McKinsey's Marc Zornes Discusses the Coming Resource Crisis

"We think there's something fundamentally different going on than what happened in the last century," Marc Zornes told a roomful of Yale SOM students.

Zornes, a senior consultant at McKinsey & Company's Sustainability and Resource Productivity Practice, was describing what he and other McKinsey researchers found when they examined commodity prices since the turn of the 20th century. Between 1900 and 2000, despite an explosion of population and demand, commodity prices fell by almost 50%. But since 2000, prices have doubled, wiping out 100 years of decline. "What shocked us was that it turned on a dime," Zornes said.

Zornes was speaking at the invitation of the Yale SOM Energy Club, presenting findings from the McKinsey Global Institute (MGI) report "Resource Revolution: Meeting the World's Energy, Materials, Food, and Water Needs," which was issued in November 2011.

There could be an era of sustained high resource prices and increased economic, social, and environmental risk over the next two decades. Some three billion people will be added to the middle class during that period, many of them in India and China, and begin to consume resources at a rate closer to that of the West. "What you see is people buying their first refrigerator, their first car," Zornes said. Meanwhile, it is becoming harder and harder to find and extract water, oil, metals, and other resources. Linkages between resources—for example, the need for water in producing energy—means that shortages can spread rapidly from one resource to another. And climate change and other environmental problems add additional constraints on supply.

In the report, Zornes and his co-authors propose a series of steps to address resource constraints. A large portion of the gap between resources supply and demand can be closed through productivity improvements. While making such improvements poses major challenges, McKinsey found that 75% of potential savings are concentrated in just 15 areas, led by greater energy efficiency in new buildings, increased yields in large-scale farms, and reduced food waste. In most of these areas, the savings would be greater than the needed investment.

Supply of resources must also be increased. And additional investment is needed to prevent climate change from surpassing the 2 degrees in increased temperature that appears to already be inevitable.

Many of the barriers to these solutions are related to policy, Zornes said. Governments must take a more integrated approach to managing resources. And they can take steps to strengthen price signals that would draw investment to productivity improvements from the private sector, such as reducing subsidies of water, fossil fuels, food, and other resources and setting a price on carbon emissions.

After the talk, Fernando Herrero Sin '13 said that it was a "great example of the kind of opportunities I love to take advantage of as a Yale student in order to stay ahead of the curve in terms of the state of the world and where it is heading to."

"As a Yale SOM student," he added. "I'm naturally interested in the intersection between business and society, so having Marc Zones come here to pinpoint the future business opportunities that address such relevant issues was extremely valuable."

Zornes' talk was one of a series put together by Energy Club leaders and Professor Manuel Pinho, a senior fellow at Yale's Jackson Institute for Global Affairs and the former minister for economy and innovation in Portugal, who is teaching a class titled Energy Economics this semester. Upcoming speakers in the series include Ping Hua, president of the International Fund for China's Environment, and Vijay Iyer, director of sustainable energy at the World Bank.

"We bring a series of high profile names in the energy space to discuss their experiences and major topics in energy," said Jessica Aldridge MBA/MEM '13, one of the Energy Club leaders. "A lot of what we try to do as a professional club at SOM is to educate our members about a critical yet very technical and complicated sector. These lectures will support that goal and also further develop the school's relationships with employers that hire MBAs."