by Alex Evans | Jun 2, 2008 | Africa, Climate and resource scarcity, Economics and development
I had a long chat with Pascal Fletcher at Reuters on Friday while he was writing this article on the effect of price rises for food and fuel in west Africa, where he’s based. He clearly knows the region back to front, and as his piece makes clear, the outlook isn’t good:
Africa’s cocoa makes the world’s chocolate, its fish, fruit and vegetables reach tables around the globe and its oil powers vehicles and factories from China to the United States. Yet far from benefiting from soaring commodity prices, African states are being squeezed as hard as any by the costs of fuel and food imports. Their desperate moves to cushion the impact for potentially restive populations threaten to wreck already stretched budgets, slashing receipts and swelling state spending.
As far as I can tell from the rough tally I’ve been keeping over the last few months, west Africa’s been one of the regions hardest hit by civil unrest related to food and fuel inflation, and Pascal’s article seems to confirm this. As a result, many governments have been under pressure to subsidise prices for both. Problem is, that doesn’t do their exchequers any good at all – quite apart from the inflationary impact of such measures.
The unplanned contingency measures, on top of global food and oil prices far above what most imagined a year ago, are wreaking havoc with governments’ finances. “This trend is throwing the budget out of gear,” Ghana’s President John Kufuor lamented last month when he unveiled a package of actions to mitigate the price rises …
As I argue in Pascal’s piece, the expense of subsiding goods across the whole economy, coupled with the inflationary impact, are two of the reasons for the current enthusiasm for social protection systems – be they food aid, vouchers or straightforward cash transfers – that are targeted at the poorest people. Expect to hear a lot about such ‘social protection systems’ at this week’s UN food summit.
But there’s a catch, too: in many places, the infrastructure for administering these systems just isn’t in place. Helping countries to get it set up has to be a top priority for donors – starting right now.
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 30, 2008 | Climate and resource scarcity, Conflict and security, Economics and development
Next week, the UN is holding a major summit on food security in Rome – I’ll be there throughout (and blogging regularly on what goes on). Ahead of the kick-off, I’ve updated the Global Dashboard page on where to get briefed on food prices, and put out a scene-setter press release through Chatham House that sets out a few thoughts on what the summit needs to achieve.
This week’s already seen a couple of new items on food prices that are worth a look, starting with a new annual FAO / OECD outlook report – which this year looks all the way out to 2017. It finds that although prices will come down in the short term (which you already knew, since you read it here on Global Dashboard on March 18th), nominal prices over the medium term will remain “substantially above” levels over the last ten years. In other words, it’s not just a blip.
Also worth a look is World Bank President Bob Zoellick’s ten point plan for food prices, published in the FT this morning. His article confirms that he’s well ahead of the curve on understanding the need for an integrated approach to scarcity issues:he says collective action is needed on “the interconnected challenges of energy, food and water [which will be] drivers of the world economy and security”. (I’ll be publishing a paper on how the multilateral system needs to be reformed to cope better with scarcity issues just before the G8 in early July.)
What will actually happen at the summit is currently anyone’s guess. It’s fair to say that FAO haven’t been very proactive in briefing the media on likely outcomes or what they’re hoping for, which puts them in the rather hazardous position of allowing high expectations to emerge without really managing them. Another risk is that a major spat over biofuels could erupt: Ahmadinejad and Chavez will both be at the food summit, and would like nothing better to embarrass the US over its support for ethanol – and while US subsidies for corn-based ethanol are certainly problematic, it’s hard to see these particular interlocutors opening up much political space on Capitol Hill as legislators contemplate the Farm Bill.
But on the upside, great progress has been made on financing the immediate humanitarian needs (after Saudi Arabia stunned everyone by coming up with half a billion dollars last week – a coup for WFP head Josette Sheeran and for UN Emergency Relief Coordinator Sir John Holmes, who’s invested much time encouraging Gulf countries to contribute). This, together with the prospect of some short term relief on prices, gives policymakers a chance to look ahead towards the longer term challenges as well as short term crisis management.
It’s also hard to remember a time when the UN system and the international financial institutions have worked together as closely or as effectively as they seem to have been doing on the UN’s food task force – a great story, given how fragmented the international system usually is, but one that’s gone largely unreported. Even so, the real work in pulling together the longer term agenda is still in front of us…
by Alex Evans | May 29, 2008 | Climate and resource scarcity, Global system
Thta’s the question lots of market analysts are starting to ask, according to Sarah O’Connor:
French fishermen and British lorry drivers set up blockades in protest at fuel costs, American Airlines grounded scores of older aircraft, and – most significantly – countries across south-east Asia said they would cut their fuel subsidies because they couldn’t afford to keep them.
Francisco Blanch at Merrill Lynch says these are signs that a “demand destruction point” is looming – where oil becomes so expensive that demand for it falls away. The market has already hit that point in Europe and the United States, but demand is still growing in emerging market economies where subsidies insulate consumers from the pain of high prices.
Nauman Barakat at Macquarie agrees with Mr Blanch that things might be changing. “The word on everyone’s lips is demand destruction which is very apparent in the US and may become a feature in the red-hot economies of Asia as those countries reduce fuel subsidies,” he says.
Daniel Yergin – head of CERA and author of The Prize, the best history of the oil industry that there is – was arguing something similar a couple of days ago:
The break point is already here. Oil is in the process of losing its almost total domination in ground transport. It is not going to fade away soon – such is the scale of its use and convenience, it will retain a dominant position for many years. But it will share the transport market with other sources as never before, reinforced by a new drive for fuel efficiency.
So now there are two schools of thought in the market: one that reckons prices are about to peak, and another that thinks that actually the peak will be in production – as we saw in the FT last week:
Veteran traders said they had never seen such a jump [in the price of forward contracts for oil – long term futures contracts have risen 60 per cent since January] and said investors were increasingly betting on the idea that production would soonpeak because of geopolitical and geological constraints. Neil McMahon, of Sanford Bernstein, said: “Peak oil views – regardless of whether right or wrong – are seeping into the market and supporting high prices.”
But actually, just as in the case of food, a short term fall in prices isn’t irreconcilable with an outlook that tends towards a long term increase. Greater volatility – including short term price bubbles, just like the one we’ve been seeing on food – may just be part and parcel of the deal from now on.
After all, higher prices in the short term will indeed tend to ease demand – and also to encourage investment in new production, both of which will reduce pressure on prices. But if the long term geological fundamentals are downwards, then scarcity will tend to yank prices right back up again. The feedback loops between these four factors – geology, price, demand and investment – may make for a rollercoaster ride over the next few years…
by Alex Evans | May 29, 2008 | Climate and resource scarcity, North America
You’ve heard of greenwash. Now: cornwash! A firm called Abengoa Bioenergy has a full page advertisement in today’s FT, which begins thus:
Manipulation: Bioethanol is the main cause of increased food prices.
Evidence: The main factors of the staggering cost of food are a shift in the Asian diet … and the current price for oil…. In fact, it is estimated that the impact of biofuels on cereal prices will only be in the range of 3% to 6% as compared to 2006 prices.
Where to start? Well, maybe with the point that their advert rests on attacking a straw man. Hardly anyone would disagree that high income growth, leading to changing diet patterns, is the single largest driver of rising prices.
What the advert doesn’t say is that most analysts would also put biofuels as the second largest. Opinion varies as to how much of the food price rise over the last three years is down to biofuels; FAO reckon 15-20%, while IFPRI reckon it’s more like 30%. (I know of at least two experts in the World Bank who’d argue privately that the figure is somewhere between 50% and 70%.) Here‘s one of the authors of FAO’s latest World Food Outlook report:
Biofuels are the largest new source of demand for agriculture and are causing higher prices. We are very worried particularly about biofuel policy. US government incentives for ethanol producers are distorting the market.
True, not all biofuels are problematic. Second generation biofuels like cellulose are great, though not commercially viable yet. Jatropha looks promising. Ethanol from sugar may yet prove sustainable.
But as the 5th largest producer of bioethanol in the US, Abengoa’s one of the prime beneficiaries of subsidies for corn-based ethanol – which, despite being on track to hoover up a whole third of the US corn crop this year, is nonetheless one of the biofuels that from a food security or climate viewpoint alike just makes no sense: for the amount of corn it takes to fill up an SUV with ethanol, you could feed a person for a year.
