Storm, The (14 page)

If the pessimists about future high oil prices are correct, for the right or the wrong reasons, the risk of future oil shocks
may, however, be an opportunity as much as a threat. High prices for oil and other fossil fuels will stimulate both the development
of renewables and investment in energy-efficiency in a way that no amount of moralizing and hectoring by governments has been
able to do. The high price of oil is a form of carbon tax which
governments, on their own, would be terrified of imposing on their citizens but are privately relieved to see oil markets
do on their behalf, thus helping to curb carbon emissions. To achieve a benign outcome, increases in price, and the necessary
adjustment to them, have to occur gradually and predictably without sudden disruption and extreme spikes. If these do occur,
then there will be panic populist measures, such as price controls and subsidies. There may also be a scramble for secure
supplies and the use of bilateral agreements or military threats in order to obtain supplies on favourable terms. Were this
to happen, much damage would be done to the world economy, involving not just oil production but, potentially, the financial
flows associated with it. Therein lies the challenge to policy makers: to maintain, through both national and international
measures, a stable long-term framework that can survive the inevitable fluctuations in prices. Producer and consumer governments
should be discussing a target range for prices and how stock management can support it. If that proves politically or technically
too difficult, the oil shocks of 2008 will return in an even more extreme and violent form.

The energy price shock, combined with a banking crisis and bursting property market bubble, has been challenging enough. The
oil price shock, however, coincided with, and was part of, a wider surge in commodity prices, including food. A big increase
in oil prices had major implications for those whose lives depend on the cost of transport and other fuels. But food is even
more basic. If people cannot afford it, they starve.

Like oil prices, food prices have long experienced cyclical spikes. Indeed, these go back through the mists of time since
agriculture became commercialized. But within the period of statistically recorded economic history, there have been very
sharp increases in basic grain (wheat) prices in identifiable major markets, which saw extreme peaks during the Napoleonic
Wars (a more than doubling of prices from those of the mid-eighteenth century) and in the 1840s and mid-1850s; then, preceded
by lesser peaks, a tripling of prices after the First World War; a further tripling from a pre-Second World War low to the
Korean War peak; and again in the 1970s. There are strong historical parallels between the simultaneous food and oil price
shocks of the 1973–4 period and those of recent years: the same steady decline in stocks (or spare capacity) in a world of
steadily rising demand, leading to an explosive surge in prices.

Just as there are parallels in the cyclical extremes of the market, there are parallels too in the way a crisis environment
has
changed our way of thinking about food and raw materials. The 1970s popularized the Club of Rome’s
Limits to Growth
, while the current crisis has created a new orthodoxy around ‘peak oil’ and, in the case of food, has brought about a revival
of the ideas associated with Thomas Malthus. His work first appeared at the turn of the nineteenth century, before the industrial
revolution was fully under way. He was preoccupied with the problem of what he saw as inexorable population growth hitting
up against finite supplies of food, restricted in supply by finite fertile land, resulting in the ‘positive check’ of famine,
disease and war. Malthus has long been dismissed as a false prophet who failed to anticipate the ‘demographic transition’
to lower birth rates and the capacity of human ingenuity and technology to increase food supplies and patterns of trade to
distribute them. But, while no one would seriously try to reinstate Malthusian pessimism in its pure and original form, its
central idea of ‘limits to growth’ has acted as a counterpoint to the inexhaustible optimism about the potential of technology
and economic dynamism that surfaces in long booms. The ideas of Malthus were taken forward by John Stuart Mill (who, in a
prescient understanding of today’s world, was also the first economic thinker to produce a coherent explanation of boom and
bust cycles in financial markets). And there is now, in that tradition, a well-developed ‘neo-Malthusian’ world view, which
is highly influential in today’s debates.

While the oil shock emerged gradually, and began to be anticipated by many commentators in 2003–4, the sharp increase in food
prices was much more sudden. Between April 2007 and April 2008 maize prices in world markets increased by over 50 per cent,
wheat and vegetable oil prices doubled, and rice prices almost trebled. At the beginning of August 2008, food prices overall
were 150 per cent higher than in the same period in 2000, and 40 per cent up over the previous year. In the year since that
peak food prices have fallen back, on average, by just over 10 per cent, but are still, even in a global recession, well above
levels before the recent shock. These price changes have been broadly comparable
to those for industrial raw materials, though less dramatic than for oil and other energy prices. There was also a big shift
in relative prices as against manufacturing. Just as oceans of ink were spilt in the 1950s and 1960s explaining the inexorable
decline of commodity prices relative to those of manufactured goods, and again in the 1980s and 1990s, the inky currents were
now swirling in the opposite direction.

On the demand side, the rapid growth of the world economy fed through into food markets as well as other consumables. It is
surely a matter for rejoicing that after millennia of subsistence on a bowl of rice a day, hundreds of millions of Asians
now enjoy a more varied diet. China alone accounts for up to 40 per cent of the increase in global consumption of soya beans
and meat over the past decade, while the pigs, cows and chickens that provide this meat also consume grain as part of their
diet. In India, where levels of nutrition are still lower than in China, though growing, and meat is less desired for cultural
reasons, increased domestic demand has led to increased imports (or reduced exports) of vegetable oils, grain and sugar. The
IMF
World Economic Outlook for 2008
concluded that China, India, Brazil and Russia together accounted for 80 per cent of the rise in demand for grains over the
last five years.

Another component of demand has been a switch from food grains to biofuels to counter the energy crisis and reduce carbon
emissions. Biofuels based on vegetable oils or grain inevit -ably diminish food for human consumption, either directly or
indirect ly, by encouraging changes in the pattern of land use away from foodstuffs. The IMF has estimated that, while biofuels
account for only 1.5 per cent of liquid fuel supplies, they accounted for half of the increase in consumption of major food
crops in 2006–7, mainly because of corn-based ethanol production in the USA. The World Bank has reported that the USA has
used 20 per cent of its maize for biofuels, and the EU around 70 per cent of its vegetable oils. Much of this biofuel is subsidized,
either directly or though protected, guaranteed markets.

On the supply side, the most important, and worrying, trend – and the one seized upon by the neo-Malthusians – is the slowing
productivity growth of the main food crops in developing countries. The green revolution of the 1960s, when hybrid crops first
boosted yields of rice and wheat, was followed in the 1970s by a big increase in output following a surge in the price of
foodstuffs. But yields are unmistakably falling. Maize yields grew on average by around 3 per cent per annum in the 1960s
and 1970s, but are now growing at just over 1 per cent. Wheat had explosive, double-digit percentage yield growth in the early
1960s, which settled down to around 4 per cent growth for a couple of decades, but has since fallen to under 2 per cent. Rice
yield growth has fluctuated to give an indistinct trend, but appears to have fallen from 2–4 per cent in the three decades
since the start of the green revolution to about 1 per cent.

These yield growth falls matter because one of the consequences of increased population in many of the most populous developing
countries is that there is little unused land left for cultivation – or it can be cultivated only by eating into valuable
environmental resources such as forests. There are vigorous debates as to why the green revolution has run out of steam, though
Malthus, and his contemporary David Ricardo, would have made the simple point that there are diminishing returns to the application
of more and more fertilizers, insecticides and other ‘scientific’ inputs. In practice, water supply has been a key limiting
factor, preventing the spread of technologies that depend on irrigation. There has been much less success in raising yields
in rain-fed agriculture, which is the norm in most of Africa and in many parts of the Indian subcontinent. These countries
also house the world’s poorest people, who would lack the resources to invest in improved technology even if it were available
to them.

This combination of supply and demand factors fed through into stock depletion. The total world stock of major crops, according
to the IMF, halved from a peak of around 120 days in 2000 to
sixty days in 2008. As stocks approached worryingly low levels, a scramble for supplies and market perceptions of impending
shortages drove up the price, very much as occurred in 1973–4 and in previous food crises. One factor aggravating the crisis
was the febrile behaviour of governments as well as markets. Exporters, such as Argentina, imposed export quotas to try to
hold down domestic prices, and in the process aggravated the scarcity in international markets. Countries that traditionally
maintained high levels of protection of their domestic farmers suddenly opened up to imports in order to meet domestic shortages,
adding to demand for internationally traded foodstuffs and reducing incentives to domestic producers.

In developed countries higher food prices added to inflation, complicating the task of fighting incipient recession. The economic
and social consequences of the food price shock, however, have been proportionately much greater in poor countries than in
rich ones, since poor people spend a higher proportion of their income on food. It is estimated that while 10 per cent of
family income is spent on food in the USA, the figure rises to 30 per cent for China, 50 per cent in Kenya and sub-Saharan
countries at a similar level of development, and 65 per cent in Bangladesh. Yet the distributional effects of high prices
are not straightforward. Countries that are net exporters experience a trade balance benefit in the form of increased (net)
income for their producers; net importers experience the opposite effect. Exporters deriving a net benefit include Argentina,
Brazil, much of the former Soviet Union, Indonesia, Malaysia and Thailand, as well as some developed countries such as the
USA, Canada, Australia and France. Most of sub-Saharan Africa, the Middle East, China, the Indian subcontinent and Europe
are net importers, with Africa taking a particularly big hit in terms of the trade balance. But there is also a complex balance
of gain and loss within countries. Urban dwellers are hit by rising food prices, as are many landless rural
labourers who have to buy food to survive. Farmers’ gains depend on whether they can produce sufficient surplus to bring to
market, whether they can market it at remunerative prices, and the balance of advantage between the foodstuffs (or crops)
they produce and those that they consume.

The most visible sign of the impact of the food price shock was political unrest in the form of food riots, as seen in Haiti
and Bangladesh. In the Horn of Africa there was outright famine, because war and political turmoil disrupted production and
distribution, adding to the unkind vagaries of nature and the lack of purchasing power caused by extreme impoverishment.

For the most part, however, the impact has been less visible: what has been called the ‘silent tsunami’ of deepening poverty
and malnutrition. Governments, aid agencies and charities reported that even at the height of the crisis food was generally
available, but at prices the poorest people could not afford. The consequence was that they cut ‘discretionary’ consumption,
such as school fees and medicines, in order to eat; switched their diet to cheaper, usually less nutritious items; or simply
ate less. The powerful, but often misunderstood, insight of the Nobel laureate Amartya Sen – that famine and hunger are not
primarily caused by a shortage of food, but by a lack of income – was put to the test on a big scale.