#72 Bioflation and the Global Eco-Hypocracy

Markets are moving, volatility is up, Forex markets are once again the focus of a broader public. However, instead of being swamped by a myriad of different analyst reports and outlooks, it could be beneficial to look beyond the complex parade, rank and file of charts in order to grasp what is happening under the bonnet of the world economy. Markets are essentially economic battlefields, continuously pulsing and pushing. The force majeure of the world economy - the dollar - has taken a severe beating. With it, volatility has come back into the market and subsequently also some repricing, so far psychologically more than in absolute yield spreads and valuation. All these things are nothing but distractions when put in perspective of the "real" hurricane out there, and that hurricane is a global one: Bioflation.

Bluntly put: Bioflation is what happens when food (that what we put on our dinner plates) ends up as fuel in our gas tanks. When the appetites of automobiles start competing for those of humanity as a result of ethanol/biodiesel mania, we have a problem called bioflation. When food crops such as corn, rapeseed, sunflower, sugarcane as ethanol or biodiesel have to compete with oil on global fuel markets we essentially interlink them on an unprecedented global scale. This has been instrumental in the increase in food commodities worldwide.

In the end the consumer pays the bill in the form of substantially higher prices for tortillas, cornflakes, cola, hamburgers and pizza. Bioflation may be good news for farmers, but not for regular consumers and the world's poor. As a result of bioflation, Mexicans have been rioting due to corn prices going through the roof. The culprit: corn being used as a source of ethanol rather than food. The result: the price of corn and other food substitutes on their way to record heights. The bad news: this is only the beginning.

When food crops become interchangeable as fuel, they have to compete with fuels such as oil. Simpleton economists would say that this is just a cyclical phenomenon and argue that, with food as a substitute, this creates more supply in a market that has very little cushion. But this extra fuel supply comes at a price: bioflation. Opec and other large exporters have enough flexibility to keep prices high. Furthermore, there is more than enough (and still growing) demand from rapidly developing countries such as China and India. So biofuels as substitutes and alternatives to the global petroeconomy are just farts in the wind. Biofuels such only be considered as a steam valve, as part of a transition completely away from a carbon based fuel economy.

Making biofuel from corn is really not very efficient and is turning the US (previously a net exporter of corn) into an importer. The price hike and volatility of corn on global commodity markets is affecting other crops and substitutes as well. The global hike in food commodities shows just why bioflation is not a welcome trend, unless you are a large scale corn farmer or an ethanol refiner. There are other non competitive, non food crops that should be considered if one really desires to shift towards a biofuel economy. Unless we are willing and capable to rise to that challenge, we will live in an inflationary and unstable world of food and energy substitution.

Several UN organizations have already signaled that they are unable to feed the world with the current trends in food prices (as if they were able to feed the world before). However, food prices are not expected to go down as long as they remain connected to the world's energy economy. As global oil output declines and the prospect of food for oil substitution remains an alternative, high food prices are here to stay, and with it hunger on a unprecedented scale.

The cycle is more vicious and cynical than you think: besides high gasoline prices at the pump, fuel for heating and cooking also becomes more expensive. In developing countries this results in increased wood and shrub poaching and increased deforestation. Higher food prices are also going to encourage increased encroachment on existing forests as villagers look to cultivate more land. As peasants cut down local shrubs and trees for fuel, they are also destabilizing the fertile top soils in the surrounding land. Indirectly, high energy prices will lead to increased soil erosion, drastically affecting the fertility and agricultural output of the land.

Bioflation thus leads to a vicious cycle of higher food prices, inflation and lower "real" economic growth. Furthermore, the collusion of the above factors also inherently exacerbates poverty. Therefore, by understanding the dynamics of bioflation, we need to consider the trade off between "biofueling" the economy and empty stomachs world wide. As such, by "biofueling" our mobility, we drive the most vulnerable participants of the world economy into deeper poverty and hunger.

The "inconvenient truth" is that we are heading towards a world where food prices will be held hostage by both higher energy prices as well as global warming. Additionally, in a very perverse way, the Saudis, Putin and Chavez are more capable of determining the price of a big mac than McDonalds itself. Biofuels as the corner stone for energy independence is a green myth that will lead us down to a greater state of (inter)dependence that we cannot even begin to comprehend.

Furthermore, the effects of "bioflation" are not experienced in homogeneously. The effects, although generally detrimental to all, will be different for low income families as opposed to higher income families across different economies and geographical regions. For example, a Mexican laborer just above the poverty line may find him or herself quickly below the poverty line as wage rises don't stay in check with food prices. Bioflation will impact developed economies and families in a higher socio-economic strata as well. On a macro level this will imply lower spending on durable goods which in the long term can shift the global economy itself. For that reason the quest for cheap alternative energy is the most direct challenge of the 21st century, for it determines the fate and prosperity of mankind.

note
* non-food commodity based plants such as jatropha do offer a viable solution as biofuels because they do not directly compete as foodbased output or as food substitutes
* the author is NOT an anti-environmentalist nor a climate change denier

#59 Divisive Ethanol

Ethanol has become the new "it" thing in terms of energy fashion. Whether you are a proponent of expanding ethanol production for energy use, believe it would be a disaster to do so, or if you could not care less about the topic, one thing is for sure: you have something to say about it. The scope of discussion on the topic extends far beyond merely energy, encompassing a wide array of sectors such as food, agriculture, energy, trade and the environment. No matter in what context ethanol is debated, it has become a particularly divisive topic.

The environmental field is one such area. High profile politicians, scientists and lobby groups such as the Renewable Fuels Association - the largest Washington ethanol lobby group - are touting it as a 'green' alternative to the heavy pollutant, gasoline. Others, such as Stanford University civil and environmental engineering professor Mark Jacobson, loudly dispute this claim. Jacobson conducted a study analyzing the environmental effects of switching to ethanol and concluded "It's not green in terms of air pollution...If you want to use ethanol, fine, but don't do it based on health grounds. It's no better than gasoline, apparently slightly worse." Green or not, ethanol has set the stage for a tough debate worthy of competing with the ever contentious notion of Global Warming.

At the top of the world's political echelons, ethanol has garnered a prominent and cosy space for itself as well. Venezuelan President Hugo Chavez, following the words of Cuban President Fidel Castro, has issued a stark warning against the use of ethanol as a main source of energy, warning there is a lack of arable land and arguing it will lead to food prices skyrocketing, subsequently causing mass starvation among the world's poor. Bush, on the other hand, has hailed ethanol as a fitting alternative to the American addiction to foreign oil, sealing a bilateral deal with the world's largest ethanol producer, Brazil. The fact that these two leaders disagree on something is far from surprising, of course. What is noteworthy, however, is the effect that ethanol is having on Chavez's relationship with Brazilian President Luiz Inacio Lula da Silva (Lula), who Chavez considers to be a close ally.

At a Venezuelan hosted energy summit involving eight Latin American nations, Lula responded to Chavez's comments regarding massive production of ethanol in an unprecedentedly stark manner, saying “The truth is that biofuel is a way out for the poor countries of the world...Obviously there is no possibility of competition between food production and biofuel production...No one is going to stop planting rice to plant biofuels. The problem of food in the world now is not lack of production of food. It's a lack of income for people to buy food.” Chavez was seemingly taken aback by these statements, softening his position afterwards by insisting that his real objection is to the U.S. corn-based variety of the biofuel – not Brazilian ethanol produced with sugar cane. Nevertheless, ethanol has managed to become the first topic to create public disagreement between the two leaders.

Let's just hope that either the proponents of ethanol as a substitute or additive for oil are correct, or that other, cheaper, cleaner and less divisive methods will be found in the meanwhile. Divisive ethanol must not become a distraction for the real reasons - which are a plenty - that we are seeking alternatives to oil.

#47 Chavez vs Bush

It is nearly impossible these days to escape the continuous taunting of US President Bush by Venezuelan President Chavez. A large portion (in any case a very loud portion) of the world seems to be squarely on the side of the Venezuelan leader, either because they truly agree with his Socialist policies or simply out of blind disgust for anything Bush-related. Both leaders are currently on a tour of Latin America, with the not all too subtle aim of beating out the other in the eyes of the local populace. While Bush is in Brazil and Uruguay, Chavez is in Argentina; Bush in Colombia, Chavez in Bolivia; Bush in Guatemala, Chavez in Haiti. Again, whether justified or not, it seems Chavez has a clear advantage, though Bush certainly wins the award for most dignified demeanor.

Indeed, by repeating calls like "Gringo go home!" and "Yankee go home!" Chavez is using highly irresponsible terminology that creates hate for an entire nation, rather than only for the man Chavez claims to be taking aim at. "Gringo" and "Yankee" have evolved into highly derogative slurs, which, coupled with the use of terms such as "devil," are nutrients for widespread incitement. Accusatory calls that the CIA is plotting to assassinate him will also do little good for US sentiment in Venezuela and beyond. Chavez recently repeated this allegation, saying "Who did they swear in at the White House as deputy secretary of state? A professional killer: John Negroponte...They have assigned special units of the CIA, true assassins, who go around not only here in Venezuela, but in Central America, in South America."

Chavez's calls resonate in the region, however, with anti-US sentiment quite possibly at an all-time high. Wherever Bush visits, he is welcomed by major protests and often violent demonstrations. Mayan priests in Guatemala have even promised to purify a sacred archaeological site to eliminate "bad spirits" after President Bush visits. Chavez easily garners tens of thousands of supporters at "anti-imperialist" rallies in any given Latin American nation.

Rather than yelling back with slogans of his own and organizing rallies (granted, it seems highly unlikely that Bush would be able to attract enough supporters to his rally), Bush remains cool, proclaiming "I bring the goodwill of the United States to South America and Central America. That's why I'm here." He rightfully notes that bilateral aid has doubled under his presidency from 800 billion to 1.6 billion and stressed "I don't think America gets enough credit for trying to help improve people's lives. And so my trip is to explain, as clearly as I can, that our nation is generous and compassionate." In this respect Bush is wise to ignore Chavez's provocations and not stooping to his level. This might count for something in time to come.

Besides the ethanol deal, Bush has pledged medical aid in the form of a new project that dispatches a Navy medical ship to 13 countries in the area in order to treat the poor. Millions have also been made available for affordable housing for the poor, while a new initiative was also presented in which $75 million is to be made available to help Latin American youth learn English and study in the United States.

Chavez, in turn, is offering free goodies such as sending doctors and teachers to allies such as Bolivia, providing an oil refinery and a highway free of charge to Nicaragua, and paying off billions of Argentina's debt. Chavez has also pledged $15 million in aid for flood victims in Bolivia, including a squadron of helicopters to deliver food to remote villages, making the $1.5 million sent by the US pale in insignificance.

In terms of direct aid, Chavez has a slight upper hand overall in Latin America today, but the years of US aid added together dwarf anything Venezuela or Chavez can dream of offering. When it comes to public opinion and image, Bush doesn't stand a chance next to Chavez. However, Bush has managed to retain his dignity in the face of ridiculous taunts and accusations. For example, the world praises Brazil for their advanced use of alternative fuels and urges the world's greatest polluter to follow suit. With the newly signed ethanol (a bio-fuel made from sugar cane or corn) deal between Brazil and the US, Bush is doing precisely this. Unsurprisingly, Chavez found a way to turn this around, saying "the US is taking food from the poor and giving it to vehicles instead." With this kind of logic, you can criticize everything and anything, of course.

The Bush vs. Chavez rivalry is far from over and is sure to provide enough interesting material for future reference.

#33 The Green Avalanche

It is impossible to escape the issue of climate change in the media today. Green issues central to political and cultural debate are everywhere now, in a way so vast and banal, it has almost escaped comment. Al Gore has been transformed into an international star with An Inconvenient Truth; David Cameron of the Conservative Party in the UK has made green issues a central plank of the Party’s manifesto, and has even changed the party symbol to reflect it; the recent Paris conference on climate change has clearly laid the blame at man’s feet, and President Chirac has demanded that the world pick up the gauntlet. Even President Bush has finally acknowledged both the reality and seriousness of climate change in the State of the Union address, whilst celebrities clamour over one another to demonstrate their green credentials. Following the tough, no nonsense Stern Report on the huge costs of inaction on climate change, the Economist recently reported that it is now global businesses leaders who are the ones demanding that action be taken, and fast, for hard nosed financial reasons. Unbelievable as it is, Arnie the Governator stands as an unlikely green champion with his initiatives on emissions and solar panels.

This is a remarkable change from even just one year ago. Of course, there has been plenty of doom and gloom too - meaning that many have effortlessly crossed from denial to hopeless resignation, and hence conveniently squaring the circle to write off any guilt for inaction or a sway some lingering sense of social responsibility whilst they blithely continue their carbon heavy lives. Even though Americans may be the ‘least concerned’ about climate change in the world (according to AcNielsen, just 42% considered it ‘very serious’), an amazing 91% of 25,000 people globally surveyed considered it a ‘very serious’ or ‘serious’ problem. With 1.5 billion people and growth projections indicating it will overtake the US as the world’s top CO2 emitter by 2009, the fact that China considers the problem both very serous and clearly man made counts for a lot, and cannot be ignored.

What is more, let us contemplate just one single momentous fact – whoever wins the US Presidential elections in 2008, from either party, they will almost certainly push America to take global leadership in tackling climate change. The forerunners, McCain, Obama and Clinton, have all pledged to bring the issue to the centre of their policies. And that’s not even touching on the impressive environmental measures that the newly Democratic controlled Houses have launched, starting with the repeal of Big Oil’s massive tax breaks (with the money going to a green fuels fund), and the Waxman investigation into Bush administration manipulation and suppression of scientific information on climate change. Even Dick Cheney’s own fund manager says he is "certain" that "oil substitution, energy conservation, and related environment issues will be the biggest investment issue of at least the next several decades," in a letter in which he blasted 20 years of political cowardice, inaction and greed in the face of mounting energy problems in the US.

The writing is on the wall, and people are finally starting to read it. How on earth did we reach this apparent tipping point so rapidly? A host of immediate issues spring to mind: the devastation of Hurricane Katrina; the looming conflict with Iran; the price of oil; the unsettling and disturbing weather patterns across the Northern Hemisphere; celebrity sound bites and tabloid hysteria; not to mention of course the mountains of solid scientific data. All have played a part. And yet, the current debate and momentum for rapid, dramatic change has snowballed so fast, that it is clearly far greater than the sum of these parts alone.

For, underlying these immediate causal factors, I suspect, lies a much deeper driving force – the maturing and development of the information revolution, the much vaulted ‘Web 2.0.’ Whilst hype is dangerous (Dot Com bubble anyone), and although one can legitimately question Time’s choice of ‘you’ as person of the year, something really significant has happened – and it isn’t so simple as the labels ‘user driven content,’ ‘amateur journalism’ or ‘new media’ imply. This is because these things are only facets of a much more profound democratising change that is occurring in the nature of information, and our relationship with it. The evidence, acceptance and debate on the reality of climate change (and the profoundly negative consequences associated with it) has spread and become commonplace in a grassroots virtual exchange that illustrates the fundamental dynamism of information. Data, in all its multifarious forms, has an independent, boundless and relentless desire to replicate and spread itself as far and as wide as possible. This is what we really need to be looking at to understand this rapid, complex weaving together of factors and forces.

Blogs, podcasts, video phones, YouTube, Google, P2P and all the rest, are all forming the infrastructure and tools to articulate this inherent dynamic of information to expand, replicate, network and generate. The Green Avalanche is just one byproduct of this new era we are moving towards. The information on climate change is ‘out there,’ in this new virtual civic space, and it wants to get out, irrespective of politics or business. The truth has a boundless desire to be set free, to operate in the market place of ideas, and Web 2.0 will increasingly make that manifestation real. Where does this end? A radical rethinking of just about everything from ownership, equality, relationships, intellectual property rights, are only a few things that come to mind…

- This article was written for and provided to the Weekend Economist by Stuart Reeve

#26 Food for Oil: The Greening of America

There was a time when, if you would talk about reducing oil consumption, you would be branded a leftist, tree-hugging liberal. These days, reducing energy consumption is slowly coming to be seen as the patriotic duty of every American. Even President Bush seems to have awakened from his comatose anti-environmentalism when, in his recent State of the Union Address, he said

"We must continue changing the way America generates electric power, by even greater use of clean coal technology, solar and wind energy, and clean, safe nuclear power. We need to press on with battery research for plug-in and hybrid vehicles, and expand the use of clean diesel vehicles and biodiesel fuel. We must continue investing in new methods of producing ethanol, using everything from wood chips to grasses, to agricultural wastes...let us build on the work we've done and reduce gasoline usage in the United States by 20 percent in the next 10 years...America is on the verge of technological breakthroughs that will enable us to live our lives less dependent on oil. And these technologies will help us be better stewards of the environment, and they will help us to confront the serious challenge of global climate change."

The drive for oil independence is not a new one; those who are old enough may remember the oil crises of the 1970's. Back then President Nixon was singing the same tune as Bush when he called for drastic measures to curb America's addiction to foreign oil. Sadly for the Unites States, Nixon's big words never amounted to anything. The same story risks unfolding once again, unless the US undergoes a fundamental political and cultural shift.

America consumes upwards of 50 million barrels of oil per day. Reducing this number does not only require fundamental technological innovation and implementation, but also a whole new cultural mindset. Bioethanol is heralded as the new miracle drug capable of curbing America's addition to foreign oil. Bioethanol is a fuel that can be derived from corn, sugar and other various crops. It is also a significantly cleaner fuel, and in that respect bioethanol can help in the greening of America's oil economy and give a viable boost to the American heartland.

However, as crops become part of a fuel economy, commodity food prices are destined to become evermore interlinked. Besides food prices going up as food crops are turned into bio-fuels, the volatility of the energy market as a whole is going to rub off on the commodity market. This is bad news for consumers and industry alike, not to mention the poor. This in turn will, and already has, affected the self sufficiency of crop production: the USA used to be one of the largest exporters of soy, but has now become of the largest importers thereof. There is a very real threat that ‘fuelification’ of food crops could inherently exacerbate that trend to other crops such as grain, sugar and corn.

As mentioned before, America needs to undergo a cultural revolution in order to change its ways. More specifically, she requires an urban revolution based on the de-suburbanization of the country. The expansion of public transport: metros, buses, trams, and yes, trains. In a nutshell; a European, if not Dutch approach towards tackling transport, the environment and oil dependency. Only then can America begin to curb its addiction to foreign oil.