liquidity and significant
difficulties can result from supply disruptions. Long-term
contracts with price indexation can also have implications
for price volatility.
A number of factors may explain the use of long-term
contracts. First, several of the sectors involved are
characterized by non-competitive producer structures
(Golombek et al., 1987). Second, because of their
strategic nature, the value of these commodities in long-
term contracts may far exceed the sale price in a more
competitive market (Parsons, 1989). Third, long-term
contracts in commodities trade may function as a device
to avoid the risks of opportunistic behaviour when there
are high sunk investments (Klein et al., 1978; Williamson,
1983). Fourth, from the perspective of an importing
country, long-term contracts are likely to increase the
security of supply. Fifth, from the point of view of the
exporting country, long-term contracts may serve as a
barrier to entry for new market participants. Finally, a

62
preference for long-term contracts over exchange
trading may relate to the nature of transport
infrastructure. For example, the existence of a pipeline6
between two countries may favour long-term contracts,
while the availability of tankers that can reach anywhere
in the world may encourage trading through exchanges.
Over time, bilateral long-term supply contracts negotiated
between exporting and importing states have been
complemented and sometimes replaced by trading on
organized exchanges. This was true for the United States,
the United Kingdom and Western Europe in general.7
It
has been argued that more exchange trading at the
expense of long-term contracts may lead to a paucity of
long-terminformationaboutfutureproductioncapabilities,
and provide an incentive for suppliers to overstate future
production capacity in order to ensure high demand and
less investment by competitors (Neuhoff and von
Hirschhausen, 2005). Box 2 provides an account of this
transition in the market for crude oil.
However, bilateral long-term supply contracts for
certain natural resource products (energy products,
metals and minerals) still exist, involving for instance,
Russia or countries in Asia and Africa (Alden, 2009;
Stroupe 2006; Energy Report, 2009). The signatories
to these contracts are governments of resource-
abundant countries and private investors or firms from
abroad. Host country governments grant licences to
these firms for exploration and extraction, and specify
the accompanying fiscal regime. Contracts typically
take the form of an initial payment for the licence and,
subsequently, a royalty or tax on corporate profits
(Collier and Venables, 2009).8
Of late, some of these
bilateral long-term supply contracts have been
characterized by pre-specified exchanges akin to barter
arrangements. For example, the China International
Fund is financing infrastructure investments worth
US$ 7 billion in Guinea in exchange for access to its
natural resources such as bauxite (Alden, 2009).
Even more recently, there has been an increase in large-
scale acquisitions of farmland (a natural resource) in
Africa, Latin America, and Central and South-East Asia
via contracts between host country governments and
private firms, sovereign wealth funds and state-owned
enterprises from abroad. This is driven by the lack of
arable land and competing uses for agricultural land in
the countries making the purchases (Cotula et al., 2009).
(iii) Vertical integration
Supply chains may involve several production stages in
certain natural resource sectors. For instance, in the
case of energy commodities (oil and natural gas),
minerals and metals, they include exploration, extraction,
processing or refining, distribution and marketing.
Hence, producers sell and convey their output to refiners
or processing units. Subsequently, refiners sell their
products to wholesale and retail marketers, who in turn
sell these products to final consumers (Smith, 2009).
Each stage in the supply chain may be located in a
different region of the world, on the basis of comparative
advantage (WTO, 2008) (see Section C.1). Hence, firms
can lower costs of production by locating different
stages of the production process in a country where
there is a relative abundance of inputs used relatively
more intensively in that stage of production (Jones and
Kierkowski, 2001). Firms can carry out this process in
one of two ways: vertical integration of various stages
of the production process within a single firm or arm’s-
length contracts between separate, independent firms.
The rationale for choosing between the two is also
based on comparative advantage (Coase, 1954). For
vertical integration to make economic sense, internal
suppliers must be more cost-efficient than external
suppliers.
In addition to the more general efficiency argument,
trade in natural resource commodities may take place
within firms for several reasons. First, vertical integration
reduces risk as profits in the different stages of the
supply chain tend to fluctuate in different ways. For
example, in the case of oil, when crude prices are low,
refining and marketing margins are likely to be higher
(Al-Moneef, 1998). This is especially relevant for
resource commodities that are characterized by high
Box 2: The evolution of the market for crude oil trade from long-term contracts to exchange trading
Prior to the early 1970s, crude oil markets were characterized by bilateral long-term supply contracts (with a
duration of 10 or 20 years, or more) between exporting and importing countries, usually through multinational
oil companies. Eight big oil companies were the “common suppliers” and dominated crude oil trade. They sold
large quantities of oil not needed for their own operations to other integrated oil companies, independent
refiners and traders to balance out world markets (Mohnfeld, 1980). However, the strengthening of OPEC and
the Arab-Israeli war of 1973 led to a wave of nationalization in a group of oil exporting nations. This, in turn,
facilitated a targeted embargo of the United States and a dramatic increase in crude oil prices.
Following a brief period of strict price controls, the United States administration initiated a process of
deregulation. Oil spot and futures markets were created, and the New York Mercantile Exchange (NYMEX)
became the first central oil trading exchange. Over the years, a proliferation of many such organized exchanges
have facilitated the creation of a global pool of oil, denominated in US dollars. At the same time, Russia and its
producing and consuming partners continue to trade oil through bilateral long-term supply contracts. In addition,
there is a trend towards the establishment of new oil exchanges in the Middle East and Asia as rivals to the
New York and London exchanges. These more recently established exchanges may denominate trade in
currencies other than US dollars (Stroupe, 2006).

63
B.NATURALRESOURCES
price volatility. Second, as opposed to arm’s-length
trade, vertical integration ensures access to resources
or security of supply (Al-Moneef, 1998).
Third, to sell an intermediate good to a particular
downstream firm, an upstream supplier may make a
location or site-specific costly investment upfront, in
order to minimize inventory and transportation costs.
Extraction or processing plants for mining products are
good examples in this context (Joskow, 2005). Fourth,
a shift from spot market exchange to vertical integration
may also be attributable to the fact that producers wish
to control their supply chains more tightly to satisfy
consumer demand for quality and safety (Ménard and
Klein, 2004). In the oil and gas sector, for instance,
many drilling companies are broadening their functions
to include reservoir development and resource
management functions.9
Box 3 provides a brief account
of Chevron, which is a vertically integrated oil and gas
company with different segments located in different
parts of the world.
To summarize, the above discussion has shown that the
way in which natural resources are traded may differ
from manufactured goods transactions on account of
certain specific features. These include the
homogeneity, storability, the uneven distribution of
supplies and the strategic importance of many natural
resources. In light of declining transport costs and the
move towards more liberalized markets, a large part of
natural resources trade is now conducted at a global
level, often via organized commodity exchanges. At the
same time, certain commodity markets continue to be
characterized by widespread government intervention
and market power. The reasons for this may be both
economic and non-economic, ranging from industrial
development considerations to geopolitical factors.
4. Natural resources: Globalization
and the intellectual debate
(a) Globalization of natural resources
Over the past two centuries – and especially over recent
decades – there has been a dramatic expansion of the
volume and range of natural resources traded
internationally. At one time only the most valuable
resources were shipped to distant markets. Today vast
quantities of almost every raw material imaginable are
traded around the planet – fuelling the rapid spread of
industrialization and development that is defining the
modern economic era. Although a number of factors
have contributed to the “globalization” of natural
resources – including population growth, colonization,
industrialization, and the rise of developing countries –
the following section looks at two key developments
that have underpinned this process: first, the far-
reaching improvements in transport technology since
the mid-19th century which have dramatically reduced
the costs of commodities trade; and second, the trend
towards more liberal natural resource markets,
especially since the 1980s, which have opened up an
increasingly global marketplace for natural resources.
(i) Shrinking distances
The rise of a world market for natural resources is a
relatively recent phenomenon. For most of human
history, bulk raw materials were too costly to transport
over great distances, which effectively tied economic
production to the location of key natural resources,
such as wood, coal or iron ore. A major factor in breaking
down these constraints is what Nils-Gustav Lundgren
describes as three “revolutions” in transport technology
(Lundgren, 1996) The first such revolution occurred
roughly between the 16th and 18th centuries with a
series of incremental improvements to sailing ship
design and efficiency. Although high costs still made it
too expensive to ship all but the most expensive
commodities, such as coffee, cocoa, spices and
precious metals, across the oceans, sail transport
gradually linked the coastal areas of North and South
America, Africa and Asia with Europe, creating for the
first time the broad outlines of a “world economy”.
A second transport revolution occurred in the mid-19th
century when the introduction of steam power to land
and sea transportation transformed the economics of
moving low-value goods cheaply across great distances.
As railways replaced overland transport by horses, and
as metal steamships took the place of wooden sailing
vessels, a wide range of primary commodities,
particularly agricultural products, in North America,
South America, Africa and Asia were suddenly
economically accessible to the world’s industrial
centres. This, in turn, greatly expanded the incentive to
engage in overseas trade, exploration and investment
and significantly widened the scope for industrial
expansion. Transatlantic transport costs fell roughly
Box 3: Chevron – A case of vertical integration
Chevron has extensive oil and gas exploration and production operations throughout the world.10
It is the
largest private producer of oil in Kazakhstan, the top oil and gas producer in Thailand, the largest holder of
undeveloped natural gas resources in Australia, among the largest holders of deepwater acreage in Nigeria,
and it holds leases in the deepwater of the Gulf of Mexico. Furthermore, Chevron works in all segments of the
downstream industry — manufacturing, marketing and transportation. The company’s refining resources are
concentrated in North America, Western Europe, South Africa and the Asia-Pacific rim, serving customers
around the world. Chevron markets refined products primarily under three brands: Chevron, Texaco and Caltex.
Under transportation, Chevron Pipe Line Co. transports crude oil, natural gas, natural gas liquid, CO2,
petrochemicals and refined products in the United States through an extensive system of pipelines and storage
facilities. In addition, Chevron Shipping Co. manages a worldwide fleet of vessels that transport retail products.

64
60 per cent in the decades between the 1870s and the
beginning of the 20th century, transforming agricultural
trade as North American and Eastern European grain
suddenly become competitive in European markets,
and accelerating the process of industrial specialization
(Lundgren, 1996).
A third revolution in transport technology occurred after
the 1950s with the dramatic increase in the average
size of merchant ships. The closure of the Suez Canal in
1956-57 (and again in 1965) played a major part in
launching this process. Suddenly faced with the
expense of transporting oil, coal, iron ore and other bulk
commodities over much greater distances, the shipping
industry decided to invest in huge, specialized bulk
carriers, as well as in the harbour facilities needed to
handle these new vessels. Whereas oil tankers averaged
16,000 deadweight tonnes (dwt) in the early 1950s
(their design partly constrained by the need to navigate
the Suez Canal), they averaged over 100,000 dwts by
the 1990s – with modern “super-takers” exceeding
500,000 dwts and capable of carrying over 3 million
barrels of oil. The same technological advances have
transformed bulk freighters, with ships growing from an
average of less than 20,000 dwts in 1960 to about
45,000 dwts in the early 1990s.
Just as the advent of steam transport dramatically
reduced the cost of agricultural trade after the mid-1800s,
new transport design technology has dramatically
reduced the costs of shipping a vast range of low-value
bulk commodities in the post-war period. Freight rates
decreased by 65 per cent in the period between the
1950s and 1990s, while bulk commodity trade grew from
about 500 million tonnes to 3,977 million tonnes – a 657
per cent increase.11
Overall the cost of transporting
natural resources has fallen an astonishing 90 per cent
between 1870 and 1990. This, in turn, has massively
expanded the volume of raw materials traded, the
distances covered, and the commodities involved. Almost
every conceivable bulk commodity – from iron ore and
phosphate fertilizers, to crude oil and natural gas – is now
routinely shipped vast distances across land and oceans.
Even resource waste – such as metal scrap, mining
tailings, or rejects from forestry and agriculture – is
increasingly traded globally.
(ii) More open markets
A second major factor influencing global trade in natural
resources has been the ebb and flow of government
intervention in national and international commodity
markets. While it is difficult to generalize, the extent and
type of government intervention in resource markets
has appeared to depend not simply on ideological views
and trends, but on the relative abundance or scarcity of
natural resources on world markets.
Certain interventions, such as international commodity
agreements, have been devised to deal with problems
of global surpluses and price volatility. Others, such as
export restrictions, have been shaped by resource
scarcity, the strategic competition among countries for
critical raw materials and the quest for economic
diversification. If the general trend towards more open
markets in recent decades has been driven in part by
the relative abundance and price declines of many
commodities, it remains an open question whether
recent commodity price increases and signs of growing
scarcity, especially for strategic raw materials, will give
rise to greater government involvement and intervention
in resource markets in the future.
An era of relatively free trade in natural resources
during the 19th century came to an end in the first half
of the 20th century. With the outbreak of the First World
War and the effort to cut off enemy supplies, countries
became increasingly concerned with securing access
to strategic sources of food, fuels and raw materials
needed to feed their populations and to supply their
armies. The dramatic collapse in prices for many
commodities after the war but especially during the
Great Depression of the 1930s also led governments
around the world to intervene in markets to assist
farmers and miners. This trend continued through the
Second World War and the beginning of the Cold War in
the late 1940s, as governments again took action to
secure access to raw materials, both at home and
overseas, for strategic and security reasons.
The break-up of pre-war empires, and the resulting
process of decolonization in the 1950s and 1960s,
precipitated a new wave of government intervention in
natural resource markets, as newly independent
countries in Africa and Asia sought to gain control of
mineral and energy sectors which had previously been
in foreign hands. Underpinning many of the interventions
during this period was a pervasive faith in the ability of
governments and state planning to correct perceived
failures in market systems (Skidelsky, 1996).
The various interventions over this period were diverse,
wide-ranging and complex. A number of countries, in
both the developed and developing world, imposed
export tariffs or restrictions on wheat, sugar, rubber, tin
and other commodities in an effort to control
international supplies and bolster prices. From the
1920s to the 1980s a number of attempts were made
– with varying degrees of success – to negotiate
international commodity agreements between exporting
and importing countries for key commodities, such as
coffee, rubber or tin, to manage international supply and
trade flows. One reason why these efforts often failed
was because consumers were interested in reducing
price volatility, while producers wanted to increase
prices. For strategic and economic reasons, a number
of countries also imposed export restrictions or
domestic price controls on key commodities, such as oil.
Concerns about growing reliance on foreign suppliers
also encouraged some countries to amass strategic
stockpiles of oil, tin and other key resources.
Another mechanism for influencing global commodity
markets was foreign aid – either in the form of
guarantees by importing countries to buy pre-
determined quantities of a given commodity, or in the
form of food aid or other types of aid, whereby exporting

65
B.NATURALRESOURCES
countries effectively shifted their commodity surpluses
on to poorer developing countries (Radetzki, 2008).
However, the trend towards government intervention in
natural resource markets – and indeed in economies in
general – had started to recede by the 1980s for a
variety of reasons. One was the ideological shift away
from state planning and controls towards market
mechanisms to achieve economic growth.
With the partial exception of the energy sector,
commodity markets have witnessed a general trend
towards greater openness. Successive rounds of
multilateral trade negotiations have resulted in low
average tariff levels on most trade in raw materials.
International commodity agreements have also declined
in number and importance, and greater emphasis has
been placed on hedging on commodity exchanges to
help stabilize prices. Government-controlled strategic
stockpiles have also fallen out of favour. Now largely
limited to petroleum, they are a small fraction of what
they were several decades earlier. Ideology is not the
only explanation for this change. A long-term trend
towards falling international prices across many
commodities, combined with declining strategic
concerns in the post-Cold War era, has reinforced this
general shift away from state ownership and control
and towards market mechanisms to bolster investment,
improve efficiency and secure greater price stability.
While the retreat of governments from active
intervention in natural resource markets has been
significant, it is hardly universal or even necessarily
permanent. The most obvious exceptions relate to
agricultural commodities where developed-country
tariffs, subsidies and regulations continue to
significantly distort global trade. The energy sector
represents another obvious example of state
intervention in international commodity markets. Not
only among OPEC members, but among other energy-
producing states, governments remain the dominant
players in the oil and gas industry, not only owning and
managing the main assets, but actively shaping global
markets through controls on output and investment
(Institute of International Economics, 2004). Recent
efforts by some countries to strengthen their grip over
domestic natural resources or to limit supplies on world
markets – especially of oil and gas – may foreshadow a
new wave of state involvement in natural resource
markets, especially as current high prices and profits
increase the incentives to do so (Radetzki, 2008).
(iii) Summary
The on-going “globalization” of natural resources trade
continues to transform not only the nature of commodity
markets but also the structure of the global economy
(Krugman, 1991). The huge expansion in the volume
and range of natural resources on world markets in
recent decades has helped to open up and equalize
access to raw materials, lowering prices for many
resources, encouraging investment in new,
geographically dispersed sources, and generally
contributing to global economic expansion. Proximity of
natural resources, such as coal or iron ore, is also much
less significant to industrial production today than it
was a century ago, gradually de-coupling industrial
development from natural resource endowments,
freeing up industries to establish themselves in the
most cost-efficient locations around the world, and
accelerating the trend towards international
specialization (Radetzki, 2008; Sachs and Warner,
1995). At the same time, the expansion of natural
resources trade – and its contribution to growing global
consumption – may have implications for resource
depletion and negative environmental spillovers.
(b) The intellectual debate:
scarcity or surplus?
For over two centuries, a wide-ranging intellectual
debate has taken place about the impact of economic
growth on the earth’s limited natural resources. Some
have argued that unrestrained economic growth will
lead inevitably to resource depletion and environmental
degradation. Others have contended that economic
growth and technological progress can help to manage
scarce resources and develop alternatives. A central
point of disagreement is whether markets, as presently
structured, are equipped to deal with these pressures.
Present-day concerns about the relationship between
globalization, resource scarcity and environmental
issues (such as climate change) have given a new sense
of immediacy and relevance to these long-standing
debates.
(i) Free-market optimism
Adam Smith was the first economist to systematize the
argument for the central role of free markets in
allocating resources, including natural resources,
efficiently and productively. In his Wealth of Nations, he
famously argued that the pursuit of self interest within a
free marketplace was the key to economic growth and
social improvement – “as if by an invisible hand”.12
Building on the ideas of the French physiocrats, Smith
rejected the prevailing mercantilist belief that a nation’s
wealth is fixed, so countries should try to part with as
little of it – and to hoard as much of it – as possible.
Instead, he argued that wealth is created by productive
work, the division of labour and international trade. In
particular, he shared the physiocrats’ view that the
productivity of land (often synonymous with natural
resources in his writing) and the expansion of
agricultural output were central to prosperity – thus
allowing a greater proportion of the population to earn
its living from manufacturing.13
The problem was not a
shortage of land, but rather a shortage of investment in
land productivity. This, in turn, often reflected problems
of government interference in markets and resulting
disincentives to entrepreneurship.
Although his work did not focus explicitly on concerns
about resource depletion or the limits of economic
growth, Smith was essentially optimistic about

66
mankind’s ability to prosper within the context of
existing resource endowments – a view reinforced by
his day-to-day observations about how the world around
him was being transformed by dramatic advances in
manufacturing, agriculture and mining (Kula, 1998). His
faith in individual efforts and ingenuity, and in the power
of the market’s “invisible hand” to allocate resources
efficiently, had a decisive impact on future thinking
about resource management, and remains highly
influential to this day.
(ii) Malthusian pessimism
The ideas of Thomas Malthus ran directly contrary to
Smith’s belief in the market’s ability to help resolve the
tension between growing human consumption and the
earth’s finite resources – and indeed against the broader
Enlightenment faith in an improving and perfectable
society. Malthus saw the idea of endless progress as not
only naïve, but dangerous because of the inexorable
pressures of population growth and the planet’s limited
capacity to support it. In his Essay on the Principle of
Population, he argued that the impact of growing
population on a fixed supply of land and other resources
would result in starvation. Economic growth, international
trade and social improvement were no solution because
they would only lead to further, unsustainable population
growth. This would, in turn, be checked by widespread
famine, disease and death.14
Malthus believed there was
a long-term tendency for the living standards of the mass
of people to be driven down to a subsistence level – a
level at which the population could only reproduce itself,
not expand, and the economy would attain a steady state,
with a constant population size and with constant,
subsistence-level living standards (Perman et al., 1996).
Malthus’s pessimism about the ability of economic
growth to transcend the planet’s natural limitations was
as influential in its day – and indeed beyond – as was
Smith’s optimism. For example, David Ricardo shared
his belief that diminishing natural resources as a result
of expanding economic activity would eventually halt
both population and economic growth. Although
agricultural output could be expanded by exploiting
existing land more intensively or by bringing new land
into cultivation, Ricardo argued that the returns to
increased inputs would steadily diminish, resulting in
stagnant growth and living standards (Ricardo, 1817).
Like other classical economists, John Stuart Mill believed
that economic development was destined to reach an
eventual equilibrium or steady state. His contribution to
the debate was to question the desirability, not simply the
feasibility, of limitless economic growth (Mill, 1848).
Writing at a time when output per person was rising, not
falling, Mill accepted that technological innovation, the
discovery of new sources of raw materials, and the
application of fossil fuels to production processes were
playing an important role in overcoming diminishing
returns from natural resource constraints. However, Mill
adopted a broader conception of the role of natural
resources in the economy. Foreshadowing later thinking
on conservation, he argued that the quality of the natural
environment not only shaped productivity, but the general
living standards and conditions of present as well as
future generations. According to Mill, the problem was not
economic growth in the developed world – where material
progress was already reaching its apogee – but its
distribution and impacts (Perman et al., 1996).
Karl Marx, almost more than any previous economist,
recognized the transformational power of capitalism
and technology’s ability to overcome resource
constraints – although he shared the classical tradition’s
basic assumption that economic progress would reach
an eventual end or steady state. He argued that the
immiserization of the working class was the result not of
population pressures on fixed natural resources, but
rather of the theft of surplus labour and value by the
capitalist class (Marx, 1867). Marx agreed that a crisis
in capitalism was inevitable. However, whereas Malthus
and Ricardo thought the crisis would result from
diminishing returns in the face of a growing population,
Marx argued that the crisis would flow from falling
profits and the limited purchasing power of the
impoverished masses (Kula, 1998).
(iii) Neo-classical economists:
Cautiously optimistic
Not everyone shared the classical economists’
pessimism about the limits of economic growth. Henry
Carey, who became increasingly critical of classical
political economy, believed in the possibility of steady
economic progress and the potential for harmonizing
diverse economic interests. In challenging the Malthus-
Ricardo theory that economic expansion would lead
inexorably to population growth, depleted resources
and stagnating living standards, he noted that the
history of agriculture and mining had been one of
steadily increasing productivity over time, the result of
capital accumulation and improved methods (Carey,
1840). Agricultural production had generally migrated
from poorer to richer farmlands, a process aided by
continuously improving agricultural and transportation
technologies. A similar pattern was evident in the
mining industry. Even as old mines were gradually
exhausted, new and richer mines were constantly being
developed, as a result of new investments, the
application of new technologies and the discovery of
fresh deposits.15
However, neo-classical economists also recognized the
market’s limitations in solving all of the problems
associated with resource allocation and depletion –
especially through their work on the exhaustion of
resources and spillover effects. As early as the mid-
1800s, Mill had recognized that mining was a different
economic activity from farming or manufacturing, in the
sense that it was a non-renewable resource that could
eventually be exhausted (Perman et al., 1996).
Extraction today meant a reduction in future profits;
conversely, extraction tomorrow would involve a
reduction in present profits. In his widely-read book The
Coal Question, William Jevons built and expanded on
this insight, drawing attention to the imminent

67
B.NATURALRESOURCES
exhaustion of energy supplies and developing concepts
of resource depletion that have recently been revisited
in work on “peak oil”.
It was in The Coal Question that Jevons first outlined
the so-called “Jevons Paradox” – i.e., that improving the
efficiency of resource-use leads to an increase, rather
than a decrease, in the consumption of that resource
because of falling prices, eventually resulting in its
depletion. Harold Hotelling offered a somewhat
different and more optimistic perspective on the
exhaustion of resources. In his seminal article, “The
Economics of Exhaustible Resources”, he argued that
rational speculators, anticipating future shortages of a
non-renewable resource, will conserve or store that
resource in expectation of rising future prices. These
rising prices generated by speculators’ decisions to put
supplies aside will in turn reduce consumption and
encourage the search for cheaper substitutes
(Hotelling, 1931).
Alfred Marshall took a further step towards an economic
analysis of resource depletion and environmental
degradation by highlighting the problem of unintended
spillovers or “externalities” – i.e., the costs or benefits
conferred on others that are not taken into account by
the person taking the economic action. His student,
Arthur Pigou expanded Marshall’s concept of
externalities, and made the case for government
intervention to correct for such market failures. The
lack of market incentives to stop someone from creating
a negative externality (such as pollution) or to encourage
someone to create a positive externality (such as
recycling) was why governments had a key role to play
in natural resources and pollution management,
typically by influencing private behaviour through taxes
or subsidies (Pigou, 1929).
(iv) Neo-Malthusians: Limits to growth
Neo-Malthusian ideas were resurrected in a highly
public way in 1972 with The Club of Rome’s publication,
The Limits to Growth. Attempting to model the impact of
a rapidly growing population and economic expansion
on finite natural resource supplies, it predicted that
existing trends could not continue indefinitely, and that
“exponential growth would eventually lead to economic
and environmental collapse” (Meadows et al., 1972). The
study also appeared to claim that the world was already
on the brink of running out of key resources (oil in 1975,
gold in 1981, silver and mercury in 1985 and zinc in
1991) – a conclusion to which the 1973 oil crisis seemed
to lend support. Similar conclusions were reached in a
US multi-agency assessment of the earth’s future
published in 1980 entitled Global 2000. This forecast
that the world in 2000 would be “more crowded, more
polluted, less stable ecologically, and more vulnerable to
disruption than the world we live in now” and that
“serious stresses involving population, resources, and
environment [were] clearly visible ahead”.16
Even mainstream economists, such as John Kenneth
Galbraith (1974) and Ezra Mishan (1967; and Potter and
Christy, 1962) questioned the ability of the planet’s
resources to withstand the strains of modern society’s
unrelenting and single-minded pursuit of economic
growth.17
More recently, the focus of concern has
expanded from dwindling supplies of natural resources
to unsustainable consumption – and its adverse impact
on the environment. Land, water and air pollution,
species extinctions, and global warming all pointed to a
future where unrestrained economic growth would
outstrip the ecosystem’s ability to sustain it.
Malthusianism had returned to the economics
mainstream (Turner, 2008).
At the same time, a number of economists were arguing
for the need to study economics within the wider
context of natural systems. In 1966, Kenneth Boulding
published a short but influential article entitled “The
Economics of the Coming Spaceship Earth” in which he
compared the planet to a small spaceship where all
economic activity takes place within the context of
ultimately exhaustible natural resources. He urged
economists to shift their thinking away from the concept
of an open economy with unlimited resources to a
concept of a closed economy “without unlimited
resources of anything, whether for extraction or for
pollution, and in which, therefore, man must find his
place in a cyclical ecological system” (Boulding, 1966).
Boulding argued that economics could only be
constructively understood as a sub-system of a much
broader natural system, and that to try to disaggregate
economic theory from the natural world in which it
operated risked environmental catastrophe. He is
widely regarded as one of the founders of ecological or
environmental economics, and subsequent work on
sustainable development and “green accounting”
(variously referred to as Natural Capitalism18
or Total
Economic Value) often take as their starting point
Boulding’s theories.
(v) A resourceful earth
A number of modern economists have criticized the
assumptions, methods and conclusions of the Club of
Rome. One criticism is that commodities have seemingly
become more, not less, abundant on world markets over
time.
In The Resourceful Earth, Julian Simon, one of the most
prominent sceptics of the Club of Rome’s claims,
pointed out that almost all commodities had experienced
falling long-term prices over the previous century, which
he argued was “prima facie evidence” of greater natural
resources abundance, not increasing scarcity.19
Simon
was not the first to make this observation. In the early
1960s, the claims about growing resource scarcity
were tested by Potter and Christy (1962), and Barnett
and Morse (1963), who analysed the long-term price
trends across a range of natural resources. Assuming
that rising prices would prove growing resource scarcity,
their finding in fact revealed that, with one or two
exceptions (such as timber), prices had followed a
downward trend over the past century, implying that

68
natural resource supplies were becoming more plentiful,
and that “technology could overcome increasing
shortages of natural resources ad infinitum”. At the
same time, the researchers cautioned that a steady
increase in the production of natural resources did not
take into account the possible adverse effects on the
environment of increased consumption.
More recently, William Nordhaus (1992) has levelled
similar criticisms at the latest efforts to update the Club
of Rome’s projections, in the 1992 publication Beyond
the Limits. While stressing that “our estimates are crude,
the models are primitive, the future is uncertain and our
ignorance is vast”, he suggests that “environmental and
resource constraints on economic growth should be
only modest over the next half century” and that “it
would take either a massive slowdown in productivity
growth or a massive underestimate of the constraints to
growth before the resource constraints would produce
a decline in global living standards” (Nordhaus, 1992).
A more fundamental criticism was that the Limits to
Growth theory failed to take into account mankind’s
capacity to innovate, adapt and harness technology to
expand the use of natural resources or to find substitute
products. As an economic law, diminishing returns holds
only for a constant state of technology and not for a world
in which methods and approaches are constantly
improving. In the pessimists’ models, noted Robert Solow
(1986), population, capital and pollution always grow
exponentially, but technology rarely does. Or as Nordhaus
puts it, “for the past two centuries, technology has been
the clear victor in the race with depletion and diminishing
returns”. Resource scarcity, far from being a problem, was
the motor that encouraged investment in finding new
resources, development of technologies to harness new,
alternative resources, and improvement in efficiency so
that resource consumption was reduced. As a result,
supplies expanded, production grew more efficient, and
costs declined.
(vi) Summary
The world of Adam Smith and Thomas Malthus was very
different from our current one, but their concerns and
insights remain highly relevant. Worries about peak oil,
global warming and the many other resource and
environmental challenges facing us today have reignited
a two-centuries-long debate about whether continued
economic development will save or destroy the planet.
It would seem that neither the pessimists nor the
optimists offer a complete or satisfactory answer. What
Malthus and his successors failed to take into account is
an unfettered economy’s adaptive power, and the extent
to which technology and innovation have managed to
overcome seemingly insurmountable resource and
environmental constraints. Certainly the classical
economists’ assumption that an economy’s potential
(the “economic pie”) is essentially fixed, that the
challenge is merely to allocate resources (the “pieces of
the pie”) more efficiently, and that, because of resource
limitations, economic growth and living standards will
sooner or later reach an equilibrium or plateau has so far
been proved wrong. The planet’s population is over
seven times larger today than it was two centuries ago,
and yet most people live lives that are longer, healthier
and materially richer than those of all but the most
privileged and wealthy in Adam Smith’s day.
Despite the fact that today we use far larger quantities
of minerals, metals and other raw materials than in the
past – and despite repeated warnings of the imminent
exhaustion of these materials – the market still provides
viable supplies of most natural resources. What the
pessimists also failed to see is that as income and
educational levels improve, people tend to modify their
behaviour, limiting the size of families, curtailing certain
kinds of consumption, and investing more income in
preserving natural resources and protecting the
environment.
However, what Adam Smith and his successors often
underestimated is the scope for market failure – and,
indeed, the extent to which existing markets are
undeveloped or incomplete. As recently as 1974, Robert
Solow argued that because every natural resource has
a potential substitute in the marketplace there can be
no problem of depletion: “Exhaustion is just an event,
not a catastrophe” (Solow, 1974). The problem is that
the resources which are most threatened with
exhaustion today, such as the atmosphere and the
oceans, are precisely those without markets. Burning
fossil fuels pollutes the air everyone breathes and
warms the atmosphere everyone needs. Logging
activity erodes soil and diminishes greenhouse-gas-
absorbing forests. Over-fishing may lead to an
irreparable loss of biodiversity. In each case, there are
no viable markets to mediate between those causing
the damage and those being harmed – especially future
generations.
While most resource allocation decisions today, such as
burning fossil fuels, entail consequences for tomorrow,
the people making them do not always have to live with
the consequences of their decisions. As Pigou (1929)
argued a half century ago, it seems to be human nature
to underestimate – and hence under-provide for –
future needs. Current markets for natural resources are
by definition incomplete if only because future
generations cannot participate in them.
(c) The intellectual debate: Natural resource
exports and economic dependency
Another important intellectual debate has focused on
the question of whether natural resources are a
“blessing” or a “curse” for the economic development of
countries. Although economists have traditionally seen
natural resource endowments as a key determinant of
comparative advantage and critical to economic growth,
some have argued that excessive dependency on
natural resource exports can actually trap countries in a
state of “underdevelopment”.

69
B.NATURALRESOURCES
(i) Singer-Prebisch thesis
The “underdevelopment” thesis was first advanced by
Raul Prebisch (1950) and Hans Singer(1950) in the
1950s. Noting that the price of primary commodities
had continued to decline over time relative to the price
of manufactured goods, they argued that the resulting
decline in the terms of trade of primary commodity-
exporting developing countries locked them into a state
of underdevelopment.
One source of the problem was the highly competitive
nature of many commodity markets which meant that
productivity improvements tended to result in declining
prices rather than higher incomes (versus the more
monopolistic organization of markets for manufactured
goods, where productivity improvements could be
captured in higher incomes). Another problem was that as
incomes rose, the demand for manufactured exports
grew faster than for commodity exports. Because falling
commodity prices meant that developing-country exports
had to grow continually in order to buy a given quantity of
manufactured goods, poor countries were unable to
accumulate the surplus capital needed for investments in
the infrastructure, technology and industrial capacity that
was a prerequisite for further development.20
It was these differences in power between commodity-
dependent developing countries and manufacturing-
intensive industrialized countries – between the
“periphery” and the “core” – that trapped poorer
countries in a cycle of declining export earnings, weak
investment and underdevelopment. In order to break
this cycle, Prebisch and Singer urged developing
countries to diversify their economies and lessen their
dependence on primary commodities by developing
their manufacturing industry – including through using
selective protection methods and attempting to replace
imports with domestically produced goods. More
generally, the Singer-Prebisch thesis implied the novel
concept that it was the intrinsic structure of world
markets, not the failings of individual countries, that was
responsible for widening inequalities in the global
economy.
(ii) Dependency theory
The Singer-Prebisch thesis has underpinned a growing
body of economic thought, broadly referred to as
“dependency theory”, which built on the insight that the
apparent failure of many countries to develop was the
result of unequal power relations between a “periphery”
of poor and underdeveloped countries and a “core” of
wealthy, industrialized states. Because of these
structural inequalities, resources flow from the
periphery to the core, enriching industrialized countries
at the expense of the poor, denying developing countries
the capital and technology needed to industrialize, and
perpetuating existing inequalities and disparities.
Against the neoclassical idea that open trade and
economic expansion benefits all countries and that
growth in industrialized countries will eventually lead to
growth in poorer countries (the “stage theory” of
development), dependency theory holds that existing
economic relations – and the nature of global integration
– lock developing countries into a state of perpetual
underdevelopment and economic subservience.
Under the umbrella of dependency theory, a number of
explanations have been advanced for how and why
structural inequalities are perpetuated in the global
economy. As we have seen, Prebisch (1950) and Singer
(1950) focused on poorer countries’ declining terms of
trade and how this contributes to underdevelopment.
Paul Baran (1957) highlighted the ways that developing
countries’ “economic surplus” is extracted by
industrialized countries, and how the international
division of labour (between skilled workers in the centre
and unskilled workers in the periphery) reinforce
dependency. Together with Samir Amin, he also
emphasized how elites in peripheral countries cooperate
with elites at the centre to perpetuate natural resource
exploitation. Arghiri Emmanuel (1972) introduced the
concept of “unequal exchange” to the debate,
suggesting that it was historically established wage
levels that set prices, not the other way around, further
contributing to developing countries’ deteriorating
terms of trade.
More recently, Matias Vernengo (2004) suggested that
the dependency relationship is a reflection less of trade
or technological inequality than of the differences in
financial strength between the core and the peripheral
countries – in particular, the inability of developing
countries to borrow in their own currency. Andre Gunder
Frank (1971; 1972) and other “world-system” theorists
broadened this analysis, viewing the stratification of the
world economy into “core” and “peripheral” countries as
the global reflection of Marx’s class divisions – i.e., the
owners versus the non-owners of the means of
production. Similar ideas about the structural nature of
“core” and “peripheral” relations can also be found in
Johan Galtung’s (1971) structural theory of imperialism.
Dependency theorists also differed in their proposed
solutions to unequal international economic relations.
Writers ranging from Prebisch and Singer to Osvaldo
Sunkel (1969) and Fernando Henrique Cardoso (1979),
viewed the problem in terms of the nature of the global
economy and the history of international economic
development. Poorer countries needed to embark on a
separate or autonomous development path and reduce
their dependence on trade with developed economies,
including by embarking on programmes of infant
industry protection and replacing imports with
domestically produced goods. In contrast, Marxist
economists, such as Baran and Gunder Frank, tended
to see the problem of developing-country dependency
as endemic to the capitalist system itself. The movement
towards worldwide socialism – and an end to foreign
domination and imperialism – was a precondition for the
elimination of underdevelopment.

70
5. Conclusions
Natural resources are indispensable for the functioning
of modern economies, and for achieving and maintaining
high standards of living in all countries. They are primary
inputs in the production of all manufactured goods (e.g.
ores and other minerals). They provide the energy
needed to transport people and goods from place to
place, to light our cities, and to heat our homes and
places of work (fuels). They are also a potentially
unending source of valuable materials and a habitat for
wildlife and plant species (forests, oceans). Finally, in
the case of water, they are necessary for sustaining all
life on the planet. It is no exaggeration to say that the
way the world manages its natural resources will go a
long way towards determining the sustainability of the
global economy.
In this section we have examined some of the factors
that make natural resources trade different from trade
in other types of products, surveyed data on global
trade flows, taken a closer look at some of the
mechanisms through which resources are actually
traded in commodity exchanges, and sketched the
history of this trade since the industrial revolution.
Taken together, these analyses provide some insight
into why trade in natural resources is sometimes
controversial.
On the positive side, trade in resources allows countries
with limited domestic supplies to benefit from the use of
these materials. Trade also contributes to efficiency in
production, provides exporting countries with earnings
that can be re-invested in future production, and
enables them to diversify their economies. On the
negative side, by contributing to production, trade may
exacerbate a number of adverse consequences
associated with resource use, such as air pollution
caused by the burning of fossil fuels, or a reduction in
biodiversity brought about by the destruction of natural
habitats. It should be borne in mind, however, that the
solution to such problems is not likely to reside in the
contraction of trade, but rather in the proper
management of scarce resources and the mitigation of
the harmful environmental effects of economic activity.
The intellectual and political debate about natural
resources, summarized in Section B.4, has seen public
attitudes and expert opinion alternate between
optimism and pessimism about whether precious
natural resources will continue to be available for future
generations. Growing concern for the environment,
combined with the steady rise in natural resource prices
in recent years, has once again brought these issues to
the forefront of public consciousness.
While trade in natural resources will almost certainly
continue to grow in the future, improved international
cooperation and domestic regulation should be able to
contribute to efficiency gains, the elimination of the
adverse consequences of extracting and using natural
resources, and perhaps increased stability in the market
prices of these goods. This section has presented some
essential background information on these issues, but
for a deeper understanding of the challenges facing
policymakers a coherent theoretical framework is
needed. The development of this theoretical apparatus
is the subject of Section C.

71
B.NATURALRESOURCES
Endnotes
1 Another way of expressing the idea that natural resources
must be scarce and economically useful is that they must
command a positive price in markets and can be used either
as inputs in production or directly as a source of utility to
consumers.
2 Proved reserves are defined as “quantities of oil that
geological and engineering information indicates with
reasonable certainty can be recovered in the future from
known reservoirs under existing economic and operating
conditions”.
3 The distribution of other fuels is similarly concentrated, with
20 countries possessing 90 per cent of global natural gas
supplies and just nine countries having 90 per cent of the
world’s coal reserves(British Petroleum, 2009).
4 These are distinct from “forward” contracts, which are not
traded in organized exchanges, but over-the-counter, i.e.
directly between a buyer and seller (Valdez, 2007).
5 The clearing houses are under the watch of independent
regulators.
6 These are likely to be important for landlocked routes.
7 In the case of natural gas, however, while markets in the
United States and the United Kingdom, are dominated by
organized exchanges, those in other European countries are
dominated by long-term contracts (Neuhoff and von
Hirschhausen, 2005).
8 Such contracts may be characterized by an acute “hold-up”
problem, i.e. governments are unable to commit not to
renegotiate the terms of any contract and hence investors are
likely to be deterred by the consequent risk. This is likely to
result in a systematic bias towards under-exploration and
development (Collier and Venables, 2009). See Section E.3.
9 Smith (2009) notes that vertical integration in the oil industry
has declined somewhat during the past two decades. This
may simply be because several large oil producers have
agreements to swap crude oil streams to minimize transport
costs.
10 See www.chevron.com.
11 Long-distance iron ore trade rose from 23 per cent of world
production in 1960 to 36 per cent in 1990. Trade in coal rose
from 2 per cent in 1960 to 13 per cent in 2005. Tankers now
carry some 2 billion barrels of oil annually – up from less than
400 million barrels in 1950. Natural gas, the bulkiest traded
natural resource, is the latest commodity to be subjected to
the forces of globalization due to declining transport costs.
Until the 1980s, transport by pipeline was the dominant
delivery mode, which meant that natural gas trade had a
limited geographical reach and markets remained regionally
segmented. However, advances in liquefied natural gas (LNG)
technology and the ability to transport gas economically in
large tankers are rapidly erasing these remaining geographical
barriers. In 2005, 26 per cent of global natural gas production
was traded internationally, more than a quarter of this as LNG
(Lundgren, 1996; Radetzki, 2008).
12 As Smith explained, “every individual ... neither intends to
promote the public interest, nor knows how much he is
promoting it .... He is, in this, as in many other cases, led by an
invisible hand to promote an end which was no part of his
intention. By pursuing his own interest he frequently promotes
that of society more effectively than when he really intends to
promote it” (Smith, 1776).
13 He argued that “there would be no attempt by capitalists to
invest in manufactures designed for distant sale as long as
agriculture resources remained unused” (Smith, 1776).
14 “The power of population is indefinitely greater than the power
in the earth to produce subsistence for man”, Malthus argued:
“No fancied equality, no agrarian regulations in the utmost
extent, could remove the pressure of it even for a single
century” (Malthus, 1798).
15 “Increased capital enables the miner to descend double the
distances and the value is now greater than at first. A further
application of capital enables him to descend successively to
300, 500, 600, 1,000 or 1,500 feet, and with ever successive
application the property acquires a higher value,
notwithstanding the quality of coal that has been taken out”
(Carey, 1840).
16 The Global 2000 Report was commissioned by President
Carter in 1977. An additional report under the title Global
Future: Time to Act was published in 1981 (Council on
Environmental Quality (CEQ) and the U.S. Department of
State, 1980).
17 “Growth, being the central goal of society, nothing, naturally
enough, is allowed to stand in its way”, observed Galbraith:
“That includes its effect, including its adverse effect, on the
environment, on air, water, the tranquillity of urban life, the
beauty of the countryside” (Galbraith, 1974; Mishan, 1967).
18 Natural Capitalism is a movement that sees the world’s
economy as being within the larger economy of natural
resources and ecosystem services that sustain us. This
implies that we should attribute value to all things – from
human intelligence and cultures, to hydrocarbons, minerals,
trees, and microscopic fungi. The authors argue that only
through recognizing this essential relationship with the earth’s
valuable resources can businesses, and the people they
support, continue to exist (Hawken et al., 2009).
19 In 1980, Julian Simon bet biologist Paul Ehrlich that after a
decade, a set of natural resources (decided upon by Ehrlich)
would be cheaper in constant dollars than they were at the
start. Simon won the bet (Simon, 1984).
20 A modern variant of this terms of trade thesis has been put
forward by Daron Acemoglu and Jaume Ventura. In attempting
to explain the relative stability (and inequality) of world income
distribution since the 1960s, they argue that countries that
accumulate capital faster than average experience falling
export prices and declining terms of trade – which in turn
depresses the rate of return to capital and discourages further
accumulation (Acemoglu and Ventura, 2002).

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