free html hit counter Peak Oil Debunked: 266. MORE FUN WITH FOOD AND OIL PRICES

Thursday, March 23, 2006

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

16 Comments:

At Thursday, March 23, 2006 at 5:15:00 AM PST, Blogger Freak said...

I think people tend to over estimate how much fuel costs actually figure into food distribution and production.

For example

If a 1 pound pizza costs 1 dollar to deliver in fuel and it's a 20 mile round trip, how much does it cost to deliver a truck, train, or freighter load of food over a given distance per pound?

I would be interested to see what it costs in equivalent oil costs per useful transport weight for a pizza delivery driver vs. a tractor trailer, train or cargo ship.

Or I should say what it would cost a pizza joint in fuel cost to deliver tons of bulk food commodities at their cost per pound/per mile.

$500 a gallon maybe?

 
At Thursday, March 23, 2006 at 7:18:00 AM PST, Blogger JDDEBUNKED said...

The data that forms the basis of JD's post is incomplete. The US Bureau of Labor Statistics CPI lists 12 food items in its survey. Conveniently, JD has chosen three of four items in the list with among the lowest CPI to support his/her argument.

The entire list shows a significant increase in food prices for all but one the items from Jan 1996 to Jan 2006 not shown in JD's blog.

Bread +22%
Beef +45%
Chicken +13%
Eggs +25%
Milk +45%
Apples +10%
Oranges +49%
Bananas +6%
Tomatoes +96%
Orange Juice +18%
Coffee -10%
Iceberg Lettuce +14%

FYI, the price of gasoline rose 105% during this same period. For those of you who want to play around with the stats, go to:

data.bls.gov/cgi-bin/surveymost?ap

Like gasoline, there is no 1:1 correlation between crude oil prices and food prices. But with 17% of all energy use in the US devoted to food production and distribution*, you would have to be stupid to ignore the effect of oil prices on agricultural and (ultimately) food prices in the US given the hugely dependent nature of American agro-business on petroleum and petrochemicals.

Does this mean the sky is falling and that we should take to the hills like "doomer" Matt Savinar? No, but we should have an awareness of the importance of oil in food production that "flat-earthers" like JD conveniently choose to ignore.

*Institute of Science in Society 2005

 
At Thursday, March 23, 2006 at 7:52:00 AM PST, Blogger JD said...

Prices in general rose by 27% from 1996 to 2006 due to inflation. So real prices for most of the items on your list declined.

Oddly, two of the most "relocalized" items on the list -- milk and tomatoes -- exhibited high price increases.

 
At Thursday, March 23, 2006 at 9:41:00 AM PST, Blogger half said...

Let's face it JD, isn't the prospect of a massive human die-off a lot more exciting (and full-filling) than carpooling?

 
At Thursday, March 23, 2006 at 11:43:00 AM PST, Blogger Dom said...

If subsidies are provided to keep prices low, shouldn't prices rise -- not drop like a rock -- when they are eliminated?

1.) Subsidies are not provided to do anything on the consumer side. They are in place to keep a lobby happy.

2.) Subsidies are paid to grow and to not grow....

3.) Yes, economics is a bit more difficult than your kindergarden.

4.) I'll stick to my guns - it has to do PRIMARILY with availability, not price. You'll see. Just like a heart attack (or a blackout, for that matter) depends on either blood or no blood. Juice or no juice. In this debate, the question is: gradual weening away from oil (2% drop in production per year) or societal collapse, however it may look (jumps of 50% supply at a time). 2% change in supply of commodities is very uncommon. Just ask the North Sea.

Ja dig?

 
At Thursday, March 23, 2006 at 1:51:00 PM PST, Blogger Roland said...

Jumps of 50% supply at a time are possible, but they're not going to be caused by geology or even supply logistics. They would be political, in which case they'd be very unlikely to affect the whole world equally. Figure out a scenario in which 50% of oil disappears - that's a lot of countries! And the oil-independent countries, their closest allies, or countries that depend very little on oil, will do just fine.

Also, it would hurt the producers as much as the consumers because oil would be extremely valuable post-peak, and they'd be depriving themselves of huge incomes. Embargoes are far more feasible propositions today, while oil is cheaper. Why would an oil producer stop exporting oil, unless its production had declined so much it was unable to meet its own needs? That will be quite a while.

So yes it's a problem, but it's not guaranteed doom, anymore than more expensive beef is.

Doomer: But it will increase demand on chicken, leading to a worldwide chicken shortage!!!!

What about logistics of supply because of increased demand on oil? This just doesn't add up. A particular region has no oil because someone else paid more for it? That is a price issue, not a supply issue.

I can see where the doomers are coming from, but really, if we're losing 4% a year then prices are going to filter that into essential uses like food. Unless Bill Gates decides to buy all the oil in the world - again, much more likely to happen now than post-peak because it is less expensive.

 
At Thursday, March 23, 2006 at 8:42:00 PM PST, Blogger Zanth said...

yikes, a 45% increase in beef prices? No wonder I can't save any money!

Um, seriously though, agriculture consumes, what, just 1% of our total oil consumption worldwide? Autos make up a good 25%-50% in comparison, so obiviously we need cheap food a lot more than cheap transportation, so of course agribusiness gets all it needs. It will always get what it needs too, even past the point where it gets too expensive for just about any of us to drive!

And I think I just backed up your argument, even though that wasn't my original intention.

Good post :)

 
At Thursday, March 23, 2006 at 11:26:00 PM PST, Blogger Roland said...

I second that. :-)

 
At Friday, March 24, 2006 at 1:22:00 PM PST, Blogger Dom said...

Well, Roland, it looks like we're getting to the heart of the discussion.

Let's just assume for a moment that world oil production were to fall at 4% per year beginning in 5 years, which is in my opinion a conservative estimate. Instead, I expect jumps of around 10% or even occasional increases, according to which countries are polically stable enough to export their oil at any given point in time. But nevertheless, back to 4% per year -


How much will this change in supply be in the USA? in Japan? in China? in Russia? in Europe? Hardly everywhere at 4% (!) at the same time. China might drop 50% in one year while the US gains 2%. Europe might drop the average 4% while the US loses 15% in one year. The East Coast may be well supplied but the West Coast has shortages. Or the coasts are well supplied while the blue states starve of energy.

That is what I mean with availability: One county (or region) may be standing in day-long lines waiting for gasoline to be delivered while another wonders where the problem is... Putin (or King Faud or whoever) decides that a tanker is not going out this week or month or year (or the natural gas is turned off) to your corner of the world. At the moment we have strategic reserves to combat the shortage, but let's not kid ourselves at how long they will last after this happens a time or two...

It will be like the Germans trying to win WWII at the end of the Battle of the Bulge. Fuel supply was EVERYTHING!!!

Think you'll even be able to get your hands on a burger if a shortage lasts a year or two? And what will your non-existent burger cost?

 
At Sunday, March 26, 2006 at 10:08:00 PM PST, Blogger Chris Vernon said...

I think there's a problem with your analysis JD. The data clearly shows that a rapid 3-fold ramp in oil prices of $20 to $60 (It's not fair to consider $10 since that was a short term low) hasn't impacted food prices (or even prices of much else).

Well - why on earth would it!? The component of oil price in the sticker price of a loaf of bread is tiny. That's not the point though.

Oil is cheap, it's cheap at $20, it's cheap at $60. Hence a 3-fold price impact doesn't have much impact on product prices.

Remember during that price rise the extraction rate increased. The price may have risen but the oil was available. After peak oil as the amount of oil available declines it won't be available. This will impact on the capability of producing food and other things.

That is what will drive prices - the shortage of oil reducing food and other product production - no the contribution of oil price to the sticker price on the food.

 
At Thursday, April 20, 2006 at 9:14:00 PM PDT, Blogger Override367 said...

JD's argument is that for oil prices to affect the availability of food, they would have to be so high that demand destruction would have already occured in other areas.

Basically that oil is not a threat to our food supply, because it's unlikely to ever get so expensive that we can't grow food. As to being *insufficient* oil to produce food, that seriously doesn't seem likely.

 
At Monday, April 24, 2006 at 5:26:00 PM PDT, Blogger Mel. said...

Ayah. Death to the McFarm, maybe. But the local farmer's markets here have been working in organics for the last twenty years.

And really. I wander down the street and count how many acres of viable farming land are being wasted by pristine, shit-and-oil-fed lawns on a single city block, and all it makes me realize is that even the suburbs could maintain themselves if micromanaged properly.

Is it likely? No. But the hard numbers of PO and JD's arguments drive home the fact that this one is humanity's to lose. Weathering the storm won't take a dose of new world McGuyverism, just some basic fucking know-how that even a five-year-old could implement.

 
At Sunday, November 26, 2006 at 6:32:00 PM PST, Blogger lyrl said...

Agriculture is a commodities market, meaning farmers have no control over the price of their product. Entirely market-set. We currently have an oversupply of food; food prices are going to remain low as long as the oversupply lasts.

Higher fossil-fuel-driven input costs (fuel, fertilizer, pesticides) will eventually drive farmers out of business, or lead them to attempt farming without conventional inputs. Either scenario will drop the supply of food. Only then - in the case of lowered supply - will food prices start rising.

The time lag between critical price increases and farmers going out of business or doing completely practice overhauls is going to be a number of years due to the financial structure of most farms. It's too soon to declare that oil price increases are not affecting food.

 
At Sunday, November 26, 2006 at 6:34:00 PM PST, Blogger lyrl said...

Agriculture is a commodities market, meaning farmers have no control over the price of their product. Entirely market-set. We currently have an oversupply of food; food prices are going to remain low as long as the oversupply lasts.

Higher fossil-fuel-driven input costs (fuel, fertilizer, pesticides) will eventually drive farmers out of business, or lead them to attempt farming without conventional inputs. Either scenario will drop the supply of food. Only then - in the case of lowered supply - will food prices start rising.

The time lag between critical price increases and farmers going out of business or doing completely practice overhauls is going to be a number of years due to the financial structure of most farms. It's too soon to declare that oil price increases are not affecting food.

 
At Thursday, September 13, 2007 at 12:40:00 PM PDT, Blogger UndrMediKated said...

Milk and meat both have gone up almost 100% since 1996 where I live and I can prove it. I collect newspapers and have copies from years back as well a some of my old grocery receipts. When the government talks about prices close your ears. It's the typical BS they always spew to keep the cost of living artificially low.

 
At Wednesday, April 23, 2008 at 7:35:00 AM PDT, Blogger Darren said...

"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."

Well, well. Oil doubles. Food doubles. Feeling like a dumbass yet?

I note that you took down your tongue-in-cheek "peak oil starvation experiment" post. I guess even you are aware that actual food riots aren't very funny.

 

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