Econbrowser: The oil shock of 2008, June 5, 2008: "Time to reassess the potential for recent oil price increases to contribute to an economic downturn. The sharp spikes in oil prices associated with the 1973-74 oil embargo, the 1978 Iranian Revolution, the Iran-Iraq War in 1980, and the first Persian Gulf War in 1990 were each followed by an economic recession. However, when oil prices started to rise again five years ago, many of us suggested that things would be different this time, in part because the price was rising much more gradually and so should be less disruptive of consumer spending patterns. Others emphasized that, despite the price increases, oil was still cheaper than it had been historically if you took into account inflation. However, once you include the most recent data, neither of those claims would still be true..."
Extract from report summary
"When Ban Ki-moon, the UN secretary-general, was asked to ponder the future of the world before an audience of powerful businessmen and politicians, at a meeting in Switzerland earlier this year, he could have chosen any topic he liked. What he focused on was both a hoary old favourite, and a newly popular preoccupation, of debates on world affairs: the rising risk of wars over fresh water, as populations increase and the world gets drier.
“As the global economy grows, so will its thirst...many more conflicts lie over the horizon,” he said, after deploring the fact that “too often, where we need water, we find guns.” Mr Ban wasn't the first to sound the alarm."
Extract from article linked to above
Knowledge Wharton: Cleaning up Its Act: How China Can Convert to More Environmentally Friendly Energy, May 2008: "If China doesn't take steps to prevent it, a big black cloud may soon engulf its economic boom. The country is growing at a torrid rate, but pollution from its hard-chugging industrial engine is expanding even faster, according to energy experts at the recent 2008 Wharton China Business Conference..."
Voluntary Corporate Environmental Initiatives and Shareholder Wealth, Karn Fisher-Vanden, Dartmouth College, Karin S. Thorburn, Dartmouth College - Tuck School of Business; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR), April 1, 2008
Abstract of the paper:
"Researchers debate whether environmental investments reduce firm value or can actually improve financial performance. We provide some first evidence on shareholder wealth effects of voluntary corporate environmental initiatives. Companies announcing membership in Climate Leaders and Ceres - two voluntary environmental programs related to climate change - experience significantly negative abnormal stock returns. The price decline is smaller in carbon-intensive industries, where regulatory actions are more likely, and for high book-to-market firms, suggesting that green expenditures crowd out growth-related investments. We also document insignificant announcement returns for portfolios of industry rivals. Overall, the environmental investments appear to conflict with shareholder value-maximization. This has far reaching implications since the U.S. government relies on voluntary initiatives to reduce the emissions of greenhouse gases."
"I must say that I do not quite understand the argument of those who criticize the earlier liberalization. It seems to me odd to fault the World Bank for advice some 15 years ago to eliminate import protection--so that domestic prices could come down at the time--while at the same time complaining about high prices now, even with the benefit of hindsight. If developing countries had all kept their import protection, the global supply of food would have been lower today, not higher. (That is because import protection would have led global production to be reallocated from efficient exporters to inefficient importers.) If you are for self-sufficiency, you must be willing to live with high prices."
Extract from D. Rodrik post linked to above
They get all wrapped up in stuff about forward markets, hedge funds, etc., and lose sight of the fundamental fact that there are only two things you can do with the world’s oil production: consume it, or store it...
...So my challenge to people who say there’s an oil bubble is this: let’s get physical. Tell me where you think the excess supply of crude is going.
Source: Extract from post linked to above
"The run-up in the world price of oil during the past several years, and especially the rapid climb during the last few weeks to over $120 per barrel, has fueled predictions that the price will reach $200 a barrel in the rather near future. Such predictions are not based on much analysis, and mainly just extrapolate this sharp upward trend in oil prices into the future. The price of oil in "real" terms (i.e., relative to general prices) will not reach $200 in this time frame without either terrorist or other attacks that destroy major oil-producing facilities, or huge taxes on oil consumption. I try to explain why in the following..."
Source: Contribution of Prof. Becker in The Becker Posner Blog (see link above)
"...The gap between the incomes of rural and urban families is much smaller in developed countries that subsidize rather than tax farmers. Indeed, with the high prices for cereals and other foods during the past couple of years, average farm incomes are often above those of city residents.
I believe that the explanation for the very opposite treatment of farmers in developing and developed countries is interest group competition (see my "A Theory of Competition Among Pressure Groups for Political Influence", The Quarterly Journal of Economics (Aug., 1983), pp. 371-400. This analysis shows that small groups, like farmers in rich countries, often have much greater political clout than large groups, like farmers in poorer countries. The reason is that even large per capita subsidies to small groups, such as farmers in the US, impose rather little cost (i.e., taxes) on each member of the large groups, like urban and suburban residents of the US. As a result, these large groups do not fight very hard politically against the small per capita taxes used to subsidize farmers..."
Source: Extract from Becker contribution
"In fact, gold has not been a good long-term investment. The previous peak was about $850 an ounce in 1980. Anyone who had squirreled some gold coins or jewelry away in a safety deposit box back then would have made next to nothing over 28 years. Indeed, with inflation factored in, gold has lost value over that period. Meanwhile, an investment in the Standard & Poor's 500 index of stocks would have grown at more than 12% a year in that time -- $100 would have grown to more than $1,800."
Extract from article linked to above
"...Our longstanding agricultural romanticism has been compounded by our new-found environmental romanticism. In the United States fears of climate change have been manipulated by shrewd interests to produce grotesquely inefficient subsidies for bio-fuel. Around a third of American grain production has rapidly been diverted into energy production. This switch demonstrates both the superb responsiveness of the market to price signals, and the shameful power of subsidy-hunting lobby groups. Given the depth of anti-Americanism in Europe it is, of course, fashionable to criticize the American folly with bio-fuels. But Europe has its equivalent follies..."
Extract from a Paul Colliers comment on Martin Wolf's FT forum
Population growth is not a major cause of the current dramatic rise in food prices. Even though population is growing since a long time food prices have been drifting gradually downward sind the early seventies of the last century.
It is a combination of factors which is currently driving food prices up:
World Bank slide presentation about food prices:
Das Magazin, Wie man in den Wald ruft, 3. Mai, 2008: ... so tönt es nicht immer zurück. Ein Gespräch mit dem grossen Forscher Josef H. Reichholf über die Natur und den Menschen in Zeiten der Klimahysterie.
"Das ist nicht die Frage. Das Problem liegt anderswo. Leider wurden aus der Klimahysterie heraus die falschen Massnahmen ergriffen, was uns in die jetzige Getreide- und Nahrungsmittelkrise geführt hat. Im Sinn des Klimaschutzes haben die Politiker vorgeschlagen, so viel erneuerbare Energien wie möglich zu produzieren, und sie haben das steuerlich begünstigt. Wenn man die Landschaft mit Windanlagen überzieht, kann man sich darüber ärgern oder nicht. Die Folgen sind jedenfalls unbedeutend im Vergleich zu dem, was der Anbau von Biomasse für Treibstoffe anrichtet. Wenn wir unser gutes Ackerland mit Biomasse zubauen, damit wir Biotreibstoffe erzeugen können, muss das Futter für die Abermillionen Stück Vieh in noch grösserem Umfang importiert werden. In den Tropen wird so intensiv weitergerodet. Wenn wir dann so tun, als wären wir die ganz Braven, weil wir unseren CO2-Ausstoss um zwanzig oder mehr Prozent gesenkt haben, ist das heuchlerisch. Wir haben das Problem nur verlagert und vergrössert."
Extract from interview
Related posts on MarketObservation:
"...far greater resources need to be devoted to expanding long-run supply. Increased spending on research will be essential, especially into farming in dry-land conditions. The move towards genetically modified food in developing countries is as inevitable as that of the high-income countries towards nuclear power. At least as important will be more efficient use of water, via pricing and additional investment. People will oppose some of these policies. But mass starvation is not a tolerable option."
Source: Extract from paper linked to above
"Climate change is already impacting on, and is likely to increase, invasive species, pests and disease vectors that all adversely affect agricultural productivity. Advances in agricultural knowledge, science and technology will be required to develop improved crop traits, such as temperature, drought, pest and salt tolerance. In addition, it will be critical to reduce greenhouse gas emissions from the agricultural sector - methane from livestock and rice, and nitrous oxide from the use of fertilisers.
And while biofuels can offer potential benefits over the rising costs of fossil fuels, energy security issues, reducing greenhouse gas emissions and rural economies, IAASTD concluded that the production of first-generation biofuels, which are predominantly manufactured from agricultural crops, can raise food prices and reduce our ability to alleviate hunger. There is also considerable debate over the environmental impact of biofuels, including their greenhouse gas emissions and their impact on biodiversity. Increased public and private investments are needed for next-generation biofuels, such as cellulosic ethanol and biomass to liquids technologies, so that cheaper and more abundant feedstocks can be converted into biofuels, potentially reducing the demands for agricultural land."
Source: Extract from article linked to above
Some further reading:
Abstract from paper:
"In many poor countries, the recent increases in prices of staple foods raise the real incomes of those selling food, many of whom are relatively poor, while hurting net food consumers, many of whom are also relatively poor. The impacts on poverty will certainly be very diverse, but the average impact on poverty depends upon the balance between these two effects, and can only be determined by looking at real-world data. Results using household data for ten observations on nine low-income countries show that the short-run impacts of higher staple food prices on poverty differ considerably by commodity and by country, but, that poverty increases are much more frequent, and larger, than poverty reductions. The recent large increases in food prices appear likely to raise overall poverty in low income countries substantially."
New York Times: Freer Trade Could Fill the World’s Rice Bowl by Tyler Cowen, April 27, 2008: "Rising food prices mean hunger for millions and also political unrest, as has already been seen in Haiti, Egypt and Ivory Coast. Yes, more expensive energy and bad weather are partly at fault, but the real question is why adjustment hasn’t been easier. A big problem is that the world doesn’t have enough trade in foodstuffs. The damage that trade restrictions cause is probably most evident in the case of rice. Although rice is the major foodstuff for about half of the world, it is highly protected and regulated. Only about 5 to 7 percent of the world’s rice production is traded across borders; that’s unusually low for an agricultural commodity..."
Abstract from paper:
"Recently, some analysts and economists had warned that the U.S. economy faces a much higher risk of falling into a recession should the price of oil rise to $100 per barrel or more. In February 2008, spot crude oil prices closed above $100 per barrel for the first time ever, and they have since climbed even further. Meanwhile, according to some surveys of economists, there is a high probability that a recession in the United States began in late 2007 or early 2008. Although the findings in this paper are consistent with the view that the U.S. economy has become much less sensitive to large changes in oil prices, a simple forecasting exercise reveals that a permanent increase in the price of crude oil to $150-per barrel-by the end of 2008 would have a significant negative effect on the growth rate of real GDP in the short run. However, the exercise also predicts such an increase in oil prices would have minimal effect on future inflation."
The New York Times: Europe Turns Back to Coal, Raising Climate Fears, Elisabeth Rosenthal, April 23, 2008: "Italy — At a time when the world’s top climate experts agree that carbon emissions must be rapidly reduced to hold down global warming, Italy’s major electricity producer, Enel, is converting its massive power plant here from oil to coal, generally the dirtiest fuel on earth..."
"Last year wheat prices rose 77% and rice 16% (see chart 1). These were some of the sharpest rises in food prices ever. But this year the speed of change has accelerated. Since January, rice prices have soared 141%; the price of one variety of wheat shot up 25% in a day. Some 40km outside Abidjan, Mariam Kone, who grows sweet potatoes, okra and maize but feeds her family on imported rice, laments: “Rice is very expensive, but we don't know why.”
The prices mainly reflect changes in demand—not problems of supply, such as harvest failure."
"In the 1980s, governments started to reduce green-revolutionary spending, either out of complacency (believing the problem of food had been licked), or because they preferred to involve the private sector. But many of the private firms brought in to replace state researchers turned out to be rent-seeking monopolists. And in the 1980s and 1990s huge farm surpluses from the rich world were being dumped on markets, depressing prices and returns on investment."
Source: Extracts from Economist article linked to above
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