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Page added on May 28, 2014

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Why Are Food Prices so High? Because We’re Eating Oil

Why Are Food Prices so High? Because We’re Eating Oil thumbnail

Regardless of what we eat, we’re actually eating oil.

Anyone who buys their own groceries (as opposed to having a full-time cook handle such mundane chores) knows that the cost of basic foods keeps rising, despite the official claims that inflation is essentially near-zero.

Common-sense causes include severe weather and droughts than reduce crop yields, rising demand from the increasingly wealthy global middle class and money printing, which devalues the purchasing power of income.

While these factors undoubtedly influence the cost of food, it turns out that food moves in virtual lockstep with the one master commodity in an industrialized global economy: oil. Courtesy of our friends at Market Daily Briefing, here is a chart of a basket of basic foodstuffs and Brent Crude Oil:

In other words, regardless of what we eat, we’re actually eating oil. Not directly, of course, but indirectly, as the global production of tradable foods relies on mechanized farming, fertilizers derived from fossil fuel feedstocks, transport of the harvest to processing plants and from there, to final customers.

Even more indirectly, it took enormous quantities of fossil-fuel energy to construct the aircraft that fly delicacies halfway around the world, the ships that carry cacao beans and grain, the trucks that transport produce and the roads that enable fast, reliable delivery of perishables.

Though many observers see money-printing as the master narrative of the global economy, we don’t see much correlation between the Fed’s ballooning balance sheet and food/oil. If money-printing alone controlled oil (and thus food), prices of oil/food should have soared as the flood of QE3 (and other central bank orgies of credit-money creation) washed into the global economy from late 2012.

Instead, oil/food have traced out a wedge: prices have remained in a relatively narrow trading range during the orgy of money-printing.

While money creation is one influence on commodity prices, supply and demand matter, too; in that sense, money printing only matters if it pushes demand higher while constricting supply.

Other observers use gold as the “you can’t print this” metric of price. In other words, rather than price grain in dollars, yuan, yen or euros, we calculate the cost of grain in ounces of gold.

The gold/food ratio is around the level it reached in 2009 after spiking in 2008.

This tells us food is cheap when priced in gold compared to 2002, but it’s more expensive (priced in gold) than it was at gold’s peak in 2012.

In effect, the influences of monetary inflation and supply/demand show up in food via the price of oil. Until we stop eating oil (10 calories of fossil fuels are consumed to put one calorie of food on the table), oil is the master commodity in the cost of food.

 

Charles Hugh-Smith of OfTwoMinds blog



19 Comments on "Why Are Food Prices so High? Because We’re Eating Oil"

  1. shortonoil on Wed, 28th May 2014 2:45 pm 

    Our projections are that petroleum prices will just about double, $200 /barrel, by 2020 (see graph# 17). Fine dining will again become the exclusive terrain of the rich!

    http://www.thehillsgroup.org

  2. Davey on Wed, 28th May 2014 3:28 pm 

    Short I find $200 hard to believe for more than a short time. $200 is out of the goldilocks range of a functioning economy

  3. J-Gav on Wed, 28th May 2014 4:17 pm 

    I don’t find $200 hard to believe at all – but I couldn’t put a date on it.

    Although … My gut feeling after many years of reading up on history, semi-technical energy articles (I don’t pretend to be an engineer), biodiversity, geo-politics etc and just watching all the social changes taking place under my nose for decades … is that, yes probably, by 2020 things will be clearer (and not in a positive sense), even to those who have thus far refused to lift an eyelid.

  4. Northwest Resident on Wed, 28th May 2014 4:38 pm 

    I think that $200 per barrel prediction is very similar to the predictions of 9 billion people on planet earth by 2030. The projection(s) is/are based on current trends, without taking into account the nearly 100% probability that something really major will occur before the projection has time to fully develop. shortonoil definitely recognizes the nearly 100% probability that the $200 per barrel price will never happen, is my guess.

  5. Meld on Wed, 28th May 2014 5:17 pm 

    $200 could be here by the end of the year if the shale bubble bursts hard.

  6. shortonoil on Wed, 28th May 2014 5:57 pm 

    Petroleum prices have been doubling on average every 7.5 years since 1960. $200/barrel oil would put gasoline prices at about $6.60/gal. The giants that supply 60% of the world’s oil will be coming off their plateau over the next few years. The shale bubble will burst in the next two. Will we see a DOW of 600 by 2020 – very likely?

    The Long Emergency isn’t going to take that long!

    http://www.thehillsgroup.org

  7. dissident on Wed, 28th May 2014 5:58 pm 

    No problem, just reduce the fraction of food in the CPI. From 0.13 to 0.08 or whatever. Inflation, what inflation?

  8. Dave Thompson on Wed, 28th May 2014 6:35 pm 

    If the price can go up slow,
    then we will all be like frogs in the pot of water.

  9. Northwest Resident on Wed, 28th May 2014 8:24 pm 

    “The Long Emergency isn’t going to take that long!”

    That’s definitely the way it looks to me. Current oil prices are already decimating the world economies. I doubt that we’d even have to get to $200 per barrel before a critical threshold breaks and we begin to see very harsh consequences. When the masses open their eyes and see the reality, confidence and trust will go down the tubes, and everything else will soon follow. This baby’s getting ready to blow!

  10. Makati1 on Wed, 28th May 2014 8:37 pm 

    I think 2020 is the max for BAU. Perhaps even that date is too far out. We live in a world that can collapse in days if the financial system gets hit with an EMT burst either man-made or natural. Think about the result of a split second where every electronic device on the planet is fried. The satellites would go first, followed in a split second by all the ATMS, internet, phones, etc. Cars would stop or crash as the chips fried that regulates their engines and system. Planes would fall out of the sky. Etc.

    Or we can just fail day-by-day until it no longer works. I’m not a systems engineer, but I can see the interconnectedness of everything today being a negative, not a positive, for our future.

  11. Ed on Wed, 28th May 2014 8:46 pm 

    I have been saying this for years. Everything we purchase costs more because of oil oil oil oil oil oil. Stop the insanity.

  12. noobtube on Wed, 28th May 2014 9:36 pm 

    As each year wears on, it is becoming clearer and clearer that anyone under 50 had better forget about the American Dream if they want to have any chance at a life in the “West” economies.

    2020. I just wonder if the USA can make it through the next Presidential election without another total breakdown somewhere (financial, energy, food, entertainment, medical, etc.).

    These next 5 years are not going to be pretty.

  13. bob on Wed, 28th May 2014 11:58 pm 

    well listen nootube!! anyone older than 50 can kiss their white fat ass goodbye there will be no pensions, or any retirement crap for them….

  14. Name on Thu, 29th May 2014 12:29 am 

    Mak, not that there would be no consequences of a EMP taking down the grid and such… it would be limited though to about half the planet at most if coming from the sun, the rest would only see the fallout. And cars are like Faraday cages, any electronics inside should be rather safe.

  15. Makati1 on Thu, 29th May 2014 5:55 am 

    Perhaps you need to do some research on EMP bursts. Think about where those satellites are and how many would exposed to the blast, especially if it is natural. Most of them.

    Also, if I understand correctly, a Faraday cage has to be grounded and completely surrounded with metal to work. Cars are NOT grounded nor are they metal anymore. Maybe some of the frame is, but most is nothing but plastic or fiberglass.

    Anyway, they will knock out enough to being everything to a halt, for a very long time, if not forever. Does it matter if your car works if there is no electric or water or food delivery?

    And, to replace those satellites, we would have to go begging to Russia for the motors to power the rockets that put them in orbit…lol.

  16. rick shelton on Thu, 29th May 2014 6:29 am 

    All these wall street boys have to do is Manipulate the oil and off they go so do the prices of every thing from gas to food cost if congress stops the regulations on gas the price for oil would drop to around 60.00 a barrel

  17. Juan Pueblo on Thu, 29th May 2014 7:57 am 

    I believe buying long shelf life food is a good investment. An EMP could be the beginning of the end. It is within the realm of possibilities. Losing the electrical grid would be catastrophic.

  18. GregT on Thu, 29th May 2014 2:20 pm 

    “When the masses open their eyes and see the reality, confidence and trust will go down the tubes”

    The masses are too busy watching the ‘other reality’ on Television. I’m sure that the media will go even further into overdrive as this shit unfolds. Most won’t be able to figure out where the blood is coming from, long after the 2×4 hits them squarely between the eyes.

    Denial is a very powerful human trait.

  19. Desertrat on Fri, 6th Jun 2014 6:29 pm 

    I don’t see oil getting to $200 nearterm as others have said, we’ve seen ample evidence that the available jobs regulate themselves to the available oil, so the extraction cost appears to be driving the price for now.

    Just give it a few years though – you might have to refer back to that gold graph because dollars will be meaningless then, but I’m sure there will still come a point when some users will happily part with an ounce of gold for a barrel of oil. Maybe more. There’s never been anything like thousands of energy slaves in a single drum in the history of the world. Gold will be nearly worthless in comparison. Forget the canned goods. If you stockpile gasoline & diesel and you can protect it, you’ll be able to get all the food you want in most places.

    Desert

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