Oil Prices, Climate Change and Food

Yesterday saw lorry drivers in Britain lobbying Parliament over the price of fuel. While from an economic prospective, I can understand that people are feeling the pain of the increase in the price of oil, but there is actually nothing that government can do.

I have watched the situation carefully, trying to understand what is really going on. What was perplexing was simply that when the price of oil started reaching new and record highs, it was the forward price that was rising. That meant oil for delivery in six weeks was at $120 to 130 per barrel, this price for immediate delivery stayed at $75-80 per barrel. While this has now changed upwards, the oil companies profited from this for over eight weeks selling petrol at the price it would be in six weeks time, while they were only paying for it at the $75-80 per barrel mark.

While this profiteering by the oil companies was a factor driving this it could not explain the whole of what was driving the market. The other aspect that doesn't make sense is that while the current global use is close to the current output, there is still more production than use. On the classic supply and demand principals of economics there is no logic to this.

There is a new factor that has come into play, that of the speculators. While there has always been some speculation in the commodity markets, with the rich and the super rich no longer making money from property vast sums are being ploughed into commodities like oil and wheat. However, while this is an important aspect that is driving the price, it is not the only factor. If it were then they will get their finger burnt when this bubble bursts. As it will.

The real difficulty is that of politics and the lack of political will to tackle climate change. Part of the political factors is the Iran question. While I personally don't like the idea of Iran having nuclear weapons, the rhetoric that the US government is using, is making the oil producing states and the emerging economy of China very nervous as they fear that Bush could suddenly rack this up to war.

While I personally doubt that even Bush could be that stupid, I can understand the rest of the globe becoming wary about this and the effect upon oil supplies. Thus some nations are increasing their stocks of petroleum.

The other political aspect is the lack of action regarding Climate change. This is the part that really makes my head hurt trying to understand the logic here.

There is a lack of investment in refining capacity, and the oil companies don't want to make that investment because they are worried about immanent sea level rise. They don't want to build on or at the coast where refineries have traditionally been constructed, as they would be lost when the seas rise. Nor do they want to build inland at a greater elevation, as that would mean the oil industry is acknowledging the reality of dangerous Climate Change.

Even looking at all these factors together still only provides an incomplete picture. But before we look at the other factors, I want to deal with three issues, not least the price of Diesel. The truck drivers protest and lobbying of parliament has provided a useful hook to examine the problem of rising oil costs. But the price of diesel is actually a symptom and not the problem. The reality is that there are to many trucks on the road. That's not a political or environmental statement but an economic one. There are twenty five percent more trucks than there are loads to carry. Even if the fuel costs were stable or even falling, there still would be businesses failing. The difficulty is that the price diesel is accelerating the failure of businesses that are failing anyway. It is painful, that I understand, but nothing can or should be done to keep lorries on the road.

The other area where the price of diesel is hastening the end of a moribund industry, is fishing.

For the last twenty years in Europe, we have continued taking fish from the breeding populations of the fish we use for food. It has also been happening all around the world, but here in Europe we actually have good data that shows what needs to be done. As during the Second world war when fishing was not possible particularly in the North Sea, fish stocks recovered and when fishing resumed fish was abundant. The only way of ensuring a fishing industry in the future is to stop fishing now. Not reduce the catch but a complete cessation to fishing and that has to be for ten years.

Fishermen will wail in protest at that, but if not there will be no fish to catch in ten to fifteen years as we are currently harvesting the breeding stock. The increase in diesel costs means that the boats can no longer afford to travel the great distances searching for the fish. They are having to search for fish that are not there. When they do catch fish, they are smaller, often not even having reached sexual maturity. Again this increase in the price of diesel is not the problem it is and has been the industrial scale harvesting of the seas that has eliminated the fish stocks. There are also additional factors such as warming seas driving the remnants of the fish populations further north, but the longer that fishing continues the faster the fishermen will kill their industry.

The last point regarding oil prices is that of speculation. The immorality of the rich gambling on the price of oil and foods, beggars belief. They are making money off poor and vulnerable people. Here in the UK the price of heating oil will be around £1200 ($2000) per delivery this winter at current prices. In many rural areas where there is no gas, that will mean the poor, the elderly will suffer, as in cold weather that delivery would only last four to six weeks. I fear that people will end up dyeing from cold this winter. I am saying this now as I will rage when it happens.
However, the speculation on the oil price is only part of the picture as it is the speculation on foods that is really what is driving the up the coast of oil. I can see the puzzled looks from here, but as the value of crops like wheat and maize go up, more farmers are planting them. That means there is and will be, a greater demand for diesel to power the tractors.

It doesn't end there, as our chemical based farming is reliant upon fertilizers that are made from oil. It is in fact this factor that is what is really driving up the price of oil.

We obviously do need to feed the world, but we have become so fixated upon the chemical inputs to grow crops that we are failing to utilise the traditional methods of feeding the soil.

This is why we are all having to pay more for oil and food.

It is a complex picture, and it has taken a while to unravel what is really happening, but this is all the result of our addiction to oil.