Peak Oil News: Why the price of 'peak oil' is famine

Thursday, February 07, 2008

Why the price of 'peak oil' is famine


By Ambrose Evans-Pritchard

Vulnerable regions of the world face the risk of famine over the next three years as rising energy costs spill over into a food crunch, according to US investment bank Goldman Sachs.

"We've never been at a point in commodities where we are today," said Jeff Currie, the bank's commodity chief and closely watched oil guru.

Sugar cane on a bullock cart in India. Rising energy costs spill into food crunch.
Sugar cane on a bullock cart in India - the commodity is popular as the basis of biofuel, as it is a cost-effective and cleaner alternative to oil

Global oil output has been stagnant for four years, failing to keep up with rampant demand from Asia and the Mid-East. China's imports rose 14pc last year. Biofuels from grain, oil seed and sugar are plugging the gap, but drawing away food supplies at a time when the world is adding more than 70m mouths to feed a year.

"Markets are as tight as a drum and now the US has hit the stimulus button," said Mr Currie in his 2008 outlook. "We have never seen this before when commodity prices were already at record highs. Over the next 18 to 36 months we are probably going into crisis mode across the commodity complex.

"The key is going to be agriculture. China is terrified of the current situation. It has real physical shortages," he said, referencing China still having memories of starvation in the 1960s seared in its collective mind.

While the US housing crash poses some threat to the price of metals and energy, the effect has largely occurred already. The slide in crude prices over the past month may have been caused by funds liquidating derivatives contracts to cover other demands rather than by recession fears. Goldman Sachs forecasts that oil will be priced at $105 a barrel by the end of 2008.

The current "supercycle" is a break with history because energy and food have "converged" in price and can increasingly be switched from one use to another.

Corn can be used for ethanol in cars and power plants, for plastics, as well as in baking tortillas. Natural gas can be made into fertiliser for food output. "Peak Oil" is morphing into "Peak Food".

Land use for biofuels has shot up from 12m to more than 80m hectares worldwide over six years. Biofuel provides 3pc of global energy needs, which will rise to an estimated 10.6pc by 2030.

In a pure market, sugar cane would be the only viable biofuel with a cost of $35 a barrel (oil equivalent). The others are sugar beet ($103), corn ($81), wheat ($145), rapeseed ($209), soybean ($232), cellulose ($305).

Subsidies drive the business. The US offers tax relief of $1 a gallon for biodiesel. The EU has a 10pc biofuel target by 2010.

The crop switch comes just as China and India make the leap to an animal-based diet, replicating the pattern seen in Japan and Korea, where people raised their protein intake nine-fold as they became rich. It takes 8.3 grams of soya or corn feed to produce a 1g weight gain in cattle - compared with 3.1g for pigs, 2g for chicken and 1.5g for fish.

Mr Currie said investment cycles in energy typically last about 10 to 12 years as producers struggle to catch up with demand. However, this cycle has been short-circuited by politicians after barely six years.

"The political environment is extremely hostile. The world is looking like the 17th century under mercantilism when countries saw economics as a zero-sum game. They exported as much as they could to get gold, and erected enormous barriers. China looks like that, so does Russia, the Mid-East and most of Africa and Latin America," he said.

While the West has much of the skill for developing energy projects, it is blocked by nationalist petro-states from investing directly.


At 10:35 AM, February 08, 2008, Anonymous Anonymous said...

"While the US housing crash poses some threat to the price of metals and energy, the effect has largely occurred already."

Do these people have a crystal ball? They expect their readers to simply accept this silly assertion given with no support whatsoever.
Oil prices have collapsed by 15% in just one month and they are calling a bottom?
It's not peak oil that is driving food prices higher. Without the Bush mandate, the ethanol boom would have never begun. The telegraph is deflecting blame.
Oil production levels are determined by political and business considerations,the present OPEC decision to cut production prooves this.
Finally, they claim that the "West" would expand production if only "petro states" would allow them to do so. Really? How is it that Brasil's Petrobras is the global leader in offshore and the extremely promising deep water exploration and development?

At 11:52 AM, February 11, 2008, Blogger Paul W. Shafer said...

I disagree with this analogy. For the past 50 years, Russian and other exploratory geology has revealed that there is potentially ten times the Middle East oil reserves on the continental shelf on the northern shelf of Russia. As global climate change (due in part to increased jet transport on the northern routes above the north polar region) causes the northern ice cap to melt and remain melted, this oil will be exploited to the fullest extent. Essentially, humans will just change the source of their oil but not reduce its use. The more oil consumed, the greater the ice cap melt and the greater the accessibility to the vast northern oil reserves. Is this environmentally logical? That depends upon your point of view. Obviously, a warmer Russia and Canada can support greater agriculture and greater human population and ultimately a greater world-wide economy

At 9:43 AM, February 25, 2008, Anonymous The smart creature said...

Let us suppose new giant oilfields exist and are easily exploited in Russia, climate change permitting, as Paul W. Shafer says ; it does not mean that Ambrose Evans-Pritchard is wrong when he says that the price of oil is famine. It just mean that the world energy output sustaining the world economic expansion we are addicted to will be prolonged for a while (for instance : one or two decades). Then Peak Oil will be postponed (but reached at a higher level with a higher level of world population concentrated in a greater number of huge cities) and the consequences of Peak Oil (one of them being famine) will be 1°/ delayed and 2°/ of greater magnitude.

At 9:55 AM, February 25, 2008, Anonymous The smart creature said...

Correction : in my previous comment, read "world enonomic output growth" instead of just "world economic ouput". A curve showing this growth can be seen in our blog (january 2008 newsletter)


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