Remember When...

we were concerned about oil reaching $100 a barrel? Take this KAL cartoon from The Economist, for example:
Those were the good old days, right? Now we are over $140 a barrel with further increases projected. The OPEC president says oil will reach $150 a barrel while Gazprom's CEO says oil could reach $250 a barrel. The latter forecast seems ridiculously high, but then again $140 a a barrel would have been hard to imagine back in 2004 when observers were getting worked up over oil reaching the staggering price of $40 a barrel. With projected prices so high, the incentives are in place to make sure the days of oil are numbered--good riddance I say!

Update: Brian Arner discusses $7/gallon gasoline by 2010.

More Julian Simon, Less Thomas Malthus Please

The Economist reminds us why the Malthusian perspective for today's world continues to be wrong...and why the Julian Simon perspective--absent some cataclysmic event--continues to be right.

Malthus the False Prophet
MID an astonishing surge in food prices, which has sparked riots and unrest in many countries and is making even the relatively affluent citizens of America and Europe feel the pinch, faith in the ability of global markets to fill nearly 7 billion bellies is dwindling. Given the fear that a new era of chronic shortages may have begun, it is perhaps understandable that the name of Thomas Malthus is in the air. Yet if his views were indeed now correct, that would defy the experience of the past two centuries.

[...]

It was the misfortune of Malthus—but the good luck of generations born after him—that he wrote at an historical turning point. His ideas, especially his later ones, were arguably an accurate description of pre-industrial societies, which teetered on a precarious balance between empty and full stomachs. But the industrial revolution, which had already begun in Britain, was transforming the long-term outlook for economic growth. Economies were starting to expand faster than their populations, bringing about a sustained improvement in living standards.

Far from food running out, as Malthus had feared, it became abundant as trade expanded and low-cost agricultural producers like Argentina and Australia joined the world economy. Reforms based on sound political economy played a vital role, too. In particular, the abolition of the Corn Laws in 1846 paved the way for British workers to gain from cheap food imports.

Malthus got his demographic as well as his economic predictions wrong. His assumption that populations would carry on growing in times of plenty turned out to be false. Starting in Europe, one country after another underwent a “demographic transformation” as economic development brought greater prosperity. Both birth and death rates dropped and population growth eventually started to slow.

The Malthusian heresy re-emerged in the early 1970s, the last time food prices shot up. Then, at least, there appeared to be some cause for demographic alarm. Global-population growth had picked up sharply after the second world war because it took time for high birth rates in developing countries to follow down the plunge in infant-mortality rates brought about by modern medicine. But once again the worries about overpopulation proved mistaken as the “green revolution” and further advances in agricultural efficiency boosted food supply.

If the world's population growth was a false concern four decades ago, when it peaked at 2% a year, it is even less so now that it has slowed to 1.2%. But even though crude demography is not to blame, changing lifestyles arising from rapid economic growth especially in Asia are a new worry. As the Chinese have become more affluent, they have started to consume more meat, raising the underlying demand for basic food since cattle need more grain to feed than humans. Neo-Malthusians question whether the world can provide 6.7 billion people (rising to 9.2 billion by 2050) with a Western-style diet.

Once again the gloom is overdone. There may no longer be virgin lands to be settled and cultivated, as in the 19th century, but there is no reason to believe that agricultural productivity has hit a buffer. Indeed, one of the main barriers to another “green revolution” is unwarranted popular worries about genetically modified foods, which is holding back farm output not just in Europe, but in the developing countries that could use them to boost their exports.

[...]

Read the Rest

More on Food Prices

Here is another article on the food crisis that points to misguided policies as being a key contributor to the food crisis. Also see Kenneth Rogoff's latest piece on soaring commodity prices.

Not by Bread Alone
Thomas G. Donlan

FROM THE REPEAL OF THE BRITISH CORN LAWS TO THE END of collectivization in China and the former Soviet Union, the key to feeding a nation's people has been to let the market do it -- ably assisted by continuing progress in agricultural technology.

But countries from the Philippines to Haiti are forcing their farmers out of world markets so as to lower domestic prices. Then, the same governments that closed markets in order to control prices vainly demand that farmers plant and harvest more food, despite lower profit opportunities. Some also foreclose their farmers from using genetically modified seeds. Nearly all have reduced local investment in agricultural productivity, following the example set by wealthy governments and charities.

High prices for the world's food commodities have also frightened the countries that produce surpluses, some of them new to the market economy: Kazakhstan, which had been one of the largest wheat exporters, is now one of the largest hoarders; Russia has levied a 40% export tax on wheat; Ukraine imposed a wheat-export quota and Vietnam has banned rice exports.

Some countries have never caught on to market reality, despite decades of experience: Argentina imposed a 44% export tax on soybeans to keep local feed prices down. Others are taking leave of their senses: Singapore, which became wealthy through trade, is bidding up the price of rice to fill supposedly strategic stockpiles; the Philippines, short of rice, cuts off trade; and Thailand, a producer of rice surpluses, builds stockpiles to hold down domestic prices.

The biggest and most sophisticated market economies, the United States and the European Union, wrap their farmers in so many subsidies and protections that prices mean almost nothing. Despite the rising world prices of grain, European production is falling, with exports falling faster. U.S. production of grain is rising, but much of the new production is going to motor fuels -- ethanol made from corn is blended with gasoline and soybeans are being converted to biodiesel. Even so, there's a record amount of American food grain available for export, but not enough to replace supplies taken off the market by other exporters.

[...]

Around the world, food producers and their suppliers face the same type of discouraging experiences as oil producers. What is the point of assembling large tracts of land, investing in heavy equipment, irrigation, fertilizer, highly productive seed and other inputs if the outputs must be sold into price-controlled markets?

[...]

Read the rest.

Up, Up, and Away!

A great picture from The Economist

Here is the caption accompanying the picture:

OIL briefly reached another record on Tuesday May 6th as West Texas Intermediate traded at over $122 a barrel for the first time. Ten years ago a barrel fetched around $15. The feeble dollar, soaring demand and supply constraints have all helped to push up prices by 25% in the past four months alone. And there is little sign of respite for worried governments and consumers. This week Goldman Sachs, a bank, predicted that oil could reach $200 a barrel before the end of the year.

Of course, many observers on the left and right believe higher oil prices are exactly what the U.S. economy needs. Higher prices are needed to motivate consumers and producers to substitute into a cleaner, less national-security related form of energy.

Update: Why $120 Oil is Good