Supplies of natural resources will remain thinly stretched in the near term cautions UBS Wealth Management Research, in a new report that projects continued strong growth in demand.

The report projects continued shortfalls in meeting oil demand, and a peak in oil production within the next 25 years. It suggests that consumption of natural resources will expand during the next two decades, driven by continued industrialization and growth of domestic demand in emerging market countries.

However, the report finds little evidence of long-term scarcity. “Specifically, although the market price for energy products and base metals has risen sharply during the past few years, prices are lower than in past cyclical peaks after adjusting for inflation,” it says.

UBS also forecasts that natural gas production and other fuel substitutes will likely grow in importance to meet an expected increase in overall energy use. “The emergence of cost-effective fuel substitutes will enable reduced reliance on crude oil, and reserves of base metals are sufficient to meet long-term demand forecasts,” says UBS.

The report suggests that the composition of global per capita income may be about to change substantially, and, along with it, natural resources demand. It projects that the per capita income gap between developed and developing countries will continue to shrink over the next several decades. As a result, the weight of the developed countries in the world economy will diminish, and the income of the average citizen in an emerging market country will likely improve relative to that of an average citizen in developed countries.

“Although developed countries will remain the largest end-consumers of natural resources, future growth in demand will likely flow from emerging markets, as per capita incomes continue to rise relative to developed countries,” it says.

UBS assumes that oil consumption will remain strong in the near term and projects that production capacity will likely trail demand due to geopolitical instability in key oil producing regions. This points to continued oil supply and demand imbalances for at least the next five years, it concludes.

Over the long term, UBS believes that the peak in oil production is likely to occur in the mid- to late-2020s. The expected slowing in oil supply growth and the potential for much faster growth in the supply of natural gas suggests that natural gas will likely eclipse oil production by 2030, if not earlier.

Substitutes for crude oil will likely emerge with time, it predicts, but they require substantial technological innovation, infrastructure development, and the willingness of governments to remove distortionary energy subsidies.

In the short run, the reserve profile for base metals is hindered by underinvestment in mining extraction capacity, as well as international trade and legislative restrictions regarding the environmental consequences of mining. Capital expenditure on metals production is increasing, but is unlikely to have a significant impact on supplies for at least the next three to five years, according to UBS projections.

Over the long term, there appears to be no issue of depletion in the next 200 years or so for mineral commodities, like ferrous and non-ferrous metals, given the high resource base availability, it says.
“Nevertheless, supply shortages similar to the current one will emerge from time to time,” it adds.

“Given our long-term outlook on commodities, particularly the impressive demand forecasts for emerging markets, UBS thinks that investments in natural resources should play a role in most private investors’ portfolios and will be able to stabilize portfolio returns. Given the changing influences on commodity prices, UBS recommends that investors consider more active investment strategies in commodities,” it counsels.