266. MORE FUN WITH FOOD AND OIL PRICES

As expected, the myth that "higher oil prices will drive food prices through the roof " dies hard. The peak oilers simply can't handle the inconvenient truth that oil prices have very little impact on food prices.

Nevertheless, I'm a cheerful vampire slayer, so let's take another crack at it, and see if we can't drive a few more stakes into the heart of this myth.

A critic in the comments to the previous article (#265) writes:

Rising oil prices have not been reflected in a correspondent rise in corn prices (to use one of JD's examples) due largely to US government farm subsidies, of which corn growers are amongst the highest recipients (1). These subsides help keep the "farm value" (i.e. price of corn at the farm gate) artificially low.

Proceeding to the critic's source, however, we find this incongruous information:

What drives the expenditures today is the same basic policy framework that has driven farm subsidy spending since the "world food crisis" of the early 1970s. When global grain and oilseed prices spiked dramatically, then-Secretary of Agriculture Earl Butz unleashed farmers from decades of production controls and exhorted them to plant "fence row to fence row" to meet the global demand for their crops—to feed the world. After forty years of "agricultural adjustment" programs, Butz foresaw that the government, at long last, was getting out of agriculture. Within a few years farmers were literally plowing up the Mall in Washington in protest of prices and incomes driven ruinously low by the pressure of massive crop surpluses.Source

It appears our critic is a little confused about what agricultural subsidies actually do. If subsidies are provided to keep prices low, shouldn't prices rise -- not drop like a rock -- when they are eliminated?

Next, our critic notes that beef prices have risen somewhat with oil prices, and gives us the peak oiler rationale for this trend:

Getting the corn from the farm to the cow (or can) and ultimately into our mouths costs far more than just growing it. This farm-to-mouth process is the marketing cost and entails processing, packaging, transporting, and selling the corn (or corn-based product) at the supermarket. It is this cost that impacts price the most.

So it would seem that all of this oil-fueled processing, packaging, transporting and selling is what has caused the price of beef to moderately rise. To verify this hypothesis, lets look at another type of meat: chicken. The following is a time series of prices for fresh whole chickens, per lb., from the Bureau of Labor Statistics (click to enlarge):

Now, from the EIA, we can obtain spot prices for Brent crude to give us a good solid run-up in oil prices:

Price of Brent in Dec. 1998: $10
Price of Brent in Feb. 2006: $60

That's an oil price increase of 6x, or 500%. So what did that do the price of chicken? Absolutely nothing, as you can see in the Table. In 12/98 chicken sold for $1.060/lb., and in 2/06 chicken sold for $1.045/lb. A 500% increase in oil prices led to a drop in chicken prices. So what happened with all the processing and transport etc.? Didn't they have to get the corn to the chickens' mouths, and get the chickens to the processing plant, and pluck the chickens, and wash the chickens, and package the chickens, and transport them to the supermarket etc. etc.? Looks like we have a serious glitch in the peak oil theory here.

The critic had yet another lame argument:

But this is not the point. Most of us don't drag our gunny sacks to the farm gate and fill them with corn. We purchase and consume corn in other ways, either fresh, frozen, or canned, or most often in the form of beef.

Yes that may be true, but (as a few people noted) when you start talking about beef and frozen entrees etc., you're basically unmasking peak oil as a trivial lifestyle issue, not a life-threatening crisis.

Furthermore, aren't the peak oilers trying to get off the food grid because food prices are going to be astronomical after peak oil? To do that, I'm assuming they'll grow gardens. Hence they'll have to grow some staple grain if they really want to be self-sufficient. I haven't seen many peak oiler sites talking about how to do your own rice paddy, or wheat field, so probably the most straightforward "local" grain is corn. You know, plant a big plot Indian-style with corn hills, beans growing up the stalks, and intercropped pumpkins to keep the weeds down. Dry it all on the stalk, and harvest the kernels into paper bags by rubbing the cobs together. Mill with a hand mill and cook into corn bread or porridge etc. etc. It's a lot of fun, but what's the point of going to all that trouble to replace a food source (corn) whose price is demonstrably not affected by oil prices? It doesn't make sense, unless you're gardening just for relaxation, or as a hobby.

The peak oilers are also deeply concerned (elated?) about the impending death of the 3,000 mile salad. The theory is that high oil prices are going to drive the price of long-distance imports like bananas and coffee to astronomical levels, and they'll quickly disappear from store shelves. Lets do a reality check on that one with some more stats from the BLS (click to enlarge):

Isn't that wild? Oil prices rise 500% from $10 (12/98) to $60 (2/06), and banana prices drop from .510/lb. to .508/lb.

Here's the stats for coffee:

Just like bananas, a 500% rise in the price of oil results in an 8% drop in coffee prices.

Clearly the relationship of oil vs. food prices is way more complicated than the kindergartner economics of the peak oilers would suggest.

-- by JD