# Prices and cycles: Real prices and the long-run trend

Source page: https://www.materialinsights.org/learn/commodities/prices-and-cycles/p4/

[Understanding Commodities](https://www.materialinsights.org/learn/commodities/) / [Module 5: Prices and cycles](https://www.materialinsights.org/learn/commodities/prices-and-cycles/) Part 4 of 5

## Real prices and the long-run trend

Over decades the question is where prices are heading. Are raw materials getting scarcer and dearer, as classical economists and depletion pessimists expected, or cheaper relative to manufactures, as Prebisch and Singer argued? The answer depends on the deflator, the end points and the commodities chosen. The same care applies to reading the charts on the tiles.

### 4.1 A real price is a ratio, and the deflator decides the story

A nominal price is in the money of the day. A real price divides it by an index of other prices, answering a specific question: how much of something else must society give up for a tonne of this? Change the something else and the answer changes.

Radetzki and Wårell list GDP deflators, US producer and consumer price indexes, and the UN's index of dollar prices of manufactured exports, the MUV index. They prefer MUV because it compares commodities with the manufactures they trade against and avoids distortions when exchange rates move faster than national prices. Its weakness is that it omits manufactures from China and the trade in services. Erten and Ocampo also use it, and note that with the US CPI oil after the second oil shock looks dearer than around 2010, whereas with MUV the 2010 level is higher.

Tilton shows what rides on the choice. Potter and Christy, deflating by producer prices, found mineral prices fell over 40% between 1870 and 1957, almost all in the first decade. Nordhaus, deflating by wages, found falls of 97% for aluminium, 90% for petroleum, 87% for copper, lead and zinc between 1900 and 1970: an hour of work buys vastly more metal. A further bias runs the other way. Price indexes overstate inflation because they miss quality gains and new products; a US commission put the CPI bias at about 1.1% a year. Commodity grades do not improve that way, so real series understate true trends. Adjust oil's real price by 0.75-1.25% a year and a flat long-run line becomes a rising one.
 In the data

#### Two oil peaks in 2010 dollars

The Crude oil tile's real chart uses the MUV index with 2010 = 100. On it, 1980 averages $58.1 a barrel, 2008 $94.9 and 2012 $101.6, the series high. Nominally, 1980 was $37.9 and 2008 $97.6. By this deflator the 2000s boom was the bigger oil shock; a US consumer-price deflator, by Erten and Ocampo's account, ranks the early 1980s higher. Neither is wrong. They answer different questions.

- Radetzki & Wårell (2021), A Handbook of Primary Commodities · pdf pp. 112-113
- Erten & Ocampo (2012), Super-cycles of commodity prices, UN DESA WP 110 [web ↗](https://www.un.org/en/development/desa/papers/2012/wp110_2012.pdf) · pdf p. 8
- Tilton (2003), On Borrowed Time? · pdf pp. 51-53, 60-63

### 4.2 The evidence: falling for crops and most metals, rising for oil, and never fixed

Grilli and Yang's classic study deflated 24 commodities by manufactures prices over 1900-1986. They found a decline of 0.59% a year, about 40% in total, steepest for metals at 0.84% a year, while tropical beverages rose. Cashin and McDermott, covering metals and agricultural raw materials from 1862 to 1999, found 1.3% a year and a fall of four fifths over the twentieth century. Jacks, using 30 series from 1850 to 2012 deflated by the US CPI, found real prices rising from 1950 onwards, with energy, precious metals and minerals rising steadily since 1900, while grains and softs fell. But his series ended in 2012, mid-boom; another end year could reverse the result.

Erten and Ocampo let the trend itself drift. Real non-oil prices edged up from 1865 to 1885, fell 47% over 109 years to 1994, then rose 8% to 2010. Metals fell 48% from 1881 to 1974 and then rose 44%. Tropical agriculture fell furthest, 67% between 1888 and 2002, which they link to surplus labour in tropical farming. Real oil, by contrast, rose 280% between 1962 and 2010.

Tilton's survey of the scarcity literature reaches two conclusions. First, despite consumption on a scale never seen before, depletion has not produced rising real prices that curtail use. Barnett and Morse found labour and capital per unit of mineral output fell more than 75% between 1870 and 1957, and Slade's U-shaped trends, suggesting scarcity setting in before 1973, were undercut by the price falls of the 1980s and 1990s; an update found the U-shape fitted only nickel. Second, the trends are not fixed. They shift with technology and growth, so extrapolating them is risky.
 Case

#### The Simon-Ehrlich bet

In 1980 the economist Julian Simon publicly bet that raw-material prices would not rise in the long run. The biologist Paul Ehrlich chose five metals, copper, chromium, nickel, tin and tungsten, and bet their real value would rise between September 1980 and September 1990. Population grew from under 4.5 to 5.3 billion, yet every metal fell in real terms, and Ehrlich mailed a cheque for $576.07. Conway's caveat: start the bet in almost any year of the 1960s, 1970s or 2000s and Ehrlich would usually have won.

- Radetzki & Wårell (2021), A Handbook of Primary Commodities · pdf pp. 113-115
- Erten & Ocampo (2012), Super-cycles of commodity prices, UN DESA WP 110 [web ↗](https://www.un.org/en/development/desa/papers/2012/wp110_2012.pdf) · pdf pp. 9-11, 25
- Tilton (2003), On Borrowed Time? · pdf pp. 49-57, 64-66
- Tilton & Guzmán (2016), Mineral Economics and Policy · pdf pp. 229-231
- Conway (2023), Material World · pdf pp. 212-213

### 4.3 Why the trend: Prebisch-Singer, technology against depletion, and Hotelling's rule

In 1950 Prebisch and Singer argued that productivity gains are shared unequally: in competitive commodity markets they pass to buyers as lower prices, while in manufacturing organised labour and firms keep them as higher wages and profits. Erten and Ocampo add low income elasticity of demand, and read their finding that each non-oil super-cycle averaged lower than the last as support. Radetzki and Wårell list less controversial causes: low income elasticity, falling freight costs that weigh more on bulky goods, and quality gains in manufactures that price indexes miss. Svedberg and Tilton found that correcting for quality turns copper's falling real trend into a rising one.

Tilton and Guzmán provide the supply-side frame. The long-run supply curve rises at first, then flattens because lower-grade deposits are far more plentiful. Over the relevant range demand growth barely moves the long-run price, though it changes output a great deal. The trend comes from shifts in the curve: depletion pushes it up, technology pushes it down, and for most of the past century technology won.

Hotelling offered the opposite prediction in 1931. A deposit is an asset. If its value in the ground grew slower than the interest rate, owners would mine faster, and vice versa, so in equilibrium the scarcity rent, or user cost, rises at the rate of interest and prices climb. That rests on strong assumptions: known, uniform deposits, no exploration and no technical change. Relax them and user costs can fall. Tilton reports studies finding user costs negligible for long-lived resources, oil included.
 Common misreading

#### Hotelling does not predict that prices will rise

Hotelling's rule says what a scarcity rent would do under ideal assumptions, not what prices will do; Geman notes little evidence of prices rising at the interest rate. Tilton's example: Sweden's iron ore was valuable through the 1950s because it lay close to Europe's steel mills. Had Sweden saved it for later, cheap bulk shipping would have erased that advantage. Its true user cost was about zero. Britain's coal and Chile's guano lost their value the same way.

- Radetzki & Wårell (2021), A Handbook of Primary Commodities · pdf pp. 115-117
- Erten & Ocampo (2012), Super-cycles of commodity prices, UN DESA WP 110 [web ↗](https://www.un.org/en/development/desa/papers/2012/wp110_2012.pdf) · pdf pp. 5-6, 25-26
- Tilton & Guzmán (2016), Mineral Economics and Policy · pdf pp. 115-117, 120, 223
- Tilton (2003), On Borrowed Time? · pdf pp. 24-27, 63-65
- Geman (2005), Commodities and Commodity Derivatives · pdf p. 193

### 4.4 How to read the price charts on a tile

Each tile with a public price series shows, in its cycles lens, the latest monthly price and its change against the same month one, five and ten years earlier, plus two charts: monthly nominal since 2000 and annual real since 1960, in 2010 US dollars deflated by the MUV index. Each answers a different question, and each can mislead.

Percentage changes depend entirely on the start month. Potassium chloride shows -50% over five years, but September 2021 was already deep into the run-up to the 2022 spike; against the 2020 lows the comparison would look very different. European gas shows only +11% over five years, from $22.84 to $25.42, yet in between it hit $70.04. Always look at the chart before trusting the stat.

Monthly averages smooth away extremes. Brent's April 2020 average is $23.3, yet for a few hours that month the US benchmark traded below zero.

Nominal records are not real records. Copper's $14,474 a tonne in September 2026 is its highest monthly price since 2000. In real terms the 2025 average of $8,568 is the highest annual figure since 1960, above 2011's $7,950 and the 1966 peak of $7,393.

Finally, check which price it is: Brent is a North Sea crude, the gas series is European, iron ore is 62% fines delivered to China. Other grades and places diverge: US Henry Hub gas, for instance, has long traded far below European gas. Many minor materials have no public series because they trade privately.
 Worked example

#### Reading the Crude oil tile

Brent was $116.8 a barrel in September 2026, +72% on a year earlier ($68.0) and +57% on five years earlier ($74.6). The monthly chart shows the path: $71.1 in February 2026, $120.4 in April, $83.4 in July, $90.9 in August, then $116.8 in September. The real chart shows 2025 at $59.5 (2010 dollars), below every year from 2011 to 2014. Whether 2026 joins 1974, 1980 and 2008 as a shock year depends on what stocks do next, not on any single month.

- Radetzki & Wårell (2021), A Handbook of Primary Commodities · pdf pp. 112-113, 124-125
- Humphreys (2015), The Remaking of the Mining Industry · pdf p. 105

### See it in the table
[Oil Crude oil](https://www.materialinsights.org/energy/crude_oil/)[Cu Copper](https://www.materialinsights.org/commodities/copper/)[Al Aluminium](https://www.materialinsights.org/commodities/aluminum/)[Zn Zinc](https://www.materialinsights.org/commodities/zinc/)[Ni Nickel](https://www.materialinsights.org/commodities/nickel/)[Fe Iron ore](https://www.materialinsights.org/commodities/iron_ore/)[St Steel](https://www.materialinsights.org/commodities/steel/)[Cr Chromium](https://www.materialinsights.org/commodities/chromium/)[W Tungsten](https://www.materialinsights.org/commodities/tungsten/)

### Check your understanding

Nordhaus found far larger declines in real mineral prices between 1900 and 1970 than Potter and Christy did. Why?
 Deflating by labour cost asks how many hours of work buy a tonne of metal. Because real wages rose strongly, the answer fell dramatically. The choice of deflator answers a different question rather than giving a more correct one.

According to Tilton and Guzmán, what mainly determines the long-run trend in real mineral prices?
 Because the long-run supply curve is fairly flat over the relevant range, demand growth changes output more than price. The trend depends on whether cost-reducing technology outpaces cost-increasing depletion.

A tile shows a commodity down 50% over five years. What is the first thing to check?
 Point-to-point changes depend on the start date. Potassium chloride's -50% reflects a starting month already in the 2021-2022 spike.

[← Part 3: Storage, convenience yield and the forward curve](https://www.materialinsights.org/learn/commodities/prices-and-cycles/p3/)[Mark read · Part 5: Booms, super-cycles, money and the dollar →](https://www.materialinsights.org/learn/commodities/prices-and-cycles/p5/)

## Other sections

- [Module overview](https://www.materialinsights.org/learn/commodities/prices-and-cycles/index.md)
- [How a commodity price is made](https://www.materialinsights.org/learn/commodities/prices-and-cycles/p1/index.md)
- [Why commodity prices swing so hard](https://www.materialinsights.org/learn/commodities/prices-and-cycles/p2/index.md)
- [Storage, convenience yield and the forward curve](https://www.materialinsights.org/learn/commodities/prices-and-cycles/p3/index.md)
- [Booms, super-cycles, money and the dollar](https://www.materialinsights.org/learn/commodities/prices-and-cycles/p5/index.md)
- [Key terms, quiz and sources](https://www.materialinsights.org/learn/commodities/prices-and-cycles/review/index.md)