An Answer?

I asked a question at the end of this post. Arnold Kling answers:

Mark Thoma's Question, by Arnold Kling: He asks,

how do you explain the large run up in, say, agricultural commodities which cannot be left "in the ground" until later?

Interesting question. Some off-the-cuff observations.

1. The point about the run-up in other commodities raises questions about any oil-specific story. ...

2. I disagree with Mark on the storability of agricultural commodities. Wheat can be stored as crackers. Corn can be stored as corn flakes. If speculators drive up the price of corn nine months from now, but there is abundant corn today, my reaction as Kellogg's is to ramp up corn flake production today, so that I don't have to rely as much on the expensive corn that is coming in nine months. But that means I buy lots of corn today, which raises the price, just as if I were buying it to store in a silo.

Let me emphasize that I am not saying that high commodity prices are a speculative bubble. Tyler and I tend to think the opposite. I like his term anti-bubble. That is, speculators guessed wrong a year ago, and prices now are catching up to reality.

What I am saying is that speculators do drive the prices of oil and other commodities. Moreover, they do so in the futures markets. Furthermore, there are alternative ways of storing commodities other than grain silos or oil storage tanks, so you can't rely on those inventory figures as indicators of the presence or absence of speculation.

I should mention that I am not opposed to having speculative markets in commodities. On the contrary...

I have been arguing that the news in oil markets has not been particularly dramatic in the past year. Paul Krugman takes a different view:

Declining Russian production, growing doubts about whether the alleged Saudi excess capacity really exists, etc.. Basically, CERA-type optimism about big new oil supplies coming on line any day now has been fading.

Whether this is "big news" or not is a matter of opinion. I am not going to go to the mat to defend my view.

I would just point out that Thoma's question raises the bar a bit for the "big news" view. What "big news" has at the same time hit agricultural markets and other commodity markets? It seems to me this nudges things in the direction of monetary surprises or autonomous changes in speculative sentiment.

A quick reaction: I don't think I'd like year old crackers or cereal very much.

On the storage question, Krugman looked at stocks of grains and other commodities back in April when he first began making this point (e.g., see his graphs for oil and metals):

The USDA data (big pdf) show stocks of wheat and other grains declining in recent years.

The link shows the data on stocks for wheat, but it isn't in graphical form. So here's a bit more on grain stocks:

Wheat

Feed Grains

Rice

World Grain and Oilseed

The question I have for Arnold's story is that while it may be possible to store grains and other commodities in non-traditional forms, if the claim is that's what's gong on now, why store grains in (what I presume are) more costly non-traditional methods when, with stocks this low, there is plenty of storage space available?

On the "big news" point, I agree that the "big news" story is hard to apply across the commodity groupings, but I don't think we are only left with the two possibilities he cites as explanations.

Comments

[anne]

"Let me emphasize that I am not saying that high commodity prices are a speculative bubble."

http://www.earthpolicy.org/Updates/2008/Update72_data.htm#table4

January 11, 2008

World Grain Production, Consumption, and Balance, 1960-2007

(Million Metric Tons)

2000 1,843 1,857 -15
2001 1,875 1,902 -28
2002 1,822 1,909 -88
2003 1,862 1,934 -72
2004 2,043 1,990 53

2005 2,017 2,019 -2
2006 1,992 2,043 -51
2007 2,075 2,098 -22

[Ramp up the corn flake production, Merv.]

[anne]

http://www.earthpolicy.org/Updates/2008/Update72_data.htm#table5

April 9, 2008

World Grain Consumption and Stocks, 1960-2007

(Million Metric Tons)

2000 1,858 564 111 (Days of Consumption for Stocks)
2001 1,904 534 102
2002 1,910 441 84
2003 1,934 356 67
2004 1,989 405 74

2005 2,019 390 71
2006 2,041 339 61
2007 2,104 317 55

[Ramp up the corn flake production, Merv.]

[Noni Mausa]

I don't suppose this has a big effect on these numbers, but ... isn't ethanol easily stored? Might be a form of corn which wouldn't make for bad cornflakes or crackers. (But good daiquiris).

The more processed and abstracted a commodity is, the longer it lasts and the more room there is for speculation. Plus, I don't imagine the Chinese would mind year-old flour if it had been turned into their spicy highly polished
snack crackers. I certainly wouldn't. (Much better than North American crunchy snacks -- try the Wasabi peas, too.)

[anne]

55 (Days of Consumption for Stocks) = lowest level ever.

http://www.earthpolicy.org/Updates/2008/Update72_data.htm#table14

January 23, 2008

U.S. Fuel Ethanol Use, Grain Production, 1980-2007

(Million Tons)

2000 16 of 340
2001 18 of 321
2002 25 of 294
2003 30 of 345

2004 34 of 386
2005 41 of 363
2006 54 of 336
2007 81 of 414

2008 114 of 400 (Projection)

[Ramp up the corn flake production, Merv.]

[anne]

U.S. Fuel Ethanol Use, Grain Production

(Million Tons)

2008 114 of 375 (My Projection)

[Rajesh Raut]

Wouldn't the historic drought in Australia that has dried up a major river system and reduced wheat exports be called "Big News"? The world has become much more dependent on U.S and Canadian exports of wheat, just as U.S. farmers shifted acreage from wheat to corn to cash in on ethanol subsidies.

How about Argentina's farm's strike? Another traditional exporter that has not been able to expand production to meet the growing demand, due mostly to bizarre governmental policy.

We can go down the list of countries that either have a long tradition of exporting food or are swing exporters and each has a story to tell: Ukraine, India, China, etc.

When the world can rely on multiple sources, prices are stable; once we become dependent on one or two sources, price become more volatile.

[anne]

http://www.earthpolicy.org/Updates/2008/Update72_data.htm#table9

April 9, 2008

World Grain Harvested Area, Total and Per Person, 1960-2007

(Million Hectares - Hectares Per Person)

2000 667 0.11
2001 667 0.11
2002 654 0.10
2003 665 0.10
2004 668 0.10

2005 673 0.10
2006 670 0.10
2007 687 0.10

http://www.earthpolicy.org/Updates/2008/Update72_data.htm#table11

January 19, 2006

World Irrigated Area, Total and Per Person, 1950-2003

(Million Hectares - Square Meters Per Person)

2000 276.3 451
2001 274.9 443
2002 277.2 441
2003 277.1 436

http://www.earthpolicy.org/Updates/2008/Update72.htm

April 16, 2008

World Facing Huge New Challenge on Food Front: Business-as-Usual Not a Viable Option
By Lester R. Brown

Between 1950 and 1990 the world's farmers raised grainland productivity by 2.1 percent a year, but from 1990 until 2007 this growth rate slowed to 1.2 percent a year....

[anne]

http://www.earthpolicy.org/Updates/2008/Update72.htm

Between 1950 and 1990 the world's farmers raised grainland productivity by 2.1 percent a year, but from 1990 until 2007 this growth rate slowed to 1.2 percent a year....

[Ramp up the corn flake production, Merv.]

[ndd]

Well, I think we are making some progress here, because now we can pull back from focusing just on oil, but can deal with the "Peak Everything?!?" issue, i.e., did the world manage to hit the limits of production in all sorts of commodities (and our gracious host hasn't put up graphs for gold, copper, or other metals here) simultaneously??? Now what do you suppose are the odds of that happening?

And looking at other commodities, especially wheat, since February, is instructive. The graph of wheat prices looks a lot like one of the Nasdaq or Shanghai stock markets during their, um, bubbles.

I notice Bruce Webb hasn't participated in this series of posts, but I do recall him positing back in February that it wouldn't take that much panic buying to create the "hoarding" that Prof. Krugman is looking for. And there was plenty of evidence of panic buying of wheat and rice back in February.

So, anyone want to take a stab at speculation/bubble vs. Peak Everything!

[anne]

http://www.earthpolicy.org/Updates/2008/Update72_data.htm#table13

April 9, 2008

World Grain Yield Annual Increase by Decade, 1950-2007

1950-1960 2.0%
1960-1970 2.5
1970-1980 1.9
1980-1990 2.1
1990-2000 1.2
2000-2007 1.2

http://www.earth-policy.org/Books/Seg/PB3ch04_ss2.htm

June 4, 2008

Falling Water Tables, Falling Harvests
By Lester R. Brown

Scores of countries are overpumping aquifers as they struggle to satisfy their growing water needs. The drilling of millions of irrigation wells has pushed water withdrawals beyond recharge rates, in effect leading to groundwater mining. The failure of governments to limit pumping to the sustainable yield of aquifers means that water tables are now falling in countries that contain more than half the world's people, including the big three grain producers—China, India, and the United States.

Most of the world's aquifers are replenishable, so that when they are depleted, the maximum rate of pumping will be automatically reduced to the rate of recharge. Fossil aquifers, however, are not replenishable. For these—including the vast U.S. Ogallala aquifer, the deep aquifer under the North China Plain, or the Saudi aquifer, for example—depletion brings pumping to an end. Farmers who lose their irrigation water have the option of returning to lower-yield dryland farming if rainfall permits. But in more arid regions, such as in the southwestern United States or the Middle East, the loss of irrigation water means the end of agriculture.

Falling water tables are already adversely affecting harvests in some countries, including China, which rivals the United States as the world's largest grain producer....

[Ramp up the corn flake production, Merv.]

[anne]

http://www.earthpolicy.org/Updates/2008/Update71.htm

March 20, 2008

Melting Mountain Glaciers Will Shrink Grain Harvests in China and India
By Lester R. Brown

The world is now facing a climate-driven shrinkage of river-based irrigation water supplies. Mountain glaciers in the Himalayas and on the Tibet-Qinghai Plateau are melting and could soon deprive the major rivers of India and China of the ice melt needed to sustain them during the dry season. In the Ganges, the Yellow, and the Yangtze river basins, where irrigated agriculture depends heavily on rivers, this loss of dry-season flow will shrink harvests.

The world has never faced such a predictably massive threat to food production as that posed by the melting mountain glaciers of Asia. China and India are the world's leading producers of both wheat and rice—humanity's food staples. China's wheat harvest is nearly double that of the United States, which ranks third after India. With rice, these two countries are far and away the leading producers, together accounting for over half of the world harvest.

The Intergovernmental Panel on Climate Change reports that Himalayan glaciers are receding rapidly and that many could melt entirely by 2035. If the giant Gangotri Glacier that supplies 70 percent of the Ganges flow during the dry season disappears, the Ganges could become a seasonal river, flowing during the rainy season but not during the summer dry season when irrigation water needs are greatest.

Yao Tandong, a leading Chinese glaciologist, reports that the glaciers on the Tibet-Qinghai Plateau in western China are now melting at an accelerating rate....

[Fake John McCain]

Crackers and cereal go stale, so that would be a terrible way to store your corn and wheat. It also fails to explain the run-up in metals and oil. Basically, all inventories of vastly different commodities would have to be hidden in many different hiding places. Some in the ground, some in cereal boxes, some in Area 51, etc. It's just not a credible argument. Furthermore, I fail to see how pension funds and investment banks could be doing the hiding.

I agree that the behavior of commodities prices recently has the bad smell of a financial bubble. However, while Krugman presents empirical evidence to back up his argument, his detractors present arguments that can neither be proven nor disproven.

It's as if Krugman had argued that there is no empirical evidence to suggest the existence of UFOs. Then the opposition, without any empirical evidence responds, "Well, maybe they're hiding in cereal boxes."

[robertdfeinman]

One never knows why Mark Thoma cites the libertarians. It may be because he has a soft spot for them personally (maybe they are nice to kittens, I wouldn't know), or because he likes to see the comments that posting their remarks generates.

Just like the talking head TV shows, to maintain an audience you need to generate debate and buzz.

Why we rise to the bait each time is an interesting question...

[General Specific]

Maybe I'm stupid but I've long thought that the energy futures market was little more than a time average of the historical spot market projected into the future--plus or minus some noise for speculation and perhaps some variance plus or minus for seasonal consumption.

Seems like the spot price is driving the future price, not vice versa.

So the idea that the futures market was telling us anything--or that it was driving the spot market--always seemed bogus to me. I've not seen much empirical evidence that the futures market drives the spot market (though I've not looked too hard).

My own read is that, by and large, energy traders were probably fairly clueless about the prospects for oil production. We had CERA projecting that we'd have few problems--much new production coming online. We had the WSJ opinion page and their likes projecting lower energy prices. And we had the cornucopians and anti-malthusians berating anyone to suggested that oil production may be unable to meet demand.

I think the big change is that people are starting to take geology more seriously. That idea is finally sinking into the heads of those prognosticators and their followers who thought $20/barrel oil was just around the corner.

This doesn't mean that we're not overpriced when it comes to the price of oil and other commodities. But to me the futures price is simply reacting to the spot price, like the tail of the dog. So in that sense, it seems odd to me that some would describe the futures market as driving the spot price.

Even more troubling, I wonder how economists can tell me much of anything on complicated social matters such as trade when they can't seem to agree on something that seems much more straight forward. Maybe I'm missing something.

[ndd]

On the issue of food shortages and their coincidental occurrence just after a major decline in value of the US dollar and simultaneously with an oil crisis, under the heading of "history doesn't repeat, but it does rhyme" you may wish to read Scenes from the World Food Crisis.

[Real Person from the Real World]

Exactly who are these mysterious oil speculators? My guess is that all the big oil companies have guys who look at what's in the ground, what's being sold, and who is holding onto their country's oil reserves and of course, what OPEC and the rest of the fharbotz middle east is doing. Some of this information is more knowable then other pieces, so there is guessing somewhere along the line, and so those same big oil companies make a conservative guess to their own advantage (ala Enron) and more-or-less collude to fix the price based on partially unknowable info. Ah, but then our Pols are all in cahoots with big oil, and there is a lot of nice expensive wars going on in the middle east, so they talk like the arabs are out there [edited] us at our own game. Franky, it's a red herring.... take a good look at US oil stocks, US oil futures, and the profits in the US oil industry, and the salaries paid to oil company biggies, and their Republican pols, like Bush Jr.

[bakho]

The Ag economists have been modeling commodity prices for quite some time. This year they are saying that corn prices and oil prices will be more closely linked, now and in the future because of ethanol production. Go Here:

http://www.sciencedaily.com/releases/2008/02/080215135701.htm

"The recent boom in production of ethanol from corn grain has tightly linked the agriculture and energy sectors in an unprecedented fashion."

"Tyner said the prices of corn and crude oil, which prior to 2007 fluctuated almost independent of one another, have become more closely linked thanks to the use of massive quantities of corn to make ethanol. This year that's about one-third of the total national harvest.
"Now, oil and ethanol are both big players in agriculture," he said. "In the future, they will march together, and their march will depend upon government policies."

OK? If huge parts of the corn crop are being diverted to ethanol production, then there is less corn for animal feed and that drives up the price. It also drives up the price of soybeans, because they are the prime alternative animal feed. Also, the demand for corn is high, so farmers are switching out of wheat and soybean production and into corn production. This drives up the price of the other commodities. Rice is a different story.

The prices have gone up A LOT recently because much of the corn crop in the Midwest is destroyed. After the fields dry, it will be way too late in the season to plant corn. Many may be able to plant some soybeans, but those will be a lower maturity group that has a reduced yield. Overall, corn yields are down, demand is way up (because of ethanol) so prices are way up.

If you own an ethanol plant, you have to have enough feedstock (in this case corn) in order to operate. Because oil is so expensive, ethanol can be marketed for a much higher price. But the plant won't operate without corn, so the owners are buying up corn contracts (and bidding up the price) so they won't be forced to shut down.

Now if we wanted to lower corn prices we could change our policy on imported ethanol from sugar cane which is cheaper to produce.

And yes, farmers will store grain in their silos until they get the price they want, or put it on the futures market to lock in the price. There is risk involved, some speculators are making money by taking risks, but speculation is not driving up the prices. Demand is driving up the prices.

[anne]

"Ah, but then our Pols are all in cahoots with big oil, and there is a lot of nice expensive wars going on in the middle east, so they talk like the arabs are out there "------" us at our own game."

Never permissible.

[Fake John McCain]

Real Person from the Real World says...
"...and so those same big oil companies make a conservative guess to their own advantage (ala Enron) and more-or-less collude to fix the price based on partially unknowable info. Ah, but then our Pols are all in cahoots with big oil, and there is a lot of nice expensive wars going on in the middle east..."

And this affects the price of steel and the price of wheat how?

[anne]

Ndd:

http://www.economicpopulist.org/?q=content/scenes-world-food-crisis

"Scenes from the World Food Crisis."

Thank you.

Bakho:

"Now if we wanted to lower corn prices we could change our policy on imported ethanol from sugar cane which is cheaper to produce."

Too difficult and even dangerous, I think, unless Cuba was used.

[Causatum Differing]

Its possible to have more than one factor affecting markets at the same time. Food prices are affected by ethanol mandates diverting acreage away from food for eating. Oil could be kept in the ground for entirely different reasons, such as a lack of inflation hedges that sovereign wealth funds can invest profitably in, or instability in various pumping regions.

That is, rising food prices are not proof that oil production has a problem. Food can be affected by factors that have no affect on oil, and vice versa.

[reason]

ndd
re peak everything - I gave this answer on another thread:
http://economistsview.typepad.com/economistsview/2008/06/more-speculatio.html#c120180534

[Lafayette]

Corporate Welfare

Kling: Furthermore, there are alternative ways of storing commodities other than grain silos or oil storage tanks

True enough, but to do so requires some transformation, which has its factor costs.

There is an element of sectoral composition that enters into consideration. Is the market vertically integrated (with numerous national conglomerates) or is it typified by farm collectives of a regional nature or does it consist of atomized individual farms.

Neither individual farmers nor collectives have, I think, the competence to play games on the futures market in an attempt to profit from speculation. This is probably not the case of conglomerates (BigAggie).

Farm collectives purchase their commodities (cereals, meats) from the producers (large farm homesteads) who require immediate payment to cover expenses. Largely integrated agricultural countries, with big conglomerates as producers, may be able to finance any storage and play the market.

But, here in Europe, where, for instance, a large part of the chicken stock is produced by local, mediums-sized cooperatives, there has never been -- to my knowledge -- any talk whatsoever of leveraging prices by withholding supply. This notion would be considered ridiculous.

The cost at which commodities can be transformed and stored is non-negligible and the degradation of the stock during storage is non-negligible as well. A business must have size to undertake the transformation necessary.

I don't think economists take sufficient note of the realities of the business. Storing corn as cornflakes may seem a solution, when indeed it isn't.

The EU once had Butter Mountains and Wine Lakes, as it purchased and stored these commodities according to market conditions. The result was great waste, because the cost of storage (during market demand depression) was never recuperated from their ultimate resale on international markets at highly subsidized prices. Without the subsidized pricing, the stocks would never move and inexorably accumulate. Then there was natural degradation. Most of the Wine Lake was transformed into pure alcohol.

Moreover, the current saga of the Doha round (Of GATT negotiations) reiterates the fact that First-world subsidies destroy incentive in the Third-world less-developed countries were food self-sustenance should be a priority. We are not helping these countries by sending "Food AID" to them. This apparent benevolence compromises the ability to develop national farming to sustain internal demand. These countries do not have the means to transform/store agricultural produce against a rainy day.

May I remind us all that agriculture is a Main Employer in much of the Third-world. First-world benevolence thus also menaces Third-world employment. For what? A First-world farm employment that is, at most, rarely more than 3% of the total population?

Someone please explain the General (and not Specific) Utility of protecting First-world farming with national subsidies that produce over-supply situations far more often than they seem to provoke commodity speculation. In America, such protection is typically tantamount simply to Corporate Welfare for Agriculture.

[spencer]

typical Kling -- creates a fantasy that has a very tenuous connection to realty and insisted the rest of the world is wrong because they do not see the world as he does.

[reason]

Spencer...
You have said what I have often thought. His partner in crime (Caplan) seems more attached to reality, but has wierd values. But yes, Kling often makes really strange arguments.

says...

HISTORIC U.S. FUEL ETHANOL PRODUCTION

Year Millions of Gallons
1980 175
1981 215
1982 350
1983 375
1984 430
1985 610
1986 710
1987 830
1988 845
1989 870
1990 900
1991 950
1992 1,100
1993 1,200
1994 1,350
1995 1,400
1996 1,100
1997 1,300
1998 1,400
1999 1,470
2000 1,630
2001 1,770
2002 2,130
2003 2,800
2004 3,400
2005 3,904
2006 4,855
2007 6,500

http://www.ethanolrfa.org/industry/statistics/#A

*Avg 07 ethanol production was 423 b/d X1000
Avg 08 Q1 ethanol production was 530 b/d X 1000

*Note that ethanol production increased over 25% from 06 to 07. Translation: Demand for corn by ethanol increased over 25%. 07 production used over 600 million more bushels of corn than 06.

Where Will the Corn Come From?

Large corn stocks will enable U.S. ethanol production to increase initially without requiring much additional adjustment in the corn market. The U.S. ended the 2004/05 marketing year (MY—September 2004-August 2005) with stocks of 2.1 billion bushels—enough to produce 5.7 billion gallons of ethanol. As long as corn is the primary feedstock for ethanol in the U.S., however, sustained increases in ethanol production will eventually require adjustments in the corn market.

One possibility is that ethanol producers will secure the additional corn they need by competing with other buyers in the marketplace and bidding up the price of corn. According to the USDA Agricultural Baseline Projections (released in February 2006), the share of ethanol in total corn use will rise from 12 percent in 2004/05 to 23 percent in 2014/15. A comparison of the 2006 Baseline with the 2005 Baseline suggests that much of the increased use by ethanol producers will be diverted from potential exports; the 2006 Baseline projects higher use for ethanol and lower exports than the 2005 Baseline.

*Note. The % of corn crop to ethanol in 2008 will be over 30%.
Note that ethanol demand for corn exceeded 04/05 marketing year corn stocks.

http://www.ers.usda.gov/AmberWaves/April06/Features/Ethanol.htm

Since when did supply and demand turn into speculation?

[bakho]

The 6/26, 5:35 AM ethanol stats were my post. My autofill needs tweaking.
bakho

[reason]

I made this comment on another thread:
http://economistsview.typepad.com/economistsview/2008/06/speculation-con.html#c120181616

"4. What happens when those new machines can't get any fuel because it is not available?"

Looks like Bakho gave me the answer. The machines keep running but some people starve as a consequence.

[General Specific]

Another comment on whether the futures market drives the spot price or vice versa:

I don't know to what degree the futures market is driven by (a) speculators or (b) airlines and the likes trying to guarantee fuel costs.

If the latter, then my thinking is that--like most human beings--those buying future contracts look at the current price and recent price history when trying to decide whether they are going to purchase a future contract. And as the spot price increased over time, the futures price followed.

This is an argument I've made with James Hamilton a few times long ago: he kept asking why the futures market for oil was so low compared to spot prices and I kept nagging and complaining that the futures market has little predictive value--particularly for what could be a transitional period in thinking. I think the phrase I used is that the futures market seems to be looking in the rear view mirror.

Kling posed a similar query in the past--the price of oil must be too high because the futures market says it should be lower. (Since they banned me from their blog, I can't argue with them on that point).

Empirically, what makes people--e.g. Kling--think the futures market in oil has predictive value--other than just telling us a time average value of the recent price history.

[reason]

GS
I get the feeling that Kling doesn't do empirical. (Sometimes I get the feeling that when you join GSU you enter another universe.)

[General Specific]

Another consideration or aspect to this line of thinking:

If I was an airline, for example, and spot prices had been stable for a while, I'd be ho-hum la-de-da about locking down future prices. And if future prices were even lower than spot prices, I'd be even more ho-hum.

But as spot prices started rising, I'd think "holy cow, maybe we need to lock down our future price of fuel."

One can argue that with future prices lower than spot prices, I would lock down those lower future prices. But if the future price is just a bit lower, I might be "whatever" about it.

In this scenario, the spot price is driving the future price, not vice versa (as Kling seems to argue). This makes more sense to me. We know what the spot price is. The future is uncertain. But as the spot price starts increasing, we say "holy cow," jump more heavily into the futures market--and lo-and-behold--futures prices rise.

The present (spot) wags the future (tail). So what changed? Easy. The spot price increased. Duh.

[roger]

There's a nice article in the FT today about Iran's oil reserves, noting that, while the prices have been shooting up, there's actually been a slowdown in the exploration of some of the biggest oil fields in Iran. http://www.ft.com/cms/s/0/
6baefef2-4219-11dd-a5e8-0000779fd2ac.html

It is really curious that nobody in the press seems to even ask whether our current foreign policy is one of the drivers of oil price increases. To my mind, it is obvious. Two weeks ago, when Bush's European tour ended with the fanfare of increasing sanctions on Iran, the price of oil on the futures market shot up. Reading the FT article explains why.

But maybe this is just a fair cost for the American public's apparent desire to be governed by idiots.

[NM]

Biologists, like me, tend to regard carrying capacity as a serious thing. I'm always skeptical of the 'Malthusian fallacy' fairy tale of arguing a balance between the very real exponential growth of populations with some half concocted stories about the unlimited potential for efficiency improvements and technological progress (whose rates would also need to be exponential, otherwise once can simply ignore them).

On the face of it, demographic scenarios provide an intuitive and comprehensive explanation for the 'peak of everything' but on the other hand it's hard to see how this mechanism can have such a dramatic effect on a 5 years period (about 1/10 of the pop doubling time), or 1/2 a billion increase.

But another factor might be at play: a generational lag. The peak of human population growth rate (2%/y) was reached already in the early 60's. However, the worldwide population yearly growth peaked only in the late 80s, adding about 90 million individuals/year, a steady increase from about 70 millions in the late 70s (due to the larger population size).

If you now add about 20-30 years for these newborns to become adults, move out of their parents' houses, buy cars, and consume heavily, this demographic peak is reaching us, in terms of resource usage, right now.

I'm absolutely not sure if an extra 20 mio people/y worldwide could have such a major impact, but maybe compounded by the slowdown in grain productivity mentioned by anne above and the per capita increase in energy and resource consumptions it could lead, at least in part, to the observed pattern.

Just a thought.

[anne]

NM:

Biologists, like me, tend to regard carrying capacity as a serious thing. I'm always skeptical of the 'Malthusian fallacy' fairy tale of arguing a balance between the very real exponential growth of populations with some half concocted stories about the unlimited potential for efficiency improvements and technological progress (whose rates would also need to be exponential, otherwise once can simply ignore them)....

Interesting argument, in all, that there is a demographic peak about now, coupled with the possibility of affordin g resources, accounting for a distinct growth in demand for resources. Look to us, but look to China and India and Brazil as well.

[anne]

Also, it is not as though we have been conserving of resources all these years from an international perspective.

[Bruce Wilder]

ndd: ". . . what do you suppose are the odds of that happening?"

On the evidence, pretty close to one.

[Bruce Wilder]

roger: "It is really curious that nobody in the press seems to even ask whether our current foreign policy is one of the drivers of oil price increases."

Not curious at all. Because if you ask that question, then you have to ask if the Bush-Cheney foreign policy has aimed at, and intended, higher oil prices.

And, if you ask, someone sensible will say, yes.

An Administration dominated by people from the oil industry has deliberately followed a policy favorable to the oil industry. Shocking, I know.

[don]

Why anyone should be surprised by higher prices for all commodities puzzles me. A big part of the world's population is experiencing large income growth. They are using more energy and mined ores, and are consuming food in a way that greatly increases demand for grains (i.e., consuming the grains indirectly by eating more meat). Whether in future technology and production can catch up is another question. My guess is, the era of cheap food and energy is over, at least for a while.

[ndd]

Bruce Wilder:
You don't seriously think we're at "Peak Copper", "Peak Gold", "Peak Wheat" etc. etc. as well as "Peak Oil", do you?
That is the frame of reference of my query. "Peak Oil" is being used by some to proclaim that oil prices at any level will never ever go down, even in a countertrend correction.
My response, "Peak Everything?!?" is meant to query why then things (like wheat or copper) as to which there is no evidence that they are at peak-forever production are showing the same inflation-adjusted chart as oil.
If copper, wheat, steel, rice, blah blah blah aren't at peak-forever levels, then there is no reason to suppose you couldn't have a commodity bubble (meaning an unsustainable spike in prices), exactly as you had in the past (See the diary on "Scenese from the World Food Crisis" for a prior example).

[Cynthia]

Because fossil fuels power our economy, whenever oil (the King of the Fossils) soars in price, all other commodity prices soar, too. In fact, fuel (regardless of the source) is so vital to our economy that I wouldn't be the least bit shocked to learn that the Joule will replace the dollar as the world's reserve currency!

[ndd]

Cynthia:
What you post may explain foods, but I do not believe it explains industrial metals, e.g., copper.

[Cynthia]

Ndd,

Maybe I'm wrong, but something tells me that it takes a great deal of energy to mine and refine minerals and metals.

[anne]

Cynthia poses an interesting question of relationship.

Me, I have been reading about irrigation, after several suggestions, and not liking what I am reading about the need for and difficulty of sustaining and even increasing irrigation in coming years.

[Remind me to start storing corn flakes, but where?]

[Lafayette]

God's Will

rog: But maybe this is just a fair cost for the American public's apparent desire to be governed by idiots.

I disagree. They are not idiots, but very cunning and selfish people.

Rapacious greed has been a human attribute since time immemorial. BigOil has given its meaning an entirely new dimension. A group of devout individuals married the notion to God's Will. It is right and just that BigOil generate enormous riches.

God's Will then decided that what was needed was the presidency of the US. And, a gullible citizenry -- not too clever about how politics is manipulable -- followed in lock-step fashion.

Becoming immensely rich by maneuvering the price of oil (perhaps by starting a foreign war on false pretenses to corner an entire nation's supply?) is ... uh, just God's Will at work.

So, you see, everything is fine, really. We have nothing to worry about. Whatever happens is just the handiwork of God's Will.

Or some such absolute nonsense.

[Cynthia]

Anne,

Since all my plants are pretty drought tolerant, my water bill remains fairly low. But, I swear, if food prices keep going up, I'm seriously considering converting my ornamental garden into an edible one: a victory garden, if you will -- minus any seeds of war, of course!

[roger]

Lafayette, I think yours is a story about the cultural conditions that have shaped the leadership, and in part, I don't disagree. But it is not a leadership which, I think, has such genius that it can unfold a diabolical plan without a hitch over years and years. Such explanations always neglect contingency and scale and - really - the records of the players. None of their records is very good, in terms of planning anything.

For a long time, I've thought that the lefty blogs, which liked to howl about an impending war with Iran, were wrong - it struck me as long ago as 2005 that Bush couldn't, politically, afford the consequence of that war. I still think this is a true description of the Bush white house foreign policy. What didn't occur to me, however, is that, in the absence of war, the white house did think it could afford, and indeed, worked hard at creating, was an atmosphere of high tension between itself (plus Israel) and Iran. It was sort of the compromise solution, if you will. The Bush neurosis.

But this is where the law of unintended consequences comes in. It just might be that the atmosphere of tension has slipped out of the hands of the Bush white house. It might be the case that, even if they want to prevent a real bombing of Iran - by Israel -things have drifted to a point where, if Israeli hardliners want to do it, they feel they will get no resistance, and the Bush ultras will operate to overcome Bush's own probable resistance.

Now, I still don't think such a thing will happen, but - given this tense atmosphere, and given the lunacy of ratcheting up sanctions to take Iran's oil capacity offline at a time of wildly increasing oil prices - is it really so risky, as a dealer in oil futures, to bet that some incident this year will freeze the major supply of oil in the world from the Middle East? That, I think, would definitely be the result of Israel bombing Iran. I suppose it would depend on the extent of the bombing - still, the bet is that the drift of American foreign policy is sending familiar signals out, like it did before the invasion of Lebanon in 2006, and there's no resistance at all, or even discussion, from the Americans.

Of course, there are other factors driving up oil prices, but I'm only speculating about what is driving up the froth, the 30 -40 dollars from 100 dollars per barrel.

[don]

Roger -
A very informative post. However, I don't think much of the $140 oil is 'froth' caused by tensions with Iran.
ndd -
'Peak everything' does not need to be the explanation, in the sense that we are running out of everything. Rather, suppliers may have been uniformaly stupid across industries when setting long-term capacity. (They can perhaps be forgiven for failing to pick up on the food-energy nexus via ethanol. That would have required taking into account some hard-to-forsee politics.) In any event, it is evident that either speculators are stupid today, or suppliers have been stupid in the recent past. I think suppliers (and consumers) are being informed by speculators as to the appropriate path of prices.

[roger]

Don, I do. I think the model to apply about oil prices right now is an insurance model. Are the homeowner insurance prices for beachfront property in Florida correct? Notoriously, those prices have increased so much, as of late, that homeowners can't afford insurance anymore. Why? After all, is it really somehow riskier now than it was ten years ago, owning a home in Florida?

The risk sensitivity here seems to be to more extraordinary storms, a la Katrina. Those homes, too, are more expensive. I think insurance models readjusted after extraordinary payoffs to reach their current model. And I think that it is risk sensitivity one ought to ask about, vis a vis the futures prices. Is the risk just that supply won't keep up with demand, or is the risk that there will be a shock to supply?

After all, the futures market is supposed to operate as insurance for oil suppliers and customers. There is supposed to be information there about expectations for the future.

[anne]

http://www.nytimes.com/2008/06/26/garden/26garden.html?hp&pagewanted=print

June 26, 2008

Provence in a Plant: Just Inhale
By ANNE RAVER

AN herb that smells as good as lavender simply has to be grown, even though it's not a native plant. I feel a little guilty saying this, because lately I have been so vigilant about planting natives, to feed the insects and birds that evolved with them. But lavender, which hails from the Mediterranean — as do oregano, bay, thyme, rosemary and so many other herbs — is one of those fragrant plants that settle in your soul....

[I will try!]

[roger]

Don, that was probably too short a response.

It seems to me that the question of whether we are seeing a speculative bubble doesn't ask the right question first - which is not, do we have a model that can redescribe things in orthodox terms of demand curves, but - why would a futures trader find the price of 138 dollars per barrel plausible?

Those traders surely have not only read about the world slowdown, but put those projections in their models. Nobody thinks that demand will drop this year or next, but everybody thinks it will increase more slowly.

There might be other variables on the demand side, but really, I think - if we hypothesize a trader who thinks that it is plausible that oil will cost $138+ - his focus would be on the supply side. The peak oil people like to say, ah, this is just evidence of peak oil. But they also like to complain that orthodox people don't believe in peak oil. Somehow, though, that belief has gotten through to the trader. Now, myself, I think the supply side should be looking up - after all, Iraq should be coming on line with more oil - and last year there was a vast find offshore in Brazil, and a big find off Trindidad Tobaggo. I don't see any peak oil information moving our trader.

So, how about my hypothesis? I've already complained that the newspapers ignore the security aspect, so the trader wouldn't be moved by newspaper stories. But how about the information outside of the newspapers - the information conveyed by, say, people on the ground in the middle east?

I think there is a much livelier conversation here. If I were assessing events that could severely - even if temporarily - lower supply, it would be the atmosphere of conflict in the Middle East.

The question is, how sensitive is trading to risk of that nature? One answer is to look at how the markets responded to the temporary downing of oil coming in from the gulf in the aftermath of Katrina. This would give us a risk sensitivity range. I think that range would show that the froth could easily come from fears of conflict. I don't think the runup is about risk on the far horizon, but rather, increased risk in the short term. This is what I hypothesize makes the trader think that oil is still not overpriced.

[Lafayette]

roger: to bet that some incident this year will freeze the major supply of oil in the world from the Middle East?

I suggest that you give some perspective to internal Iranian politics and particularly economics. The country's economy is a basket case. It depends heavily on oil to feed the population and give it a lifestyle that grossly resembles neighboring oil-rich countries, meaning this: By no means can it, on a whimsy, withhold oil for very long and not feel a real internal political kickback.

The Mullahs risk this kickback if they play their foreign policy cards too strictly. Both North Korea and Iran play the atomic card for just about the same purposes -- to obtain concessions in any negotiations.

It is not relevant, but drugs are rampant amongst the youth in a country with extremely high unemployment rates -- which cannot be known since the government is faking the numbers.

For these reasons, a surgical devastation of uniquely uranium enrichment plants would probably pass, since they do not involve collateral damage to the Iranian population -- as do so many strikes in Iraq. And, no one doubts the Israeli Air Force's ability in the matter. (Aside from some questions regarding their ability, with current aircraft, to get to the target and back without the USAF refueling the Israeli bombers.)

The Mullahs will be deprived of their atomic option, but the Iranian population will be untouched.

Frankly, I hope this does not happen. But, if it must, it will. It is inconceivable that the West allows an Iranian Regime to possess an atomic bomb. And, most importantly, I doubt very much the Saudis would want this to happen either.

[Lafayette]

Typo: And, most importantly, I doubt very much the Saudis would want this to happen either.

And I doubt the Saudis would want the Iranians to have an atomic capacity either, which would upset definitively the balance of power in an already highly volatile part of the world.

[hari]

The Marquis is utilizing outrageous (ill)logic on impact of nucler facilities by IDF bombing....also forgetting Perisan Kingdom/Iran today dates back +3000years of civilization of a major nation-state in the eregion compared to a desert kingdom with nothing more than a non-renewable *black gold*.

[Lafayette]

hari: The Marquis is utilizing outrageous (ill)logic on impact of nucler facilities by IDF bombing.

Perhaps. But let's see your explanation of how that is likely.

The targets are the centrifuges that are "spinning" the uranium isotope from which the bomb will be constructed. Attacking where it is stocked, probably not far from where it is produced, is just a matter of precision bombing.

The resulting explosion would be "atomic", dispersing radioactive uranium over a large area, like a dirty bomb. If the storage is in a surface area. If deeply underground, it will be contained there.

But, this area is not located in downtown Tehran. Which is not a bad idea, because this is the tactic that Hussein employed to protect certain installations. However, even in downtown Tehran would not defray the Israelis, or Americans, from attacking. And, it would leave a large part of Tehran uninhabitable for a long while - until cleaned up.

Frankly, all these contingencies makes one think, plausibly, that the Iranians now exactly what they are doing. And, it may be that they know that an atomic bomb is not in the offing. They could just be telling the truth when they say they have no intention of making a bomb.

Just the menace of one is often enough sufficient as a bargaining chip.

[Lafayette]

AM: Net out of pocket cost today: 0

What if a sequestered down-payment requirement on such contracts, of say 20% of the total -- would this dampen speculating on futures contracts?

The cost (to the buyer) would be in sequestering the 20% in down-payment (at a holding rate of 0%) until delivery of the commodity and the remainder is paid. A zero-percent interest rate on sequestered funds is a "cost" of forgone interest-income that would have been earned if the funds were employed elsewhere. And, if the spot-contract was made binding and non-swappable or non-transferable.

Would this be sufficient to dampen speculation since it is apparently based upon "zero operational cost"?

[Lafayette]

fI don't know about the rest of the world. But France is bringing in bumper crops. Right now, the mill just down the street from me is going into overtime, processing into flower the Spring Wheat, which will continue through the summer and into the fall.

This may be anecdotal and restricted to France, but I wonder if Europe and the major producers, such as the Ukraine, wont be seeing similar yields.