The Shifting Economics of Raw Materials: Why Commodities Get Cheaper (Until They Don't)

The familiar chart from the American Enterprise Institute showing how different goods and services have changed in price over time has become a standard reference for understanding economic trends. It shows a clear divergence: labor-intensive services like education and healthcare have become dramatically more expensive in inflation-adjusted terms, while manufactured goods like televisions and clothing have become cheaper. But what about the raw materials that go into those manufactured goods? What about commodities—the iron ore, oil, cotton, and wheat that form the foundation of the global economy?

This question matters because commodities represent a unique category in the economic landscape. Like manufactured goods, they are physical products produced using technology—mining equipment, oil drilling rigs, agricultural machinery. Many undergo factory-like processing steps: oil refineries, blast furnaces, textile mills. Yet they also have distinct characteristics that set them apart. Commodities are often extracted from finite deposits, subject to depletion dynamics: the best iron ore deposits in Minnesota were mined out, forcing steel companies to source from overseas. The concept of "Peak Oil" is built on the premise that easily accessible reserves will be exhausted, pushing extraction toward increasingly marginal and expensive locations.

Some commodities escape this pattern. Agricultural products can be repeatedly grown on the same land, though poor farming practices can degrade soil quality over time. Others, like non-farmed timber or wild fisheries, face depletion if extraction exceeds natural replenishment rates. But the fundamental question remains: do commodities generally get cheaper over time, like manufactured goods, or more expensive, like services?

Historical data suggests the answer is more nuanced than either extreme. Julian Simon famously won his 1980 bet with Paul Ehrlich that several raw materials—copper, chromium, nickel, tin, and tungsten—would be cheaper in inflation-adjusted terms after ten years. Critics note that selecting a different ten-year window might have favored Ehrlich instead, highlighting how price trends can vary dramatically over different periods.

To get a clearer picture, I examined historical prices for over 124 different commodities using data from the U.S. Department of Agriculture, U.S. Geological Survey, and energy databases. The patterns that emerged reveal a fundamental shift in commodity economics over the past century.

Fossil Fuels: Spikes and Long-Term Drift

Fossil fuel prices show the most dramatic volatility. The 1970s energy crisis, where prices tripled before collapsing, dominates the visual landscape, but it's far from the only major spike. The early 2000s saw another dramatic increase. Beneath this volatility, there's a slight long-term tendency for prices to rise, particularly after the 1970s crisis. However, this trend isn't universal. Natural gas prices have generally declined since the early 2000s, and all fossil fuels experienced extended periods of price decline. Oil prices fell steadily from the late 1860s through the early 1970s—a century-long decline. Natural gas prices dropped from the 1920s through the 1940s. The pattern suggests that fossil fuel prices are subject to cyclical forces—supply shocks, demand fluctuations, geopolitical events—that can overwhelm any underlying trend.

Agricultural Commodities: The Strongest Decline

Agricultural commodities show the clearest and most consistent price decline over time. Of 25 crops examined, 24 have lower inflation-adjusted prices today than at the beginning of their historical series. Seventeen of these have fallen by more than 50%. The single exception is tobacco, which has seen price increases.

This trend has weakened in recent decades. Looking at the period since 1990, 20 of the 25 crops are cheaper today, but four—barley, oats, rye, and Durum wheat—have become more expensive. The trend reversal is even more pronounced since 2000: only four crops (cotton, peanuts, tobacco, and sweet potatoes) have fallen in price in real terms. This suggests that the era of steadily declining agricultural prices may be ending.

Meat prices tell a similar story. Chicken prices have declined since 1980, but beef and pork show a different pattern. Both fell from 1970 through the mid-1990s, then reversed course. Pork prices are up 15% since 1995, and beef prices have risen 41%. The divergence between chicken and red meat likely reflects different production technologies: chicken production has become highly industrialized and efficient, while beef and pork production face biological constraints that limit similar efficiency gains.

Minerals: Mixed Trends with Recent Reversal

Mineral commodities—industrial metals, precious metals, chemicals, and other extracted materials—show the most varied price patterns. Of 93 mineral commodities examined, 60 became cheaper over their historical time series. Thirty-six saw price declines greater than 50%, and ten declined by over 90%. The most dramatic example is industrial diamonds, which fell 99.9% between 1900 and 2021 due to advances in lab-grown diamond production. Today, roughly 99% of industrial diamonds are synthetic, effectively replacing mined diamonds with manufactured ones.

Other major price declines resulted from production process improvements. Aluminum became cheaper following the invention and refinement of the Hall-Héroult smelting process. Titanium prices declined after the introduction of the Kroll process. Steel became dramatically cheaper following the Bessemer process, though this predates available price data.

However, this historical trend has weakened significantly. For the 75 minerals with data from 1990 to 2020, only 39 (slightly more than half) became cheaper. The other 36 became more expensive. Several commodities that previously showed consistent price declines—copper, construction sand, phosphate for fertilizer—have been rising in price for the past several decades.

The 20-Year Window Analysis

To better understand these trends, I calculated equivalent annual price changes for each commodity over 20-year windows, creating over 600 data points. The resulting histogram shows a left-skew, indicating a general tendency for prices to decline over 20-year periods. This pattern holds for each commodity category except fossil fuels, which show a slight tendency toward price increases.

But when we examine only the most recent window (2000-2020), the pattern reverses. The histogram shows a right-skew, indicating a tendency for prices to rise. This shift is consistent across commodity categories and represents a fundamental change in the economics of raw materials.

The Manufacturing Analogy

The key variable explaining these patterns appears to be how closely production resembles manufacturing. Commodities produced through repetitive, improvable, and automatable processes—without severe depletion constraints—tend to see prices fall over time. Industrial diamonds exemplify this: synthetic production replaced mining entirely for industrial uses. Aluminum production became cheaper through process improvements. Agriculture has evolved from manual harvesting to highly automated, continuous-process machinery, mirroring manufacturing trends.

Conversely, commodities subject to depletion dynamics or biological constraints show less consistent price declines. Beef and pork production faces biological limits that prevent the same efficiency gains seen in chicken or industrial manufacturing. Fossil fuel extraction confronts geological constraints and declining resource quality. Even commodities produced in manufacturing-like operations—steel, cement, silicon—haven't seen consistent price declines throughout their history.

Recent Reversal: A New Era?

The most significant finding is the recent reversal of historical trends. Since roughly 2000, agricultural commodities, minerals, and fossil fuels have shown increasing prices rather than decreasing ones. This shift coincides with several global changes:

1. Resource depletion: The easy-to-access deposits have been exhausted, pushing extraction toward more marginal locations.
2. Rising demand: Global economic growth, particularly in developing nations, has increased demand for raw materials.
3. Energy costs: Higher energy prices increase extraction and processing costs.
4. Environmental regulations: Stricter environmental standards add compliance costs.
5. Geopolitical factors: Trade policies, sanctions, and supply chain disruptions affect prices.

The data suggests we may be entering a new phase where commodity prices are more likely to rise than fall over multi-decade periods. This has profound implications for economic growth, inflation, and resource policy.

Implications and Limitations

The manufacturing analogy provides a useful framework for understanding commodity price dynamics, but it's not a complete explanation. Cartels, national policies, demand spikes or collapses, and technological breakthroughs can all shift supply and demand curves. Some commodities that resemble manufactured goods have still seen price increases recently.

The historical pattern also raises questions about sustainability. If commodity prices generally decline when production resembles manufacturing, but rise when subject to depletion or biological constraints, what does this mean for an economy increasingly dependent on finite resources? The recent price increases across multiple commodity categories may signal that we're approaching or have passed the point where depletion dynamics dominate over manufacturing-style improvements.

For policymakers and investors, these trends suggest that assumptions about long-term commodity price behavior need revision. The historical tendency for prices to fall may be giving way to a new reality where raw materials become increasingly expensive, with significant implications for inflation, economic growth, and resource management strategies.

The data ultimately reveals that commodity prices are not governed by a single, universal trend. Instead, they reflect the complex interplay between production technology, resource constraints, and global economic forces. Understanding these dynamics requires looking beyond simple narratives of scarcity or abundance to the specific characteristics of each commodity and the systems that produce them.