Cielito Habito
Philippine Daily Inquirer

MANILA, Philippines–Our inflation rate has gone double-digits–something we haven’t seen since the early 1990s–and we haven’t seen the worst of it yet. While rapid price increases hit all of us, the sad fact is that it hits the less fortunate even harder. This is even more so now, with food prices rising the fastest, and we all know that the poorer one is, the larger the portion of one’s income that is devoted to food and other basic needs.

Is there any relief in sight? Since the current inflation episode traces to surging oil and food prices globally, the question really boils down to what’s in store for oil and food prices. I wrote recently on the oil price debate (“Ready for $200 oil?” NFL 5-26-08), and there are more angles to the debate that we can further explore. There is somewhat less divergence of views on where food prices are heading. The overall picture I get doesn’t look very pretty.

Supply and demand

When crude oil prices began rising last year from the $60-$70 a barrel range that the world had begun to get accustomed to, one analyst wrote: “With global economic growth obviously slowing, demand for oil is sure to weaken in its wake, suggesting softer prices to come. While the $100 level may yet be achieved, it’s not likely to last long. We expect an average of $66 next year… $2 below the 2007 average…”

How wrong he was, of course, and yet he was far from alone in his optimistic assessment then. Even now, there continue to be those who forecast oil prices to collapse in the foreseeable future, arguing that oil prices have changed much more drastically than the real supply and demand situation has. The implication is that the recent oil price surge must simply be the product of excessive speculation or outright manipulation, rather than fundamental supply and demand forces.

But this question deserves a closer look. Has the supply and demand situation indeed not changed that much to warrant the recent oil price movements? Isn’t the market reflecting rational responses not just to the current supply-demand (im)balance, but to what it is actually shaping up as well?

Dominated markets

It has been asserted that it took 125 years for the world to consume the first trillion barrels of oil, but at the rate we are now going, we will use the next trillion within 30 years. And it’s very easy to understand why. With zooming economic growth from just two countries (China and India) that account for well over a third (37 percent) of humanity, demand for oil is outstripping supply. Add to that yet another populous nation, Indonesia, where car sales reportedly zoomed 24 percent last year despite rising oil prices. One sees how surging world oil demand is actually being fueled (pardon the pun) by just a few major players. And because of their huge populations, not even an economic slowdown is likely to dramatically curtail their oil appetites.

On the supply side, world crude supplies are similarly dominated by a few players. Trouble is, the supply outlook from the most prominent ones (Saudi Arabia, Iran, Iraq, among others) cannot be reliably anticipated, for reasons I need not explain. And current American saber-rattling against Iran won’t help the situation any.

And then there is the raging debate about whether the world has reached or is soon to reach “peak oil,” and therefore could anticipate supplies to slow down and eventually decline. But whether or not one believes that there are still huge reserves of oil under the ground or under the sea, few disagree that the remaining reserves are becoming more technically difficult, and thus more costly, to extract. Thus, even if the oil was there, these remaining reserves will only be economically feasible to extract at extremely high prices, the likes of which we are seeing now.

Food prices

So much about oil; what about food? It was a global food price spike, after all, that pushed domestic food prices to double-digit growth as early as three months ago. As many of us predicted, world food prices have since moved down relatively quickly. It was easy to see that the heavier planting by farmers encouraged by higher prices (something also attested to by farmer leaders I’ve talked to) would reverse the price climb just as promptly. So the direction we can expect sooner or later is downward.

But don’t rejoice just yet. The UN Food and Agriculture Organization (FAO) warns that we should not expect food prices to return to their former low levels, for three reasons. One, costs of farm inputs have escalated, and many of them in fact come directly from petroleum (e.g., fertilizers, pesticides). To the extent that high oil prices are here to stay, as we argue above that they indeed are, then food production costs, and therefore prices, will still be higher than before. Two, the food-surplus countries are increasingly using up their own production due both to rising incomes and populations, leaving less for them to export. And three, the rest of us who are net food importers likewise need more and more food to support our growing economies and populations.

Times have indeed changed. And the call of the times points to making some fundamental changes in our consumption habits, and ultimately, our lifestyles. And as we do, let us not forget about the growing numbers among us who do not even have much of a lifestyle to speak of.