TORONTO, Nov. 22, 2011 /CNW/ - A complete rethink of resource
management—a resource revolution—will be needed to keep pace with
soaring demand for energy, water, food, and basic materials as up to
three billion new consumers are added to the middle classes over the
next 20 years, according to new research by the McKinsey Global
Institute (MGI), McKinsey & Company's business and economics research
arm, and McKinsey's Sustainability & Resource Productivity (SRP)
The report, Resource Revolution: Meeting the world's energy, materials, food, and
water needs, examines how the world's growing demand for natural resources can be
met. It also looks at how policy makers and companies need to change
their approach to resource management to avoid the risk that we enter a
period of resource price spikes.
During the 20th century, progressively cheaper natural resources
underpinned global economic growth. Higher supply of natural resources
and increases in productivity with which we used resources offset
growth in demand. But over the past ten years, surging demand in
emerging markets has wiped out all of the price declines that had
occurred in the previous century. Indeed, there has been a near 150
percent increase in real commodity prices since the turn of the
Up to three billion new consumers are likely to be added to the global
middle classes over the next 20 years, leading to ever increasing
demand for natural resources. Demand for steel, for example, is likely
to rise by 80 percent. At the same time, finding new sources of supply,
and extracting them, is becoming increasingly challenging and
expensive. The average cost of bringing a new oil well on line has
increased by 100 percent over the past decade. Meanwhile, the
correlation between various resources and their prices is now higher
than at any point over the past century, increasing the risk that
shortages and price changes in one resource can rapidly spread to
others. Moreover, environmental effects such as climate change and
over-exploitation of groundwater resources, themselves driven by growth
in resource consumption, also appear to be increasing the vulnerability
of resource supply systems and acting as a constraint on production.
Without action both to expand the supply of natural resources and to
achieve a step change in the way we extract and use resources—resource
productivity—the global economy could enter an era of higher and
volatile resource prices.
"A radical rethink of how we manage our global resources is needed to
meet resource challenges over the next 20 years, on both the supply and
productivity sides. The good news is that there is an opportunity to
achieve a resource productivity revolution comparable with the progress
made on labor productivity during the 20th century. The question is
whether the private sector and governments can implement the steps
needed to deliver these opportunities quickly enough," says Richard Dobbs, a director of MGI.
Measures to boost resource productivity—from improving the energy
efficiency of buildings to a shift to more efficient irrigation and
reducing food waste—could meet 30 percent of total demand for resources
in 2030. These opportunities would deliver around $2.9 trillion of
savings to society in 2030. The value of the opportunity would increase
to $3.7 trillion assuming a $30 per tonne price for carbon and the
removal of energy, agriculture, and water subsidies, as well as energy
taxes. Just 15 of these productivity opportunities represent over 75
percent of the potential resource benefits.
The research finds that 70 percent of productivity opportunities have an
internal rate of return of more than 10 percent at current prices. This
would rise to 90 percent if adjusted for subsidies, carbon pricing,
energy taxes, and a discount rate of 4 percent.
The supply of resources would need to grow alongside improvements in
resource productivity. For example, energy supply would still need to
expand by 420 quadrillion British thermal units (QBTU) from 2010 to
2030, almost entirely due to the fact that sources of existing supply
However, even capturing available supply and productivity opportunities
would not put the world onto a carbon pathway that would prevent likely
global warming above two degrees Celsius. Nor would it alleviate the
resource poverty that affects so many citizens.
"By increasing supply and driving productivity, the world's immediate
resource needs can be met. But more targeted action is needed to reach
climate change and energy-access objectives. To achieve a 450-ppm
carbon dioxide pathway, a greater shift to low-carbon power combined
with further abatement of emissions tied to land use would be required.
Action on these fronts would entail a further annual investment of
roughly $300 billion, but would potentially accelerate the clean-energy
revolution and reduce adaptation costs. Providing universal access to
modern energy would cost an additional $50 billion a year over the next
two decades—but that's a fraction of the $410 billion currently spent
globally on fossil fuel subsidies," says Jeremy Oppenheim, a director of SRP.
Tackling the resource agenda must start with new institutional mindsets
and mechanisms that can generate more coordinated approaches to the
challenge of resources, reflecting the stronger interconnectedness of
resource systems. Beyond this shift to a more integrated approach,
policy makers might consider taking action on three broad fronts.
First, they should strengthen, not dampen, price signals so as to
unleash the next wave of investment, innovation and resource
conservation. Unwinding more than $1 trillion of subsidies on resources
today would, for example, encourage more efficient use of resources; so
too would ensuring that resource prices capture the cost of their
impact on the environment. Second, tackling a range of non-price
barriers would help reduce investor risks and increase the flow of
capital into resource-intensive sectors. Policies that create a more
predictable long-term framework for investment are particularly
important in resource sectors, given their long-term asset structures.
The resource revolution would require investment to increase by 50 to
75 percent or to $3.1 trillion to $3.5 trillion per annum. Finally,
action needs to be taken to increase the resilience of society in the
face of resource-related shocks and price volatility, including more
public education to change consumer and businesses behavior, together
with stronger safety nets to mitigate the impact of resource and
environmental risks on the poorest.
This new era also presents opportunities and risks for business.
Resource-related trends will shape the competitive dynamics of a range
of sectors in the two decades ahead. Resource-intensive sectors are
exposed to much higher risk of either increased resource prices and/or
of restrictions on their licence to operate. These risks will be
particularly acute in the fastest-growing markets where constraints on
access to resources and accelerating environmental degradation are most
acute. Resource-supplying companies may appear to be positioned for an
era of windfall profits. However, they face an increasingly complex set
of portfolio investment challenges, especially given a rapidly changing
technology and regulatory landscape. In general, businesses will need
to rethink how resources might shape profitability across their
operations, produce new growth opportunities, and pose new challenges
for risk management.
Read the executive summary or download the full report at www.mckinsey.com/mgi and www.mckinsey.com/en/Client_Service/Sustainability.aspx
The McKinsey Global Institute (MGI), the business and economics research
arm of McKinsey & Company, was established in 1990 to develop a deeper
understanding of the evolving global economy.
McKinsey & Company's Sustainability & Resource Productivity practice
(SRP) works with leading institutions to identify and manage both the
risks and opportunities of an era with new resource challenges,
integrating the sustainability agenda into better operational
performance and robust growth strategies.
1 1 QBTU is enough energy to power all of the cars, trucks, buildings,
homes, infrastructure, and industry of New York State for more than
For further information:
Dorothée D'Herde (Dorothee_dherde@mckinsey.com; +44 (0)20 7961 6432) or Rebeca Robboy (Rebeca_robboy@mckinsey.com; +1 415 318 5107) with any questions or to speak to the authors of the report.