Expensive Oil = Expensive Food
by Erling Moxnes
Erling Moxnes (Norwegian, born 1952) is a professor in system dynamics at the University of Bergen (Norway). He has a PhD from Dartmouth College (USA). He has published on resource management and economics with a focus on misperceptions of dynamics and on policy.
Food Markets If There Was No Biofuel
Even without scaled-up biofuel production, the world today is unable to feed its population. The FAO estimates that close to a billion people are unable to pay the price for all the food they need; they are chronically hungry. But this is primarily a question of distribution.
There is enough food around to feed everyone adequately, but the poor cannot afford to buy their fair share. Population growth leads to increasing demand for food. Likewise, economic growth allows people to increase per capita food intake and to replace cheap staple foods such as grains, tubers, legumes, and seeds with meat. Increasing demand stimulates increases in production. Under such conditions, the FAO expects the supply of food to increase up to 2052. But determining how much the food will cost compared to today is not so easy.
The land area now used to grow crops could probably increase by 30%. However, marginal costs will increase with the use of less productive lands and increasing losses of biodiversity. Those increasing marginal costs imply that one cannot simply extrapolate the declining food prices of the past. Traditionally production costs declined as labor productivity increased in agriculture. This explains the recent long historical period where food prices declined relative to wages.
New agricultural technologies, new plant varieties, aquaculture, and education will help prolong this green revolution. Pulling in the opposite direction, though, higher energy prices will increase the costs of fertilizers, pesticides, plowing, irrigation, and transportation.
Which of the above factors will dominate in the future is hard to predict. Potential climate change adds uncertainty, both because the weather influences yields and because mitigation policies could lead to higher energy prices and restrictions on emissions of methane and nitrous oxide from agricultural production.
Markets for Fuel and Biofuel
While there are limits to how many calories each of us can eat, demand for fuel—such as petroleum liquids, alcohol, biodiesel, and other types of transportable energy—tends to increase endlessly with income. For a long historical period fuel prices declined relative to wages because of discoveries of giant oil fields, increased scales of operations, and technological progress. Again, one cannot extrapolate this historical decline to future prices, because we will soon have depleted the cheapest oil resources. Conventional oil production has probably peaked.
The availability of fossil-based fuels may still increase for some time, through new discoveries and because it is possible to convert coal and gas into liquid fuels. But conversion adds costs, and eventually costs of coal and natural gas will increase as these energy sources have to be brought in from less accessible locations. Probably the world will see a major transition from oil toward methanol produced from shale gas and conventional natural gas in remote locations.
Thus, in the coming decades there will be long periods with high oil prices. High prices will be needed to finance costly capacity expansions and structural change, and to force consumers to reduce their dependence on fossil fuels.
The Impact of Biofuel on Food Prices and Hunger
First-generation biofuels are made by converting normal agricultural outputs like corn, sugar beet, and sugarcane to ethanol. Over the last twenty years, research, development, and experience have led to efficiency improvements and cost reductions. Estimates suggest that biofuel costs range from around USD 45 per barrel for the cheapest sugarcane in Brazil to around USD 100 per barrel for corn and sugar beets in the United States, and around USD 120 per barrel for the more expensive wheat-based ethanol in Europe. More experience and larger scales of operations will lead to further cost reductions. Similar to petroleum, considerable use of fuel in the production process makes costs escalate with fuel prices.
Many users of fossil fuel can use biofuels with no or limited adjustments. Therefore prices of biofuels are strongly coupled to prices of oil. Note, however, that demand for fuels is much larger than demand for food. Measured by energy content, current world oil production is about five times larger than world agricultural production. Assuming that the conversion of food to biofuel involves a loss of some 40% of the energy content of the food, the entire world food production could not replace more than 12% of current world oil production.
New plant species could raise the percentage somewhat, but if more than 12% of current world oil production were to be replaced, hardly any food would be left for human consumption. Future biofuel expansion will depend on the difference between fuel prices and biofuel production costs. Long periods with fuel prices exceeding costs will lead to a long-term buildup of biofuel production capacity. In periods when fuel prices drop below biofuel production costs, investment in new plants will stop, while production in old plants will go on as long as current fuel prices cover operating costs.
Increasing biofuel production will cause feedstock and food prices to rise, and this will eventually stop the growth in biofuels. Even though biofuel production is and will remain a small percentage of world fuel production, it certainly can cause higher food prices. The potential for increased agricultural production is considerable compared to human food demand, but small compared to the potential for increased biofuel demand. As limits for agricultural production are approached, marginal costs will increase and lead to high food prices also in the long run. Many poor people will not be able to pay the higher prices for the staple foods they rely on for survival. Hence, biofuel production could easily expand at the expense of food consumption.
Enter the Government
What could keep this prediction from coming true over the coming decades? Development of new ample sources of fuels could limit fuel prices and prevent biofuels from taking off. However, it takes decades to develop new technologies, reduce costs, and expand operations. It also takes decades to improve energy efficiency and to foster cultures where energy is less important. Energy-consuming machinery, buildings, and infrastructures have long economic lifetimes. Much of the man-made capital of 2052 has already been produced.
International agreements to reserve agriculture for human consumption and to prohibit production of biofuels from agricultural products will require major changes in people’s attitudes toward land as private property and toward the institution of the free market.
Such attitudes will be particularly hard toward change in nations that are more than self-sufficient in food while they depend on imports of increasingly costly petroleum.
Nations with limited agricultural production are more likely to prohibit local production of biofuels. China has implemented restrictions on the use of corn for ethanol, and Indonesia has raised export duties on palm oil to secure local supplies of cooking oil. However, such policies will not always be enacted in time to be effective. In previous food crises, poorly managed countries have exported cash crops out of regions with hunger.
A redistribution of incomes to enable poor people to compete for food is also unlikely at the international level. But it can be done nationally, to avoid revolution caused by hunger. Perhaps the greatest reason for pessimism is widespread misperceptions among journalists, politicians, and voters. Focus tends to be on current-day problems with current-day perspectives. Most people do not understand how energy and food markets work, and they underestimate the time it takes to change course and the need for precaution. They do not realize fully that we have more resources to prevent future hunger today than we will have tomorrow.