Food, Fuel, and Finance: The Crisis of the Three Fs

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While the share market digests the news of collapsing brokers and falling financial profits, the grand poobahs of the world’s economy are wringing their hands in worry. What’s keeping them up at night? The three Fs, each its own kind of crisis: food, fuel, and finance.

“The World Bank met on Sunday faced with a mounting food price crisis that has sparked deadly unrest in developing countries, underscoring the urgency of fighting hunger and poverty,” reports Channel News Asia.

How urgent, you ask? The Prime Minister of Haiti was sent packing this weekend by crowds protesting soaring food and fuel prices. We don’t even know who the man is but reckon he won’t be the last public official to be ridden out of town on a rail before this current crisis is over (and it may not be any time soon).

As usual, it’s the people at the margin (whether lending or with food) that are affected first when surplus turns to scarcity. Despite all the daily signs of abundance here in Australia, let us not forget that there are about four and half billion people on the planet who have little margin for error in their daily lives. If food prices go up, many of these people go hungry.

World Bank President Robert Zoellick, doing his best impersonation of Franklin Delano Roosevelt, wants a “new deal” for global food programs. He’s asked richer nations to contribute US$500 million immediately to help get food to poorer nations.

IMF President Dominique Strauss-Kahn was less pragmatic but more rhetorical. Wrapping up his organisation’s annual spring meeting, he said that, “Food prices, if they go on like they are doing today … the consequences will be terrible…Hundreds of thousands of people will be starving…As we know, learning from the past, those kinds of questions sometimes end in war.”

People often talk about resource wars being a common feature of the coming century (or decade). But it’s usually oil and energy they’re talking about, not rice and wheat. Food is fuel for the body (we’ve been watching the Biggest Loser). If you don’t have access to cheap calories, what good is cheap fuel?

It’s our contention here at the Daily Reckoning that both food and fuel are getting more expensive. The scary thought is that artificially low interest rates and cheap energy have, for many years now, sent bogus signals to the world about how much and how fast the population can grow. Agricultural abundance is only a very recent (and perhaps temporary) historical phenomenon. It’s no coincidence that it occurred alongside the energy boom from cheap oil.

Not that it’s any consolation to starving people stranded in long petrol lines, but businesses in the agricultural sector are going to boom (provided they aren’t nationalised). Farm equipment, fertilizer, and large producers should all see earnings rise this year. And next year. And the year after that.

The second “f” crisis is in finance. It’s been with us so long now it doesn’t seem like it’s new. But some people are slow on the uptake. The nerve endings of large institutions like the IMF and World Bank are few and far removed from the tiny central brains that direct the movements of these mammoths. Brontosaurus Banks.

Like a bunch of dinosaurs standing under a meteor shower, the G-7 meeting this weekend produced lots of talk and no action. The ministers agreed that concrete steps need to be taken in the global financial system to improve transparency and the way the banks value certain assets. The G-7 statement also paid lip service to issue of credit ratings and how to make sure in the future that garbage debt doesn’t get a Triple A investment grade rating.

Here’s the trouble though…American policymakers are worried about recession and plunging house values. Everyone else-especially the increasingly sweaty Wayne Swan-is worried about inflation. Because of the different concerns, no one can agree on any policy solutions.

The conclusion? There is no one solution to the credit crisis. That is bad news for people who think of the economy like a machine. It’s not just a matter of changing the oil or checking the fuel pump. The engine is sputtering, the drive train is wrecked, the tires are flat, and someone seems to have cut the brake lines. There are no air bags.

As they say in the used car business, it’s not the years, it’s the miles. You wonder if this globalisation jalopy is going to make it.

As for the dollar, Europe would like it to be stronger in order to revive its exports. Dollar-pegging countries in the Persian Gulf would like the dollar to be stronger too, so they don’t import inflation and the political instability that goes with it. Even Japan and China would like the dollar to be stronger. Dollar strength maintains the basic economic model of the last 50 years: manufacture cheap and sell to America.

But the dollar is not strong. And the things that would make it stronger-a lower trade deficit, higher interest rates, lower government spending-are not going to happen. In fact, the opposite will happen. While officials talk up a “strong dollar,” everything they actually do weakens the dollar.

This is why the day-to-day movements in the dollar index and in gold don’t tell you much. The most important fact about the gold price is that that the official policy of the U.S. government is to cheapen its currency. Rates are being lowered. The government is spending money. It’s also giving away money, hoping Americans can spend the country out of recession.

Do you know of any person or any nation that ever spent its way to prosperity? Neither do we.

The fuel crisis hasn’t reached the same acute stage as global food markets. But in time, it will. There were two developments in the clean coal front this that caught our eye this week. First, “Australia is now investing $63 million in developing clean-coal technology in China, our biggest coal buyer,” according to Dennis Shanahan in today’s Australian.

Making the last stop in his first world tour, Aussie PM Kevin Rudd told reporters made the case for an Australian Chinese partnership on coal, “The fact that Australia is the world’s largest coal-exporting country, and that China is the world’s largest coal-consuming country, presents both of us with a fundamental responsibility to act in this area of critical technology,” he said.

You say “responsibility” we say “opportunity.” Now that we are moving into a world of energy “haves” and “have nots,” coal is a realistic source of transportation fuels for oil-poor, coal-rich nations. What coal-rich nations lack is the technology and capital to turn coal into liquid transportation fuel. Australia has several public companies that can help them do it. That’s the opportunity.

The trouble with above ground coal-to-liquids (CTL) technology is that it produces nearly double the carbon dioxide emissions that you get from burning coal to make electricity. In the U.S., green politicians have actually prohibited U.S. government agencies from buying coal-based fuel with tax payer money.

The U.S. has plenty of coal. The Air Force would like private enterprise to turn that coal into fuel for U.S. planes. But California Congressman Henry Waxman introduced a provision into last year’s U.S. Energy bill (section 526) that prohibits government agencies from buying fuels from “unconventional” sources.

Those “unconventional” sources are oil shale (the Pieceance Basin in Colorado), coal (the Powder River Basin Wyoming), and heavy oil sands (found in Alberta in Canada). Two U.S. Congressman are looking to repeal Section 526 from last year’s U.S. Energy Bill and unlock the future fuel from those unconventional hydrocarbons.

Will the section be repealed? It depends on what you think about global warming. We won’t weigh in here. Our main interest is in how governments respond to the dueling crisis of Peak Oil and Global warming.

The old “real politik” answer is to use your domestic resources to achieve energy security. This way you don’t exchange your currency reserves for oil and outsource your supply of a vital industrial commodity to foreign interests. If you have lots of coal but no oil, you turn your coal into fuel.

But hey, if the planet is warming and coal is the culprit, burning more coal doesn’t exactly make things better, does it? What do you do? Go nuclear? Conserve? Go renewable?

All of these options are on the economic table and an intelligent and prompt response is becoming increasingly urgent. You can bet that the government will do something, and probably the wrong thing. Meanwhile, our money is on the firms doing something with coal, wind, waves, and solar.

These three crises-food, fuel, and finance-are a formidable triply whammy for the global economy. It’s bad news for the indexes, which already have plenty of bad economic news to consider. But for a certain class of agricultural and alternative energy firms, this could be the bull market of a lifetime.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. But what about alternative fuels such as HHO or Browns Gas?
    Vehicles can already run on it and are doing so here and now in Australia ……Google cars running on water………

    nic meredith
    April 14, 2008
    Reply
  2. Capitalists dream egocentric dreams on poors’ back. Dreams are permitted, but they don’t really help.
    Reduction of useless consume is the real point! And:
    Facts don’t tend to disappear just because you ignore them.

    Reply
  3. Your three F’s are inter-related and all really rest on energy cost and availability. As an American, my greatest concern is the transfer of wealth from this country to the OPEC nations. But, paradoxically, the current high cost for oil is the very impetus that will lead us back to energy independence. See America’s Energy Independence Future.
    Ozarkcountryman

    Reply
  4. A nice article but you skirted around the elephant in the room.

    Population.

    Famine, War they are both forms of population control. If countries have exceded they carrying limits then you can add pestilance to the mix as well.

    I put it to you that this is not a crisis of three F’s but a crisis of one P. Everthing else is just window dressing.

    Enjoy
    Ademac

    Reply
  5. I think we will see something like I like to think of as ‘deglobalisation’. Globalisation has been built on the assumption of cheap commodities and low energy input costs for transport/logistics. As input costs rise the global economy will slowly dislocate and supply chains will realign around region and national supply chains – we have passed the point where you can capture prawns in the UK ship them to Asia for processing and packing and then reship back to the UK for consumption.

    Reply
  6. Good point Iain

    Fortunately I don’t eat imported seafood if I can avoid it (no, I didnt miss the point ;))

    Reply
  7. The earth is certainly capable of supporting well over 100 billion people. But as long as the richest 5% are completely controlled by their television sets, they will never possess the intellectual honesty and clarity required to tackle the problems facing the world today. Just look at all the people freaking out over carbon dioxide. Only via television mind control can a population become so dumbed down as to think that CO2 is a problem! Especially given the enormity of the problems we face today… problems which get no coverage on the mind-control box. It’s like a dream steadily evolving into a nightmare. It is so obvious now that I dont even know what to say to the vast majority of people out there who still cannot see what’s going on. I keep thinking I am going to turn on the tv one day to find that congress has mandated the use of gatorade for all irrigation, because its got electrolytes.

    Reply
  8. As I look out my window I see a plume of traffic stretching for miles into the city. Most of the vehicles have a single person in them, they are traveling at barely walking pace and many are SUVs or other heavy vehicles.

    While this kind of behavior goes on its difficult to believe that oil is too expensive. Clearly there’s so much that can be wasted and governments are happy to encourage people to do so.

    When prices hit the point that we are genuinely alarmed perhaps we should look at solutions that involve better design to avoid waste – energy efficiency, town planning etc. Hoefully we will do away with the internal combustion engine entirely and replace it with far more efficient electric motors. We will then be able to avoid burning food, or burning fuel to make fuel (as CTL would have us do). These are wasteful and environmentally damaging solutions and are worse than the problem to begin with.

    dexter bland
    April 16, 2008
    Reply
  9. Iconoclast421: Haha thats a reference to the movie ‘Idiocracy’, I saw that recently

    The problem you speak of is ‘greed’. The rich have a desire to get richer – how much is enough money? There is never enough. Hence profit will always win in the fight of profit vs. the-good-for-humanity.

    Besides, we are just so disorganised. Think of all the problems we put bandaids on instead of actually fixing them:
    – poverty in africa (and developing countries)
    – environmental care (renewable energy, use of fossil fuels, recycling)
    – the credit crisis (*snigger* … this includes real estate problems)

    We have a U.N that is about as useful as a paper helmet when it comes to actually doing anything other than discussing things. The US doesn’t listen to them, China doesn’t listen to them, I don’t know why anyone would listen to them unless they were so small that a convoy of peacekeepers could impose martial law on them. Look out Vatican!

    I believe the market will control population through supply/demand. If the whole world has food shortages, like in some African countries, then we’ll have famine and all sorts of things unless we can bring in population controls like the one child policy of China. As medicine advances, people live longer and we don’t have any substantial wars right now to kill off the populations when they get too big (that’s what happened in ancient times and our WWI and WWII).

    Reply
  10. Frivolous government mandates, such as those imposed by Henry Waxman, should slowly give way under the weight of political realities. Once Americans start to pay $6/$7 a gallon gas, coal to oil may be a matter of when, not if. The US is the Saudi Arabia of coal as well as shale oil. No other nation is blessed with so much unused energy, nor has so much productive, arable land. It is a testimony to government inefficiency that the amber waves of grain once used to fend off world starvation are now being used to top off tanks while enormous energy potentials better suited sit idle.

    Reply
  11. Good article. The 3Fs will explode in 2010.

    Reply
  12. […] Dan at The Daily Reckoning (no fan of Peak Energy I believe, but no matter) has a column on the food vs fuel issue, containing a few choice turns of phrase about dinosaurs and meteor showers (along with some […]

    Reply
  13. if we were not to have money what would live b like… . . . . .use your imagenation

    Reply

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