Why Oil Prices Dropped Recently

Rasheed Moore asked over at Tariq Nelson's blog, "How do oil prices just suddenly drop a dollar a gallon when our economic crisis hits?"

Because everyone stopped driving.

Not really, of course, but the trends against driving have gained the upper hand in recent months, which has caused the demand for oil (and gasoline) to drop. Several suggested readings:

James Hamilton at Econbrowser does a monthly post showing US auto sales. The most recent post (for October sales) shows that US-manufactured car sales are down 27% from a year ago, US-manufactured light truck sales (including SUVs) are down 40%. GM's chief sales analyst: "Clearly we're in a dire situation."

The Federal Highway Administration's (FHA) Travel Trends (August 2008 - most recent month available) - In the 12-month moving average, 2008 has the fewest amount of vehicle miles driven since 2003. The peak year was 2007. Most people aren't driving as much as they used to.

In my original response, I linked to an FHA graph showing the 12-month moving average since 1983 to make clear the drop in the number of vehicle miles traveled within the US. The original FHA graph is rather difficult to read, so I've made a new graph, below, showing the same data:


If it makes you feel any better, The Economist is reporting that oil prices may be going back up to around $150 or so by 2010.

China Beating the US in the Global Oil Game

A very interesting article at Money Morning about how China is beating the United States in the global oil game. (Actually, The Economist tackled the larger issue of China's thirst for natural resources and how they're going about getting them, particularly in Africa, in a noteworthy special report back in March.) Below are some of the article's highlights:

While this deal, on its face, appears to be just another global oil-services contract, it’s actually a very significant development in the hunt for long-term energy supplies. In fact, it actually demonstrates that – when it comes to nailing down those long-term oil supplies – China is an expert, and is playing a very deep game. And the outcome of that game will certainly have substantial long-term implications for consumers and investors both here in the United States, and in markets abroad. Here’s why:

With estimated reserves of 115 billion barrels, Iraq is tied with Iran for the world’s No. 2 position, trailing Saudi Arabia, which has estimated reserves of 264 billion barrels, according to estimates from the Energy Information Administration .

In a country where electricity is in short supply, the oil produced from the Ahdab Oil Field will help fuel a planned power plant that would be one of the largest in Iraq. By helping Iraq with this key initiative, China can expect to gain a solid foothold in one of the most oil-rich nations in the world, analysts say.

At the end of the day, the deal clearly highlights something that most U.S. investors haven’t focused on yet – namely that the eventual winners in this game may not be such well-known giants as Chevron Corp. (CVX), ExxonMobil Corp. (XOM), or other household names. Deals like this one and the host of others that are undoubtedly close behind suggest that tomorrow’s winners may have names most English-speaking investors can’t pronounce, since they’ll be distinctly Arabic or Chinese in nature.

...

While China won’t participate in the profits from the oil it helps pump, it is shrewd enough to realize there will be long-term benefits. Analysts who see the bigger picture here agree with our view.

“There are some political profits for China,” Ibrahim Bahr al-Ulum, a former Iraqi oil minister, told The Times. “They need access to Iraq, and when they need oil, at least the Iraqi people will feel that China has done something for them.”

...

By invading Iraq, the United States dealt China’s central planning commission an embarrassing wakeup call when the second Gulf War summarily wiped out China’s oil interests in Iraq.

When that happened, China’s central planners realized two things:

The status quo in the global oil game had changed.

And China’s double-digit economic miracle could not be sustained with only a few oil suppliers.

What China fears most is that there will not be enough oil to go around in the very near future and that a U.S.-dominated supply chain could effectively “strangle” China’s growth.

So, it has done what the United States and other great powers have done at other times in history and gone on a buying spree from Darfur to Peru that’s turned heads and ruffled feathers all across the world.

What’s been especially frustrating for hapless Western leaders who do not understand that their actions caused this in the first place, is that China’s not afraid to do business with rogue nations like Iran, Sudan and Burma. It has even gotten chummy with Venezuela and Russia – much to the consternation of our present administration.

It’s a virtual certainty that China will maintain this policy going forward. My contacts in China and Africa have told me point blank that China’s leaders “don’t care about human rights or nukes or hostile governments. What matters is anyone who provides oil to China no matter what the rest of the world thinks.”

So, in as much as the U.S. media has dismissed this deal as only one in a long string of recent Chinese oil purchases, it’s arguably the most important deal yet. The reason: It suggests that China will go to extraordinary lengths to obtain the oil it wants and needs.

To add to its stable of captive oil suppliers, China will pay far more money, endure limitless criticism for ignoring human-rights issues and endure harsher business conditions than our companies can or will undertake. While U.S. firms must worry about sanctions, bad publicity or simply security, China worries about one thing, and one thing only – getting oil.

HT: Informed Comment

ANWR: Too Little, Too Late

Source: Wikipedia

Based on some of the comments I've received recently, there seems to be some resistance to the idea that American oil production can be increased and gasoline prices lowered if only the U.S. will drill for more oil in various restricted areas, such as offshore and in the Arctic National Wildlife Refuge (ANWR).

This ain't gonna happen, folks.

Let's take the case of ANWR:

In May of 2008 the Energy Information Administration released the following report:

"The opening of the ANWR 1002 Area to oil and natural gas development is projected to increase domestic crude oil production starting in 2018. In the mean ANWR oil resource case, additional oil production resulting from the opening of ANWR reaches 780,000 barrels per day in 2027 and then declines to 710,000 barrels per day in 2030. In the low and high ANWR oil resource cases, additional oil production resulting from the opening of ANWR peaks in 2028 at 510,000 and 1.45 million barrels per day, respectively. Between 2018 and 2030, cumulative additional oil production is 2.6 billion barrels for the mean oil resource case, while the low and high resource cases project a cumulative additional oil production of 1.9 and 4.3 billion barrels, respectively." [Source]

The report also states:

"Additional oil production resulting from the opening of ANWR would be only a small portion of total world oil production, and would likely be offset in part by somewhat lower production outside the United States. The opening of ANWR is projected to have its largest oil price reduction impacts as follows: a reduction in low-sulfur, light crude oil prices of $0.41 per barrel (2006 dollars) in 2026 for the low oil resource case, $0.75 per barrel in 2025 for the mean oil resource case, and $1.44 per barrel in 2027 for the high oil resource case, relative to the reference case." [Source; page 6]

For the average case, drilling in ANWR would reduce crude oil by 75 cents, in 2025. The total production from ANWR would be between 0.4 and 1.2 percent of total world oil consumption in 2030. [Source; page 17]

So, let's review the facts. If the U.S. were to begin drilling for oil in ANWR today, the earliest it would start to increase American oil production is ten years from now. This isn't some overnight cure or even something that will help us within a year or two. This is a "solution" that will take a DECADE to implement. What are you going to do in the meantime? Your gas prices won't go down just because ANWR was opened up to drilling.

Then, in the best case scenario, oil pumped out of ANWR amounts to 1.45 million barrels per day. Sounds like a lot; it isn't. For 2007, the Energy Information Administration (EIA) estimated that a total of 82.501 million barrels of crude oil were pumped out of the earth every day. 1.45 million barrels compared to 82.501 million barrels is 1.76%. DROP IN THE F****** BUCKET, PEOPLE!

How much will oil prices drop when ANWR finally goes on line? At best, a mere $1.44 per barrel (in 2006 dollars) in 2027, nineteen years from now. Right now, as I write this, West Texas Intermediate (WTI) crude oil is selling for $134.62. If we could apply that best case scenario of ANWR oil to current oil prices, then WTI oil might be down to $133.18 (at best). Wow, an astounding drop of... 1.07%. Such a bargain! NOT!

ANWR will not solve America's oil problems. Offshore oil drilling will not solve America's oil problems. It's all too little, too late. Only a massive conservation effort in which crude oil consumption per person goes down by a huge level (at a minimum 50%) is going to help solve America's oil problems.

Until then, you're screwed.

Update: How Much Oil Does America Import?

Currently, my most popular blog post by far is How Much Oil Does America Import?, written back in May 2006, two years ago. I thought it was time to update the figures and see how the U.S. is doing since I first wrote that post.

The U.S. gets its oil from two sources: either it pumps its own oil, called "Field Production" by the Department of Energy, or it imports oil from other countries around the world. In 2000, American commercial field production made up 38.69% of the total supply of crude oil, while imports made up 60.28%. In 2005, when I wrote the last post, those same percentages were 33.67% and 65.84%, respectively. (These numbers are different from what I wrote back in 2006 as adjustments have been made to the official statistics; these types of revisions are normal for economic statistics.) In 2007 (the most recent year), the percentages were 33.72% and 66.19%, respectively. While there has been an extremely slight increase in the amount of oil pumped domestically (0.05%), imports have also increased as well. (The reason why both numbers can increase is because a third number, "supply adjustments," fell.)

In 2007, the U.S. imported a total of 3,656,170 thousand barrels. Of those 3.66 billion barrles, the U.S. imported from a total of 46 different countries. The top 5 importing countries were: Canada (18.61%), Saudi Arabia (14.50%), Mexico (14.07%), Venezuela (11.48%), and Nigeria (10.80%), for a total of 69.47% of all American imports. In contrast, imports from countries six through ten (Angola, Iraq, Algeria, Ecuador, and Kuwait) made up only 17.95% of the total; countries 11 through 46 made up the remaining 12.58%.

Looking at petroleum imports in two other ways...

In 2007, imports from OPEC countries* made up 53.85% of all U.S. imports, compared to the 46.15% from non-OPEC countries. However, this is the exception rather than the rule. Since 1993, when the Energy Information Agency (EIA) started breaking out the statistics, non-OPEC countries have been the dominant exporters ten years out of the past fifteen. The year 2007 was the first time since 2001 that OPEC countries had sold more petroleum to the U.S. than non-OPEC countries.

With respect to the Persian Gulf, those countries** only made up 21.19% of the total imports. This is down slightly, one-half percent, from my 2006 analysis. Note that the U.S. imports no oil from Iran.

Conclusions/Predictions:
Two years ago, I made four points as to how I thought things would go with respect to American oil imports and consumption. We'll look at how good or bad those predictions were:

1. American field production will probably go below 25% of its total annual supply within the next five years.

I think we can write this prediction off; I don't foresee this happening within the next three years (or perhaps even the next ten).

2. In that same time frame, imports will probably be in the high 50s percentage (perhaps 58-59%).

On the other hand, I think this prediction is very much a lock at this time. In fact, I wouldn't be surprised if this number goes back up again, remaining in the 60-65% range.

3. America will continue to seek the majority of its oil from non-OPEC countries, such as Canada and Mexico, if only to avoid being as dependent on OPEC countries as they have been in the past. However, this will probably turn out to be a pipe dream in the long run unless Canadian oil reserve estimates turn out to be near the high end. (Estimates for Canada's proven oil reserves ranges from 4.7 billion barrels (World Oil) to 14.803 billion barrels (BP Statistical Review) to 178.792 billion barrels (Oil & Gas Journal). Obviously, this extremely wide range of guesses shows that no one truly knows how much oil Canada has.)

Since I wrote this, I've gotten a better understanding with respect to Canada's oil reserves. The problem with the Canadian oil sands is that it is made up of a very dense and viscous type of petroleum called bitumen. Bitumen is like molasses at room temperature, and needs heating just to flow. (The tar that we pave roads with is bitumen.) Oil refineries are set up to process certain types of crude oils, and bitumen is normally not one of them. So, while Canada has a lot of proved oil reserves, most of it is not in the form the refineries need to produce products like gasoline. In this respect, the lower reserve amount mentioned above is probably closer to the amount of crude oil Canada actually has. In time, more refineries may convert to take advantage of the Canadian oil sands, but that will probably be a gradual process.

4. Persian Gulf oil, which has ranged between 19.81% and 28.56% of all U.S. imports since 1996, will probably continue to hover in the high teens-low 20s, despite President Bush's goal to cut American consumption of Middle Eastern oil by 75% by 2025, per the latest State of the Union address.

I don't see this forecast changing at all. What President Bush said in 2006 about cutting the amount of Middle Eastern oil America consumes was complete and utter bullshit (and shame on you if you believed him). BTW, shame on you again if you believe either McCain or Cheney that drilling for oil offshore or up in Alaska will make a significant difference. Two reasons: "drop in the bucket" and "long-term projects," neither of which will lower your gas prices. I may post on this in the near future, insha'allah, but in the meantime I recommend that you read John McCain's Oil Scam over at Informed Comment (Juan Cole), and Drilling Our Way to... by Menzie Chinn over at Econbrowser.


References:
US Crude Oil Supply and Disposition (DoE)
US Crude Oil Imports by Country of Origin (DoE)

Notes:
* OPEC countries include Algeria, Angola, Ecuador, Indonesia, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the UAE, and Venezuela.
** Persian Gulf countries include Bahrain, Iran, Iraq, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates. However, Iran and Qatar export no oil to the U.S.

Why Beef Prices are Heading Higher

Bonddad recently wrote about a Bloomberg article on rising beef prices. My quibble isn't with his technical analysis, but with one of his comments. He thought that demand was increasing for beef because...

...as the world's standard of loving [sic] increases (think India and China making more and more money) people will want better things like steak.

Now, generally speaking, what he said is true; as people's incomes rise, we do want goods that are better than what we had before. In economics, we call these "normal goods." A normal good is any good for which demand increases when income increases. A car is an example of a normal good. All things being equal, what would you rather do if your income increases, continue taking the bus or train to work or buy a new car? Of course, you'd buy the new car. (Conversely, an "inferior good" is a good that decreases in demand as income rises; an example for the US being ramen noodles.) Anyhoo, Bonddad is suggesting that because incomes are rising in countries like India and China, they want to eat better foods such as American steak. However, the truth is that beef exports to other countries isn't the reason.

In 2006, the US exported a total of 1.145 billion pounds of beef out of a total supply of 29.912 billion pounds, which comes to 3.83%. So a little under 4% of all US beef available in the country was exported. In 2007, the percentage was 4.74%, in 2008 total beef exports is projected to be 5.44%, and for 2009, 6.21%. [All of these numbers and the following data come from the US Department of Agriculture's monthly report, World Agricultural Supply and Demand Estimates, for April and May 2008.] So, beef exports are increasing, but very slowly. Rising beef exports out of the total available for sale in the US will cause domestic beef prices to rise, but not by that much. Let's look at the more likely culprit.

American cattle are normally either grass-fed or corn-fed. Per Wikipedia, "In the United States, cattle in concentrated animal feeding operations (CAFOs) are typically fed corn, soy and other types of feed that can include "by-product feedstuff." As a high-starch, high-energy food, corn decreases the time to fatten cattle and increases yield from dairy cattle." Per a 2003 Colorado State University study, "80% of consumers in the Denver-Colorado area preferred the taste of United States corn-fed beef to Australian grass-fed beef." And so a very significant portion of America's annual corn crop goes to feed cattle, and the price of corn has been rising dramatically, like other agricultural products, such as rice. Just how much corn is being used to feed cattle?

In 2005/6, the US had a total supply of 13.237 billion bushels of corn. Of that amount 6.155 billion bushels (46.50%) were used as "feed and residual," 2.981 billion bushels (22.52%) were used as "food, seed and industrial," and 2.134 billion bushels (16.12%) were exported. The remainder (1.967 billion bushels, 14.86%) was "closing stock" and used in the following year, 2006/7. Now, looking at these individual categories, we see that "feed and residual" was 44.73% in 2006/7 and is estimated to be 42.73% in 2007/8 and 39.19% in 2008/9. Clearly, "feed and residual" isn't a problem. Likewise, exports aren't a significant cause of corn inflation either: 16.98% of all US corn was exported in 2006/7, and 17.37% and 15.53% is expected to be exported in 2007/8 and 2008/9, respectively. Which leads to "food, seed and industrial."

The first two of these should be self-explanatory. It's the industrial that we're concerned with. The industrial use of corn comes primarily in the form of ethanol. You know, the alcohol addititive to your gasoline so that you wouldn't pay as much money (you hoped) to run your car? Turns out that ethanol is bringing up the price of corn. The USDA breaks out the amount of corn that's used in the production of ethanol, which is very helpful for our analysis. In 2005/6, corn used for ethanol made up 1.603 billion bushels out of the 2.981 billion bushels mentioned above (the remainder was presumably used for food and seed). Which means that that 1.603 billion bushels made up 12.11% of the total American corn supply. In 2006/7, that percentage increased to 16.92%, and is expected to increase to 20.84% and 29.58% in 2007/8 and 2008/9, respectively. That's where the corn's going! So, let's connect the dots.

Because Americans prefer corn-fed cattle over grass-fed, cattle producers feed them lots of corn and other grains that, in turn, help them to fatten up quicker before they're slaughtered. Still, it takes feedlot cattle 14-18 months before they are killed, which means they eat a lot of corn. (I don't know exactly how much an average cow eats in its lifetime. No doubt the farmers do.) Because the price of corn has been going up ($2.00 per bushel in 2005/6 to $3.04 per bushel in 2006/7), it costs the cattle producer that much more to feed a cow until it gets to its terminal weight. Which means that cattle producers are actually losing money now for every cow they sell. According to the Bloomberg article, the feedlots were losing $139.56 a head in April, up from a record loss of $169.80 a head in March, and down from a profit of $46.79 a head in April 2007. No doubt there are some other factors that probably have affected the price increases for corn (oil and fertilizers come to mind), but the primary cause of the price increases in beef appears to be due to the increases in the price of corn. Which, no doubt, must be a relief to the Indians and Chinese, who don't tend to eat beef anyway; the former tend to eat mutton and chicken, the latter pork.

Cross-posted at J2TM and at Daily Kos, where there are a lot of very good comments. Check them out.

Jeffrey D. Sachs: Surging Food Prices Mean Global Instability

Quite by coincidence, I came across the following article from Scientific American just a short time after publishing my last post. This article, by Jeffrey Sachs, Director of the Earth Institute at Columbia University, focuses primarily on one of the root causes of the current food crisis, the conversion of maize ("corn" to us Americans) into ethanol. One of the good things about this article is that four recommendations are given, the first of which ties in very well with the food sovereignty idea/Malawi case study mentioned in my previous post.

While you're at it, you should also read Angry Bear's The Biofuel-Backlash Backlash and Econbrowser's Reconciling Estimates: Biofuels and Food Prices.

The recent surge in world food prices is already creating havoc in poor countries, and worse is to come. Food riots are spreading across Africa, though many are unreported in the international press. Moreover, the surge in wheat, maize and rice prices seen on commodities markets have not yet fully percolated into the shops and stalls of the poor countries or the budgets of relief organizations. Nor has the budget crunch facing relief organizations such as the World Food Program, which must buy food in world markets, been fully felt. The results could be calamitous unless offsetting policy actions are taken rapidly.

The facts are stark. A metric ton of wheat cost around $375 on the commodity exchanges in early 2006. In March 2008, it stood at over $900. Maize has gone from around $250 to $560 in the same period. Rice prices have also soared. The physical inventories of grain relative to demand are also down sharply in recent years.

Several factors are at play in the skyrocketing prices, reflecting both rising global demand and falling supplies of food grains. World incomes have been rising at around 5 percent annually in recent years, and 4 percent in per capita terms, leading to an increased global demand for food and for meat as a share of the diet. China’s economic growth, of course, has been double the world’s average. The rising demand for meat exacerbates the pressures on grain and oil-seed prices since several kilograms of animal feed are required to produce each kilogram of meat.

Feed grains have risen from around 30 percent of total global grain production to around 40 percent today. Land that would otherwise be planted to the main grains is shifting to soya bean and other oil seeds used for animal feed. It is forecast, for example, that U.S. farmers will cut maize plantings by 8 million acres, while raising soya-bean production by about the same amount. The grain supply side has also been disrupted by climate shocks, such as Australia’s massive droughts.

An even bigger blow has been the U.S. decision to subsidize conversion of maize into ethanol to blend with gasoline. This wrong-headed policy, pushed by an aggressive farm lobby, gives a 51-cent tax credit for each gallon of ethanol blended into gasoline. The 2005 Energy Policy Act mandates a minimum of 7.5 billion gallons of domestic renewable-fuel production, which will overwhelmingly be corn-based ethanol, by 2012. Consequently, up to a third of the U.S. mid-Western maize crop this year will be converted to ethanol, causing a cascade of price increases across the food chain. (Worse, use of ethanol instead of gasoline does little to reduce net carbon emissions once the energy-intensive full cycle of ethanol production-- including the energy-intensive fertilizer and transport needs --is taken into account.)

The food price increases are pummeling poor food-importing regions, with Africa by far the hardest hit. Several countries, such as Egypt, India and Vietnam, have cut off their rice exports in response to soaring prices at home, thereby exacerbating the effects on rice-importing countries. Even small changes in food prices can push the poor into hunger and destitution: as famously expounded by Nobel laureate Amartya Sen, some of the greatest famines in history were caused not by massive declines in grain production but rather by losses in the purchasing power of the poor.

At a time when hundreds of billions of dollars each year veer to war rather than peaceful development, and when media attention is riveted on the U.S. financial crises, it is hard to raise even a few billion dollars for desperately hungry people. Still, it is urgent to do so. At least four measures should be taken in response to soaring food prices.

First, the world should heed the call of U.N. Secretary-General Ban Ki-moon to fund a massive increase in Africa’s own food production. The needed technologies are available—high-yield seeds, fertilizer, small-scale irrigation—but the financing is not. The new African Green Revolution would initially subsidize peasant farmers’ access to high-yield technologies and thereby at least double grain yields. The funding would also help farm communities establish long-term micro-finance institutions to ensure continued access to improved agricultural inputs after the temporary subsidies are ended in a few years.

Second, the U.S. should end its misguided corn-to-ethanol subsidies. Farmers hardly need them given world demand for food and feed grains. There is certainly a case for re-doubling the scientific efforts to produce bio-fuels on lands which do not compete with food crops, for example from cellulosic ethanol, but this technology is still not ready for the market.

Third, the world should support longer-term research into higher agricultural production. Shockingly, the Bush administration is proposing to cut sharply the U.S. funding for tropical agriculture research in the Consultative Group for International Agriculture Research (CGIAR), just when that research is most urgently needed. This is an example of the Administration’s anti-scientific approach at its worst.

Finally, the world should follow through on the promised Climate Adaptation Fund announced last December in the Bali Climate Change conference, to help poor countries face the growing risks to food production from increasingly adverse climate conditions. Even as the world staunches the immediate crisis, there will be more wrenching dislocations as drought, heat stress, pest infestations and other climate-induced shocks occur increasingly often.

HT: Economist's View

Walden Bello: Manufacturing a Food Crisis

In reading this important article by Walden Bello in The Nation, one wonders who the people at the World Bank, the International Monetary Fund (IMF) and the World Trade Organization (WTO) really are: dogmatic eggheads who blindly follow the "free trade" mantra without regard to the human consequences, or useful fools working on behalf of rich northern nations and corporations? Perhaps both. Bello shows that, since the early 80s, the World Bank, IMF, WTO and free trade agreements like NAFTA have caused several nations (Mexico and the Philippines are given as examples) to go from being net exporters of food to net importers, largely as a result of World Bank and IMF policies that helped keep several governments solvent but at the expense of ruining local farmers. The countries were forced to accept highly subsidized food imports from the U.S. and the European Union or, in the case of Malawi, to sell off their food reserves in return for loans. In the meantime, more and more farmers are committing suicide (especially in India) as their livelihoods are ruined, and about 1,500 Malawians died from starvation when a famine struck that country in 2001-02, when little food was available because the country had been forced (earlier) to sell their food reserves. (One wonders whether the IMF and the other NGOs realize how much blood is on their hands.) The case of Malawi is particularly rich with irony considering that the World Bank forced the Malawian government to scrap a subsidy program for its farmers (which had been very successful, bringing in a bumper crop of corn), because "the subsidy distorted trade." And, yet, "[s]ince the late 1990s subsidies have accounted for 40 percent of the value of agricultural production in the European Union and 25 percent in the United States." What hypocrisy.

There is nothing wrong with international trade; we all benefit by it. But "free" trade often isn't free and can carry an extremely heavy cost. Trade, like anything else, needs to be regulated if it is to work most effectively. Obviously the human costs, in terms of suffering and needless deaths, are factors that need to be considered, but aren't. The suggestion of "food sovereignty," mentioned at the bottom of the article, makes sense. We need to realize that most of these farmers in Mexico, the Philippines, and around the world are among the poorest of the poor who, like everyone else, need to be able to support themselves and their families. Poor national governments need to weigh more carefully the demands of debt servicing by organizations like the IMF and World Bank against the needs of their citizens who are most at risk.

Some excerpts:

However, an intriguing question escaped many observers: how on earth did Mexicans, who live in the land where corn was domesticated, become dependent on US imports in the first place?

The Mexican food crisis cannot be fully understood without taking into account the fact that in the years preceding the tortilla crisis, the homeland of corn had been converted to a corn-importing economy by “free market” policies promoted by the International Monetary Fund (IMF), the World Bank and Washington. The process began with the early 1980s debt crisis. One of the two largest developing-country debtors, Mexico was forced to beg for money from the Bank and IMF to service its debt to international commercial banks. The quid pro quo for a multibillion-dollar bailout was what a member of the World Bank executive board described as “unprecedented thoroughgoing interventionism” designed to eliminate high tariffs, state regulations and government support institutions, which neoliberal doctrine identified as barriers to economic efficiency.

Interest payments rose from 19 percent of total government expenditures in 1982 to 57 percent in 1988, while capital expenditures dropped from an already low 19.3 percent to 4.4 percent. The contraction of government spending translated into the dismantling of state credit, government-subsidized agricultural inputs, price supports, state marketing boards and extension services. Unilateral liberalization of agricultural trade pushed by the IMF and World Bank also contributed to the destabilization of peasant producers.

This blow to peasant agriculture was followed by an even larger one in 1994, when the North American Free Trade Agreement went into effect. Although NAFTA had a fifteen-year phaseout of tariff protection for agricultural products, including corn, highly subsidized US corn quickly flooded in, reducing prices by half and plunging the corn sector into chronic crisis. Largely as a result of this agreement, Mexico’s status as a net food importer has now been firmly established.

With the shutting down of the state marketing agency for corn, distribution of US corn imports and Mexican grain has come to be monopolized by a few transnational traders, like US-owned Cargill and partly US-owned Maseca, operating on both sides of the border. This has given them tremendous power to speculate on trade trends, so that movements in biofuel demand can be manipulated and magnified many times over. At the same time, monopoly control of domestic trade has ensured that a rise in international corn prices does not translate into significantly higher prices paid to small producers.

...

The Philippines provides a grim example of how neoliberal economic restructuring transforms a country from a net food exporter to a net food importer. The Philippines is the world’s largest importer of rice. Manila’s desperate effort to secure supplies at any price has become front-page news, and pictures of soldiers providing security for rice distribution in poor communities have become emblematic of the global crisis.

The broad contours of the Philippines story are similar to those of Mexico. Dictator Ferdinand Marcos was guilty of many crimes and misdeeds, including failure to follow through on land reform, but one thing he cannot be accused of is starving the agricultural sector. To head off peasant discontent, the regime provided farmers with subsidized fertilizer and seeds, launched credit plans and built rural infrastructure. When Marcos fled the country in 1986, there were 900,000 metric tons of rice in government warehouses.

Paradoxically, the next few years under the new democratic dispensation saw the gutting of government investment capacity. As in Mexico the World Bank and IMF, working on behalf of international creditors, pressured the Corazon Aquino administration to make repayment of the $26 billion foreign debt a priority. Aquino acquiesced, though she was warned by the country’s top economists that the “search for a recovery program that is consistent with a debt repayment schedule determined by our creditors is a futile one.” Between 1986 and 1993 8 percent to 10 percent of GDP left the Philippines yearly in debt-service payments — roughly the same proportion as in Mexico. Interest payments as a percentage of expenditures rose from 7 percent in 1980 to 28 percent in 1994; capital expenditures plunged from 26 percent to 16 percent. In short, debt servicing became the national budgetary priority.

Spending on agriculture fell by more than half. The World Bank and its local acolytes were not worried, however, since one purpose of the belt-tightening was to get the private sector to energize the countryside. But agricultural capacity quickly eroded. Irrigation stagnated, and by the end of the 1990s only 17 percent of the Philippines’ road network was paved, compared with 82 percent in Thailand and 75 percent in Malaysia. Crop yields were generally anemic, with the average rice yield way below those in China, Vietnam and Thailand, where governments actively promoted rural production. The post-Marcos agrarian reform program shriveled, deprived of funding for support services, which had been the key to successful reforms in Taiwan and South Korea. As in Mexico Filipino peasants were confronted with full-scale retreat of the state as provider of comprehensive support — a role they had come to depend on.

And the cutback in agricultural programs was followed by trade liberalization, with the Philippines’ 1995 entry into the World Trade Organization having the same effect as Mexico’s joining NAFTA. WTO membership required the Philippines to eliminate quotas on all agricultural imports except rice and allow a certain amount of each commodity to enter at low tariff rates. While the country was allowed to maintain a quota on rice imports, it nevertheless had to admit the equivalent of 1 to 4 percent of domestic consumption over the next ten years. In fact, because of gravely weakened production resulting from lack of state support, the government imported much more than that to make up for shortfalls. The massive imports depressed the price of rice, discouraging farmers and keeping growth in production at a rate far below that of the country’s two top suppliers, Thailand and Vietnam.

The consequences of the Philippines’ joining the WTO barreled through the rest of its agriculture like a super-typhoon. Swamped by cheap corn imports — much of it subsidized US grain — farmers reduced land devoted to corn from 3.1 million hectares in 1993 to 2.5 million in 2000. Massive importation of chicken parts nearly killed that industry, while surges in imports destabilized the poultry, hog and vegetable industries.

During the 1994 campaign to ratify WTO membership, government economists, coached by their World Bank handlers, promised that losses in corn and other traditional crops would be more than compensated for by the new export industry of “high-value-added” crops like cut flowers, asparagus and broccoli. Little of this materialized. Nor did many of the 500,000 agricultural jobs that were supposed to be created yearly by the magic of the market; instead, agricultural employment dropped from 11.2 million in 1994 to 10.8 million in 2001.

The one-two punch of IMF-imposed adjustment and WTO-imposed trade liberalization swiftly transformed a largely self-sufficient agricultural economy into an import-dependent one as it steadily marginalized farmers.

...

A study of fourteen countries by the UN’s Food and Agricultural Organization found that the levels of food imports in 1995-98 exceeded those in 1990-94. This was not surprising, since one of the main goals of the WTO’s Agreement on Agriculture was to open up markets in developing countries so they could absorb surplus production in the North. As then-US Agriculture Secretary John Block put it in 1986, “The idea that developing countries should feed themselves is an anachronism from a bygone era. They could better ensure their food security by relying on US agricultural products, which are available in most cases at lower cost.”

What Block did not say was that the lower cost of US products stemmed from subsidies, which became more massive with each passing year despite the fact that the WTO was supposed to phase them out. From $367 billion in 1995, the total amount of agricultural subsidies provided by developed-country governments rose to $388 billion in 2004. Since the late 1990s subsidies have accounted for 40 percent of the value of agricultural production in the European Union and 25 percent in the United States.

...

This is not simply the erosion of national food self-sufficiency or food security but what Africanist Deborah Bryceson of Oxford calls “de-peasantization” — the phasing out of a mode of production to make the countryside a more congenial site for intensive capital accumulation. This transformation is a traumatic one for hundreds of millions of people, since peasant production is not simply an economic activity. It is an ancient way of life, a culture, which is one reason displaced or marginalized peasants in India have taken to committing suicide. In the state of Andhra Pradesh, farmer suicides rose from 233 in 1998 to 2,600 in 2002; in Maharashtra, suicides more than tripled, from 1,083 in 1995 to 3,926 in 2005. One estimate is that some 150,000 Indian farmers have taken their lives. Collapse of prices from trade liberalization and loss of control over seeds to biotech firms is part of a comprehensive problem, says global justice activist Vandana Shiva: “Under globalization, the farmer is losing her/his social, cultural, economic identity as a producer. A farmer is now a ‘consumer’ of costly seeds and costly chemicals sold by powerful global corporations through powerful landlords and money lenders locally.”

...

At the time of decolonization, in the 1960s, Africa was actually a net food exporter. Today the continent imports 25 percent of its food; almost every country is a net importer. Hunger and famine have become recurrent phenomena, with the past three years alone seeing food emergencies break out in the Horn of Africa, the Sahel, and Southern and Central Africa.

Agriculture in Africa is in deep crisis, and the causes range from wars to bad governance, lack of agricultural technology and the spread of HIV/AIDS. However, as in Mexico and the Philippines, an important part of the explanation is the phasing out of government controls and support mechanisms under the IMF and World Bank structural adjustment programs imposed as the price for assistance in servicing external debt.

...

The support that African governments were allowed to muster was channeled by the World Bank toward export agriculture to generate foreign exchange, which states needed to service debt. But, as in Ethiopia during the 1980s famine, this led to the dedication of good land to export crops, with food crops forced into less suitable soil, thus exacerbating food insecurity. Moreover, the World Bank’s encouragement of several economies to focus on the same export crops often led to overproduction, triggering price collapses in international markets. For instance, the very success of Ghana’s expansion of cocoa production triggered a 48 percent drop in the international price between 1986 and 1989. In 2002-03 a collapse in coffee prices contributed to another food emergency in Ethiopia.

As in Mexico and the Philippines, structural adjustment in Africa was not simply about underinvestment but state divestment. But there was one major difference. In Africa the World Bank and IMF micromanaged, making decisions on how fast subsidies should be phased out, how many civil servants had to be fired and even, as in the case of Malawi, how much of the country’s grain reserve should be sold and to whom.

Compounding the negative impact of adjustment were unfair EU and US trade practices. Liberalization allowed subsidized EU beef to drive many West African and South African cattle raisers to ruin. With their subsidies legitimized by the WTO, US growers offloaded cotton on world markets at 20 percent to 55 percent of production cost, thereby bankrupting West and Central African farmers.

...

In 1999 the government of Malawi initiated a program to give each smallholder family a starter pack of free fertilizers and seeds. The result was a national surplus of corn. What came after is a story that should be enshrined as a classic case study of one of the greatest blunders of neoliberal economics. The World Bank and other aid donors forced the scaling down and eventual scrapping of the program, arguing that the subsidy distorted trade. Without the free packs, output plummeted. In the meantime, the IMF insisted that the government sell off a large portion of its grain reserves to enable the food reserve agency to settle its commercial debts. The government complied. When the food crisis turned into a famine in 2001-02, there were hardly any reserves left. About 1,500 people perished. The IMF was unrepentant; in fact, it suspended its disbursements on an adjustment program on the grounds that “the parastatal sector will continue to pose risks to the successful implementation of the 2002/03 budget. Government interventions in the food and other agricultural markets… [are] crowding out more productive spending.”

By the time an even worse food crisis developed in 2005, the government had had enough of World Bank/IMF stupidity. A new president reintroduced the fertilizer subsidy, enabling 2 million households to buy it at a third of the retail price and seeds at a discount. The result: bumper harvests for two years, a million-ton maize surplus and the country transformed into a supplier of corn to Southern Africa.

Malawi’s defiance of the World Bank would probably have been an act of heroic but futile resistance a decade ago. The environment is different today, since structural adjustment has been discredited throughout Africa. Even some donor governments and NGOs that used to subscribe to it have distanced themselves from the Bank. Perhaps the motivation is to prevent their influence in the continent from being further eroded by association with a failed approach and unpopular institutions when Chinese aid is emerging as an alternative to World Bank, IMF and Western government aid programs.

...

It is not only defiance from governments like Malawi and dissent from their erstwhile allies that are undermining the IMF and the World Bank. Peasant organizations around the world have become increasingly militant in their resistance to the globalization of industrial agriculture. Indeed, it is because of pressure from farmers’ groups that the governments of the South have refused to grant wider access to their agricultural markets and demanded a massive slashing of US and EU agricultural subsidies, which brought the WTO’s Doha Round of negotiations to a standstill.

Farmers’ groups have networked internationally; one of the most dynamic to emerge is Via Campesina (Peasant’s Path). Via not only seeks to get “WTO out of agriculture” and opposes the paradigm of a globalized capitalist industrial agriculture; it also proposes an alternative — food sovereignty. Food sovereignty means, first of all, the right of a country to determine its production and consumption of food and the exemption of agriculture from global trade regimes like that of the WTO. It also means consolidation of a smallholder-centered agriculture via protection of the domestic market from low-priced imports; remunerative prices for farmers and fisherfolk; abolition of all direct and indirect export subsidies; and the phasing out of domestic subsidies that promote unsustainable agriculture. Via’s platform also calls for an end to the Trade Related Intellectual Property Rights regime, or TRIPs, which allows corporations to patent plant seeds; opposes agro-technology based on genetic engineering; and demands land reform. In contrast to an integrated global monoculture, Via offers the vision of an international agricultural economy composed of diverse national agricultural economies trading with one another but focused primarily on domestic production.

Walden Bello is senior analyst at and former executive director of Focus on the Global South, a research and advocacy institute based at Chulalongkorn University in Bangkok. He is the author or co-author of many books on politics and economic issues in the Philippines and Asia, including, most recently, Deglobalization (Zed), and recipient of the 2003 Right Livelihood Award, also known as the “Alternative Nobel Prize.” In March he was named Outstanding Public Scholar for 2008 by the International Studies Association.

HT: Economist's View

The Economist: Bernanke's Bind

An important article in this week's Economist. As I had first pointed out a couple weeks ago on my new blog, part of the reason for the rising inflation in commodity prices, such as oil and rice has been due to the combination of dollar-denominated commodity prices and a weakening U.S. dollar; i.e., as the dollar weakens against other currencies, this causes the prices for commodities to rise in order to maintain value. (For you non-Econogeeks out there, this is what is known as "purchasing power parity." A McDonald's Big Mac here in Singapore is the same as a Big Mac in the U.S., and the exchange rate between the Singapore and U.S. dollars should be such that you would pay the same amount for the same product (the Big Mac) regardless of what currency you're using.)

The other major problem is that, as interest rates keep going down (as they did again last week), the real value of the interest rate goes into negative territory. The real interest rate is (essentially) the nominal interest rate minus the rate of inflation. With this negative real interest rate, commodity producers such as farmers, miners, oilers, etc., have more incentive not to sell their products, even though this hurts them in the short-term by not bringing in revenue. As a a result, the amount of supply is lowered, which, in turn, raises prices.

There is another problem mentioned in the final paragraph below; however, the primary argument remains that the Federal Reserve must take some share of the blame for rising commodity prices, whether it's oil or agricultural products, due to their continued lowering of interest rates. This argument suggests, then, that commodity prices might not begin to drop until the U.S. dollar starts to strengthen.

An excerpt from the article:

But oil—and other commodities—are the crux of the problem. In the past, economic weakness in America has usually pushed the price of oil and other commodities down. That relationship has weakened thanks to demand growth in big commodity-intensive emerging economies. But the recent surprise is that commodity prices have soared even as America’s economy has stalled and forecasts for global growth have been trimmed as well. Supply shocks are clearly part of the problem. But the fact that prices have soared across so many commodities suggests a common cause.

Could the culprit be the Fed? Advocates of this idea point to two channels. First, by slashing real interest rates, the Fed has encouraged speculation in commodities by reducing the cost of holding inventories. Second, by pushing down the dollar, Fed looseness is pushing up the price of dollar-denominated commodities.

Jeff Frankel, a Harvard economist, has long argued that low real interest rates lead to higher commodity prices. When real rates fall, he points out, commodity producers have more incentive to keep their asset—whether crude oil, gold or grain—in the ground or in a silo, than to sell today. Speculators, in turn, have more incentive to shift into commodities. There is no doubt that commodities have become an increasingly popular investment category—in fact they bear many of the hallmarks of a speculative bubble. But inventories for many commodities, particularly grains, are unusually low.

What about the dollar link? Chakib Khelil, president of the Organisation of Petroleum - Exporting Countries, argued this week that oil could reach $200 a barrel largely because the market was being driven by the dollar’s slide. Movements in the euro/dollar exchange rate and the price of oil have become extremely close (see chart). An analysis by Jens Nordvig and Jeffrey Currie of Goldman Sachs shows that the correlation between weekly changes in the oil price and the euro/dollar exchange rate has risen from 1% between 1999 and 2004 to 52% in the past six months.

That link is partly a matter of accounting. If the dollar falls, the dollar price of a commodity must rise for its overall price—in terms of a basket of global currencies—to remain stable. But commodity prices have risen even when priced in non-dollar currencies. And the correlation between changes in the price of oil and the euro/dollar exchange rate has risen even when oil is priced in a basket of currencies, such as the IMF’s special drawing rights.

So is the weaker dollar driving oil prices up or are high oil prices driving the dollar down? The Goldman analysts argue the latter because oil exporters import more from Europe than America and hold less of their oil revenues in dollars. A second factor lies with central banks. Because the Fed focuses on “core” inflation (which excludes food and fuel), whereas the ECB targets overall inflation, America’s central bank runs a looser policy in response to higher oil prices, thus pushing the dollar down.

Another reason to suspect that the Fed is more than a bit player is that American interest-rate decisions have a disproportionate effect on global monetary conditions. Some emerging economies still peg their currencies to the dollar; many others have been reluctant to let their exchange rates rise enough to make up for the dollar’s decline. As a result, monetary conditions in many emerging markets remain too loose. This fuels domestic demand, pushing up pressure on prices, particularly of commodities. All of which suggests that the Fed’s decisions are propagated widely through the dollar.

Rice Inflation: When Did It Start?

The global food crisis has been getting a lot of well deserved press recently, and while several different crops have experienced varying levels of inflation, I thought I'd look at rice in particular. Although rice isn't a staple crop in America the way wheat and corn are, it's very much a staple crop here in Asia. Asian reactions to the price increases for rice have varied dramatically. Singapore, for example, has tried to reassure the public that there is plenty of rice while keeping price controls off and allowing companies to bring in additional supplies above and beyond what's normally imported to hedge against any future supply shocks. On the other hand, some other countries in this region (e.g., Vietnam, India and China) have temporarily banned the export of rice.

For this analysis, I used the price data for milled rice provided by the U.S. Department of Agriculture's Economic Research Service. This particular file has price information on a monthly basis since August 2005 for several types of rice in the United States, Thailand (the world's largest exporter of rice), and Vietnam (the second largest rice exporter). For my analysis, I've chosen two American varieties, Southern long-grain milled (LGM) and California medium-grained milled (MGM), and one Thai variety, 100% Grade B. (I've done some analysis on the Vietnamese data; however, the data set is incomplete so I'm not as trusting on that information as I am for the other three sets.)

As you can see on the above chart, rice prices had been relatively stable since August 2005, especially for Thai rice. The current upswings in prices began last summer, in July 2007 for both the Southern and California rices, and in September 2007 for the Thai rice. (For Vietnam, it appears that the upswing began in May 2007; however, there is three months' worth of data missing for October-December 2007, and it's conceivable that prices could have dropped in that time period.) Since that time, prices have risen at a compound monthly growth rate of 7.65% for the Southern LGM, 2.80% for the California MGM, 14.47% for the Thai rice, and 8.32% for the Vietnamese rice. Moreover, as the graph currently shows, there's no indication on the part of any of the varieties that prices are likely to change direction soon.

From my perspective, the inflation for rice is mostly of the cost-push variety, with oil and fertilizer costs as primary culprits. The discussion of the inflation being driven by demand-pull is nonsense, in my opinion. Demographic changes are far too slow to account for such a rapid increase inside of one year's time, and there's not been any sudden desire for people to eat more rice or that rice has become a substitute in place of another grain.

When might we expect to see rice prices declining? Based on current futures prices for rough rice at the Chicago Board of Trade, the May 2008 futures are selling at a price of $23.80 (as of this time). Futures peak with the July 2008 contracts ($24.18), before falling slightly to this year's low of $21.78 (November 2008). For 2009, prices are expected to increase slightly ($22.38 in May 2009), before falling to a low of $18.25 for November's contracts. In other words, prices are expected to drop by almost a quarter, but only in another year and a half's time.

Cross-posted at Daily Kos and J2TM.

Update: This post was mentioned on the Daily Kos Eco-Diary Rescue 4.26. Thanks Meteor Blades!