Resource Revolution: Meeting the world's energy, material, food, and water needs

The McKinsey Global Institute (MGI) and the company's Sustainability & Resource Productivity (SRP) Practice published this report, dated November 2011. Employing the disciplines of economics and management, the Institute offers strategy and policy directions for management to consider when making decisions. As this document stated, "current research focuses on four themes: productivity and growth; the evolution of global financial markets; the economic impact of technology and innovation; and urbanization" (p.1). These themes constituted the framework for this work, enabling the authors to exam the world's energy, material, food, and water needs in this context.  With more than 1000 consultants worldwide, investigating approximately 20 countries and 30 industries, the firm has produced this and other reports.

Noticing a change in the supply and demand equation of natural resources, from the match of resource availability with the rise in demand during the past 100 years to demand outpacing supply due to the surge of emerging markets, the authors outlined the challenges of this situation, including the resource demand shortages that impact business and environmental decisions.  The report began by stating six facts that frame the challenges:

• 3 billion more middle-class consumers expected to be in the global economy by 2030
• 80% rise in steel demand projected from 2010 to 2030
• 147% increase in real commodity prices since the turn of the century
• 44 million people driven into poverty by rising food prices in the second half of 2010, according to the World Bank
• 100% increase in the average cost to bring a new oil well online over the past decade
• Up to $1.1 trillion spent annually on resource subsidies

 The authors identify five opportunities:

•  $2.9 trillion of savings in 2030 from capturing the resource productivity potential . . . rising to $3.7 trillion if carbon is priced at $30 per tonne, subsidies on water, energy, and agriculture are eliminated, and energy taxes are removed
• 70% of productivity opportunities have an internal rate of return of more than 10% at current prices . . . rising to 90% if adjusted for subsidies, carbon pricing, energy taxes, and a societal discount rate of 4%
• At least $1 trillion more investment in the resource system needed each year to meet future resource demands

Included with these opportunities, the authors added 15 opportunities. These supplemental opportunities would meet some of the anticipated 2030 demand, 30 percent overall, 100 percent of the land demand, 80 percent of the energy demand, 60 percent of the water demand, and 25 percent of the steel demand.

Because these concerns echoed those of Thomas Malthus, who wrote the famous work, An essay on the Principle of Population, the authors questioned whether current conditions mirror those that prompted Malthus to voice his concern. He postulated "that the human population was growing too rapidly to be absorbed by available arable land and that this would lead to poverty and famine" (p. 1). Except for small groups of promoters, Malthus' premise did not monopolize 20th century thought. According to the authors, "the dominant thesis of the 20th century was that the market would ride to the rescue by providing sufficient supply and productivity" (p. 1).

The facts of the period, the authors asserted, support this view. Placing their faith in the "number of people, devices, and sensors that are now connected by digital networks" the authors believed that the networks "can help to transform the productivity of resource systems, creating smarter electricity grids, supporting more intelligent building, and enabling 3D and 4D seismic technology for energy exploration" (p.1). These technologies, however, should not minimize current and future challenges, given the stresses on the natural environment to produce food, supply water, and generate energy and the required "step change in the productivity of how resources are extracted, converted, and used" (p. 2). Despite existing technological improvements, global warming, above the two degrees Celsius, remains a threat as well as increased poverty from higher resource prices. Concerted efforts at the local, national, regional, and international levels would allow a more collaborative approach to solving these problems. The authors recommended three managerial and policy changes: the elimination of resource subsidies; sufficient capital to mitigate "market failures associated with property rights" (p. 3) and to support funding for incentives and innovation; and funding to establish safety nets for the poor and educate the general population on the new "resource-constrained" (p. 3) realities and regulatory regimes.

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The 15 opportunities: (1) Building energy efficiency, (2) increasing yields on large-scale farms,(3)  reducing food waste, (4) reducing municipal water leakage, (5) urban densification (leading to major transport efficiency gains), (6) higher energy efficiency in the iron and steel industry, (7) increasing yield on smallholder farms, (8) increasing transport fuel efficiency, (9) increasing the penetration of electric and hybrid vehicles, (10) reducing land degradation, (11) improving end-use steel efficiency, (12) increasing oil and coal recovery, (13) improving irrigation techniques, (14) shifting road freight to rail and barge, (15) improving power plant efficiency.