Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Saturday, January 19, 2008

Fuel and Biofuel

This morning's New York Times has an article I think everyone on this blog should read. It reports that food shortages around the world are growing dramatically in one particular area: food oil. I had no idea that the price of cooking oil was rising so rapidly in Asia. The particular focus of the piece is on palm oil, a staple of Southeast Asia. Apparently the demand for biofuels and the US cutback on "transfats" (the bogeyman du jour of American nutritionists, who used to promote margarine based on the same sort of poor science) has led to a massive diversion of production of soy and palm oil from food to fuel, causing soaring prices.

It was long thought that developed nations were constrained in their ability to consume the agricultural production of the third world by the number of calories their population could consume. (For the last 25 years, the US has seen that it is possible to increase the number of calories per person where government agricultural policies produce an excess of corn: it is made into high fructose corn syrup and sold at rock bottom prices. Obesity is the natural result). The growing tragedy in the third world is a new fact, that the food needed by the poor can now be sold instead as a consumable commodity with unlimited demand (energy) in the developed world. Previously in history, the only way for this to happen was to divert acreage from food production to other sorts of agricultral production, such as cotton, coffee, tea, or trees (or even opium and coca). But demand for such things never matched the demand for a commodity so fungible as fuel.

Of course, this is not to say that biofuels are bad. Biofuels were intended to spare the environment from global warming and the ill effects of petroleum-based economics. Unintended consequences can be horrid, however. Few dreamed that biofuels would literally take food out of the mouths of starving people, as now appears to be the case.

In "The Omnivore's Dilemma", Michael Pollan points out that we use a huge amount of petroleum in the form of fertilizer, and that this is what the "green revolution" was in large part about. In other words, we were previously eating petroleum products (in a memorable phrase, he says that food in the USA is primarily a "petroleum byproduct.") He make a compelling argument that biofuels produced through application of large amounts of petroleum-based fertilizer does little to reduce carbon emissions. All it really does is divert agricultural production. Our Iowan friend here can speak of ethanol. The US issue is not soy diversion, but corn diversion, btw. We don't see rising prices here for food, since the US was overproducing (for domestic consumption) anyway due to food subsidies. Corn prices are rising, but food prices remain rock bottom in US terms (fast food "value" meals have been priced at about $5 for more than a decade, despite a steady 3-4% inflation rate that has caused everything else to inch up in price by 30-50%). Of course, each such $5 "value" meal is priced far above what a couple billion poor people can afford.

What can be done? The conservative/libertarian/free marketeer answer is "do nothing." Or one could blame government programs in the developed world (and Brazil, for example) promoting biofuels for the problem. The "free market" answer is to suggest that if no government anywhere interfered with (subsidized or banned) any kind of agricultural production, the market would sort it out for itself.

That's wishful thinking. We cannot as a planet rely on a "free market" that would lead to sustained dramatically higher food prices for the poor. Imagine, for a moment, that food production drastically reduced in favor of biofuel production until prices finally rose for food high enough to make food production worthwhile as an alternative. That scenario, to which we are headed, is a disaster for the poor. Demand for food is relatively inelastic. We must consume a certain # of calories to survive, but can only consume so many calories each day per capita (note the obesity issue, above, an example of the, well, limited elasticity of the market). That demand must be satisifed for humanitarian, or at least political reasons. Hungry people are the major source of political instability in the world.

Unfortunately for the free market theologians, the solution here will require government action in addition to free market prices. Simply put, we must ensure that a certain amount of land is devoted to food production even though biofuel production would be more profitable.

The other problem, not addressed by the NYTimes, is that loosening of strictures on agricultural markets (i.e., free trade) means that, for example, a Mexican farmer who used to supply corn cheaply to his local market now grows tomatoes for export. This is already a problem in Mexico, as corn prices have risen and there have been little-publicized tortilla riots in poorer areas. That problem would grow worse if productive land in developed countries actually went fallow (or was devoted to specialty crops like fine cheeses or wine) for economic reasons, and we instead bought our food from poor countries. That would be, however, the natural result of eliminating subsidies on food production in th edeveloped world.

The problem is rather like the shame of a rich person cleaning out the Salvation Army Store because it is cheaper, leaving no clothes for the poor. Or middle class people taking government cheese. Such things would interfere with the intention to produce below-market goods for a segment of the population that cannot afford them. (Note that the Salvation Army prevents this, not so subtly, through shame and stigma attached to shopping there, and the government prevents it by making you wait on long lines and, again, feel shame and be stigmatized - while this hurts the self-esteem of those who must, it prevents the market from sucking up these underpriced goods). The failure of rent control is a similar problem, btw. The idea of rent control is to make sure that lower-income people can afford a home; that is severely perverted when high-income people (all over Manhattan) take advantage for themselves. The difference, of course, is that housing is not a consumable commodity like food. It is more like capital. But I digress...

The model that RBR has proposed for agriculture around the world - that poor nations would prosper by selling food to the rich who are selfishly insisting on producing their own through subsidies - reaches its limit where the poor nations need the food but are simply outbid, then left to starve. If we accept that the free market can lead to food prices above levels needed for subsistence, then we need to find some way to alter it.

The obvious solution to this problem must include, dare I say it, a form of agricultural subsidies in the third world and some trade barriers to prevent diversion of food production from domestic consumption to foreign export. Something must be done to ensure continued production of food at low prices for poor nations. Put another way, the highest and best economic use of the land is not, in fact, its highest and best social use. Where these diverge, the free market and the invisible hand cannot accomplish their magic. Are direct subsidies to the world's poor the answer, so they can participate in the market with more money in their pockets? Is that inflationary? My head hurts.

What are the Citizens' thoughts about this complicated subject?

13 comments:

The Law Talking Guy said...

I should add that one result of soaring agricultural prices should be obvious: cutting down of the tropicals rainforest for food production or (worse) biofuel production.

Can we simply say, if the poor have no bread (or no soy), let them eat cake?

And yes, I started writing this piece at 5:30am. It's a holiday weekend and I choose to celebrate by sleeping and blogging when I want.

Raised By Republicans said...

I'll say it. Biofuels are a HUGE mistake not just because of the misery that LTG points to but because we will NEVER combust our way to solving the greenhouse gas problem or our dependence on imported fuels.

Biofuels are a giant cash transfer from the world's poor to the petro-chemical companies that process and sell the junk.

Biofuels are pure idiocy they have no redeeming qualities. We should abandon them entirely and devote the resources to research on safer forms of nuclear energy, batteries and solar generators.

LTG is also right that this is having a similar effect as ag subsidies. Poor people in the developing world are having misery imposed on them by a policy - and an ill advised one at that - in places like the United States...and let's be clear...our friends in other developed countries are also jumping on the idiotic biofuel bandwagon.

Dr. Strangelove said...

Aren't there biofuel subsidies in the US? Is that part of the problem?

USWest said...

NPR has covered this topic as well. What gets me is the rapidity with which biofuels have taken off and how quickly the effects have been felt.

Food is going to be a huge problem, even for us. California has lost a lot of Ag land to developers. And that will mean a growing population that will depend more in imports to eat. That raises dangers in and of itself.

The problem is even more complex than you think, LTG. The weak dollar isn't helping. Saudi Arabia is a case in point. The poorer people in rich nations like Saudi Arabia are going without bread or vegetables. The sister of a Saudi friend of mine claims that tomatoes are up to about $10 a pound. She can't buy them, and they are middle class. Food inflation is a huge problem- so huge that the Saudis tried to protest recent price hikes to milk by staging a five day boycott on dairy products. The boycott was a complete failure. Not enough people participated- this time. The price hikes reveal the Kingdom's dependence on food imports and the effects of a weakening dollar on the domestic economy. The Riyal is pegged to the dollar. And the US has successfully pressured Saudi to continue its currency policy even though it is hurting the Saudi people.

The Royal family cannot afford to let its subject suffer much because the House of Saud hold on power is less than certain. If too many people can't buy food, say good bye to one of our most reliable oil suppliers. This will only compound the problem because someone will say, "more biofuel" to replace the oil. And then we are off to the races.

Good post, LTG!

Raised By Republicans said...

Yes, part of the problem is huge subsidies for bio fuels.

There is no danger in importing food. That is a red hearing put forward by supporters of Ag subsidies. When the UK abolished the Corn Laws back in the 1840s many predicted Britain would suffer in wars due their dependence on imported food. Britain has fought 2 major wars since then (WWI and WWII) and in both food blockades were attempted by the Germans and in both the blockades failed and Germany was defeated.

The US is nearly impossible to blockade. So the "importing food makes us vulnerable" argument is completely without basis.

As for the loss of agricultural land in California...it would be better if it returned to its natural state - desert - but removing it from subsidy sucking ag production is at least a movement towards rational markets. Most of California should not be in ag production anyway.

Dr. Strangelove said...

The "free market theologian" side of me says: remove all the subsidies for biofuels and the problem will go away. I know that's not enough, but it is the only significant step I can think of that seems a safe bet. Whenever possible, don't mess with the free market. That's my theology.

To me, the "importing food makes us vulnerable" argument is not so much about hostile action against the US as losing an important hedge or buffer against economic downturns. If we imported most of our food, the devaluing dollar would be especially disastrous for the poor in this country. Any major disruption of the trade system would also hit home real fast. We also would have less control over quality and crop type.

Anonymous said...

The replacement of trans fats with palm oil is not going to solve America's collective weight problem.

Trans fats naturally occur in a number of foods (beef, eggs, many dairy products). The use of trans fats in processed foods is not ideal, but I'm willing to bet that in 20 years, nutritionists will trot out a "breakthrough" study showing that palm oil is just as bad for you as trans fats.

While food fads have long been part of the American experience (Corn Flakes, anyone?), it's terribly unfortunate that our latest Puritan food craze is going to be balanced on the backs of people in the developing world.

-Seventh Sisiter

The Law Talking Guy said...

Dr.S - part of my post was to suggest that leaving things to the free market will result in underproduction of food. The reason? Poor people in the third world will be outbid for precious food resources by wealthier nations who have the money to buy the food to (literally) burn. Poor people cannot express their demand through paying more, so their demand gets trampled. It's okay if the market won't provide cars or TVs for the poor, but food is different. Food must be universally provided in sufficient per capita quantities. Until the recent biofuels craze, the wealthy were largely limited by their own stomachs from raising the price of food through increased demand. The only mechanism in the 19th century for depriving the poor of food was to convert areas of food production to cash crops for export, but at the time there was little effect on food prices because of the much lower population. There was excess land. This is no longer true.

So my point, Dr.S., is that I don't believe the free market can solve this problem - it is creating the problem.

The Law Talking Guy said...

Subsidies for biofuels are superfluous with $100/barrel oil. The oil price, not the subsidies, is driving consumption.

Raised By Republicans said...

LTG,

You are blaming the market when well meaning interventionist regulations are the real cuplprit.

If the market were really left on its own, biofuels would fade away. But governmetns pour subsidies, tax breaks and other supports into them making them profitable but only artificially so.

Not everything that has to do with pricing is the result of a free market. Especially not when the prices are largely set by governments.

Your concluding statement about the superfulousness of subsidies does not make sense. Biofuels are simply not profitable - even now, without the tax breaks and subsisdies. And even if they were, the subsidies would make them even more profitable than the market would which would make the problem to which you allude even worse.

The Law Talking Guy said...

I believe that even without subsidies, biofuels are cheaper than oil. If not true now, you must agree that it is entirely possible for biofuels to become cheaper than oil when the price of oil gets high enough, whether or not there are subsidies for biofuels. Then the problem of biofuels eating up the world's food supply will be occurring without government subsidies.

Raised By Republicans said...

But EVEN IF biofuels are cheaper than oil (probably not true now), subsidies will make them EVEN cheaper. Thus exacerbating any trend towards the situation you point out.

But in anycase, we know that biofuels as currently made, are horribly ineffecient ways of generating energy. They only make money because of the government internventions.

And what will any of it get us? If we have to import the corn for the ethanol, we haven't "reduced our dependence on foreign fuels." If we are still burning the stuff we are still polluting even if it is slightly less polluting.

There is simply no good reason to look at biofuels. We are far better off taking all that subsidy money and putting it into battery research and ways of generating renewable electricity.

The Law Talking Guy said...

I agree, RBR, that biofuel subsidies are bad. But imagine that, tomorrow, all oil wells ran dry. How would we stop rich nations from literally burning the food that billions of others need to live? Wouldn't that require some government action of some kind?