Cheap Oil and Cheap Food

I just watched Charlie Rose interview Thomas Friedman on TV. (It was almost entirely a one-way conversation; Friedman talked a mile-a-minute and kept saying “let me finish....” and because he was so interesting, Rose didn’t interrupt him at all.)

One interesting point caught my attention. He reminded me that the reason the USSR fell apart was that oil was selling at $10 per barrel. (I remember using that to excuse poor Gorbachev's failure, since I loved that peaceful man a lot.) Then Friedman amended that explanation by saying that it was really because it had been selling at $80 a barrel, so the government was spending money like crazy, and then it fell to $10 a barrel. They were over-extended and the Soviet citizens were shocked that the good times suddenly ended.

This was said in the context of his comments about bringing democracy to the Middle East. Everyone knows that democratic opposition movements haven’t a chance of bringing down the Islamic dictatorships so long as the price of oil stays high – but if it can be brought down, then that’s another matter. Some democratic reforms might be possible.

So we want “cheap oil”? I don’t think so. Or at least I had to stop and reorganize my thoughts on the subject. I’d actually read Friedman on this subject before, but the dissonance hadn’t made me stop to wonder at that time. I assume that what we have to do is raise the price of oil enough to force people to cut fuel consumption drastically. That didn’t fit with Friedman’s comments about driving down the price of oil in the Middle East.

In fact, it didn’t even fit with another of Friedman’s big positions: that most politicians are scared to do what is most needed: tax gasoline heavily. Here he is arguing in favor of raising the price at the pump, for reasons that are perfectly clear to me.

So I had to reconcile the two notions: price at my Esso pump versus price at the wellhead in Iran, say, or Saudi Arabia. The difference is clear; Friedman’s ideal situation would be cheap oil made expensive to consumers by the imposition of steep taxes. He is appalled that no one in Congress will dare to propose such taxes. He didn’t speculate, but one could argue that if hefty taxes were slapped onto gasoline, drivers would reduce their consumption enough to bring down the price at the wellhead and make the Islamic dictators less popular at home.

Anyway, I see now how I had been mistaken. When oil is cheap in one place, it could be expensive in another place, depending on the level of taxation.

And as I switched off the TV and turned to an article from the Worldwatch Institute, I got another surprise. This piece was arguing that the current high price of biofuels may actually benefit many of the world’s rural poor. Everything I had previously read had suggested the opposite: that high fuel prices spelled trouble for the Third World. Farmers couldn't afford fertilizer and other supplies, and the urban poor couldn't afford high priced food products. So how could the Worldwatch fellows see any of this as beneficial?

The Worldwatch article began explaining this contradiction by mentioning the role of biofuels such as ethanol. Again I was surprised. Most of the articles that I read these days say that biofuels offer no solutions to our problems; they induce people to shift away from producing much-needed food. Besides, the net energy of most ethanol is too low to be useful. So why should Worldwatch be celebrating the rise of biofuels in the Third World?

Answer: the price of agricultural products have been declining for decades, but now with the demand for biofuels, farm commodities are fetching higher prices. Christopher Flavin, Worldwatch president, said:

“Farmers in some of the poorest nations have been decimated by US and European subsidies to crops such as corn, cotton, and sugar. Today’s higher prices may allow them to sell their crops at a decent price, but major agriculture reforms and infrastructure development will be needed to ensure that the increase benefits go to the world’s 800 million undernourished people, most of whom live in rural areas.”

Citing the Institute’s new book, Biofuels for Transport, Global Potential and Implications for Energy and Agriculture, the article admits that high food prices will create problems for some urban poor. The answer is to direct more relief efforts to them, since the real cause of hunger is poverty (lack of money), not shortage of food. “Driving agricultural prices ever lower will hurt more people than it helps,” they insist.

“Growth in biofuels production may have unexpected economic benefits, according to the experts who contributed to the report. Of the 47 poorest countries, 38 are net importers of oil and 25 import all of their oil; for these nations, the tripling in oil prices has been an economic disaster. But nations that develop domestic biofuels industries will be able to purchase fuel from their own farmers rather than spending scarce foreign exchange on imported oil.”

Okay, that makes some sense. It seems paradoxical, but — hey, I’m no economist, so how should I know?

The Worldwatch writers do acknowledge the alternative, more familiar perspective, pointing out that the real advantage will come from using degraded land for biofuels made from switchgrass and other non-food sources of cellulose. They even argue for developing social and environmental certification and a credible system to certify compliance.

I hadn’t heard those proposals elsewhere and they seem promising. After all, if the diamond industry could create the Kimberley process to keep African dictators from selling blood diamonds, it should be possible to monitor ethanol’s sources and the revenue it generates. So, although I remain slightly skeptical about the overall argument, I can see that it may be right.

Several months ago I posted another blog entry that was favorable to biofuels. I was reporting on Ted Turner’s appeal to the WTO negotiators to reduce agricultural protectionism by the richer countries for the sake of keeping the Doha round from failing.

His reasoning was quite different from the Worldwatch argument that I’ve just mentioned. Turner was addressing the political pressures that Western farmers exert on their governments to retain protectionist measures. He argued that ethanol production (presumably from corn, though he did mention the coming of cellulosic ethanol) would give Western farmers a good income for the first time in many years. Their prices have been declining for decades too. And with the boost given them by the demand for ethanol, these farmers will be less desperate, hence perhaps more amenable to the reduction in agricultural subsidies to which they have become accustomed. This could save Doha, Turner believed, and with it the future well-being of farmers in the less developed countries (see photo).

My friends jumped all over me for accepting this argument. In fact, there was no breakthrough in the Doha round, which I might be officially dead by now. However, that seems not to be the case; the president of WTO is continuing even now to urge it onward and I wish him well. Most of my friends who know their way around the energy issue claim that biofuels are doing more harm than good, but they are not thinking about cellulosic ethanol. Nor, for that matter, about the potential use of algae. Apparently those little green cells grow like crazy, soaking up huge amounts of CO2, and yielding fuel that can extend if not even supplant the use of gasoline.

In the meantime, I’ll keep my mind open and cheer whenever one of these technologies proves itself.