by Alex Evans | Jun 2, 2008 | Climate and resource scarcity, Economics and development, Global system
Here’s a question I’ve been wondering about for a while now. Just how much of an impact are soaring oil costs having on international trade through making it more expensive to ship freight? And if oil costs keep rising – to $200 and beyond, say, as some analysts reckon could happen by the end of the year – is there a risk that transport costs could in effect start to roll back globalisation’s relentless advance over the last few decades?
Last week, courtesy of John Robb, I found the first serious attempt I’ve yet come across to answer that question, from Jeff Rubin and Benjamin Tal (both at CIBC, an investment bank) – see pdf here (scroll down to page 4). And it’s pretty powerful stuff, right from the first sentence, which says bluntly: “Globalisation is reversible.”
The authors say that every one dollar rise in world oil prices translates into a one per cent rise in transport costs. And as freight costs rise steadily upwards, they argue, what’s in effect happening is a de facto reversal of the tariff reductions that have been painstakingly negotiated in international trade rounds.
Back when oil prices were $20 a barrel, they explain, transport costs were the equivalent of a 3% US tariff rate. But at $150 a barrel – just $15 or so higher than oil today – the equivalent tariff rate goes up to 11% – “going back to the average tariff rates of the 1970s”. And $200? “We are back at ‘tariff’ rates not seen since prior to the Kennedy Round GATT negotiations of the mid-1960s.” So with this kind of economic impact, the authors continue, markets will seek shorter, and hence less expensive supply lines – which is “precisely what we have witnessed in response to past OPEC oil shocks”.
Now think about what this means for economies that – like China and India – have emerged by exploiting their cheaper labout (albeit that wage costs have more recently been rising sharply in both countries). China’s steel exports to the US, they say, are now falling by 20% on a year-on-year basis – and they think that’s not only because of the slowing US economy, but also because cheaper Chinese labour is starting to be offset by the sheer cost of transporting the steel across the Pacific. Bottom line:
“In a world of triple-digit oil prices, distance costs money. And while trade liberalisation and technology may have flattened the world, rising transport costs will once again make it rounder.”
Although Rubin and Tal don’t get into the effect on food prices specifically, the drivers they discuss are profoundly relevant for the longer term food outlook. More on that in a future post.
by Alex Evans | May 28, 2008 | Climate and resource scarcity, Economics and development
A couple of weeks ago, I wrote a post noting that the global food prices debate was hallmarked by three competing schools of thought on trade contesting food as a key battleground. One schools thinks liberalisation is the answer (think World Bank). A second reckons self-sufficiency is the way forward (think 1970s import substitution). A third likes long-term bilateral contracts (think of China’s approach to securing energy food supplies). But as I wrote at the time, it seemed to me that the none of these three approaches really offered a complete answer.
Talking to friends at NGOs recently, it seems they think so too. But that’s not to say that they’ve got a fully worked-up narrative yet either.
Back in 2005, during the heyday of Make Poverty History and the One Campaign, the mainstay of development NGOs’ policy agenda on trade was something called “policy space“. In a nutshell, policy space was an argument that developing countries should have the freedom to set their own trade rules rather than have liberalisation, or any other standardised approach, forced upon them: they should have the ‘space’ to determine their own policy in other words.
Fast forward to today, though, and the policy space narrative is starting to look in need of renewal – for three reasons.
The first is that arguments about policy space are fighting the last war. NGO activists love to saddle up to fight the evil Washington Consensus, with its dark plans of forcing privatisation, liberalisation and other ills on hapless low income countries. Just one problem: the Washington Consensus ended 15 years ago. Today, the idea that NGOs did so much to champion back then – that there are no one-size-fits-all answers in development – has gone mainstream.
Secondly, the policy space argument is silent about the trade issue that is at the top of developing country governments’ in-tray: security of supply. On food, energy and other commodities, the big worry this year is about scarcity of strategic resources – and as the Philippines discovered this year when its rice supply chains sputtered, all the policy space in the world is no use if the goods you need aren’t for sale.
Finally, arguments in favour of policy space rest on the problematic assumption that if only developing countries were free to take their own decisions, everything would be fine. But what about when developing countries use their policy space to take decisions that are extremely problematic for other poor countries – for instance when Argentina, Kazakhstan, Vietnam or India decide to reduce or suspend exports, leaving other countries (like the Philippines) in the lurch? Policy space has lots to say about developing countries’ rights, in other words – but what about their responsibilities?
While there’s no shortage of specific ideas and policy proposals in the trade context that can help to move things forward on the food prices agenda, what’s still lacking is a narrative that set out the basic approach.
by Alex Evans | May 20, 2008 | Climate and resource scarcity
For all the media comment criticising biofuels lately, you might have thought that the tide had clearly turned against the increasing trend of using crops for fuel. But you’d be wrong. In fact, as Javier Blas repoted in the FT last week, the proportion of American corn going to biofuels is going up: from 22 per cent of the crop last year to a third this time around.
The reason why is simple: oil price. With oil now at $126 – that’s up $10 just since the start of the month – and lots of analysts pondering $200 by year end, biofuels look like part of a route that leads towards energy independence. And even though corn-based ethanol is about the most idiotic substitute for oil imaginable (on a climate change as well as an energy independence basis), the truth is that in its messed-up way, it kind of works.
The proof: look at the front of today’s FT, where the headline is “US begins to break foreign oil ‘addiction’“. Foreign oil made up 57.9 per cent of imports in the first quarter of this year – as opposed to 58.2 last year. A small drop, you might think, but the Department of Energy is already forecasting a fall to 50 per cent by 2015. And here’s the grim bit:
Although the reduction in oil demand growth is partly because of slower economic growth and a projected 1m-barrel-a-day rise in output from the US’s Gulf of Mexico oil fields by 2012, experts also believe that legislation will accelerate the trend. The Energy Information Administration expects the energy act to help boost biofuel production from 8bn gallons this year to at least 32bn by 2030…
And that’s not all: even as the US starts the long hike towards weaning itself, the oil price is expected to keep on going up, as demand in China continues its ascent skywards. In the background, the International Energy Agency is warning that “the world can not easily afford to retreat from bio-fuels in spite of their possible role in driving up food prices”:
Biofuels already make up about 50 per cent of the extra fuel coming to the market from sources from outside of the Opec oil cartel this year. This explains why fears of a retreat this week helped drive oil prices to record levels. William Ramsey, deputy executive director of the IEA, said: “If we didn’t have those barrels, I am not sure where we would be getting those half a million barrels.”
Bottom line: we must not kid ourselves that we can deal with the food security issue separately from the energy security issue. They’re fundamentally intertwined in over a dozen ways – and the fact that hardly any multilateral institutions cover both energy and food is something that should worry us a lot…
by Alex Evans | May 14, 2008 | Climate and resource scarcity
Just back from ten gorgeous days on holiday in Cornwall – hence radio silence on the blogging front, and a much-needed break from frenetic activity on the food prices research front.
(As I found, Cornwall is actually about the best place you could go to get some fresh perspective on food. The Lost Gardens of Heligan have the most impressive kitchen gardens I’ve ever seen; the Eden Project fizzes with thoughts about how we’ll feed ourselves through this century; and Tim Smit – who led the construction of Eden and the restoration of Heligan – and Tony Kendle, director of the Eden Foundation, were both full of ideas about the future of food. Plus, just over the Devon border is Totnes, home of the transition towns movement – which John Robb admires as an exemplar of the idea of the resilient community.)
So with last month’s briefing paper on food prices out of the way, I’m starting to think in earnest about the content of the main pamphlet that I’ll be writing over the summer.
Although we’re not out of the woods yet on gearing up the humanitarian response to immediate term food price impacts, the issue is firmly on the agenda; by the time of the G8 at the start of July, most governments should have made their initial pledges of increased assistance. Meanwhile, the UN’s new task force on food prices met for the first time on Monday, and will pull together a framework for action over the next few months.
But what about the longer term? What are the big questions we need to think through between now and the Italian G8 in 2009, by which time we’ll need to have thought through a global plan for the longer term challenge of meeting 50 per cent higher demand by 2030 – and a population of nearly ten billion by 2050?
I’m tentatively organising my thoughts into three main clusters: questions about the future of agriculture; questions about the future of trade; and questions about the future of demand for food among wealthier consumers. (more…)
by David Steven | May 12, 2008 | Climate and resource scarcity, North America
John McCain’s out on the campaign trail today promoting his green credentials, but its clear that his climate change proposals would put a McCain administration on collision course with many, maybe most, of its international partners.
Here’s McCain’s headline promise on climate:
By the year 2012, we will seek a return to 2005 levels of emission, by 2020, a return to 1990 levels, and so on until we have achieved at least a reduction of sixty percent below 1990 levels by the year 2050.
At first glance, this sounds pretty compatible with the ranges that the Kyoto countries (almost all countries bar the US) agreed to be ‘guided by’ in their side negotiation at Bali. Following the lead of the IPCC, these countries said that:
Global emissions of greenhouse gases (GHGs) need to peak in the next 10-15 years and be reduced to very low levels, well below half of levels in 2000 by the middle of the twenty-first century.
McCain’s 60% by 2050 is ‘well below half’ of course (especially when you note the different baseline). But that fails to take into account how Americans emit at the moment. The US will have to cut much further and faster than McCain realises, if we are going to hit the global target.
Breaking out emissions on a per capita basis shows why:
- According to Nick Stern (pdf), per capita emissions will need to be around 2-2.5 tonnes gigatons CO2e by 2050, based on a population of 9 billion people.
- The US government’s own stats, however, show that its per capita emissions were around 24 tonnes gigatons in 2006 (based on a population of 300 million).
- McCain’s 60% reduction would take them down to just under 6 tonnes gigatons, based on a population that had grown to 420 million people (and obviously higher if population growth is less rapid.
In other words, the US would still be two to three times above the global average in 2050. By mid-century, under McCain’s plan, its per capita emissions would be higher than China’s – at around 5 tonnes gigatons – are today! (more…)
