Global Trends by Martin Khor

Monday 23 June 2008

Oil and food prices continue to rise

The prices of some foods and of oil moved to new record levels last week, which is bad news for consumers and producers alike.  There is a dispute as to the causes and thus also the solutions.

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There is so far no limit to the rise in food and oil prices, a situation that is leading many consumers and also producers to a point of where they are carrying an unbearable burden.

Last week saw more bad news on the price front.  The prices of soyabean, corn and some meats jumped further to all-time high levels.  The oil price had slipped earlier in the week but on Friday it rebounded by US$4 a barrel to its record US$140 a barrel.

Food is the most important consumer item, and price increases hit poorer people especially hard since a higher share of their household budget is spent on food.

Food prices have shot up due to many reasons, and the rise in oil prices last week will put even more pressure as oil is an important input in producing and transporting food.

Public protests have spread to even more countries as prices of imported and local food have jumped, and now many new protests have been held over the rise in petrol prices, including due to the reduction of government subsidies. 

Malaysia is one of the countries with the highest rise in petrol prices, after the reduction of the oil subsidy.

Malaysia was also mentioned in a front page Financial Times article last Saturday as among the nations in which the price increases are becoming a “security issue.”

The article quoted an unnamed Washington official as saying:  “What we have been watching is behaviour that indicates China, India, Vietnam and Malaysia simply can’t bear the burden on the central budget and that the medium to long term confluence of oil and food prices is just too much….It is leading to a real security issue where the streets are talking to the president.”

The Western leaders are now upgrading the food and oil crises to the status of a security concern since the record prices are destabilizing key developing regions, said the Financial Times.

As families struggle to make ends meet, and firms face rising production costs that may threaten their competitiveness or survival, raging battles are being waged over the factors causing the rise in prices of both food and oil.

At the recent FAO food conference in Rome, political leaders as well as citizen groups were arguing over who or what should be blamed for soaring food prices.  The rising cost of oil and the drought conditions in many regions were the least controversial factors mentioned.

But while the leaders of many countries pointed to the displacement of crops for food by crops for biofuels, some countries like Brazil and the United States disputed that this was a significant factor.

Some American leaders seemed to point to people in India and China increasing their food intake as the countries’ incomes improved.  Angry Indians in turn pointed out that people in the West have much higher food consumption, while the FAO director general spoke of the rich countries spending billions treating obesity as an ailment while not providing funds to help the malnourished in developing countries.         

Many developing countries also criticized speculation in the commodity markets for driving up the food prices.

There is even more contention over the factors driving up oil prices.  The US and other Western countries seem to be blaming oil producing countries for not increasing their oil supply to meet the increased demand.

 The US energy secretary Samuel Bodman said that "production has not kept pace with growing demand for oil, resulting in increasing prices and increasingly volatile prices.

Many members of the US Congress are also sponsoring a bill to declare the activities of OPEC (the organization of oil exporting countries) illegal.

There is a feeling among the developed countries’ politicians that oil exporters are somehow deliberately keeping the oil price high so that they get more revenue.

However the exporters say this is an unfair accusation. Some countries, like Saudi Arabia, are saying they also are not in favour of such a high price.  Saudi Arabia has increased its oil supply in May, and has just announced it will raise output again.

Saudi Arabia and some other oil exporters, as well as several NGOs, put more of the blame on speculative activities of hedge funds and banks.  These institutions anticipate even higher oil prices in future, and they have placed bets accordingly in the oil market, thereby pushing the prices even higher.

To counter the attack on OPEC and to explore the real causes of the oil prices increase, Saudi Arabia hosted an international conference on the oil price rise on Sunday in Jeddah.

At the meeting, a clash of views on the causes of the crisis can be expected. Whether the meeting leads to some concrete action remains to be seen.

One good thing arising from the spectacular jump in the oil price (more than doubling in the past year) is that it induces firms to be more energy-efficient, and it makes the promotion of alternative energy sources such as wind and solar easier.

That is important.  Meanwhile, however, the protests against more costly food have now spread to protests against more costly oil.  There are excessive profits being made by oil companies and speculators, while oil exporters are also reaping super benefits.

Speculation should be curbed now, through better regulation.  The oil companies could be subjected to a tax on windfall profits.  And the oil exporting countries should be prepared to use some of their increased wealth in helping poorer developing countries that import oil to ease their extra burden. They can also increase their spending on developing renewable energy.