Soaring cost of oil and food will result in turmoil
Inflation worldwide is back with a vengeance — and with distressing social consequences. World food prices hit a new all-time record last week, passing their previous peak in 2008.
The oil price is within a whisker of $100 a barrel, which, while below its previous peak, is nevertheless going to put pressure on all other prices as it feeds through the economic system.
We here are very aware of the oil price every time we fill up our cars, for thanks to further increases in taxation and a weak pound, British petrol and diesel prices seem set to pass previous records. With other rising prices, the consumer price index is likely to be up well over 4% this year, double the official ceiling. In a developed country such as Britain, food typically accounts for 15 to 20% of a household budget. If prices in the supermarkets go up, we spend a bit less on something else, or choose a cheaper cut of meat. But in most of the emerging world, food typically accounts for half people's income, sometimes three quarters, so a surge in food prices is an utter catastrophe.
The Food and Agriculture Organisation, a UN body based in Rome, announced a few days ago that food prices had risen 32% in the second half of last year. Specific types of food, notably sugar, cereals, and oils and fat are up but meat and dairy prices have so far been contained. However, that must be a lag, for a rise in cereal prices pushes up the cost of feeding livestock, which in turn is bound to push up these prices too.
You can see the effect of this around the world. Rising food prices seems to be one of the immediate causes of the riots in Tunisia and Algeria. The governments of Libya, Jordan and Morocco have all taken steps in the past few days to control food prices in the wake of this unrest. The Indian government has taken a number of measures, including a ban on exporting onions, to try to hold down vegetable prices. China has cut road tolls for food lorries. In Indonesia, the price of chillies has risen five-fold and fears of unrest have been one of the reasons share prices have fallen sharply in recent trading.
Even relatively developed countries have been affected. The South Korean government has released emergency stocks of cabbages, pork and fish.
There are a number of reasons to believe that higher food prices may have become a long-term trend. For a start, it is a bit ominous that this surge in prices is coming early in the growth phase of the economic cycle. Back in 2008, there had been several years of strong growth. This time, the developed world has hardly escaped from recession, though it is true that most of the emerging world did not experience any recession at all. Other reasons to expect that food will generally become more expensive include a rising world population and, less obviously, the social shift towards higher meat consumption (It is more efficient to eat grain rather than feed it to an animal and then eat the animal). But perhaps the greatest single driver of higher food prices will be a higher oil price. That is because increasing food yields requires fuel and fertiliser. If the price of hydrocarbons rises, these go up in step.
So what will happen to the oil price? In the short term a lot will depend on Opec. That is where the ‘spare’ supply is.
But when looking at the demand side of the equation there is no doubt that future trends will be shaped by the emerging world, not the developed one. Total oil demand is back to its pre-recession levels of a little under 90m barrels per day. But demand from the developed world is stable, actually lower than it was a decade ago, while that from the emerging world has continued to climb and is about to pass that of the developed world. That does not absolve the developed countries from trying to use less oil, indeed use less energy generally.
The big point is that energy conservation is not just about carbon reduction, climate change and all that. It is also about feeding the world. It is about social pressures and, as we can see in Tunisia, social conflict. Markets will eventually adjust, we will figure out ways to increase the global food supply, we will become better at energy conservation and so on. But I fear it will be a turbulent period ahead.